Tempeludden becomes Marathon Software, a permanent capital vehicle increasing its investor base before a potential IPO

Gustaf Hakansson
September 5, 2022
”Having permanent capital changes your mindset from the classic PE five to seven-year holding period. We strive to fix things on a fundamental level.”

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 Richard, how did you end up at Tempeludden? And what is Tempeludden today?

Richard Treffner: I worked with VC software investments for Investor AB a couple of years back and realized that everyone wanted to do the fast-growing blue ocean stuff. But we did a few “mini buyouts” of early SaaS companies, which felt novel at the time, around 2010.

And I like the continuous improvement mindset, with incremental and tireless compounding progress. I guess I am more buyout than venture that way.

So, I joined a small PE outfit that did classic buyouts of product companies, with an industrial tilt. They wanted to start doing software buyouts, so it seemed like the perfect match.

Except, buying software companies was a surprisingly big leap internally for them. Therefore, I ended up starting Tempeludden with Johan Hazelius, who worked with operational improvements in some of the portfolio companies.

We both enjoy working with really small companies, and with our limited funds, we decided to go for the “microcaps” that are too small for other software investors.

And that has influenced everything we do. Because we have to be smart with our resources to work efficiently. Simplicity is key for us.

We like microcaps because even a few focused upgrades can make a significant impact. It’s a more volatile environment, but the short feedback loops can make them nimble.

We have taken a lot of inspiration from Constellation Software and the likes, but we have a more active and growth-oriented approach. Thus far, we have made five acquisitions during the three years since we founded Tempeludden – all niche software companies with turnovers ranging from six to thirty million SEK.

They will add up to a run rate revenue of about SEK 80 million by year-end, approaching the 10% EBIT-margin mark. We buy companies with a variety of cash flow profiles, and sometimes it makes sense to have an initial period where we allow negative cash flows.

But we typically want to grow profitably and increase profitability over time. And we expect the overall group profitability to increase gradually.

Gustaf: What is the next step for the firm, and why?

Richard: The next step is a new platform to invest from: Marathon Software!

We started out with limited funds and a deal-by-deal structure to get going quickly. Our bottleneck has been – and will perhaps always be – sourcing of new acquisitions.

We haven’t been too stressed about acquiring many companies fast and “deploying” large amounts. We want all acquisitions to be successful and would rather miss a few opportunities. However, now that we have been at this for a while, the deal pipe is growing quickly.

With our proactive approach (we have bought all of our companies in bilateral dialogues), we have a long lead time from establishing contact with an attractive company to the point where there is a majority stake for sale. It takes years if we don’t happen to be lucky.

Today, we are courting about a hundred companies, so the time has come to establish a larger platform.

It will be a permanent capital vehicle, holding the current portfolio and dry powder to let us invest at a slightly higher pace. We plan to continue our selective approach and still be large enough to go public within a couple of years.

We felt that the name “Tempeludden” sounds, at least in Swedish, more like a traditional investment company. And sure, we do acquire companies as a core part of our strategy, but we are a software group at heart, so we wanted a new name.

And we feel that “Marathon” breathes the culture of hard work and our long-term view.

Gustaf: What opportunity do you see, and how much capital do you intend to raise?

Richard: Public SaaS valuations have skyrocketed during the last few years. While things are more sensible in our arena, it has been a nuisance.

Unrealistic price expectations is a frequent deal breaker. Now that the loftiest valuations are history, we think investments with vintages from the next few years will be stellar.

At the same time, our deal pipe is larger than we can handle due to our intense sourcing efforts during the last three years finally paying off.

So, we are eager to beef up our operations and raise a couple of hundred million SEK to make the most of the opportunities we see.

We already have a circle of great investors, such as Per Granath and the Wilkne family – who resonate well with our long-term focus and “relentless grit approach”, but we are looking to increase this circle.

Gustaf: What are your acquisition criteria, and at what valuations do you transact?

Richard: We look for B2B software companies with a turnover of between five to fifty million SEK. With positive cash flow or a clear path to positive cash flow. All of our companies should be capable of growing profitably.

We want well-run companies with a stable base business. High stability is often achieved through a high market share in a small niche, so we often look for that.

