E-Sourcing Forum » Who’s Your Vendor’s Daddy?

Who’s Your Vendor’s Daddy?

September 21st, 2006 at 08:38am David Bush - Iasta

Last month, AMR published an article entitled Who Really Owns Your Software Vendor? Should You Care? where they stated that private equity firms have been spending billions to buy up software companies and combine them into very large portfolios. It is true that acquisitions in software are a very regular occurrence, and that it often has no effect on you as the end customer, but the article, which states that software buyers need to understand who really owns their vendors notes the bad news associated with this recent trend:

The real owners are financial investors with little interest (or knowledge of) the software products or underlying technology.
Private equity firms typically do not want to hold an investment for more than five to seven years in totality.
Employee, product, or customer loyalty is unlikely to influence business strategy.
Debt reduction is a much higher priority than long-term product investments, such as functional rewrites or new architectures.

In other words, if your vendor is owned by a private equity firm, the chances of significant new releases are significantly diminished due to reduced chances of significant R&D investment, your input is less likely to be valued, and long term stability is up in the air, since the private equity firm is likely to dump the company once they’ve realized their expected returns.

By now you’re probably asking how does this affect me? Since most companies in our space are not currently owned by private equity firms. It affects you since most companies in the space were established with venture backing and are thus majority owned by venture capitalists who also want their money back within five to seven years. This means that if your vendor is majority owned by a VC and not picked up by a big company within the space looking to broaden its offering after a few years, it is most likely going to be sold to a private equity consolidator whose only interest is to ride it for all it is financially worth, even if it means driving the company into the ground.

This is one of the hidden values of our company when compared to others. We are 100% privately owned, profitable, and free of itchy trigger fingers eager to get return. We have had plenty of discussions with VC firms and have never been able to justify the changes that would inevitably impact our clients and our management style. If we ever do find a good way to accelerate growth beyond just having a good product, we will do so in a way that allows us to maintain our philosophy of running Iasta with a client driven focus. Our history since 2000 has proven that we can compete and excel against much larger and much deeper pocketbooks.

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Entry Filed under: General, e-Sourcing Marketplace

2 Comments Add your own

1. Eric Strovink | September 21st, 2006 at 10:40 am

What’s more troubling than the funding of firms in our space is the overall lack of innovation. Iasta and a few others continually improve their products, but other vendors appear willing to declare software “done,” and are riding the same tired horse they rode in on five years ago. The analysts in the space haven’t helped sort this out — with the exception of Debbie Wilson at Gartner, how many have actually sourced a commodity at a real company? Without independent experience in the space, and a solid grounding in reality, analysts fall easy victims to vendor Kool-Aid.

Lack of innovation is the kiss of death for software companies. Software that isn’t changing, growing, and being enhanced continually is essentially dead. Vendors who are unable to retain key talent often find themselves in a difficult position. There’s nobody left who understands the product, so nobody can enhance it. The result? Core technologies remain stagnant, while effort is re-directed toward glitz, glamour, and marketing-speak.

To your point Dave, VC and private equity firms can be big contributors to this problem. Their relentless push for hockey-stick revenue growth — absent the management push-back that is required to control them — can lead to miserable work environments, high turnover rates, and loss of both intrinsic capability and vision. What’s worse, companies with “puppet master” pressure cannot price effectively and sanely. That leads directly to the outrageously expensive deals we’ve seen in recent years.
2. David Bush - Iasta | September 22nd, 2006 at 10:37 am

Thanks for the input, Eric. Obviously, I agree with your sentiments completely.

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