B2B software assets embraced in work-from-home environment

B2B software, one of the hottest and highest valued sub-sectors of PE investment, is proving invaluable as companies seek to improve processes and workflow under a remote-everything environment.

The technology sector remains relatively insulated from the disruption caused by the global pandemic. However, B2B software companies are likely to experience different implications based on the exposure of the end-market it is serving, industry sources told PE Hub.

Some bankers and investors believe B2B software businesses and those operating with a subscription model are already in a position to benefit, while other companies are pivoting their focus to address covid-19-related needs.

Core areas of subscription software – such as subscription entertainment, online learning, e-commerce, marketplaces and payments – are all potential benefactors of the current environment, according to Per Roman, co-founder and managing director at technology-focused investment bank GP Bullhound, who spoke at last week’s Global Tech Market Update webinar.

Software for efficiency

Brian Shortsleeve, a managing director at growth equity and venture capital firm M33 Growth, is one investor who believes the tools offered by his B2B software companies will be embraced in the coronavirus crisis.

“This is [a] time where businesses are looking to move faster, reduce their operating expenses, focus on their most important work – and often that means to partner with the best-in-class software providers that allow them to do so,” Shortsleeve said. 

The investor said he sees a lot of interest in cloud software, technology that provides avenues for some companies to reduce operating expenses and perform their work remotely.

For example, M33 Growth-backed Titan Cloud, which provides cloud-based environmental compliance software for retail fuel operators and commercial fleets, can help a company like 7-Eleven monitor their environmental compliance remotely, according to Shortsleeve.

Online learning companies that offer software services to schools and other businesses in the academic world have also seen growth in demand in the wake of the public health crisis.

Great Hill-backed Examity, an online proctoring service and provider of authentication solutions for higher education institutions, is one of them. The company has seen an increase in client volume as American students transition to remote and online learning, Chris Gaffney, managing director at Great Hill, recently told PE Hub.

As students are increasingly moving to a distance learning model, exams will be taken online and universities will want to ensure testing is being done correctly, Gaffney said.

New demand

Elsewhere, some B2B companies are repurposing resources and adding new capabilities to address new demand triggered by the covid-19 outbreak.

Alpine Investors-backed VHT, a provider of callback software and services, recently launched the VHT covid-19 Assistance Program (VCAP). The program offers relief to customers, including healthcare and other critical services workers who are experiencing massive in-bound call volume. VHS’s software enables its client providers to transition callers with non-critical requests to SMS text messaging and other remote options.

The company is now providing a set of services for free for 30 days, Mark Strauch, a partner at Alpine Investors, told PE Hub. “We took the software that VHT provides and made it available for this 30-day crisis period for those [customer] companies free of charge,” Strauch said.

Mission critical B2B software will be a sector that shines in this environment, agreed Bruce Eatroff, managing partner at mid-market PE firm Halyard Capital.

Consider Halyard-backed healthcare IT company, Yoktel, which provides software that enables video communication in hospitals. Not surprisingly, Yoktel has seen a considerable uptick in demand resulting from the pandemic.

“It has seen such dramatic growth that we had to try to figure how we can meet the demand,” Eatroff said.

Another important factor to take into account when evaluating the risk positioning of a B2B software company is the structure of its client contract, according to GP Bullhound Director Eric Crowley.

If the company operates under an annual contract and its billing date is in January or February, the company is clear for the following year and the pandemic won’t influence revenue significantly, Crowley explained.

On the other hand, a usage-based contract means revenue is dependent on the number of transactions. Companies with these contracts are at greater risk, as the dollar amount of total transactions is prone to decline amid a weakened economy, Crowley added.

In terms of M&A valuations, higher-growth software companies saw their multiples compress by nearly 30 percent during a recent month-long stretch, according to a Jefferies report.

On February 19, on average, a higher-growth software company was valued at 12.5x its forward annual revenue. On March 20^th, the same company was valued at 8.9x its forward revenue, the research said. Many of these companies have yet to re-forecast their revenue for the next year, which is set to be lower considering the global shutdowns, according to Jefferies.

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Update: This story has been updated to clarify the full name and position of Eric Crowley of GP Bullhound, as well as clarify that M33 is M33 Growth.