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3 Tips for Finding Great Deals in Software and Tech

Explore 3 tips for finding great deals in software and tech

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June 20, 2023

One question that's always on dealmakers' minds is: "Where's our next great deal coming from?" While the software and technology industry has been hit hard recently with falling stock prices, layoffs, and more, the rebound in recent weeks has given hope that the worst is over.

To get an inside look and learn how to recognize great deals in software and tech, Private Equity Career News, Private Equity Professional, and Sourcescrub invited a panel of experts to a roundtable:

  • Abraham Borden, Director, Diversis Capital
  • Devin Mathews, Partner, ParkerGale
  • Dominic Chan, Director, Vaquero Capital
  • Josh Giglio, VP of Product, Sourcescrub

The panelists discussed what they've seen recently across the dealmaking landscape and gave tips on how to capitalize on trends to make this year a success.

Tip #1: Be Optimistic, But Adjust Expectations

A slower start to 2023, at least compared to the highs of 2020 - 2021, left a lot of companies and firms taking a less aggressive stance on dealmaking in the first few months of the year. But many firms are optimistic: over half of our webinar attendees expect to do more deals in software & technology than last year.

Our panelists all agreed that the quantity of deals more closely resembles pre-pandemic levels but is holding steady and showing signs of improvement, especially in the last few weeks. Devin Mathews, Partner at ParkerGale, specified his firm has a very thesis-driven approach that is helping them to stay more consistent and keep finding great opportunities. For firms not currently using an investment thesis to help drive their strategy, 2023 may prove to be the perfect opportunity to give it a try.

The panelists also agreed that the quality of opportunities has dramatically changed. The large amount of available dry powder combined with the reduced number of companies looking for an investment has created an opening for companies that didn't stand out previously. What once was considered less than ideal "e.g., 20% year-over-year growth and either breakeven or only slightly profitable "now commands high multiples of 7 - 10x.

While it's not yet a "take what you can get" market, those looking to make deals this year should adjust their expectations and capitalize on the deals that do present themselves. Your firm may just find itself with a diamond in the rough.

Tip #2: Prioritize Add-Ons in the Short Term

With the reduced supply of investment opportunities, our panelists revealed how the nature of deals has changed from recent years. Add-on acquisitions are becoming increasingly prevalent, especially over platform deals. In fact, Mathews discussed how their deals are more often brokered than not, which is leading to more add-ons.

Abraham Borden, Director at Diversis Capital, shared that, with all the uncertainty in the market, his firm is focusing on relationship-building to pave the way for future investments. In those conversations, he's noticed a trend of companies looking for more transformational or solutions-focused deals.

As such, firms may wish to focus on add-on investments for the short term while they make plans for the long term. Outreach and communication with potential investment opportunities for deals next year may prove to be the crucial activity for future success. The relationships you build today could return even greater profits if given enough time to breathe.

Tip #3: Certain Sub-Sectors Are Thriving

While sub-sectors like mortgage and mortgage tech have understandably cooled following the incredibly hot real estate market during the pandemic, other sub-sectors are becoming hotter by the day. After the recent supply chain issues that impacted many industries, the supply chain and broader industrial tech sectors seem to be entering a renaissance.

Dominic Chan, Director at Vaquero Capital, noted that he's seeing more deals and opportunities arise out of sub-sectors relating to logistics, including food supply chain, energy tech, and transportation. On top of that, industries that experienced significant hardship during the pandemic "hospitality and travel, for instance "are bouncing back, and the software and tech that help those industries succeed are likewise improving.

Find Your Next Great Opportunity

Even amidst an economic slowdown and decreased appetite for risk in the industry, there are still many opportunities for the firms who know what to look for and where. Proactively building a strategic focus, facilitating the right relationships, and keeping abreast of trends will go a long way toward making 2023 a success for your firm.

For more tips and insights from our panelists, listen to the full webinar, How to Find Great Deals in Software and Tech, on-demand here.