What I look for in a technology services business

Hear from Richard Pugh, an investor in our Scotland team, as he explains some of the key traits he looks for in a high-potential tech services business.

4 May 2022

Richard Pugh is an investor in BGF’s Scotland team. He has invested in technology businesses such as Waracle and Kick ICT.

1. Technology leadership

A good technology business will be at the forefront of its niche. Whether you’re a Microsoft or Oracle partner or a specialist in React, Node or Xamarin, you’ve got to be up to date with developments in your ecosystem. Otherwise, you’re not supporting your clients as well as you could be, missing potential opportunities to upsell, and leaving a possible inroad for your rivals. Technology leadership means knowing the software and hardware product roadmaps, understanding industry trends, and having the expertise to back it up.

2. Knows its customer

A good business understands its target customer, knows why it is successful with this type of client, and really focuses on those groups. Businesses that sell to small and medium-sized enterprises (SMEs) must deal with many relationships, each generating revenues in the region of £5,000-50,000 a year. This kind of company finds it difficult if not impossible to sell to large enterprise customers such as the big banks. Equally, businesses with a few large clients find it is not cost-effective to go after small contracts. It is possible to grow from serving SMEs to serving enterprise clients, but the transition will take commitment and time – maybe five years.

3. Sales, sales, sales

It’s easy to underestimate the difficulty of selling, but you can’t overstate its importance. Having understood its target market, a business needs to embed a sales mentality deeply into its culture – and not just the sales team’s. To sell to SMEs, a more regimented approach is required – targets, funnel, conversion and so on. For enterprise clients, it’s about meeting the right people, understanding their needs, and managing a complex and often very long sale. It goes without saying that a business should seek to “land and expand” – ie. deepen relationships wherever possible. Some businesses have sales in their DNA, some don’t.

4. They know where they make money

A good business understands utilisation rates, profitability of different clients, and what it costs to service which customer. It knows how its particular mix of contractors and staff affects its bottom line. It is relatively simple for a small business to understand its profit structure, but formal procedures are needed as a business grows and becomes more complex. A business has to understand where it makes money.

5. Happy people

Managing a high turnover of staff is difficult. Making up for it with contractors is expensive. One way to gauge how well a business retains staff is to read anonymous reviews from current and former employees on Glassdoor. Are workers motivated? Are they loyal? Companies that retain staff tend to have a strong corporate culture – something that has been difficult to maintain during the pandemic, when workers have been home-based. I expect businesses to face extra pressure this year due to inflation and a shortage of skilled people, which pushes salary costs up and up. The challenge for management teams will be to retain and motivate people, reward them fairly, but also get price increases through so margins don’t get squeezed.

6. They get paid on time

Sounds obvious, but a business must ensure it gets paid in a timely manner. If a business has recurring service agreements, then regular payment shouldn’t be a problem; however, if you run a consulting-type operation, and bill your clients after the event, it’s a red flag to have outstanding debts. Is the client unhappy? Did something go wrong with the project? Good businesses rarely have bad debts.

Which BGF investments have you made that are a great example of the kind of business you look for?

Waracle is a software developer based in Scotland that creates mobile applications for highly regulated sectors. It made Virgin Money’s banking app, the Sainsbury’s credit card app, and develops various leading-edge tech for the healthcare sector. It’s a well-run business that knows its target customer, has never lost an account, and has always grown year on year. We invested in 2019.

Another example is Kick ICT, based in Glasgow. The business has proved its ability to grow through acquisitions and is planning further expansion now that BGF is a minority investor. It has built a high level of recurring income and is a technology leader within the Microsoft ecosystem it supports.

Looking ahead, are there any sectors, technologies or business models that you are excited about investing in?

A huge amount still needs to be invested in digital transformation. Consumers are demanding more mobile access to products and services, and businesses are supporting more remote working, which requires connectivity and cybersecurity services. Technology services is very fragmented so often suits a buy-and-build strategy, but it is also possible to invest and grow organically, both in the UK and overseas.

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