Investing at the intersection of software and services

Digital Transformation Strategy
Investing at the intersection of software and services
Digital Transformation Strategy
When we started working in the software business in 1999, we were changing the use of software from on-premise enterprise software to software-as-a-service. Now we're changing software-as-a-service to just simply service. Every leading service business will be a software company at its core. (I wrote a blog post about this last year — read it next).

One of our top areas of interest for investment at Castle Digital Partners is the intersection of software and services. We like this theme for a number of reasons, but primarily because we can lead the transformation of a business from services to software. When you transform a services leader into a software company, you not only create value through market share gains, you also generate value by changing how the business is valued by future investors (receiving a software multiple vs. what is normal for services).

This opportunity is present today across numerous services markets. Here are specific areas that we are targeting at Castle.
Our first business was one of the first SaaS companies in the logistics space. The company we started, now called One Network Enterprises, continues to leverage the value of a network that is inherent in logistics to drive growth and recurring revenue. Orders, shipments, inventory and capacity are shared by trading partners. The more scale and visibility you build across a network, the more efficient the network runs. This concept was the basis of our original business plan.

With network key to value creation, we're now seeing the intersection of the 3PL/forwarder/broker/trucker and software company. A couple of examples include Flexport and Convoy. These companies are basically building freight forwarding and trucking services businesses that are powered by proprietary software. As a result, they are receiving software valuations on traditional logistics services revenue. What was once a freight forwarder's book of business is now a sexy high GMV.

This opportunity is all over the place. If you have a successful business in the freight brokerage, forwarding, factoring, or other logistics services business — let's chat.
I've always looked at owners of insurance companies with some degree of jealousy. It's one of the oldest recurring revenue businesses around, and they seem to be great businesses.

We love the idea of taking a business insurance brokerage and making it into a software company. Take the existing business and put a wonderful self-service customer experience on top of it. Then, go acquire more insurance companies and flip their customers into this new digital experience. Then work on the backend of the business to scale it. If you are in this business — let's talk.

The activity in insurance-tech is hot from all sides, but this is a huge market and we're in the early stages of massive transformation in this business. Whitney Arthofer wrote up a nice summary of brokerage last year, "Insurance brokerage is broken."
Next-generation banking and investing
Consumer and business banking is another services sector that is being attacked by software-services hybrids. Castle is based in Charlotte NC, home to Bank of America and Wells Fargo. Really the only startup that should be in Charlotte is a next-generation banking startup. If you are doing anything in this space, we're interested.

A few years ago in New York, we met with the founders of Stash who were looking for help with building software. I wish we had found a way to work together… as they've made incredible progress building a new type of investment services company that is based on software. They are essentially building a financial services company — they just launched bank accounts!

We'd like to be involved in this major transformation from the Bank of America's of the world to the Stash types of the world.
The idea of building new services companies based on software can be applied to endless services markets. The sectors listed above are just some examples.

Services businesses have historically faced scalability challenges. Look how many people work at Bank of America! The good news is that software is evolving quickly to scale complex services. Hello machine learning.
Machine learning / automation
A large part of our business, which is a hybrid of services and investing, is coding software. This article from this week caught everyone's attention on our team — largely due to its inevitable reality: "Airbnb built an AI that turns design sketches into product source code". This is clearly going to happen. And it's an opportunity to create a new type of software development services company that scales far better than today's dev shop.

Machine learning is one of the keys to building massive new logistics, insurance, banking and other software-driven services companies. Again, we're early-days on this technology — but it's coming for real and the early adopters will be well positioned.
Let's talk
There are two ways to build these services/software hybrid companies. You can start from scratch and build an entirely new business. Or, you can take a leading services company and work towards software transformation.

As a Digital Partner, we can help with both approaches. But as investors, we really like the idea of transforming the business that already has some scale. These transformations are not easy to achieve for management teams that do not have software backgrounds and true software teams. We solve that problem as a partner and investor, so that this clear upside can be achieved and we can create significant value together. (Next read — What is a Digital Partner).

Feel free to send me an email: [email protected].
Castle Digital Partners
Castle is a digital partner for management teams of software-driven businesses. We team with management to envision, design, develop and operate digital platforms, products and services that drive growth, market differentiation — and ultimately enterprise value.

We are a venture services firm operating as a true partner and investor in our portfolio businesses. We focus on software-as-a-service, digital commerce, and tech-enabled services companies that have strong management, solid business traction, and a clear opportunity for digital product creation or transformation. We then partner on the execution of the digital thesis with creative deal structures involving equity investment and/or fees.

To date, we have executed over 50 digital platform programs and invested in 18 of these companies.