A Smooth Sea Never Made A Skilled Sailor
Arrowroot and the management teams of our portfolio companies reacted RAPIDLY in the March and April period when COVID first hit. Nobody knew where life and the economy were going to take us. Nobody was talking about an “acceleration of digital transformation” at an enterprise … nobody believed in a “COVID tailwind.” It was a wartime CEO environment and ALL management teams acted accordingly. The unknowing created a rough moment but we adapted. Some changes in forecast, some expense cuts, and a lot of hurry up and wait to see when this will pass. Arrowroot’s Strategic Resources Group bore down and the level of engagement with our portfolio company was at an all-time high. New investments were set aside and 100% of our focus was our portfolio family.
How many times a day do we hear “you’re muted?” Business has changed forever. Arrowroot went remote and we have not missed a beat. At one point in the highs and lows of social restrictions Arrowroot had an outdoor, social distanced ‘closing’ event for one of our new deals. I had not seen a new associate face-to-face since I had interviewed him a year and half ago. I went through half a day with him until I realized this was the case. I felt like I knew him and was with him often. We interact on zoom that much! A relationship was built. If (and that is a big ‘if’) Arrowroot is remote through 2021 we would have worked remote for a quarter of the firm’s existence. We have been successful in this environment and it will continue. With all of that said – I CANNOT wait to cheers the whole Arrowroot team at one of our loud and crowded events! Thank you for being flexible, team.
Testing “resilience” is now universal when executing due diligence on a company. COVID has forced investment committees to sound more like credit committees. Arrowroot is lucky and blessed to have a portfolio that is definitively resilient. In fact, most of our firms are actually benefiting from said “acceleration of digital transformation” at the enterprise. Enterprise software is THE SECTOR to invest in due to the resilient characteristics. Arrowroot has become a thought leader in software and we couldn’t imagine investing in another sector. “Wait, you don’t have over 100% of your revenue guaranteed for the next 12 months – YUCK!”
The enterprise software industry is ending 2020 with a lot of consolidation. The Slack deal is huge but that type of mega deal is going to always be far and few between. I am talking about the $20m to $250m acquisitions…the number of these deals are accelerating and will continue to grow. Smaller SaaS businesses should be comfortable to the idea of joining a larger platform. Firstly, valuations are at an all-time high. Secondly, larger is typically better and more resilient. The revenue multiple expansion for software companies with enterprise value between say $500m to multi-billion dollars is mind boggling (see delta between private vs. public software company valuations). 2021 will be the year of consolidation.
Special Purpose Acquisition Companies. SPACs. They rose from the ashes in 2020 and will be everywhere in 2021. By the end of January 2021 there will be over 300 SPACs in the market. Oddly enough, there is a bit of a void for enterprise software focused SPACs planned. Demand from the public markets for great enterprise software companies is quite high. SPACs are needed, they will come, and they could magnify said “mind boggling” multiple expansion at the $1b+ enterprise value level.
2020 gave Arrowroot several successful exits, several new investments, and a tighter knit and more efficient team. I would like to thank the Arrowroot team and our portfolio companies as we finish a CRAZY year. I am proud how we helped our portfolio companies and proud how we enabled our portfolio companies to help each other. We are all more skilled sailors.
2021 is collectively going to be our year. As our friend George Baker Sr., CEO and Founder of ParkHub, always says – “to the moon!”
Thanks for reading.
Arrowroot Capital wishes all of you a healthy and happy new year!