Today’s guest is Lance Fenton, a Partner at Serent Capital, a private equity fund investing in bootstrapped vertical market software businesses. In this episode, Lance breaks down Serent’s software investment thesis, how it evolved over time, and how they think about sourcing, returns, hold period, and the future prospects of these niche businesses.

Lance shares how Serent approaches value creation, the importance of high gross retention, the role of pricing optimization, and how they are responding to AI’s arrival as a threat and opportunity across their portfolio. Lance shares an unusually transparent and candid look at Serent’s direct sourcing model, why they prioritize long-term relationships with founders, and what makes an investment business truly great over decades of success.

Discussion Points:

Serent Capital’s transition from B2B services to vertical market software
Why high recurring revenue and high ROIC drive investment decisions
The adoption curve of Vertical Market SaaS: from on-premise to cloud and beyond
How shifting to SaaS from on-premise improves net revenue retention
The role of payments in vertical software and its impact on valuations
How Serent thinks about downturns and risk in underwriting deals
The key attributes Serent looks for in vertical software investments
Why pricing strategy is a critical lever for growth
The role of AI in the evolution of software businesses
Why Serent prioritizes direct sourcing over intermediated deal flow
The challenges and advantages of a long-term sourcing approach
How PE firms evolve and sustain long-term success

Masters in Small Business M&A (sign up for podcast drops here) is produced by its host Peter Lehrman and the team at Axial (www.axial.com). Axial makes it easy for small business owners to confidentially explore growth capital and exit transactions with top-ranked lower middle market M&A advisors and professional capital partners. In every episode, we explore the dynamic world of small business M&A, interviewing a mix of proven and emerging owners, operators, acquirers, and M&A advisors whose strategies and methods are being put to the test.

If you’d like to go deeper, head to Axial.com, where we make available the Axial member directories, downloadable tools for dealmakers, the Axial quarterly lower middle market investment banking league-table rankings, the SMB M&A pipeline report, and other useful information. If you’re a business owner, professional acquirer, or M&A advisor, you can start using Axial for free at Axial.com.

Resources:

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