#255: Value Creation and Multiple Arbitrage by Transforming Analog Businesses into Digital Companies

Software and tech companies get much higher valuations than traditional service-based companies because these “digital” companies are valued on a multiple of revenue instead of a multiple of EBITDA. This huge difference in how the business is valued provides a unique opportunity to reap high financial rewards by transforming old analog businesses into technology companies.

Today’s guest, Corey Tollefson of ArcSpring, shares how his company combines capital, technology, operational expertise, and design to unlock exponential growth in traditional businesses. He and his team of rock stars (a bunch of heavy hitters from Oracle and Infor) are creating real value—and multiple arbitrage—by investing in companies they think should be software companies.

What You Will Learn In Today's Podcast Interview

What ‘Analog to Digital’ (A2D) means and how it impacts the value of a business
Why transforming an analogue business into a technology business changes the valuation methodology
How ArcSpring scales their portfolio companies by focusing on ‘micro-verticals’
The difference between a spreadsheet jockey private equity firm and one that has an operations background
How ArcSpring defines digital transformation
Why ArcSpring bought the largest flag football league in the area and how they scaled it by integrated technology
Why having—or upgrading—an ERP system is not the type of technology that can change your valuation multiple
How to mine your customer base for new products and services
Why a five-year timeline to transform a business from analog to digital is more than enough time to capture the value creation and multiple arbitrage
How his company got to the tagline “Enterprise software sucks!”
Why the experience and involvement of the general partners at a private equity firm matters
How to use your customers and their needs as the backbone of your digital transformation
Things to think about when you are trying to determine how much equity you should be rolling
back into your business
What makes companies consider becoming a SaaS business

Are You Growing The Value of Your Business

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Does the business have a written strategic plan on how to achieve the desired normalized EBITDA and valuation?

About the Guest:

Corey Tollefson is co-founder and general partner at Arcspring, a PE firm that invests in companies that should be software companies, and has over 20 years of experience in the software and technology industry. He’s on the Board of Advisors for #YesWecode, Sezzle and PLNIFY. Previously, Corey was senior vice president and general manager at Infor and group vice president at Oracle. He also has a BSc in Marketing and Management Information Systems from the G.R. Herberger College of Business at Saint Cloud State University.

Quotes:

06:57 - “To really own an industry and to become dominant in an industry, you have to have micro-vertical solutions.” – Corey Tollefson

07:21 - “The more you can speak to running a company’s business, then all this other stuff like database, and middleware, and hardware, cloud… It all comes with it.” – Corey Tollefson

09:00 - “In an industry like software and technology, if you’re not growing 20%, you’re dying.” – Corey Tollefson

16:48 - “Our thesis is really around building an underwritten model that aligns to private equity, but has the upside case of venture.” – Corey Tollefson

28:00 - “We want to reinvent—in our own shape, way, and form—private equity.” – Corey Tollefson

29:36 - “We’re not buying software companies, we’re buying companies that should be software companies.” – Corey Tollefson

38:12 - “The relationship doesn’t end at the signature, the relationship begins at the signature.” – Corey Tollefson

38:29 - “We’re not doing ERP so this isn’t heart and lung surgery.” – Corey Tollefson

39:47 - “We’re looking at, how do we take some of your revenue and pivoting it onto more of a recurring revenue model. How do we open up that possibility of creating a fin-tech platform?” – Corey Tollefson

46:59 - “We did some thematic research and we found that there are 1.8 million kids in the United States playing flag football every year.” – Corey Tollefson

48:01 - “The thesis is that it’s a high growth market. We want to consolidate that market. There’s multiple vectors to revenue.” – Corey Tollefson

48:40 - “The other part of the thesis is that we want to lower the cost of ownership, and lower the cost for these parents and their kids.” – Corey Tollefson

49:14 - “For us, we could improve unit economics per player at a granular level.” – Corey Tollefson

53:32 - “When you’re selling software, as software operators, they vote with their wallets, so you have to create a better experience for them or they’re not going to continue to pay.” – Corey Tollefson

58:38 - “If we can create a Robin-Hood-like application, the platform becomes itself. Inherently, the way the customers engage with it, that’s the legacy. That’s what you’re buying.” – Corey Tollefson