At Pluralit, we are moved by helping businesses grow using digital tech, often through developing proprietary tech platforms. In this article, we will focus on the multiple ways we have seen that tech investments help increase business value and valuation. We will look at the drivers of value and valuation in marketing and service-oriented businesses, and then see how, in our experience, tech investments have contributed to growth in those value dimensions.
TECH INVESTMENTS GROW BUSINESS VALUE AND VALUATION
Marketing and service type businesses tend to be valued in one or both of two ways:
1. Revenue x Multiple
2. EBITDA x Multiple
Tech investments can grow all of these factors: revenue, EBITDA and their respective multiples. The multiples are a bit more subjective though, and investors will take a view based on several factors that can include (not an exhaustive list!):
- Growth rate: how fast revenues and profits are accelerating,
- Scalability: how easily the business can grow, ideally without huge growth in costs,
- Recurring revenue: whether there are reliable, recurring revenues such as subscriptions or retainers,
- Contracts: whether future revenues are secured through contracts with clients,
- Risks: investors will look at a multitude of potential risks, but also at how these are managed and mitigated,
- Cost to replicate: this is another lens for valuation, where an investment (e.g. in a software platform) can inform a view of what it would cost to build the business from scratch,
- Condition of code (in software / digital assets): investors may want to audit any tech assets to see if they’re well maintained, documented and extensible.
Complementing that, the next drivers of value and valuation in terms of tech investment, specifically bespoke software or similar platforms, which drive businesses.
1. REVENUE GROWTH
The first is whether the platform or software itself is a revenue generating entity. As an example, a gaming platform where, itself, is the product and the revenue generating part of the business. However, it could also be that the platform supports revenue growth to expand an existing business, such as developing an analytics platform that could help gain market share.
2. COST REDUCTION
The second driver is obviously cost reduction, which has a big focus now with the economic challenges in many markets. The examples often to do with businesses that have started up by using external technology partners, which is a super smart and low risk way to build and scale your business. But at some point, these businesses have wanted to bring that capability internally, so they can bring those revenues and margins that they will pay to the external partner and they can increase their own margin. They can start to integrate capabilities within their own business to increase operating efficiency. And finally, by being able to bring those capabilities in and having your own software, there are possibilities to automate that part of the operation as well.
3. DIFFERENTIATION
There is a big search for how we can really stand out from the crowd, particularly among marketing businesses. And that is where having control of your own roadmap, of your own features that you are prioritising for your business really makes a difference, especially, again, if you were relying on external partners.
Those can be good partnerships. But often we have met businesses that want to drive their own features, a roadmap faster than the external partner can help them with or to take a different route that is tightly aligned to their market opportunities and their client needs.
4. ASSET CREATION
Several of our clients wanted to create an asset that sits on the balance sheet of the business and really becomes something tangible within the business. The motivation is often not just creating something valuable that can be carried within the business, but also something which captures some of the business know-how in terms of intellectual property. That is important for investors because it reduces risk - it means that a lot of the functioning of the business will carry on, for example, even if key people such as the founders depart from that business at some point in the future. It also means that the business has a certain autonomy and that the know-how is codified and not just in the minds of people.
5. BUSINESS MODEL
We have seen that having a technology platform will often allow businesses to scale to serve more customers and more markets while their cost base will only increase marginally - with the same exponential growth potential as famous Silicon Valley examples like Uber, Netflix and similar tech platforms businesses.
As a first value-creating step towards this, we often see clients building a platform that their internal teams can use to boost sales, for example, or a platform that their clients can access directly to self-serve (e.g. to access campaign analytics or other dashboards) and can be a tool in expanding their businesses by driving operating efficiencies. Ultimately, there is often a realistic pathway toward a software-as-a-service (SaaS) model with recurring revenues.
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