Lars Stenlund Interview – building Vitec, the Nordic vertical market software company

Gustaf Hakansson
November 10, 2022
“A lean, mean, focused machine!”

Disclaimer: This is not investment advice. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice. Any reference to or omission of any reference to any company should not be construed as a recommendation to buy, sell or take any other action with respect to any security of any such company. The author may hold positions in securities discussed. Any forward looking-statement is subject to risks and uncertainties. Read further disclosure in the Terms of Service.

Gustaf: Hi Lars! Your PhD friend hit your shoulder in 1985, “You know programming, and I have money for a PC. Let’s sell software!” What led up to that?

Lars Stenlund: Gustaf, I was researching heating efficiency for existing housing due to the 1970s energy crisis. Specifically, to experimentally try to substantiate certain practitioner claims.

So, we went on for years and measured and measured, verifying and refuting different claims. And my co-founder Olov Sandberg saw the opportunity – through his father in the energy industry – to launch a software product out of that research.

We thought we could be commercially successful by combining our computer science and domain expertise. Ideally, in the same brain, which we initially did! And that’s what we still believe at the Vitec group level.

I hadn’t come across computers until I came to Umeå and started studying in 1978. They caught my interest, and I practically lived with them for ten years. And you would laugh at the code I had to write just to plot graphs. It took 45 minutes only to compile it.

Gustaf: You had a five-year “dark period” where you worked at night. When did you know that Vitec would become more than a side project?

Lars: I completed my PhD in 1987 and got an associate professor position within electronics & microcomputer technology – effectively a teaching position at Umeå University.

I’ve known all my life that I wouldn’t be a teacher. Because I don’t find it fun to explain things to people who don’t get it right away.

So, I took a leave of absence in 1989 to focus on the business. And after a year, the director of studies said, “The semester starts now.” And I responded, “No, not for me.”

Gustaf: What did you learn during the initial years?

Lars: If you’re an experimental physicist, you constantly experiment to understand how things work. When you’re right, you get rewarded, and when you’re wrong, mother nature punishes you immediately. Eventually, you can start building theories from that.

For example, electrical engineering established things in the 1800s that eventually became Maxwell’s Equations. They are considered the most beautiful thing a physicist has ever achieved, like poetry.

They were known experimentally but without any theory behind them. And Vitec’s thinking has been influenced by that. First, we test what works. And only after that do we try to deduce what happened. Those theories then give us communicable ideas, so we don’t appear like cowboys!

Gustaf: Vitec’s total shareholder return CAGR of 40% in the last 20 years suggests that your cowboy aim might be quite decent. What happened next?

Lars: We had a five-year reseller agreement with an energy efficiency consulting firm. They used our software as a door opener for their consulting services. But in 1990, working full-time, we wanted to try selling ourselves.

Further, it was in 1995 that Olov got the revelation, “We shouldn’t sell this as a license. We’re going to sell it like a newspaper!” And we started selling our program on a SaaS model.

Gustaf: You initially also sold some hardware. When did you realize that you would focus on software exclusively?

Lars: In 1993. The pandemic recently showed how treacherous supply chain dependencies can be. Also, as the advances for selling hardware were low, we mainly used it as a go-to-market strategy.

The problem with hardware is that you have less control. In contrast, we have complete control of our software. We have no deniability and can’t blame third parties.

Gustaf: Speaking of accountability, you had nice-looking user interfaces in the old days, but the computer could crash if you clicked the wrong buttons?

Lars: We had to develop the company on the money we generated. We’ve been profitable every single year, with one small exception.

How do you do that? You utilize customer financing, which in our case, was possible by selling a license. And we couldn’t afford our software to have all the demanded features. So, we used license money to finance the features we should have included before selling the software in the first place.

It may very well have happened that we were scolded. But customers will understand if you’re kind and ambitious. It's the art of making it possible when you're young!

Gustaf: What’s Vitec today?

Lars: A lean, mean, focused machine!

The hardest thing about entrepreneurship is choosing what not to do. There are so many fun things out there. But it’s essential to focus and get a feel for what you’re good at.

Vitec is a kaizen story with many small incremental improvements. Both in the operational way of developing products and our go-to-market. Because when you’re growing, something is always breaking somewhere.

Culture isn’t an issue when you’re ten people around a coffee table. But when people are in different places, you need to prioritize it. We have ensured an understanding of why we do what we do from the board level down to the business level. And true understanding translates into a liking of that prioritization.

Decentralization is about not meddling too much, which requires a strong culture because 99% of decisions are made in the outermost parts of the organization.

Even if fun things may temporarily occur, you won’t get praise unless you push us forward. A market economy is a gauntlet run; you must always move. There are no ideas that no one else can steal.

Gustaf: You’ve said that acquired firms start reporting their most important KPI. Which one?

Lars: We look at recurring revenues divided by labor costs. It’s straightforward, so everyone understands it. And when recurring revenue starts to become a large percentage, you must put some constraints on that. But the goal is to reach 100% on that KPI.

