Let us start this article with a comparison. The metal industry – the production of steel and other metals plus metal products – accounts in its entirety for about 1.5 percent of the Dutch economy. Then the software industry. In 2021 the sector’s contribution is estimated at some 4 to 4.5 percent of the Dutch economy.
Both sectors are certainly not the most popular kid in the class. The steel industry is essential to the economy, and it is a sector people have traditionally been quite proud of. But it is also a polluting, conservative sector. The software sector inspires pride due to its innovative, disruptive nature, but people also fear this somewhat invisible giant. A common complaint is that the advance of software is leading to employees being automated away.
A question of customization
The similarity ends here. Steel has been produced industrially, using large-scale processes, since around 1860. Drastic changes are necessary, as is clear from the current challenges of Dutch steel manufacturer Tata Steel, but changing the sector is a very slow and difficult process.
In the software industry the situation is very different: the sector evolves extremely fast. Admittedly, the first mechanical computer was invented in 1822. It was only after the launch of the first microprocessor in the early seventies and later the introduction of the PC (1976) , that large-scale software production really took off. Before that time software had been a matter of customization. The very first time the word ‘software’ was used was in 1958.
Chris Ouwinga is the founder of the listed company Unit4. Together with Exact, this was – and is – one of the first large, successful software groups in the Netherlands. The company was founded in 1980. Ouwinga describes how things were back then: ‘A company bought a computer, which was as big as a room and later as big as a large refrigerator. Once the computer was delivered, the software programmers got to work. A year later – if things went well – the software was ready and the computer was put into operation.’ It was a bit like making steel in the Middle Ages: every craftsman on his own turf.
But the Middle Ages were to last a short time for the software industry. From the time that the same computers were installed in different companies, it made good sense for entrepreneurs to invest in the creation of software packages – and then to sell them to several companies. That led to the birth of the software industry as we know it today. Because what was born then has subsequently proved to be by far the most important unique selling point of software, namely the extreme scalability of the service.
In the beginning this scalability was not yet clear. Ouwinga: ‚We worked with Unit4 for a few years on our first software package. That was software for financial administration. There were two major struggles in discussions with our customers. The first was to convince them that they were not unique and did not necessarily need customized software. We won that argument by explaining the price difference with customization. The second struggle was that customers always wanted to change so much afterwards that the packages were at risk of becoming customized again.
He adds: ‘The first ten years were a struggle for Unit4. The company was growing, but we did not have a penny to spare. A couple of times bankruptcy was pretty close.’
Let us now move forward in time to the late 1990s. Two decades earlier, Ouwinga was able to respond to the first megatrend in the software sector: the arrival of the PC. Twenty years later, Charly Zwemstra spotted the second megatrend: the Internet. For merchant bank NIBC – and later as a partner at Alpinvest, a private equity house for the pension world – Zwemstra was allowed to look at the most modern trends, even though the bank initially laughed at what was then called the ‘new economy’.
‘I made an investment, and they said, “Well, it’s only because we’re making enough profit. We’ll just write this one off right away.” The company in question was a software company. Two years later we sold it for 60 million, a return of 1,100 percent. Then nobody laughed anymore.‘
Zwemstra had learned a lot about software at that point, but unfortunately for many, he seemed to be alone in this knowledge. Zwemstra explains: ‘There were two kinds of software companies at the turn of the century. Most companies, websites mostly, wanted to profit from the enormous potential of the Internet. They hardly had a business model. In the beginning that did not matter because investors jumped at it.’ Later these investors would regret that sorely. Large companies from the United States such as webvan (online grocer), pets.com (pet supplies) and flooz.com (a provider of online payment methods) collapsed. In the Netherlands, the hyped WorldOnline narrowly escaped bankruptcy. Zwemstra continues: ‘And then there were the other type of software companies, often long-established software builders. The Internet offered them unprecedented opportunities for further growth.’ Unit4 was one of them.
When the dotcom bubble burst after the turn of the century, Charly Zwemstra decided to start his own business. In 2003 – the AEX stock market index reached a low point that year – he founded Main Capital Partners together with a few associates. The software investor from The Hague immediately focused on investments in fast-growing but also financially sound companies.
At first, this would be done hesitantly because just like Unit4, Main had to go through a pioneering stage. In a first investment round, three years after its formation, the company raised 12 million euros to invest. By contrast, Main’s most recent fund amounts to 600 million euros. In October Main will launch a fund of 1.2 billion euros. Zwemstra: ‘I still remember the first investment well: Actuera, which supplies software to pension funds and insurers. The company proved to be a stable grower, also financially, and we sold it to Waterland with a nice return. That’s when we knew: that’s the kind of deal we want to do.’
The rest is history. Whereas the Internet was just beginning to affect business models, many software companies nowadays develop all their services and products for online sales: ‘cloud native’, it is called. The ultimate scalable company is the one that works on a single software package – the developers may be located all over the world, by the way – and then supplies that software package in subscription form all over the world as well.
Main has fine-tuned the search for this type of company. Through its Market Intelligence Department, it continuously searches for the most promising, groundbreaking software companies, especially in Europe. Zwemstra: ‚We talk to as many as 700 of them a year. And then, we try to build various large software companies at the same time.’
The growth of the publicly listed Unit4 and of Main, the most active software investor in Europe according to Preqin’s private equity database, is largely due to the Internet and the scalability of software. But there is another trend that the companies in this sector have in common and that drives them forward. The software industry facilitates progress, but it is also exposed to it like no other.
‘Everything has changed’
The pace of change is enormous. Chris Ouwinga describes how Unit4 programmers made PCs ready for operation in the 1990s: ‘The complete program had to be put on an 80 kilobyte floppy disk. That is archaeology today. Everything has changed.’ Ouwinga, who is now mainly active as an investor, says, ‚Where things were going fast then, now they are going much faster.’ The convergence of the various trends – cloud computing, ever improving hardware, software as a service – leads to the continuous creation of new product-market combinations.
With the maturing of the software sector, the facilities for entrepreneurs have also changed drastically. Ouwinga recounts how he managed to raise start-up capital from an entrepreneur friend – a ‘business angel avant la lettre’. He borrowed 100,000 guilders from the man [45,000 euros – Ed.], which he received in 100 notes of 1,000 guilders.
After the dot com bubble, steadily growing companies (think of a company like Salesforce) became much more popular with both public and investors. Ouwinga: ‘At least three television crews came to the presentation of the annual figures of Unit4, and I was approached by investors on the street.’ The focus remained on these steady growers, mainly through private equity investors but also through the stock exchange.
Nowadays, software companies looking for growth can also turn to third parties for know-how. For start-ups there is plenty of guidance from organizations such as Startupbootcamp. Main Capital focuses on more mature companies seeking strategic and pragmatic support. ‘Main is on the board of all our participations. This provides us with an enormous amount of network, data and experience’, Zwemstra explains. ‘Investment firms are not typically this involved with their acquisitions, but we firmly believe in driving sustainable growth through partnership. That’s why we want to share the knowledge we have built up over the last 20 years with future investments and their management teams.’
Ouwinga: ‘Nowadays there are venture capital firms in all shapes and sizes. You could even ask yourself whether there are not too many of them.’ Zwemstra: ‚What you saw when I started was overheating in the market. You see that again now. Not every software company can be a unicorn.’