Helping Investor Clients Gain an Edge to Outpace the Market

In-depth diligence into a market and company fundamentals helps investors identify the most attractive opportunities:

• Market Opportunity – Quantification of the overall market opportunity and end markets a company serves. 
• Voice of Customer – Data-driven perspective of customer feedback and experiences to assess the strength of the relationship and stability of the customer base. 
• Competitor Assessment – Customer, company peers, and channel partner (where relevant) viewpoints of the competitive landscape, the company position within it, and its right to win in the market. 
• Company Growth Opportunities – Scrutiny of the market and go-to-market drivers that are underpinning management forecasts. 

When clients are considering new investment opportunities, one of investors’ gating questions to help inform the valuation is substantiating “what is the market opportunity for this business?” The market opportunity, or total addressable market (TAM), provides a baseline for investors to evaluate opportunity in the immediate and long-term growth potential. However, by focusing on the overall size, investors can risk losing sight of what is most actionable for the prospective investment target. 

An investor hired Stax to evaluate a provider of background screening and hiring solutions. Our client had to ensure the market opportunity to support the target company’s valuation. Through the engagement, our client gained insight that the global TAM was large (~$13 billion) with half of market opportunity not yet captured (i.e., whitespace). 

The market opportunity was considerable, but it was also clear there were many providers vying for market share to support that large of a market opportunity. Our client also needed confirmation that the target company was perceived as a market leader, could expand the current market opportunity, and outpace key competitors and the broader market. 

Voice of customer insight helped our client understand the target company’s product-market fit and identify customer segments or profiles that were most strongly aligned with the target company’s value proposition. Through a bottom-up assessment of the target company’s customer segmentation, our client had a firmer understanding of the company’s overall positioning, market momentum, and runway for growth among their customer base. 

As investors evaluate prospective investments, a target company’s customers are one of the most important components of value creation. Voice of Customer analysis provides clients with an objective outside-in view of the strength of a company’s brand in the market; assessment of the strength of the customer relationship; and an examination of the stability of the customer base. This enables clients to de-risk the company’s current revenues and helps uncover opportunities to grow share of the wallet. 

Stax supported a client to evaluate a business management platform (the Target) serving field service management (FSM) companies such as HVAC, plumbing, electrical, and other related end markets. As the field service business landscape is fragmented, there are several software providers serving this market. Our client wanted to ensure the target’s customer base was entrenched with a minimal risk of churn. 

Stax’s work demonstrated that field service businesses have been a historic laggard adopting commercial software. However, the pandemic and current workforce dynamics (e.g., talent shortage, aging of workforce) drove greater “tech-ification” of field service businesses. As a result, businesses were often transitioning from pen and paper and/or spreadsheets to a commercial solution. Compared to manual methods, commercial offerings were easy-to-use, enabling businesses to multi-task and streamline operations while saving time for business owners. These positive experiences were shared by both the Target’s customers and customers of competing offerings. Growing adoption of commercial solutions would be a tailwind for many FSM software vendors, including the Target. 

As adoption of field service management solutions increases, the life stage of the market will evolve from a growing market to a maturing market. As a result, organic growth opportunities for providers will become more limited, as field service businesses already have a commercial solution in place. 

Accordingly, companies’ financial standing can only be improved through M&A. To that end, investors need to ensure their potential investment can be a “winner”— a serial acquirer as the market matures (versus being the one acquired). Competitor Assessment helps investors to understand the company’s differentiation and right-to-win versus competing solutions. 

Through Stax’s Voice of Customer work and Competitor Assessment, our investor client was able to better understand product-market fit of the Target company and competing solutions and unpack differences by segment. Our client found that the Target company was regarded as an industry leader, providing our client to use the Target to create a platform, and acquire and tuck-in inferior solutions. 

Competitor Assessment helps investors gain a more complete understanding of a Target company’s strengths, weaknesses, and differentiators in the market. These insights can help an investor understand a company’s “moat” and ability to withstand competitive pressures. 

Tech industries carry a winner-takes-all perception—economies of scale, network effects among customers, R&D to invest in big data, machine learning, and AI, as well as high switching costs for customers create formidable challenges for new entrants or challenger brands to achieve critical mass and effectively compete against incumbent and larger existing players. 

An investor client engaged Stax to evaluate an investment opportunity in a business-spend management provider. A chief concern of our client was the Target company’s ability to differentiate and withstand competition. A granular Competitor Assessment helped our client to better understand the target company’s value proposition and to what extent it was differentiated from other competing offerings.

Through Stax’s work, our client found that a “winner-takes-all” outcome was unlikely given the extreme fragmentation of existing technology systems. Additionally, variances were evident across company size increasing the difficulty of directly comparing solutions for customers. 

Market Opportunity can help investors get more comfortable with the investment opportunity. Understanding the market’s size and the accompanying dynamics helps to inform a company’s ability to grow in a given market. Our client learned that the business spend management market was sizeable—spanning upwards of $90B in total addressable market opportunity. Accordingly, despite the presence of scaled players, there was still runway for other companies to grow—provided they found ways to differentiate and can serve their customer base more effectively than those from incumbent players. 

Stax’s work helped quantify the overall market opportunity and evaluate its current stage of development. Our client determined the market size was sizeable to support multiple players and because the market was still in an early stage of development, there could be opportunities for other players to grow in this market. As the market evolves, there will be leaders that emerge to take material share; Stax’s Voice of Customer work helped to identify those vendors whose value proposition are more strongly aligned with customer requirements. 

As investors evaluate potential investment positions, investors are diagnosing a prospective company’s positioning within its addressable market and the Company Growth Opportunities. Growth pathways for a prospective investment, both within its core market as well as in market adjacencies (e.g., new product, new market), need to be considered. 

Adjacency expansion helps companies to grow their total addressable market, increasing investor interest in the process. To that end, M&A enables companies to accelerate their revenue expansion efforts in these adjacencies. 

While product expansion does support TAM growth, the successful execution of strategy rests on the alignment with customer needs and making them more successful. Investors should consider how a product expansion strengthens a core company’s business; noticing if it enables the company to be a leader in the adjacent market and create a competitive advantage for the company. When factoring in M&A the company has undertaken to accelerate that expansion, investors need to understand the competitive landscape of that adjacency, both the composition of providers and the competitive advantages that the acquired company may have over these other providers. 

Stax supported a client to evaluate an enterprise software business. Enterprise businesses maintain a heterogeneous tech stack, operating many different systems with their own data structures and requirements. As a result, aggregating data sources to obtain a real-time and unified view of customers is an ongoing challenge. The enterprise software business previously acquired an integration platform to companies unifying disparate software applications and data to provide clients with a unified view of their customers. 

However, the company’s success in the adjacency required further vetting as the market for integration platforms is fragmented, providing customers with many available competing options when considering integration needs. Competitor Insight helped Stax’s investor client understand whether the company’s acquired business was a market leader, differentiated, and have a right to win versus competing solutions. 

Our client found both the Target company and the acquired business were perceived as market leaders in their respective markets. Furthermore, the acquired company complemented the company’s core product. Customers were able to accelerate their digital transformation by more easily unlocking data across systems and developing scalable integration frameworks which enabled faster, more seamless integrations across disparate systems. 

Through Stax’s Company Growth Opportunities and Competitor Insight analysis, our investor client was able to better understand the company’s ability to unlock revenue opportunities in those adjacencies. Our client leaned in on the investment opportunity as a result.

Palash Misra

Managing Director | Boston

Palash Misra has extensive experience on a global and domestic level in corporate and strategy consulting roles, with a strong background in both strategic synthesis and implementation.