DRS Principles – “Good employees are the basis for every business success.”

DRS Investment follows its own principles and applies them in its own team as well as in the management of its own portfolio companies. A key principle for DRS is to find and develop good employees. This also includes “protecting” employees – especially from other employees with a negative influence. Consistency and courage are required here – because individual employees can destroy the motivation of a complete team. “Leadership” and not the famous kicker-table are decisive for satisfied employees. The shareholders bear the responsibility to establish a respectful leadership towards the employees. DRS Investment likes to play an active role here.

It is indisputable and plausible that good employees are important for the company’s success and that they should be encouraged. Large corporations therefore have HR managers who are strategically and professionally responsible for recruiting and development of employees.

Nevertheless, the promotion of talent is essential, especially in software companies. As a rule, this is in the hands of the company management, not infrequently the founder of the company. Since the founder often lacks a comparison and experience – especially if the company was founded at a young age – personnel management is often handled “from the gut” and to the best of his or her knowledge and belief. This can be good or bad.

Again and again we see software companies where the growth of the company slows down, often growth barriers within the organization are a reason. In addition, there is a high fluctuation rate and a shortage of skilled workers. And in this context, the topic of strategic personnel management is increasingly coming to the fore.

Because DRS Investment looks at and analyzes more than a hundred software companies every year, we often see similar patterns. We are happy to share our findings here:

  1. Leadership roles are not lived out sufficiently
  2. Long-standing employees are selected for management roles – even if these are not suitable for this purpose
  3. Too few external, experienced managers are brought on board
  4. No professional, external support is used
  5. Employees are kept, even if they do their job badly
  6. “Stinky boots” are tolerated
  7. “Harmony” is written in capital letters
  8. The founder of the company makes too late room for his successor

Ad 1.: Leadership roles are not lived out sufficiently

The culture of “togetherness” is particularly important in founder-managed software companies. This is of course desirable, as cooperation has an extremely positive effect on the motivation of employees. A high level of identification with the company and the purpose leads to top performance, nothing is impossible. Since the hierarchies in software companies are very flat and the employees are well trained, there is often a kind of grassroots democracy. This culture is helpful in the start-up phase. With increasing growth, hierarchical structures become necessary, not everyone should discuss everything.

The leadership roles to be filled are often filled by the best (technical) employees from the own team (see point 2). Employees without management experience often experience this career step ambivalently: on the one hand they are happy about the career step, on the other hand they are suddenly empowered to give instructions to their colleagues and are increasingly alien to them.

Since the progress in the company and often the salary increase depends on the new boss, they behave accordingly. On the one hand, the young team leader still wants to be considered an equal among equals, on the other hand, he is treated as the boss by his colleagues. If the new leadership role is not accepted, this leads to confusion and frustration among the employees, as the team is perceived as leadershipless.

The problem is particularly evident in conflict situations: If a manager is “conflict-shy”, conflicts are rarely proactively addressed and resolved. Criticism and clear feedback about poor performance are also not made transparent, which in turn frustrates the high performers of a team. This is a recipe for anger.

Ad 2.: Long-standing employees are selected for management roles…

…even if they are obviously not suitable for all of them. As described under point 1, the best and longest serving employees are often selected for leadership roles. This is understandable, since a.) the professional skills are projected onto the leadership qualities and b.) a close relationship of trust is maintained with the long-term employees. From our point of view, this view is an obstacle to selecting really good managers. It is more relevant to compare the tasks of the role with the abilities of an employee and to decide accordingly. Otherwise there is a great danger of destroying the productivity of excellent specialists and of risking dissatisfied employees because teams are inadequately led. In general, it is advisable to think outside the box and bring “fresh blood” into the company. Only an objective selection process reduces the risk of an incorrect appointment. Diagnostic tests and detailed organisational analyses help to achieve a good “matching” between role and candidate.

Ad 3.: Too few external, experienced managers are brought on board

From a certain company size it makes sense to buy knowledge. Growth poses great challenges to companies and it is simply inefficient to want to make any experience (however good or bad) yourself. It is much easier to bring on board experienced specialists and managers who have made their mistakes in the past with other companies and learned how the game works. It can be helpful to recruit employees from competitors or to try to recruit employees who have been working successfully in similar roles for years. Experienced employees always bring new knowledge into an organization or question traditional processes, rules and views in a very refreshing way. Important here: The corporate culture must be open to new ideas, criticism must be taken seriously and must not be formulated personally. A culture of “constructive conflict” is very helpful here.

