Big growth, cash flow positive… and raising equity?

Over the past few months I have seen a few software companies serving the energy and industrial verticals with this head-turning profile:

+ $5-10M of revenue

+ >200% YoY revenue growth

+ Profitable

+ Sizable cash balance

My first thought when seeing these companies? Wow, this scale of efficient growth wasn’t happening before.

My second thought: This firm won’t be raising money, right? Wrong.

COVID changed the energy and industrial verticals. All software purchases are accelerating and new budgets are being formed and consumed. The smartest start-ups realize that these energy & industrial software relationships could extend decades.

These digital-focused start-ups have two early advantages that compound:

  • access to historically buried and undiscovered data assets that are revealed as firms move from analog to digital-first operations
  • license for product-driven growth as industry’s new knowledge workers realize the potential to digitize industry’s soft costs

Given the potential to entrench within the customer and iterate with non-transferable assets, software firms serving the energy and industrial vertical are attracting new investors. These investors, it seems, believe that there is potential for the Law of Accelerating Returns in heavy industry’s digital layer. In this structure, winning companies far escape their peers and should continue to invest early and often to capture market share to solidify the #1 market position. I have seen this accelerating return profile in other verticals, but it is a relatively new phenomenon for software companies serving the historically analog verticals.

As a result, the race is on to build the new software operating platforms for the Operating Technology network. I suspect we are at the beginning of a 10-year+ trend in this purchasing cycle and there will be many head-turning financing rounds in the coming quarters for software companies addressing this theme.