Gustaf: Did you use the 1998 IPO proceeds for acquisitions?

Lars: It turned out that way. It was supposed to be used for expansion into Germany. But it wasn’t long before we understood that such a strategy would cost too much.

We’ve had external board members since we started in earnest, and they asked, “What’s the plan b?” We didn’t have one. But I said, “I can call a friend!”

We had been in the industry for 15 years and had seen other real estate software suppliers that did different things than us. In the fall of 1998, I called one the same size as we were, asking for an “unconditional meeting.” It was our first acquisition.

Gustaf: Why did acquisitions become a key part of your strategy in 2003?

Lars: We had been going at it for almost 20 years in 2003. I had always thought that our business idea was terrible. There was no potential for becoming big.

And as I alluded to, we had tried expanding internationally but had realized that it wasn’t possible. To enter a new market, you had to acquire an incumbent. We learned that from our acquisitions in the late 1990s and early 2000s.

We had two business areas at the time, serving energy and real estate companies. And all pundits told us we had to decide which one to focus on. But Olov and I said, “But it’s working!”

Why? Because 95% of the issues were the same in both businesses. While the residual 5% is vital and you need domain expertise, a lot is the same. The problems we had five years prior in one business were now felt in the other. And it couldn’t be just the real estate and energy sectors that had vertical market software (VMS).

Generally, there may be three competitors in a vertical software market worth SEK 100m annually. It costs SEK 40m for a new entrant to invest in such a market. And after five years, they can maybe reach a 7% market share. So, VMS has competitive moats, as the math doesn't add up.

Gustaf: Did you know that you’d make many small acquisitions?

Lars: We didn’t, but they were! And we know that buying big is a hassle, as we’ve done it twice. It takes time for the target to understand that it’s not a merger of equals.

In the beginning, we integrated firms into what you would call a rollup. And to extract synergies, we reduced several product lines into one. But that’s incredibly tiring. The big acquisitions we made in the early 2000s within real estate software began to pay off in 2012.

Gustaf: How do you increase profitability post-close?

Lars: Firstly, we almost always remove unprofitable revenue. Small companies may have been desperate to grow in any way possible.

We tell them to consider stopping that, and they oppose, “But my turnover drops!” And we say, “Yes, and that’s ok. Because it will get better.”

For example, we made a license firm acquisition around 2014. So, we had to transition it to SaaS. And the management team said, “It won’t work.” We asked, “Have you asked customers?” and we got the reply, “No, but they don’t want to.”

So, there was internal resistance to deal with first. And the advantage of a group is that you can say, “You two should talk. You don’t need to hear it from me.”

Generally, we help firms to focus on their core. We say, “A little crap in the corners has never killed anyone, so maybe don’t worry about that.” If someone with domain expertise doesn’t instill focus, the developers will indirectly decide the roadmap.

Gustaf: When transitioning to a SaaS model, do you get a short-term cash flow hit?

Lars: Nah, we don’t want to take a hit! We say, ”Don’t let cash flow drop. We want it to rise steadily.” And then we reason from there.

Gustaf: How did you bump into Mark Leonard from Constellation Software?

Lars: There was an M&A advisor who probably wanted to facilitate a transaction. But I wasn’t that interested.

Olov and I thought we were alone making VMS acquisitions because everyone always questioned us. But then this corporate finance boutique said there was another. What!? And we looked at them and said, ”That’s a great way of describing it. We’ll use that!”

But we’ve understood that we’re not really Constellation. Our approach comes from the industrial side; we are geeks. Mark is more of an investment banker. He identified VMS as a profitable spot.

Partly, it’s Nordic culture vs. North American. And Sweden is home to 10 million people, whereas North America has some 600 million. A bad reputation doesn’t travel as fast in such a large market. And we’ve always avoided doing dramatic things with customers. Trust takes a long time to build.

Besides, we don’t have bonuses. I’ve never understood why you must have a bonus to go to work. But I strongly support employees becoming shareholders, and we have convertibles to facilitate that.

Also, Constellation has decentralized its M&A. But we do it centrally, telling our CEOs, “You take care of the bottom line, and we take care of the top line.” They must generate cash flow, and the product must last 100 years, not three. We'll lose product focus if we involve business unit managers too much in acquisitions.

Gustaf: How many acquisitions will you do going forward?

Lars: When you’re growing faster than 25% to 30% annually, things break a little too much. I believe that it’s basically the maximum speed one can handle organizationally. Organically you may grow faster in some periods but not profitably.

We have recently gained a foothold outside the Nordics, in the Netherlands, and will build a European network. So, I think there will be more opportunities through our proactive deal sourcing. We tell company brokers that we’re interested, that they’ll receive quick answers, and that we’re easy to deal with.

Gustaf: How can company owners and investors get in contact with Vitec?

Lars: Feel free to contact Aleš, head of M&A, at:

And Patrik, head of IR, at:

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Author of 100-Baggers
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Kelly+Partners Group