What probably stands out the most about us is that we go after micro businesses. We only buy businesses, not products, so our lower limit is around five million SEK in recurring revenue. At that lower end of the range, we have to see potential or high profitability, because they typically have some hair on them.

You can’t just buy the shares and put them in a drawer – you have to work closely with the firms and be able to step in if, for instance, a key person leaves. Thankfully, that hasn’t happened yet, but it is an ever-present risk.

Price tags can vary a lot. If the company is any good, it is hard to go below 6x EV/EBIT or 1x EV/Sales. On the high end, deals in our space can reach 12x EV/EBIT or 2.5-3x EV/Sales, but that requires both size and growth.

Companies we look at can have high dependence on key individuals, high customer concentration, high technical debt, or be “sunset companies” with dwindling market positions. We can live with some risks and mitigate others, but we don’t want a situation requiring too much change.

We want to take companies that do well and help boost them. Absolutely no turnarounds.

Although most of our companies have 90%+ SaaS license revenues, we are ok with a diluted revenue mix from a proportion of consultancy or consumption. Sometimes it doesn’t make sense to charge a fixed per-user monthly fee for everything.

Gustaf: How do you work with subsidiaries?

Richard: First, there is always a “Stabilization” phase, where we make sure we can rely on the numbers and get the most critical metrics in place.

Then comes the “Integration”, which is very light in our case since we want all our companies to be independent. But we have shared resources in areas such as accounting and online marketing.

And it is in the long game, or the “Optimization” phase, where we really dig in.

We are happy to spend a lot of time in the areas we think our support matters most. However, we never show up uninvited – we don’t want to infringe on our companies’ independence. We believe that being bossed around quickly takes the fun out of working as we do.

So, after a busy initial period where we work with a company to identify and launch key initiatives to realize the long-term plan, things often quiet down a bit. The company focuses on execution, so we stay close but are careful not to add to their load.

From there on, we work very differently with the companies depending on their bandwidth and openness to new initiatives.

If you think about it, it's ridiculous how much effort we put into “the toolbox” for our small companies, but we have a very long perspective. Having permanent capital changes your mindset from the classic PE five to seven-year holding period. We strive to fix things on a fundamental level.

Like talent, and that’s a big one. We help with best practices within engineering, sales, product management, and whatnot, but talent is probably the one making the most difference in the very long run. Just being part of our “family” can make a company more attractive.

If you are a key employee, we let you own part of the business and this becomes your adventure as much as ours. You get support and can exchange ideas with your counterparts in our other companies. And if you outgrow your current company, you can take on broader responsibilities in the group.

The CEOs we have often come from leadership roles in other, larger companies, but it is typically their first CEO experience. When we recruit, we look for enthusiasm and hunger, along with “knowing what good looks like”, but not necessarily that gray hair.

You need to be entrepreneurial to enjoy getting your hands dirty – these are small companies, so you might suddenly find yourself with a screwdriver in one hand because someone had to fix that table before that important meeting.

For our management teams, this is a really fun adventure with the potential to make a fair amount of money.

Also, we typically find that the companies we work with welcome our insights and suggestions on how to improve. We have two partners dedicated to operational improvement, Chris Tholén on Product & Technology and Helen Agering on Sales.

I thought their efforts would receive more skepticism, but our companies have been really eager to find ways to improve.

The most fundamental value in our companies is that they understand, I mean really understand, their niche markets and customer needs. We can’t teach them anything here, so we don’t try to! I guess this core competence makes them open to our input on the backend of their operations.

Gustaf: What’s your favorite business book?

Richard: I’ve recently obsessed over Michael Lewis’ Moneyball and love everything about the Oakland Athletics story. That’s how business should be – and the book is not really even about business.

Lynch’s One up on Wall Street is one I like on investing. I have never understood investors who see companies as just “assets”. It’s almost insulting when so many individuals’ efforts are needed to turn a profit. I choose to believe that Lynch’s success is partly due to his grounded understanding of what makes companies win.

Gustaf: How can business owners and investors reach you?

Richard: We’re all available through our website and are happy to connect with new companies, investors, potential partners, or just any great people who want to talk about niche software.

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Chris Mayer
Author of 100-Baggers
PM & co-founder, Woodlock House Family Capital
Brett Kelly
Founder & CEO
Kelly+Partners Group