An Investor's Public Market Journey
How I Began My Journey to Enterprise Software
The tweet below brought up some good memories on my journey as an investor and I thought I might share how each of these companies helped develop my competency in enterprise software in case it’s helpful for others. When I first started invested, I was 10 years old and didn’t know a thing about what I was doing (I still don’t). As I learned, I became a Warren Buffett disciple as so many others and over time morphed my investing style to fit my personality and behavioral quirks. I started off as a traditional value investor and now still consider myself a “value” investor in search of companies whose present value does not encompass the potential future state regardless of short term relative valuations.
While the companies below may not be directly related, studying them helped with various aspects that relate to enterprise software today!
Kellogg’s: What does cereal teach us about enterprise software you might ask? Well besides the fact that Frosted Flakes are the best, there are some super interesting dynamics about cereal manufacturers. First, they sort of all implicitly agree to keep margins at a certain level because they know that if they all start to undercut each other, it’ll lead to a value destructing paradigm. (We see similar dynamics in areas of high competition like Database software.) Distribution is paramount. Not only do you have to play slotting fees to get featured prominently on shelves but also relationships with certain distributors will lead to better placement & more sales.
Berkshire Hathaway: The importance of capital allocation. Also, how to centralize and decentralize decision making to run an efficient organization. Both of these are areas that I evaluate deeply when looking at enterprise software companies. Berkshire was the first time when I realized that capital allocation means not just money but also people and time.
S&P Global: It’s hard to remember that at one point, one of the best stocks in the S&P 500 held the name “McGraw-Hill” better known as all the provider of those textbooks we bought for school. The business divested non core assets over time showing the value of focus to become the credit rating, financial analytics, and indexing behemoth that we know today. With their success now, it’s hard to remember but as they were divesting and shrinking down, there was a ton of negative commentary and also multiple compression. Always a good reminder that starting small and narrow is what allows the larger success over time. They also showed how to aggressively move into adjacent areas and leverage direct sales and distribution to scale those new products rapidly. You’ll see this come up again in companies like Salesforce and ServiceNow.
Facebook: Network effects, network effects, network effects. How to use a data driven culture to convert and engage a massive user base. Everything was and still is measured. People may say Facebook is a “product” company but in reality it’s a “data first” company. Also, how to utilize software infrastructure as a core advantage to the business.
Amazon: Decentralized decision making and making your org structure into a competitive advantage. Two pizza teams has now become a meme but the time and effort that Amazon has spent engraving this into the culture continues to have compounding effects on its way to being a $2T company. Also, how sometimes the biggest risk to the business long term may be not taking bold risks at all.
IAC: Specialize in your core competency (marketplaces) and leverage that compounded knowledge to make better investments while also helping those companies make better decisions in their own markets.
Constellation Software: Vertical market software has a ton of defensibility and spits out lots of free cash flow at steady state. Software does not always have to be about growth. Be efficient in the core function of your business (buying companies in this case) and don’t worry as much about other areas. CSU is very efficient in making investment decisions and has pushed these decisions down to various individuals but is highly inefficient at each company subsidiary level as there are no standardized backends, accounting systems, or people/system synergies that they pursue across the portfolio.
Salesforce: Too much to write about but a lot of my learnings around distribution come from studying this company. I could write a freaking book on the learnings from Salesforce and if you are a frequent reader of my posts or go back through old ones, you’ll see them mentioned over and over again.
ServiceNow: See Salesforce above. Although, unlike CRM they grew a lot of their new products in non-adjacent areas through internal development rather than M&A which is fascinating. But leveraged a similar gtm and distribution model to do so.
Shopify: Pretty much the confluence of all my learnings in software came together in Shopify. They combine a product-led bottoms up adoption model with a top down sales model. They also have a platform approach and an app marketplace with ancillary payments on top. Finally, they leverage distribution through channel partners, direct sales, and consumer tactics to get the word out. Truly a fascinating company that I think the next generation of investors will grow up studying and learning from for a long time.
Datadog: How to engage individual developers and use that developer love to grow into a massive business. How to utilize that engagement to move into adjacent areas utilizing the same focus on individual developers and then showing the team/enterprise value over time. Also, a case study on product pricing and packaging, showing customers how a large usage-based bill can still be lowering total cost of ownership for the organization and enabling the sales and customer success teams to effectively deliver this message.
Good post, I enjoyed it.
I should do a similar exercise someday with "milestone" companies 🤔