Ad 4.: No professional, external support is used

It surprises us again and again that small software companies rarely use the possibility of external consulting. Especially for growth companies with a high speed of change and high recruitment costs, external support can be very helpful. Organizational consultancies that sensitize to permanent change and accompany it or define fields of development on the basis of organizational analyses are an option. In addition, it makes sense to work with personnel consultants who relieve a lot of administrative work when recruiting employees and fill specific positions via headhunting. The big challenge here is to work with really good consultants, because the selection of consultants is almost infinite. Over the years, DRS has built up a network of professional consultants and tried them out again and again in various situations. Such contacts in particular can be worth “gold” for a company at the decisive moment.

Ad 5.: Employees are kept, even if they do their job badly

In every company there are employees who do not work at the same level as the others. This is usually uncritical, especially as such employees often have “hidden” skills that cannot always be measured in good code or sales deals. It becomes problematic when employees are so bad that other colleagues have to join in or repair their work. Understandably, this leads to frustration. It is therefore incomprehensible if the company management (or the responsible team leader) does not put an end to this. The responsible managers must have the courage to quit “low performers” in order to protect their own team and corporate culture. Sounds hard, but is fair.

Ad 6.: “Stinky boots” are tolerated

Even more fatal than holding “low performers” is holding “stink boots”. As stink boots we call coworkers (frequently even high-level personnel or managing directors), who are technically brilliant, personally however difficult. These consider themselves then gladly also still irreplaceable. Dishonesty, mobbing, narcissistic behaviour and much more are often tolerated when an employee is perceived as “irreplaceable”. The irreplaceability can manifest itself in head knowledge (“the only one who knows the code”) or sales talent (“without him/her, one third of the turnover is lost”). Sometimes employees or even shareholders are simply afraid of such people or the upcoming decision. In our experience, it does not make sense to hold on to such “stink boots”, as they destroy the culture of a company or significantly reduce the productivity of entire teams. The unmeasurable and thus invisible loss of productivity is often worse than the loss of the highly praised skills of the stink boot. In general, it is dangerous for companies to become dependent on individual employees or to be susceptible to blackmail. The boots often use this dependency to gain personal advantages from the situation. A “No Asshole Policy” applies to DRS, i.e. a zero tolerance of stink boots. Especially supposed “stars” with a stinky boot attitude should be visibly and comprehensibly fired. This is the only way to protect valuable employees and develop a positive culture.

Ad 7.: Harmony” is written in capital letters

The zero tolerance for stink boots does not mean that conflicts should be avoided in a company or that everything runs harmoniously. The metaphor of the three monkeys (see nothing, hear nothing, say nothing) shows nicely how it should not run. Constructive and non-personal criticism, putting one’s finger in the wound, absolute transparency, the introduction of new ideas, the struggle for the best idea – all this leads to conflicts that an organization should endure and resolve. Under the heading of “living constructive conflict”, we encourage our employees to repeatedly engage in constructive conflict and work out solutions. A deceptive harmony on the surface all too often obscures the view of the fermentation of problems beneath the surface. It does not always have to be “peace, joy, pancakes” if the personality of everyone is respected.

Ad 8.: The founder of the company makes too late room for his successor

No joke: We’ve often sat together with entrepreneurs who, at 75 years of age, are still stuck in the executive’s chair and think that they won’t have to start the succession process “for a few years”. From our point of view, it is irresponsible towards employees and customers to be negligent in dealing with their own succession. In the ideal case, it is the founder himself who thinks about establishing a founder-independent management system at an early stage. Here, too, much can be done wrong: The choice of the “perfect son-in-law” (in the truest sense of the word) is a possibility, but rarely optimal. DRS Investment is very familiar with succession planning. We have made good experiences when we first agree on the procedure and timing between the founder and, if necessary, external investors. The process itself should then be accompanied professionally, for example by first defining the management culture and control system of the company as part of an organisational diagnosis. Since a company founder can seldom be replaced 1:1, a reorganisation of the organisation as well as a new filling of vacant positions can make sense. As an investor, DRS actively supports this change process.

