Optimism in the Air at Software Silicon Slopes
Baird recently hosted its second annual Software Silicon Slopes event in Park City, UT connecting leading software companies and technology investors to explore emerging sector themes. Despite a pullback in the market and cautious earnings commentary in 2022, Software company management teams and investors are optimistic to start 2023. Overall, software demand trends appear to be stabilizing and investors are actively seeking investment opportunities in the sector.
We share key insights from panel discussions and conversations at the Software Silicon Slopes event below.
Product-Led Growth (PLG) is Transforming the Enterprise
The rise of product-led software platforms has given business units direct access to explore, test and engage with more software than ever before. This trend has shifted IT decision flow by giving business leaders a voice in internal IT budget discussions, which are increasingly based on bottom-up business needs. This shift in IT decision making across the enterprise is one of the biggest pivots in recent technology history. Recently, PLG companies have benefited from accelerated growth but are now being tested by the first economic slowdown.
Cloud Adoption and Digital Transformation Have Just Begun
Enterprises have only started to migrate data to the cloud due to complexity, resources and scale of the required projects, so the opportunity for cloud adoption remains large. The pace of technology innovation, including AI capabilities, shows the untapped technology potential for enterprises. The recent ChatGPT reveal renewed investor enthusiasm around AI software opportunities and disruptive cloud applications. Furthermore, scalable open source projects, secure software delivery and containerization will be key drivers for enterprise software development and delivery.
Security as the Top Priority
A rebound in business travel combined with increased application adoption and remote work during Covid is putting pressure on enterprise security. As IT budgets come under scrutiny, security has emerged as a prominent recession-proof software category and remains a board-level issue. In this category, technology leaders actively seek out redundancies and lead their vendor decisions with best-of-breed security solutions to complement platforms. The shift in prioritizing leading-edge technology vs. legacy vendors for large enterprise cybersecurity has emerged in the last five years and is expected to continue.
Metrics that Matter
Current investor focus is on balanced growth and profitability as well as shifting customer trends due to slowing seat expansion. As customer dynamics shift, investors are increasingly focused on Gross Revenue Retention and placing less emphasis on Net Revenue Retention as it may conceal certain customer trends. In the current macro backdrop, customer retention is seen as the new customer acquisition, and customer success is becoming a top priority for senior leadership, including growing demand for a Chief Customer Officer role. Stock-Based Compensation continues to be scrutinized by investors and will be closely watched in the near-term. Finally, investors are focused on unit economics and Customer Acquisition Cost efficiencies to validate long-term profitability outlook.
Growing Investor Appetite
The bid/ask spread between public, private companies and investors is starting to narrow. Company expectations have started to reset off elevated 2021 levels and investors are gaining confidence in the macro outlook. Each IPO cycle is unique, and this one is marked by private capital funding prevalence. As a result, while the current IPO market remains challenged, the quality of the IPO backlog remains strong. According to investors, the market is already open to high-quality issuers with a balanced approach to growth and profitability, equity story simplicity, durable margins, growth visibility and market leadership. Investor receptivity can be proven by an uptick in follow-on offering activity in February, which is often seen as an early IPO market rebound indicator. In the meantime, Private Equity take-private transactions are likely to continue to set a valuation floor for public market software businesses, while transformational strategic acquisitions are unlikely to rebound until later in the economic cycle.
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