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