European software companies’ “scrappier capital mindset” compared to Silicon Valley unicorns means the region is full of overlooked “gems”, Joanne Yuan, partner, investments, at Turn/River Capital, told PE Hub Europe.
San Francisco-based Turn/River invests in B2B software companies and raised $1.35 billion for its fifth fund in April 2022. Around half its investments historically have been European, but in the last year it pushed operationally, hiring Kais Baker as executive director, Europe, and Sebastien Delattre as vice-president, investment development, Europe. They are based in Munich and Paris, respectively.
The hires fit a firm that, despite its location and focus, has no portfolio companies based in venture capital-heavy Silicon Valley.
“The venture capital path works for some, but for a lot it’s not necessarily the right path,” said Yuan. Because the European venture capital ecosystem is less developed, she said, more companies are bootstrapped or have alternative sources. That leads to “a scrappier capital mindset, which means it’s easier for us to work with them, rather than companies burning for growth with no efficiencies”.
“Europeans have the right mentality. There are so many gems overlooked in Europe because everyone is trying to chase these high-fliers.”
Turn/River has a “proven track record” of helping European businesses grow North American revenue, she said – often in a mirror image of how Turn/River won European business before its latest hires.
“As it’s become easier and easier to buy software without having to meet in person, what we like is they can sell into America without having established a huge American sales team or base,” said Yuan. “Even if locally or regionally there’s things to learn about regulations, they are able to build products that can be more widely marketed and fit the American market.”
CoSoSys, a data loss prevention product provider based in Cluj in Romania, is one such example. When Turn/River invested in it in 2020, half its sales were in North America despite having no staff there, said Yuan.
Cash crunch
Another opportunity is to help businesses switch to subscription models from the “old school” perpetual maintenance system that many European companies still use, under which customers buy software for, say, €100k in year one, then pay €25k per year for maintenance.
“Maybe they’ve started to sell subscription licences, but they can’t ask customers to pay €100k a year, because it’s so different to what existing customers are paying,” said Yuan. “So maybe it’s €35k a year, averaged between the two. But now, for every new sale, instead of getting €100k it’s only getting €35k.
“It’s a huge cash crunch. Cashflow is down, so it’s troubling for debt servicing. We help companies do the flip that’s needed, often in a year rather than the three- to five-year timeframe, without the same cash crunch. That’s allowed us to be the high bidder.”
Redwood Software, an IT process automation company based in Houten in the Netherlands, in which Turn/River invested €315 million in May 2021, is an example. “It was bootstrapped for decades, and had some of those legacy type of contracts, even though the software was modern,” said Yuan.
New world
Turn/River’s approach is growth, rather than cost cutting and financial engineering, said Yuan – an advantage as the era of ultra-low interest rates ends.
“As the alpha from financial engineering really gets eaten up, more and more firms will have to look like Turn/River,” she said.
Despite the rocky macro environment, Turn/River’s portfolio had a “pretty strong” second quarter, leaving Yuan cautiously optimistic.
“From a dealmaking perspective, even as interest rates changed we were open for business,” she added. “Reciprocity on the add-on side was a little more open in the new world of valuations, and we also did a take-private last year.
“Now, in the back half of this year, there’s a lot of pent-up demand for activity. So hopefully in the fall it’ll be more open for a busy stretch. We’re starting to see more openness from owners to want to speak to us.”
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