Supply chain software brings growth capital as investors call it a new “hot” space

Supply chain software is in a good place right now with more people anticipating a new “industrial revolution”.

Tech Take with Milana Vinn

Digital transformation is taking hold of businesses in the supply chain sector. And with that, more growth investors continue to pour capital into the market. 

Just in the past year we’ve seen a few prominent tech investors bet on supply chain companies.

TCV last year invested $200 million in Relex, an end-to-end retail planning technology company, which uses artificial intelligence to automate demand forecasting.

In October, Insight Partners led an $11 million Series A round in Fairmarkit, an AI-powered tail spend management software company.

Earlier this month, CVC Growth Partners invested $200 million in EcoVadis SAS, a provider of business sustainability ratings for global supply chains.

There are a number of reasons why the market has become very interesting to different types of investors, including traditional PE, growth investors and VCs, John Doran, a partner at TCV, told me in a recent conversation.

“Growth investors like when markets have attractive tailwinds or when they are going through refresh cycles due to technology innovation,” said Doran, who led the investment in Relex. “It means there is room for growth and for innovators to win market share.”

New technology that is being adopted by supply chain management providers is solving a number of old problems, including wastage, unused shipping space, lack of clients’ visibility into demand, inventory forecasting, inefficient user experience and more, I’m hearing.

Relex, for instance, was deemed attractive by TCV due to its innovation in forecasting and demand optimization technology, which has changed the way retailers manage their inventory.

Instead of using older generations of software that many retailers bought in the late 90s and early 2000s, clients can now transition to supply chain forecasting software that includes space, promotions and workforce planning – technology that Relex offers, Doran told me.

Another good reason to invest in the space is the stickiness of the supply chain model.

For example, if you sign up a big client like Airbus, many of its suppliers and vendors would also be encouraged or incentivized to join your digital supply chain network, Eric Crowley, director at GP Bullhound, told me in a recent conversation.

That network effect creates a good cash-generating opportunity for businesses in the sector, he said.

“As more and more purchasers and suppliers become entrenched and transact on the network, user retention increases and the incentives for new customers to join grows, ultimately resulting in a highly valuable supply chain solution driven by network effects,” Crowley said. “Supply chain software is a very hot sector as more and more companies are adapting these efficiency tools.” 

Choosing a supply chain platform is also not a decision made lightly by customers. If a company makes a decision to switch, it’s usually to a solution that they plan to use for five-plus years, TCV’s Doran said. The sector’s high customer stickiness and visibility into recurring revenue streams is attractive to investors, he said.

So how are these sector attributes being reflected in the M&A universe? 

I recently wrote about Insight Partners putting E2Open, a software provider for supply-chain management, on the block. Sources told me the company is likely to sell for nearly 20x EBITDA. 

That kind of valuation is practically expected in the space, whereas a multiple of 15x EBITDA is considered “almost cheap,” one of the sources told me. For more info on potential buyers and advisers on the process, read my story. 

Supply chain software is in a good place right now with more people anticipating a new “industrial revolution,” one GP told me. As firms begin to rethink ways to operate more efficiently, companies like E2Open grow in demand, the person said.

What is your “tech take” on the supply chain sector? And what are some other processes in the space I should put on investors’ radar? 

Action Item: Read my story about Insight Partners’ sale of E2Open.