We’ve got the conversation really rolling in this post; we’ll explore what the motivations are of private equities and what types of technology companies they are interested in. Remember in the last post that we described the different types of investments — note that this post focuses strictly on the private equity model.

Obviously, investors want to earn as much money as possible on their investment. Private equity firm executives manage the funds on behalf of the investors, and make decisions on how to improve the operation of companies in which they’ve invested to maximize their valuations. Their goal is to maximize the company’s value and flip it within a few years. It’s kind of like flipping a house, but with a much longer timeframe; usually 4-7 years from initial investment to sale.

The top strategy in an investment is to improve product quality and reliability, because that’s the most reliable way to increase the company’s valuation. A superior product can command a higher price point, and improved quality has a trickle down effect on reducing support expenses. Plus, a superior product builds a better perception in the market.

But there’s also a focus on reducing costs and increasing revenues.

To reduce costs, the new executives’ goals are — above all — to improve the reliability of their products, but also to minimize support expenses, lower headcount, streamline or automate processes, and eliminate inefficiencies. Hold on to this thought. It will be important in a future post.

To increase revenues, they want to sell more product and bolster profit margins. One way that private equity firm executives do this is by aligning companies that work in the same industry, creating a suite of products that may appeal to all of the sister companies’ customers. Then, existing customers from one company become low-hanging fruit for sales reps at the sister companies.

What kinds of technology companies are they interested in?

Private equity firms are typically interested in product businesses that have an easily repeatable sales and implementation process, and that offer recurring revenue. Enterprise Software as a Service (SaaS) companies are especially attractive to private equity investors because customers are normally locked into subscription contracts of a year or more requiring monthly payments

Companies with minimum annual revenues in $10-$20 million range are of interest to private equity firms. These companies have a proven history of revenue, and are at a strategic inflection point in their growth cycle. If the infrastructure required to support a larger company can be implemented, these companies can turn into lucrative payoff opportunities for investors.

In the next post of “Follow the Money” we’ll bring it really close to home and share why investors are particularly interested in the association market. Keep watching. Oh and don’t forget that we’re getting up close and personal around this conversation at AMS Fest next week in the session titled: “Beneath the Surface: Investors Discover Association Tech & What it Means for You.” There’s still room to join us.

Special thanks to the author of this series: Ben Martin, CAE, Online Community Results.