Why Software Combined aims to offer ISVs an alternative M&A path

Former AWS executive Stefan Jansen discusses Software Combined's mission to acquire A/NZ software companies while still giving control to their owners.

Eleanor Dickinson (ARN), 24 August, 2022 17:37

The Australia and New Zealand channel has been in the grip of a mergers and acquisitions (M&A) flurry for the last few years as investors jostle to capitalise on skyrocketing demand for technology services.

With systems integrators and private equity firms leading the M&A charge, channel players and independent software vendors (ISVs) are being lured to sell with the promise of big money and a cushy retirement.

However, these all too often come with big conditions for the founders: high earn-out targets and the absence of any meaningful control over their former business.

Amid this M&A craze, three former technology and investment leaders -- Stefan Jansen, Niek Hoogenhout and Evert Den Hollander – are aiming to provide ISVs with an alternative to all-out acquisition and integration via an aggregation model.

Known as Software Combined, the Sydney-based company invests in, acquires and supports established A/NZ software businesses with the promise of leaving complete control with the original founders.

With funding from PE firm Navis and five companies within its portfolio -- Streamtime, Scope Systems, Energy Inspection, MacroView and Omnitronics – Software Combined is now aiming to scale up its aggregator model across A/NZ.

Speaking to ARN about Software Combined’s formation, Jansen, a former channel leader at Amazon Web Services (AWS) and Microsoft Azure, said the goal was to give software vendor founders a different option than simply having their intellectual property (IP) acquired and merged.

“A lot of software company owners were nervous that they would be acquired and integrated into a large buyer, who will take the IP but not the staff in a way that the owner wants,” he explained. “The foundation of Software Combined was to offer them continuity and stability.

“Software aggregation and the aggregator model is about buy and hold for us, and we do not integrate. An owner tells us how they want to run their business and we give a value of the business on that basis, allowing them to run it as they want.”

While PE firms are more focused on driving returns and have clear deadlines for a financial return before moving on, Software Combined aims to hold onto acquired companies forever, Jansen said.

“Our model is very different,” he added. “We acquire and we hold forever. For us, it’s about investing in companies whether they grow fast or moderately. Our first focus is stability and to continue to give very solid returns.”

In order to build a pipeline of companies capable of delivering such returns, Jansen, Hoogenhout and Hollander have built a large database of A/NZ software companies that fit their criteria of being financially stable and with recurring earnings and high free cash flow.

Once acquired, companies have free rein to run themselves. No effort is made to combine or cross-sell the different companies’ offerings – at least on the Software combined leaders’ part – and founders are highly encouraged to stay with the business for the long term.

In addition, they are encouraged to pursue their own M&A, leveraging Software Combine’s access to capital.

Out of 12,000 tech companies profiled in A/NZ through Software Combined’s database platform, the three founders unearthed just 150 companies that meet their criteria. And, as Jansen points out, thousands more companies are entering the arena every year offering a software or software-as-a-service product.

“Of course, that’s a lot of companies to engage with,” Jansen quipped. “But we have built quite a sophisticated database to find the ones that fit the criteria.”

All three founders bring a high level of either investment, M&A or technology experience to Software Combined's leadership, which also aids in narrowing their investment choices.

While CEO Hollander, the former head of M&A at Macquarie Group, brings insight into the deals market, chief investment officer Hoogenhout brings a blend of both tech and investor relations based on his experience at The Boston Consulting Group, Rubrik and Accenture.

Meanwhile, Jansen, who was previously AWS’ A/NZ head of training and certification, said his technology and channel knowledge said his experience helps on the advisory side, a key component of Software Combined’s offering.

“A lot of ISVs were born from software developers and have a very different commercial or go-to-market context,” Jansen explained. “Part of what I do is help founders revisit channel engagement and channel strategy, as well as providing support around best practices, financial management and accounting.

“When I talked to a lot of founders, especially those who were technologists who almost started a business accidentally, they often have a great team, loyal customers and are profitable. But what I found was that owners were struggling to find support – especially financial and advisory support – when they reached a certain point. So, providing very structured support and advice in growing their product, say in a new market, and business is very important for us.”

Jansen’s AWS history has also come in handy for helping Software Combined’s portfolio navigate the ongoing tech skills crisis in A/NZ.

“The skills shortage in A/NZ is topic number one and it has been for several years but has really hit a critical point as a result of the pandemic,” he said. “Bringing in my experience around skills helps. I can’t solve the problem, but I think access to training is important in that it offers your team the development they need to serve customers and stay abreast of the latest technological advancements. It’s also important from a career standpoint.”

According to Jansen, Software Combined is now in the “advanced stages” of engaging several prospective software vendors for future acquisition, with a number of those based in New Zealand.

On the subject of what prospective sellers need to do in order to fit Software Combined’s criteria, Jansen said it is often “very personal” to the founders.

“A starting point is for an owner to think about what they want to leave behind when they exit.,” he explained.

“Secondly, how do you value what you leave behind both in a monetary sense but also from customer, product and [people perspectives. Vendors who want to sell their business often want to ensure their customers and their teams are looked after.

“Then also it’s about the readiness of the organisation. Do you have all the data points available for someone to come in and quickly learn about your business? We don’t just look at numbers; we look at culture and strategy, customer profiles, etc... If we have access to that information, then we can act very fast.”

“Think carefully about the long-term journey; what is the legacy you would like to leave behind,” he added. “And who do you engage as an investor if you seek to exit? If you seek to grow, how do you seek capital: do you seek a fast return or an investor who is in for the long term.”