How does UEF evaluate the proprietary tech position for software investments?
The UEF’s investment mandate requires a proprietary technology solution to be central to the product/business plan of an investee company. This stems from UniQuest’s reputation and experience around registerable IP as Australia’s leading research commercialisation company managing the intellectual property of the University of Queensland. Here, we set out to define our investment requirements for software companies and list specific inclusions and exclusions for investment consideration. It is important to note that all investment opportunities are reviewed on a case-by-case basis. This paper provides key guidelines but is not fully comprehensive and subject to exceptions.
Why invest in software companies?
Software companies appeal to Venture Capital (VC) investors due relatively low development costs, easy product scalability and recurring revenue business models. They can be very capital efficient companies servicing very large markets which often means high return potential for investors. There is little technical risk in taking a product to market (relative to other sectors), and the performance of software companies can be clearly assessed based on standard financial and growth metrics. Despite all this upside, the major downside for software investments is that often software products can be easily and quickly replicated allowing competitors to rapidly compete for market share (i.e. Uber as the first mover in the ride-sharing industry quickly had competition with fast followers Lyft, DiDi and Ola).
What is a proprietary tech position?
A proprietary technology position is what makes a technology company unique and clearly differentiated. It can also be referred to as a ‘technology moat’, which can be:
- the complexity of a product/tech stack that makes it difficult (or take longer) for copycats to reproduce (not for consumers to use)
- a combination of product (e. complex features), business (i.e. integrations that are exclusive or take a long time to implement) and market elements (i.e. networks and exclusive relationships or regulatory environment[1]) that add up to making a product difficult to replicate.
A proprietary technology position needs to be sustainable to be an effective barrier to entry for competitors. What does your roadmap need to look like to keep you ahead of others existing and emerging in the market?
Why it’s important?
The technology moat gives a company time to capture market share and brand loyalty, making knockoff products less viable.
A software company with a deep technology moat would have at least one of the following:
- Proprietary algorithms/models that are integral to a company’s strategy, enabling superior product performance and/or unique capabilities, and where the company maintains exclusive control.
- AI models fine-tuned with domain-specific knowledge so long as (i) it leads to a model that significantly outperforms generic models trained on public data and, (ii) the model can quickly adopt new versions and updated knowledge base.
- Complex or exclusive integrations with existing software and ecommerce platforms used by customers in difficult to access markets.
A software company with a deep technology moat would have more than one of the following ‘shallow’ moats layered together
- Finding a vertical niche and offering a hyper specific solution with bespoke customisations (caveat: the vertical would need to be big enough and the customisations would need to be scalable across that market). This is generally achieved by a founder with deep domain expertise and/or unique insight into the problem being solved.
- Software that integrates well with other products and services. Companies that build ecosystems around their products and can lock in customers and create barriers to entry for competitors.
- Evidence of networks effects in action. Network effects are where more users joining the platform directly increases the value of the product/service making it harder for competitors to lure customers away (think LinkedIn, AirBnB).
- A highly scalable product that can grow without significant increases in costs.
- A very ‘sticky’ product with long term contracts, high switching costs, and therefore low user churn.
- Distribution partnerships to support rapid sales growth, market expansion and/or customer retention.
- Software that ensures customer compliance with complex regulatory requirements.
What kind of software-only companies does UEF not invest into?
Where innovation is limited to:
- utilisation of white label software;
- copycat social media;
- AI wrappers;
- e-commerce platforms;
- basic mobile apps;
- generic project management/CRM/business insight tools.
Where products:
- address overly saturated markets g. dating apps, short video clip or music platforms;
- show low engagement or high-churn;
- have a high moderation overhead and risk (g. unfiltered content);
- are relevant only to a specific geography and don’t scale well.
Final Thoughts
Building software products that solve real problems is valuable and can be very exciting. Often software companies can bootstrap product development and take an accelerated path to market. Whilst there are certain software companies that don’t appeal to VC investors, these same companies may not need VC investment. There are other programs that may provide more value to software companies than capital alone, for example UniQuest’s Venture Architect Program. Understanding UEF’s approach to software investment opportunities may help you determine if we are a good fit for you. Where it is unclear, feel free to reach out.
If you have a software startup based on a proprietary tech position and have a connection to the University of Queensland. Please contact us through the UEF website or email us at investment@uniquest.com.au
[1] Companies operating in a heavily regulated industry may have a moat due to the complexity and cost of compliance.
