What is a Software Holding Company

What is a Software Hold Co?

A software holding company, also known as a Hold Co, is a company that owns and manages a portfolio of software companies. The Hold Co is responsible for the strategic direction, financial management, and operational oversight of the portfolio companies. The Hold Co provides shared services such as technical, development, finance, legal, HR, and marketing to the portfolio companies, enabling them to focus on product development and growth. Outroll is a software holding company that focuses on acquiring and growing software companies in the low to lower middle markets, which are often overlooked by larger PE funds.

Software acquisition playbook

The Hold Co playbook for software is a simple one: acquire, build, and grow. There are several sub-strategies within this playbook, ranging from low growth to high growth, and from distressed to healthy companies. As a technical holding company, Outroll focuses on acquiring software companies that have a strong product-market fit, a loyal customer base, but rely on legacy and not so up to date technical foundations. Once a company is acquired, we then invest in refactoring the codebase, integrating a modern tech stack, and expanding the product, sales, and marketing teams to accelerate growth and expand the customer base.

Build not buy

An alternative strategy to acquiring software companies is to build them as part of a venture studio. A venture studio (also known as a venture builder) is a company that builds and launches multiple startups in parallel. The venture studio model is a great way to build software companies from scratch, as it allows for rapid iterations, market validation, and early profitability. This model is also a great way to build software companies that are highly customized to the needs of a specific client or market, as the development team can work closely with the client to build a product that meets their exact needs. This aligns well with the hyperniche software trend that we are seeing as a growing trend in the software industry.

The successful companies that spin out of the venture studio can then be managed by the Hold Co on a long-term basis with a focus on sustainable growth and profitability.

Sustainable software

We believe that software holding companies will be the most sustainable way to maintain niche software companies that address the needs of a specific market or client. The traditional holding company model focused on scaling a small number of software companies to a large size, however, we believe that the future of software is in building highly customized solutions. This shift also enables a higher level of synergy between the portfolio companies, as they can share resources, knowledge, features, and even the underlying tech stack and infrastructure.

Expertise in maintaining software

The new software private equity model is quite dissimilar from the old one. In the 1980's to the 2020's the modus operandi was to buy a company, fire people, cut costs, and sell it for a profit. The new model is to buy a company, invest in it, grow it, and hold it for the long term. This requires a deep understanding of software development, product management, and customer success. The Hold Co must be able to attract and retain top talent in these areas, as well as provide the necessary resources and support to enable the portfolio companies to succeed.

Data, customers, and capabilities are the assets

As the software development costs continue to decrease, the value of software companies are increasingly tied to their data, existing customers, technical capabilities, and more importantly, the knowledge and expertise within their target market or niche. The Hold Co must be able to provide a solid technical foundation that enables individual portfolio companies to leverage their niche-specific knowledge, without having to re-invent the wheel each time.

The moat of what we do not know

We believe that the main moat of a modern software company is to provide a solution that addresses a specific need in a specific market that is not self evident to industry outsiders. Competition on those terms is limited, as the knowledge and expertise required to build a similar solution are not easily transferable or acquired without industry guidance. This is why we focus on building software companies that are highly customized to the needs of a specific market or client, as this provides a strong moat against competition. The main outcome of this fact is that the hold co can focus on building the best software companies in their niche, without having to worry about competition from other software companies.