Why Software is proving a resilient sector… again  

2nd June 2020 by Mike Reid, Senior Partner

The Software sector is performing strongly relative to other sectors throughout this pandemic, just like it did in the Global Financial Crisis of 2008. This is positive news as we move into what is predicted to be a deep recession. 

This can be seen in the Bessemer Venture Partners & NASDAQ Cloud and SaaS index relative to broader indices.

Three of the key characteristics that makes software so resilient are: 

  1. It’s mission critical
  2. It’s a flexible business model
  3. It’s a catalyst for productivity gains  

Software typically is at the core of running operations, whether accounting, logistics, customer service, health administration etc. Many of these activities are mission critical in nature, and therefore prove robust in a downturn.  

Software customers benefit from two factors of flexibility in business model, which makes it easier to adjust in a poor economic climate: price and personalisation. Customers are typically able to adjust pricing on tiered bases, by number of users, duration of contract, or the level of service they require. Software companies can easily change the level and range of service to tailor solutions specifically for customer needs, and therefore retaining more customers during difficult times. 

And finally, in a recession people want to do more with less. Software is often at the core of any project to streamline operations in order to increase productivity and reduce costs. 

How was Software particularly resilient throughout the last financial crisis?  

During the last financial crisis, the Software index reached its lowest trough quicker than the general market, and recovered faster and stronger, as shown by the chart below. 

Software is becoming even more important to all parts of working, industrial and public life. This is being driven by major reductions in computing hardware costs, increasingly pervasive broadband internet and the rising impact of machine learning. 

In business, software has become mission critical to almost all organisations on the planet, in fact IT spending growth since 1995 has been impressively consistent driven by its increasing involvement in so many operational processes of organisations and machines. 

The strong resilience of the Software sector during the global financial crisis and this 2020 crisis, together with the strong underlying demand trends are at the core of why Frog continues to specialise in the sector. 

We see this growth continuing driven by the shift to cloud computing, the increasing use of intelligent devices and upcoming impact of artificial intelligence. 

Whilst historic demand growth for software has been impressive, the future opportunity remains equally interesting. The McKinsey chart above gives an indication of how much further progress will be made across a range of large industries in the coming decade. 

Altogether, Software is a sector any investor should have a strong profile in. 

Mike Reid

Article by Mike Reid, Senior Partner

Mike launched Frog in 2009, after seven years in industry and 12 years at 3i. As Managing Partner, he represents Frog on the boards of Rated People, and Dynamic Action.