Whether evaluating a company as an investment vehicle or as a potential vendor, the processes are similar.
Three elements are at the heart of our due diligence process when we evaluate Technology companies as investment vehicles and when we evaluate them as vendors.
1.) Quality of the Management Team. We listed this attribute first as it is the most important. Some questions we typically ask include: Who comprises the senior management team/ key employees? What is their level of domain expertise? What is their track record for generating profitable growth? What is their track record for delivering new products and services (whether by R&D, M&A or both)? What is their long-term strategy as it relates to revenue growth, cash flow generation, product road map and for recruiting employees across the various functional areas? Bloomberg, CoStar Group, Microsoft, SS&C Technologies and Twilio come immediately to mind as examples of Technology companies with quality management teams.
2.) Quality of Products and Services. What I’m really trying to discern here is whether the Technology company in question has the product portfolio and long-term vision that would enable them to become a strategic partner as opposed to a point solution vendor. Some high-level questions we typically seek answers to include: How do the company’s products & services compare to competitive offerings from a feature and functionality standpoint? In terms of customer satisfaction? In terms of value proposition? Is the company a market share leader? How are the products & services delivered (SaaS vs. on-premise vs. co-hosted)? If SaaS, does the company incorporate AI and machine learning to track usage patterns (at a minimum)? Microsoft Azure, AWS and Google Cloud have democratized AI. There really isn’t a valid reason for technology vendors to not consider embedding AI capability into their product offerings. Does the company have a track record and the requisite Balance Sheet strength to deliver on its long-term product vision?
3.) Strength of Financial Position: The final leg of the stool is important as it speaks to a company’s ability to execute on its long-term vision. It is a bit of a self-reinforcing loop in that excellence of execution drives revenue and profitability growth and the company with the strongest cash flow position can afford to take risks and experiment and be aggressive in areas where competitors can’t afford to follow. We see this in cloud computing where Microsoft and Amazon often subsidize extended trial periods in an effort to grow the number of third-party developers who build on top of Azure and AWS. We believe it is very important for vendors to be aggressive when pursuing new markets. Sticking with the cloud example, Google is without a doubt the AI leader and Google’s cloud offering – GCP – is the most technically capable from an embedded AI standpoint. Yet, Google lags AWS and Azure as it was slow to build out its partner support system. Conversely, AWS aggressively built out its partner network, making it easy for third party developers to build on top of it. The rest is history, as AWS is the clear cloud leader from a revenue and market share standpoint. To borrow a line from General Patton “A good plan violently executed now is better than a perfect plan executed next week.“