VC Perspectives

If you, like me, are interested in what goes on in the software sector in terms of investments and M&A activity, an interesting source of information is Ridgecrest Partners, a technology investment bank in San Francisco. They release a newsletter on a regular basis tracking recent investments and acquisitions as well as public company data which provide good comperative data on valuation multiples and exit values. The focus is primarily US but also deals from the rest of the world are included.

Looking at their latest newsletter, one can see that there have been quite a bit of M&A-activity with 100+ transactions between December 2008 and February 2009. However, the exit values are in general low (or not even disclosed which oftens means small exits). Also, company exit values are in the range of 1-2 times revenue (usually referred to as P/S-multiple: price for the company versus either current or forecasted revenue) or even lower.

So, it’s quite clear that in general one cannot expect very high valuations for software companies in the near future.

Every year Truffle Capital establishes the ranking of the top 100 European independent software companies based on software revenue. Given that the software industry is a major sector in the Nordic region it is interesting to understand how the industry is developing and how it compares to the rest of Europe and the US.

Here are some observations from having analyzed the data:

Few very large European software companies

There is only one major world-class independent European software company, SAP. It constitute about 42% of the top-100 company revenues and is almost 8 times bigger than the second company. In all, there are only three independent software companies in Europe having revenues of more than €1bn (SAP, Sage and Dassault Systems).

39 vendors (up from 30 in 2007) have revenues of €100m or more and 65 vendors have revenues of €50m (up from 56 in 2007). As a comparison, there are more than 250 software companies worldwide with revenues of €50m or more. 

Limited exit opportunities in Europe?

That there are fewer really large European software companies than in the US also means that there are a limited number of European software companies that can acquire other software companies at very high valuations. As an example, Microsoft alone has more revenues than the top-100 European companies together. So it’s no surpirse that almost all big exits of Nordic software companies have been made to US companies (that in addition has another tradition of fuelling growth with acquisitions rather than organic expansion).

The Nordic region performs well compared to Europe despite its small size

In 2008, 23 vendors in the top-100 (21 in 2007 and 2006) are Nordic software companies. This is well on par with UK and France although we have a much smaller population. However, based on aggregated revenue, the Nordic companies are less successful meaning UK, France and Germany have more really big companies:

In terms of a breakdown of the Nordic countries, Norway has 8 companies, Finland 7, Sweden 6 and Denmark 2 on the list.

So, there’s definitely a good tradition of building software companies in our region, which is important also for start-ups since it means local access to people who have been part of growing these companies into international success stories.

Not much diversification

1/3 of the Truffle 100 are in the ERP or related business and another 1/3 is composed of infrastructure software vendors. In general there is an overweight of Financial software and Public sector software and most software companies have a very traditional B2B sales model with large sales forces and partnership programs although some are trying to move into for example SaaS-models.

 Here are links to the Truffle-100 reports:

http://www.truffle100.com/europe/downloads/2008/Truffle100_2008.pdf

http://www.truffle100.com/europe/downloads/2007/Truffle100_2007.pdf

http://www.truffle100.com/europe/downloads/2006/truffle100_2006.pdf