Traditional vs Software Businesses

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June 03, 2020

by a searcher from Stanford University in San Diego, CA, USA

Hi folks,

I've been deliberating on the nuances between buying/operating a traditional business (e.g., manufacturing, distribution, services, etc.) vs a software business (eComm, SaaS, etc.) and wanted to tap into the group's collective experience.

Software: Easier to scale, subject to global competition

Traditional: Harder to scale, subject to only local competition

Of course there are exceptions but I'd find this the general rule. How have others deliberated which route to take? Feel free to DM me. Thanks!

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commentor profile
Reply by a searcher
in Los Angeles, CA, USA
As someone who has spent a decade in the software business, two comments: i. Anticipate a high multiple on any tech company (including the not-so-profitable ones), and ii. not all technology solutions are scalable - I personally am aware of tech companies that ran out of juice becuase the underlying software (the product) was bloated and highly complex and expensive to implement with clients....as a searcher I have come across 25+ yr old companies that have revenues of less than $2MM - clearly, they were not able to scale over the last two and a half decades...;maybe some issues with sales and marketing, but to assume that all tech is scalable would be incorrect. happy to chat more offline.
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Reply by a searcher
from Columbia University in New York, NY, USA
Many of the good aspects of software can show up as liabilities. The faster-growth, higher-margin characteristics can flip overnight. Nate is completely right about keeping an eye on product.

I believe it's harder to find a true moat around a software product. Given the global nature of cloud software, it's difficult to size-up the competition the way you would in a local market bounded by physical constraints. All said, I am still pursuing SaaS, but I am clear-eyed about those risks.

If you do it, make sure your management team includes experienced engineers or product people with broader market knowledge. They should to be able to react to external developments, quickly.
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