Conclusion: Good employees are the basis for every company’s success. In order to provide them with an optimal working environment, shareholders and management must actively work on the working conditions within the company. This is not so much about the famous kicker-table as about the respectful management of employees. Conflicts are not excluded, but pre-programmed. DRS recommends to meet these conflicts constructively and to make decisions with courage and consistency. External support can have a great effect here. The prerequisite for this is to deal positively with new things and change.

About DRS Investment

DRS Investment GmbH is a private investment company. In addition to management equity, DRS invests capital from selected family offices exclusively in stable and established niche software companies (“Vertical Market Software”) in Germany, Austria and Switzerland. DRS was founded in 2017 by the entrepreneur and investor Dr. Andreas Spiegel with the support of other private equity investors in order to acquire software companies with the aim of managing and developing them on a long-term basis (“Buy and Hold”). DRS Investment currently holds stakes in Ascora GmbH (Germany) and XELOG AG (Switzerland). DRS Investment plans to build a large portfolio of small to medium-sized software companies with an EBIT of between €0.5 million and €3 million and a company valuation of up to €30 million.

Further information is available at: https://www.drs-investment.com/Weitere Informationen unter: www.drs-investment.com

The DRS investment philosophy

M&A advisors regulary present DRS Investment potential transactions – interesting and less interesting ones. What is “interesting” or “uninteresting” for us cannot always be clearly assessed in advance by M&A advisors and sellers. The evaluation by DRS says little about whether a company is interesting or uninteresting per se, but rather about the question of whether DRS suits a company and vice versa. The following Blogpost pursues the question after for DRS interesting Investments.

At DRS Investment, we have defined clear investment criteria that follow a certain logic. First of all, we believe that DRS should only become a shareholder in a company if DRS, as an active shareholder, can provide real added value. This is about the “fit” between the upcoming developments in a company and the capabilities of DRS.

DRS is an active shareholder who unites the most diverse skills under one roof via a very heterogeneous team. Figuratively speaking, we see ourselves as sports directors and coaches who work from the edge of the pitch on the company or with the team. Only in exceptional cases do we intervene as players and personally manage a company. As a rule, this is only for a limited period of time. In our role as sports director and trainer, we benefit from the fact that we have advised companies over many years, founded and built up them ourselves or managed them as managing directors. We ourselves were confronted with the implementation of projects and the mastering of not always easy challenges. At DRS, experienced experts work with a large network of managers and advisory boards.

DRS has particular experience in the management and development of small to medium-sized businesses. In concrete terms, the experience consists of organisational development (e.g. hiring and developing management teams, coordinating the succession of founders and managers), sales (e.g. setting up sales teams, partner management, incentives, internationalisation), marketing (in particular all facets of online marketing, but also pricing and price increases), the development of new business models e.g. transformation to SaaS models), in the streamlining of processes, but also in the use of new technologies (e.g. dockers, machine learning) or the support of new software developments (e.g. architecture, etc.).

Companies that want to develop “to the next level” and are looking for an experienced partner are suitable for DRS.

Surely there are many companies that fit this description. Another limitation of DRS is the focus on established companies, i.e. DRS neither invests in start-ups nor provides growth capital for loss-making companies. The reason for this is that we as entrepreneurs invest significant amounts of our private assets and consider such investments to be too risky. As we ourselves have founded companies, we know how unpredictable the development of a young company is and how stony the road to a sustainable business model can be.

Our focus is on established companies that have already successfully occupied their market niche and are operating successfully in the market. The special ability of DRS is to give established companies a new dynamic, which may have been lost over time. An essential criterion for DRS are stable customer relationships, consistently high profitability over the years and long-term positive cash flows.

DRS invests exclusively in mature and profitable companies. DRS does not invest in start-ups or loss-making growth companies.

The restriction to “software” is often unclear, by which we ultimately mean own software products. Why this restriction? First of all, in the area of IT, we make a rough distinction between a.) software development houses with a focus on individual programming, b.) software providers (with their own standard software), c.) value-added resellers and d.) IT system integrators.

