Most of our nation’s utilities still run on software from two decades ago. Others only recently upgraded because they needed to manage operations remotely during the pandemic. Utilities are just one example—this is a common story in many industrial sectors.
Indeed, while venture-backed tech startups are racing to adopt AI, many companies across manufacturing, construction, agriculture, oil and gas, government, and defense are just now adopting modern software. And this digital revolution for tech-laggard industries is accelerating. The software companies that serve these sectors will have once-in-a-generation growth opportunities over the next several years.
Why Industrial Sectors Are Embracing Software Implementation Now
A new generation of managers. Inertia, market factors, and workforce dynamics have all contributed to the lag in software adoption across industrial sectors. Buyers at these companies also tend to rely heavily on word of mouth and, in generation’s past, have been hesitant to take risks on “newer” vendors.
But today’s managers are digital natives. They are experiencing an extreme dichotomy between the user-friendly apps on their iPhones and the legacy tools they use at work. They expect a better experience and have a long career ahead of them to reap the benefits of a change. As a result, they have a much higher inclination to change workflows than the older generation of managers.
Compounding market complexities. A number of global challenges have also caused companies to rethink their approach. Geopolitics is intruding more often, with many industries seeing increased regulations and frequent international supply chain disruptions that add new dimensions of complexity. There are also macroeconomic forces, with high inflation squeezing already thin margins and consumer demand fluctuating more widely. Combined, these factors present managers with an increasingly multifaceted problem that extends beyond the four walls of their facilities.
Forced migration from ERP monoliths. Meanwhile, leading legacy ERP vendors like SAP and Oracle have announced end-of-life schedules for their on-premises software within the next five years. If companies in these industrial sectors weren’t motivated to migrate before, they must be now.
Even when customers migrate to cloud versions of their legacy provider’s base system, they often unbundle features, choosing best-of-breed vendors for different functions. This is easier in a cloud world than it had been when software was on premises. This is an especially great opportunity for smaller vendors to get a foot in the door with one key function and then expand over time.
All of these factors have coalesced to create a unique growth opportunity for software companies supporting traditional industrial sectors. For example, the global market for manufacturing operations management software was estimated at $16.2 billion in 2023 and is forecast to increase by 14 percent annually until 2030. And, the global software market for the mining industry is projected to grow by 48 percent from 2023 to 2028.
We have seen this theme play out across multiple verticals, which has led to our more recent investments in software companies such as Datacor in process manufacturing, Envestnet in wealth management, and SpryPoint in utilities.
Can Modern Software Companies Meet the Demand?
The opportunity may be large, but that doesn’t mean it is easy to capture. Building a software business robust enough to replace legacy functionality takes time and expertise. Software founders need to know their customers’ problems inside and out. And many of these tech-laggard buyers are risk averse and insular by nature. As a result, earning market share often requires methodical, incremental gains over the long haul rather than a rapid blitzscaling.
As a result, we see a larger proportion of bootstrapped or capital-efficient businesses within these sectors. These capital-efficient software businesses tend to perform well in these industries for several reasons:
- They are led by founders who bring deep industry experience and entrenched industry relationships.
- Their products are purpose-built for the vertical, which dramatically increases usability relative to broader “horizontal” platforms.
- Given the lack of capital to burn, they often partner closely with customers when building a product–sometimes even “pre-selling” the product to help support cashflow. As a result, they are often better attuned to market feedback and need.
- They are focused on being a capital-efficient business because raising additional capital doesn’t necessarily increase growth, which allows them to build and invest on much longer time horizons.
This combination allows companies to be patient with the longer sales cycles and complexities of replacing legacy technology.
Yet even successful vertical-focused vendors who’ve found product-market fit experience growing pains. As revenues inch toward $10M, the challenge moves from “build a great product” to “build a scalable business.” Norwest has been studying vertical software for decades, and we’ve seen a set of common challenges that hinder software companies across these late-adopter industries:
- Management: The founder(s) and core operating team take on too many roles and struggle to manage compounding complexity. They may also find themselves stretched as the main challenge changes from “build from scratch” to “scale systems repeatably.”
- Talent: Companies can hit a plateau when management exhausts the sector-specific talent pool in their networks and they can’t continually attract, train, and retain talent beyond 50-100 employees.
- Go-to-market strategy: Once a company moves beyond the initial phase of sales – typically involving close interaction between founder and customer – it needs to have people, processes, and leadership in place to repeatably grow the business.
- Product development: It’s critical for a scaling software company to transition from a niche solution that can serve only initial customers to more standardized product offerings that still meet the exacting needs and expectations of customers in the target verticals. As the offering matures, the product set may also expand, adding to the opportunity but also the complexity.
- Operational excellence: As the company matures, it requires greater discipline and more formalized procedures in strategic areas such as M&A, financing, and partnerships.
How Norwest Helps Vertical Software Companies Succeed
Norwest’s Growth Equity team has had the fortune of partnering with many leading vertical software businesses, helping them navigate these growing pains. We deeply respect the role that founders play in managing their businesses, and we aim to complement their deep expertise in the industry and company with our experience in scaling businesses, which can often be generalized across sectors. We’ve “seen this movie before” across multiple businesses as they scale. Our approach is to provide guidance as if we are an “invited guest” in the business for the long haul: we honor the deep sacrifices made in the past and expect to leave a stronger, robust company to future generations after our exit.
Some tangible examples of how we’ve worked with our companies include:
- Talent: Facilitated key executive hires for AbsenceSoft (HR tech), leading the search for a new CEO, new CRO, new Chief Customer Officer, and board of director candidates
- M&A: Sourced, negotiated, and closed a strategic acquisition for Galvanize (governance, risk management, and compliance) and helped to source and execute multiple acquisitions for Cority, which vaulted both companies into the top right quadrants in their respective industry research reports
- GTM: Drove optimal commercial organization design and KPI management for YipitData, leading to marked improvement in sales efficiency as well as gross and net retention
- Operational excellence: Worked with Avetta to optimize internal operations, which helped enable a 10x scalability increase
If you are leading a software company that targets these sectors where technology adoption is lagging – and if any of the growing pains discussed above sound familiar – we’d love to hear from you. Contact Ran Ding or Chris Scullin.
