PE - Investment Rationale (Where I Focus)

PE Investment Rationale – My List

Since the time I was on the investment team and recently in the PE operating partner role, here are some of my Investment Rationale areas I focus on. It’s a structured framework for evaluating software and tech-enabled businesses in private equity, designed to identify the most compelling investment opportunities and value creation levers.

1. Market Tailwinds & Industry Dynamics

Core Question: Is the company riding a powerful external wave?
Captures favorable external forces shaping the environment.

Operating in a large and expanding market with sustainable demand
Benefiting from secular changes in technology, regulation, or behavior
Rising complexity or fragmentation driving increased need for solutions
Accelerating digital adoption or workflow transformation
Favorable demographic, economic, or technological trends

2. Greenfield & Underpenetrated Opportunity

Core Question: Is there open space to win?
Highlights whitespace or lack of established vendors.

High percentage of target market is unserved or lightly served
Few scaled or capable competitors addressing specific needs
Market has low software or solution penetration relative to opportunity
Emerging category where demand is outpacing vendor development
Minimal direct competition in high-value segments or geographies

3. Solution Differentiation

Core Question: Does the product solve a real problem better than anyone else?
Assesses alignment between offering and end-user needs.

High-ROI, mission-critical, and sticky product or service
Deep solution fit for specific customer use cases or workflows
Clear value proposition validated by adoption or performance metrics
Technology or IP advantage difficult for competitors to replicate
Platform or ecosystem status in the customer’s operational stack

4. Financial Profile

Core Question: Is the business performing well financially?
Evaluates core financial and operational performance.

Strong combination of growth and profitability (e.g., Rule of 40+)
High gross margins with scalable cost structure
Efficient customer acquisition and retention metrics
Favorable long-term unit economics and margin expansion potential
Attractive historical or projected financial trajectory

5. Organic Growth Levers

Core Question: Can we grow this business without M&A?
Identifies self-driven growth opportunities.

Clear pathway to expand within existing customer base
GTM realignment or enhancement to reach new segments
Geographic expansion into untapped markets
Expansion into adjacent use cases or functional areas
Upsell and cross-sell of additional modules or offerings

6. Pricing & Packaging Optimization

Core Question: Can we make more money from the same customers?
Opportunities to improve monetization mechanics.

Legacy or simplistic pricing model not aligned with value delivered
Low average revenue per customer relative to benchmarks
Lack of usage-based, tiered, or modular pricing
Minimal price realization despite high customer stickiness
Willingness-to-pay exceeds current monetization strategy

7. Operational Optimization Upside

Core Question: Can we make the business run better?
Improvements in cost, focus, or execution.

Unproductive or inefficient cost base that can be rationalized
Lack of execution discipline or strategic prioritization
Subscale or misaligned organizational design
Fragmented leadership or unclear accountability
Low output relative to talent or capital invested

8. M&A Platform & Inorganic Growth

Core Question: Can this be a vehicle for consolidation?
Growth through consolidation or strategic acquisition.

Highly fragmented competitive landscape with consolidation potential
Pipeline of actionable tuck-in opportunities in adjacent spaces
Potential to integrate new capabilities, geographies, or data sources
Strong integration infrastructure or operating model for M&A
Historical or potential proof of accretive acquisitions

9. Exit Potential & Strategic Relevance

Core Question: Will someone want to buy this later—and why?
Alignment with logical acquirers or IPO paths.

High strategic relevance to multiple potential acquirers
Historical indications of buyer interest or transaction attempts
Unique market position creating scarcity value
Aligned with larger platform roll-up or vertical expansion trends
Long-term ability to attract public or private capital markets interest

10. Competitive Positioning & Moats

Core Question: Is the company ahead of its peers—and defensible?
Strength and defensibility relative to peers.

Category leadership in terms of scale, product quality, or brand
Technological lead or architectural advantages vs. competitors
High switching costs or workflow integration barriers
Data or customer network effects increasing value over time
Purpose-built offering outperforming generalist solutions

11. Customer Metrics & Retention

Core Question: Do customers stay and grow with us?
Measures durability and quality of customer base.

High retention across cohorts (gross and net)
Strong customer satisfaction, usage, or engagement trends
High share of wallet and expansion potential among customers
Long customer lifetimes and low churn dynamics
Strong economics in target segments or personas

12. Business Model Advantage

Core Question: Does the revenue model scale well?
Structural elements enhancing scalability or profitability.

Recurring or re-occurring revenue model with visibility
Favorable unit economics and revenue scalability
Separation of user and payer supporting low-friction adoption
Embedded or usage-driven monetization model
Mix shift opportunity toward higher-margin offerings

13. Platform Dynamics & Ecosystem Potential

Core Question: Can this become more than a point solution?
Potential to serve as a foundation for broader expansion.

Core offering is a system of record or workflow anchor
Strong product extensibility across multiple needs
Ability to support multiple modules, services, or integrations
Central role in ecosystem enabling sticky network effects
Infrastructure position from which to launch new capabilities

Summary Table: Category Overview

#	Category	What It Captures
1	Market Tailwinds	Are we surfing a long-term wave?
2	Greenfield Opportunity	Is there open space to capture?
3	Product-Market Fit	Does the product solve a pain point better than others?
4	Financial Profile	Is the company efficient and performing well financially?
5	Organic Growth	Can we grow meaningfully without M&A?
6	Pricing Optimization	Can we charge more or smarter for the same value?
7	Operational Optimization	Can we make the business better run with the same assets?
8	M&A Platform	Is this a hub to build around through acquisition?
9	Exit & Strategic Relevance	Will someone want to buy this in the future?
10	Competitive Position	Are they ahead—and can they stay ahead—of competitors?
11	Customer Metrics	Are customers staying, growing, and profitable?
12	Business Model Advantage	Does the model enable durable margin and scale?
13	Platform Dynamics	Can this become a broader solution, not just a single-point tool?

Credit: writing/draft cleanup assisted by AI

PE – Investment Rationale (Where I Focus)