03.09.19

Investing in technology businesses (part one)

How to crack the code

Tom Matthews

Technology runs our lives these days. Smartphones, tablets and computers – we really can’t seem to function without them.  In a very short amount of time, technology has exploded in the market and now many people cannot imagine a life without it.  Accordingly, it is probably no surprise that during my career in growth investing I’ve found my investment focus has shifted from people-based businesses towards technology-enabled services.

Why do growth investors find technology businesses attractive?

Technology businesses tend to exhibit a number of characteristics that growth investors search for.  Software as a service (SaaS) businesses are asset-light, with highly scalable business models that are often growing strongly in the sectors they are disrupting.  In addition, many SaaS companies have high levels of recurring revenue and are typically very cash generative.

Experience counts

Returns from investing in technology companies have generally outperformed the market.  However, analysis by Boston Consulting Group (BCG) has found that expertise in software investments makes a tremendous difference.  Experienced tech investors outperformed by 20 percentage points.  BCG state that what sets the experienced tech investors apart is their ability to successfully apply a distinct set of value creation levers to generate higher returns from their technology investments.

Pemba’s deep experience in technology

At Pemba we have made over 14 investments in technology businesses over the last three years – across HR tech, education tech, government tech, automotive tech, QA testing, cyber security, predictive analytics and behavioural science.

What next?

At Pemba we come across many technology companies seeking investment.  However, only a handful of these get through our rigorous screening criteria of what makes an attractive investment opportunity.  In this series of articles, I’ll take you through some of the key indicators we look for in tech investments and the playbook we have successfully applied across some of our investee tech companies to drive value.

Get in touch

If you are interested in learning more about technology investing or are an owner of a technology business considering partnering with an experienced technology investor, then please contact us to find out more.

Photo by Markus Spiske on Unsplash

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