PE – Tech Investing Criteria

 

PE Tech Investing Criteria

PE investors look for more than just growth – they look for durability, scalability, and resilience. The best firms apply a consistent framework across markets, products, customers, GTM, and financials to separate true compounders from hype-driven plays. Below is a distilled set of criteria drawn from my notes over the past 20 years since I was on the investing team, and capturing what makes a software business truly investable.

1. Market

  • Large, growing TAM and core SAM with adjacencies
  • Attractive end-markets with secular tailwinds and resilience to cycles
  • Greenfields, whitespace, and “jump ball” opportunities
  • Market leadership potential (Top 3 position)
  • Favorable industry structure (oligopolies > fragmented volatility)
  • Sweet spot use cases with adjacencies for expansion
  • Room for organic and inorganic growth vectors
  • Policy, regulation, or macro drivers (tailwinds/headwinds)

2. Product & Technology

  • Mission-critical / business-critical, embedded in workflows
  • High ROI for customers (measurable, sustainable, 600%+ like Vista cites)
  • Stickiness — hard to rip out, “need to have, not nice to have”
  • Differentiated UVP vs. competitors
  • Modern, scalable architecture; low technical debt
  • Innovation velocity; responsiveness to customer VOC
  • High NPS, product usage metrics (DAU/MAU, feature adoption)
  • Few substitutes; high cost to replicate
  • Barriers to entry (tech depth, data scale, network effects)

3. Customers

  • High GRR and NRR with land-and-expand motion
  • Diversified customer base; low concentration risk
  • Contracted recurring revenue with long-term visibility
  • ICP clarity and segmentation (enterprise, mid-market, SMB)
  • High NPS and customer references validate retention
  • Expansion opportunities (cross-sell, upsell, share of wallet)
  • Willingness to pay / pricing power evidenced in cohorts

4. GTM & Sales

  • Proven, repeatable new logo engine
  • Strong pipeline health and coverage; bookings efficiency
  • Sales productivity, win rates, cycle time improvements
  • Segmentation and territory design discipline
  • Quota attainment consistency and S&M efficiency
  • Capacity planning, funnel conversions, inbound vs. outbound ratios
  • Marketing/GTM alignment; partner/channel leverage
  • Bookings growth consistency vs. S&M spend

5. Financials & Unit Economics

  • Revenue: $10m+ ARR (Lead Edge)
  • Growth: 25%+ YoY with durability
  • Gross margins 70%+; Rule of 40–60 profile
  • LTV:CAC 5–10x; CAC payback <18 months enterprise, <12 months SMB
  • Efficient growth: revenue ≥ burn historically
  • High free cash flow yield, low capex and WC needs
  • EBITDA margin expansion runway (25% → 50–60% like Bravo)
  • Strong ROIC and capital allocation discipline
  • Predictable cash generation with line of sight to leverage paydown

6. Management & People

  • Experienced, “fit for purpose” leadership with track record
  • Open, data-driven, competitive, “want to win” mindset
  • Alignment with investors and skin in the game
  • Proven ability to attract/retain top talent; strong culture (eNPS)
  • Succession depth; org design clarity
  • Openness to structured playbooks (Vista) or partnership (Bravo)
  • “Super leaders” (Sacerdote) with vision and ability to scale teams
  • Incentives aligned with value creation and FCF

7. Competitive Position & Moat

  • Sustainable advantage: brand, data, network, cost, scale
  • Pricing power → gross margins and customer loyalty
  • Barriers to entry (Mauboussin: switching costs, supplier power, patents, scale)
  • Industry structure supports durable ROIC
  • Differentiation vs. competitors, few substitutes
  • Market share stability and concentration dynamics
  • Embeddedness in workflows drives lock-in

8. Value Creation Levers

Organic

  • Pricing optimization and packaging
  • Sales productivity uplift (enablement, specialization)
  • CS motion → higher NRR
  • Product velocity and UX upgrades
  • Expansion into adjacencies, verticals, geographies

Inorganic

  • Add-on runway and platform fit
  • Integration capability and historical proof
  • Synergies (cross-sell, cost take-out, consolidation)

9. Risks & Mitigants

  • Customer concentration or renewal cliffs
  • Tech obsolescence / disruption exposure
  • Execution risk in GTM or product roadmap
  • Incomplete integrations / messy systems migrations
  • Cyclicality, low RONA, capital intensity
  • Overvaluation risk if growth slows
  • Regulatory and compliance risks (esp. gov SaaS)
  • Mitigants: pricing studies, customer interviews, phased tech fixes, management coaching, conservative downside cases

10. Valuation & Return

  • Growth-adjusted multiples (Vista’s GARP lens)
  • Base / Upside / Downside cases tied to operating levers
  • FCF yield and sustainable ROIC as anchor
  • Underappreciated earnings power (Sacerdote)
  • Look for mispricing via confusion → clarity (variant perception)
  • Compounders: 20%+ CAGR potential with reinvestment runway
  • Avoid value traps: cyclical, one-off tailwinds, or trendy “hype” categories

11. M&A Criteria

  • Strategic rationale: why does A need B?
  • Quality of B (financials, product, team, customers)
  • Synergies: cost savings, revenue, adjacency expansion
  • Cultural compatibility and key talent retention
  • Integration feasibility (tech + org)
  • Financial health and valuation of B
  • Risks: overpaying, integration failure, cultural mismatch, regulatory hurdles
  • Exit strategy clarity

12. Moat & Quality Investing (Mauboussin, AKO, Buffett style)

  • Industry: structure, rivalry, barriers, substitutes, buyer/supplier leverage
  • Firm-specific: economies of scale/scope, patents, differentiation
  • Brand strength, willingness to pay, reputation durability
  • Network interactivity and ecosystem position
  • Oligopolies > fragmented competitive markets
  • Durable compounders with simple, predictable models

13. Core Metrics (Benchmarks)

  • GRR ≥ 90% (mid-market), ≥ 95% (enterprise)
  • NRR ≥ 110–130% by maturity
  • Gross margin ≥ 70% SaaS
  • CAC payback ≤ 12–18 months depending on segment
  • LTV:CAC ≥ 5–10x
  • Rule of 40–60 depending on stage
  • EBITDA margin expansion path to 50%+
  • Predictable FCF conversion

14. Pitfalls to Avoid

  • Overreliance on temporary growth/tailwinds
  • Chasing hype categories without ROI proof
  • Formulaic LBOs with cyclical risk
  • Low quality of earnings or sloppy integrations
  • Herd mentality investing or overpaying for “hot” assets
  • Businesses too complex to control key drivers
  • Weak culture or misaligned management incentives

 

Highlights of What I Like

  • Leader in the space, mission-critical SaaS, systemic operating playbook, growth-adjusted multiples, low tech debt
  • Recurring high-margin SaaS, margin expansion to 50–60%, strong management we want to keep, product + GTM investment
  • S-curve positioning, airtight competitive advantage, underappreciated GTM/growth power
  • Resilient industry/sector, durable moat, multiple ways to grow (organic + M&A), long-term demand
  • Key metrics: 25%+ recurring & quality revenue growth, 70%+ GM, GRR 90%+,  NRR 105%+,  diversified customers (no customer concentration), capital efficiency

 

 

Credit: writing/draft cleanup with the help of AI