In our opinion, the big difference between software providers (our DRS focus) and the other IT companies (here DRS does not focus) is the fact that a software provider scales in the event of success, i.e. with increasing revenues only has to increase costs disproportionately or becomes disproportionately profitable with growth, whereas this is usually not the case with the other IT companies. This is due to the fact that for the growth of a software provider the product is decisive (which can be multiplied), while for the growth of other IT companies the personnel (number of software developers who develop software on behalf of third parties or number of sales employees and consultants who sell or implement software) is usually decisive. Multiplication or scaling is difficult in these cases.

IT companies without their own standard software are also more dependent on their staff (top consultants or top vendors), which runs counter to our need for security. A further point is that the barriers to market entry for new competitors are lower for the IT companies described than for software providers and therefore the risk of competition and price erosion is higher.

For outsiders, the restriction to “vertical market software” is often confusing, which ultimately corresponds to a software product for a specific industry or niche. Basically, we differentiate between “Horizontal Software”, which maps one or more business processes industry-independently and “Vertical Software”, which maps all business processes of a specific industry. Both types of software providers are attractive for DRS in principle, but the types differ in essential areas. DRS has a general preference for vertical market software, although in individual cases we also invest in other segments.

Examples of Horizonal Software are ERP or CRM systems. Even though the market potential for such software is usually almost unlimited, we see a high risk in it: Often there are a few overpowering large competitors who consolidate the market and displace small providers. In addition, the markets are also attractive for well-financed start-ups that want to “roll up” the market using disruptive technology. Ultimately, the Horizontal Software markets are often “winner-takes-it-all” markets. Examples are ERP systems (SAP, Microsoft Dynamics), CRM systems (Sales Force), but also platform markets (Facebook) or Internet search (Google). Of course, exceptions also confirm the rule here – so we take a very close look at such software providers!

In the case of Vertical Market Software, the niches served are often extremely small – and therefore rather unattractive for the very big players in the industry as well as start-ups. Examples are software products that concentrate on regional specifics in industries (e.g. payroll accounting in Switzerland) or have to map complex processes (municipal software, software for pharmacies, software for restaurants, etc.). In these industries, there is often only room for a handful of vendors due to their small market volume – and these have been in place for years. The expense for a completely new development, which corresponds to the level of the established providers, would be simply too high against the background of the limited revenue potential. Unfortunately, this is also the big disadvantage: The growth of vertical market software providers is often limited. DRS has a preference for vertical market software, but even here the devil is in the detail. As a result, DRS also analyzes this very carefully – lower growth opportunities or identified risks lead to a moderate valuation in such a software environment.

Conclusion: DRS invests in well-established and profitable software vendors with a preference for Vertical Market Software, as these vendors are highly stable and can be developed to a new level using DRS’s existing capabilities. The focus is on organizational development, marketing & sales and technology. However, exceptions confirm the rule ;-)

 

About DRS Investment

DRS Investment GmbH is a private investment company. In addition to management equity, DRS invests capital from selected family offices exclusively in stable and established niche software companies (“Vertical Market Software”) in Germany, Austria and Switzerland. DRS was founded in 2017 by the entrepreneur and investor Dr. Andreas Spiegel with the support of other private equity investors in order to acquire software companies with the aim of managing and developing them on a long-term basis (“Buy and Hold”). DRS Investment currently holds stakes in Ascora GmbH (Germany) and XELOG AG (Switzerland). DRS Investment plans to build a large portfolio of small to medium-sized software companies with an EBIT of between €0.5 million and €3 million and a company valuation of up to €30 million.

Further information is available at: https://www.drs-investment.com/Weitere Informationen unter: www.drs-investment.com

Grasshoppers and related species

In 2004 the then SPD chairman Franz Müntefering launched the “grasshopper debate” in which “anonymous investors” were equated with grasshopper plagues. From our point of view an excessive exaggeration, but with a true core…

Since then, the term “grasshopper” has been regarded in German political usage as a devaluing animal metaphor for private equity companies and other forms of capital participation, such as in the public-private partnership model, with presumed short-term or exaggerated yield expectations, such as hedge funds or so-called vulture funds (Wikipedia). It is assumed that private equity companies acquire long-established profitable companies and overload them with debts, under which the companies later collapse. The consequences are job cuts, relocations of production or even the filleting of companies.

In concrete terms Münte said in the Bildzeitung: “We must help those entrepreneurs who have the future viability of their companies and the interests of their employees in mind against the irresponsible swarms of grasshoppers that measure success every three months, suck away substance and destroy companies when they have eroded them. Capitalism is not a matter for the museum, it’s a hot topic.”

And he continues: “Some financial investors don’t think about the people whose jobs they are destroying – they remain anonymous, have no face, fall upon companies like swarms of grasshoppers, graze them off and move on. We fight against this form of capitalism.”

Even though the metaphor is exaggerated from our point of view, it makes sense to take a closer look when choosing the buyer. Basically, strategists, i.e. buyers with a strategic interest, are not better suited to the purchase than financial investors. However, every entrepreneur should be aware of the differences between potential buyers. From our point of view, the following types of buyers can be distinguished:

Strategic buyers: Strategic buyers are companies that generally come from the same industry and combine strategic goals and the realization of synergies with the purchase of companies. A resale of the investment is not planned. Nevertheless, discrepancies may arise after the takeover: Often the brand name disappears, locations are relocated (even against the location guarantee guaranteed before the transaction), new management methods and reports are introduced – processes change on a regular basis. As a result, the identity of the acquired company may be lost, important employees may leave the company frustrated, and competitiveness may increasingly dwindle. In addition, strategic buyers often act sluggishly and inexperienced in the transaction itself, making the transaction significantly less secure than with other types of buyers.

Financial investors: Professional financial investors act quite differently. As a rule, they are quick and agile in the transaction. After the transaction, the tone often becomes somewhat rougher, i.e. the company is trimmed to yield. Nevertheless, independence (i.e. brand name and location) is maintained. In order to finance the transaction, financial investors use debt capital in addition to equity capital. This doesn’t have to be bad, although one or the other financial investor lacks a healthy sense of proportion and simply gambles away. This can then lead a company into an existential crisis.

A major disadvantage is that many financial investors have no knowledge of the industry, are pure Excel acrobats and confront management with nonsensical ideas. In general, the shareholders often know everything better – which does not necessarily make cooperation any easier. It becomes particularly difficult when discussing the content of technologies and investments – often there is a lack of understanding and willingness to invest in projects that make sense in the long term. In general, one should know: As a rule, a financial investor only participates for a limited period of time due to its own limited fund duration, i.e. a “passing on” of the company is part of the concept. Consequently, a financial investor will usually act at short notice. If you’re unlucky, you’re in bed with a partner who resembles a used car dealer: buy, make up and then resell quickly. As always in life there are of course big differences and not only black or white. Individual funds act very prudently and develop the companies very successfully.

Purchase by managers or private individuals: Many entrepreneurs wish to sell their business to a “real successor”. If there is no suitable successor in your own company (which is rarely the case), you will be searched for externally. The problem: Hardly any private person can buy a company costing several million euros. If it does, then it will often be with windy financing constructions, i.e. extremely high debts. This requires a sense of proportion and experience – a buyer should also be able to afford a share. Financing on a private level, on the other hand, is often “sewn on edge”. In addition, an operational manager rarely has experience with such complex transactions. The probability of such a construction is therefore very low.

DRS Investment is a new type of investor

DRS Investment is a hybrid buyer type consisting of strategist and financial investor, who combines the advantages of both buyer types, while trying to avoid the disadvantages:

On the one hand, DRS Investment regularly acquires companies. In addition, DRS concentrates exclusively on the purchase of software companies. Transaction security is very high. DRS is able to give feedback on the same day after the first information has been transmitted. Depending on the seller, a transaction can be completed within 12 weeks.

On the other hand, DRS acts like a strategist: we buy companies in order to maintain and develop them over the long term. Employees and job retention are very important to us. A sale is not planned. The nice thing is that since we invest in software companies in a wide variety of industries and do not want or have to realize any synergies in the operative business, the independence of each company is maintained. The value arises from access to the DRS family: the exchange at developer conferences or with DRS experts helps our companies to set the right course for the future. Since DRS invests long-term, projects can also be realized with long-term returns.

Company sellers sell your business only once in a lifetime

No matter which type of buyer is the right one in the individual case, sellers should consider which buyer suits you and your company, regardless of the evaluation. This saves nerves and usually leads to better results.

We look forward to hearing from you!