Cloud Computing Helps Lift Small Business Valuations

It takes more than a solid business plan and gumption to succeed in business nowadays. Growing your company in a competitive businesses landscape—and attracting interested investors—requires a solid footing in technology.

As ephemeral as the term “cloud computing” sounds, it’s one of the most concrete foundations you can lay for your business, according to Kristina Heinze, a partner at ParkerGale, a Chicago-based private equity firm specializing in growing small technology firms by investing in them for an ownership stake.

[Related: Small Business IT Scores Middling Grades]

Investing in cloud services software and IT services can make all the difference when it comes time to put a price on your company for the purposes of attracting investors. When ParkerGale seeks out small business growth opportunities, Heinze and her crew take a good hard look at how the company ticks.

ParkerGale invests in companies that operate in expanding markets and are often “growing despite the lack of the founder investing in sales and marketing,” Heinze told Small Business Computing. Companies that make those investments early command a premium, particularly if they turn to the cloud for their sales and marketing needs.

The Value of Embracing Cloud Technology

Heinze and her group of investors perk up when they learn that a small company already uses cloud software and services.

“You come across as so much more professional and sophisticated,” she said. Using a cloud-based software-as-a-service (SaaS) platform is not only a good indicator of savvy tech leadership. It also shows that a small business owner sits on the cutting edge of what the IT industry has to offer.

Today’s cloud platforms evolve at a much faster rate than in years past. Updates and enhancements arrive at a continual rate, meaning that small businesses no longer have to wait months or years for advanced functionality to trickle down from enterprise editions of on-premises software as they once did in years past.

Take Salesforce, for example. The leading cloud customer relationship management (CRM) platform helps smaller companies to derive business insight from real-time data, allowing companies to quickly gauge the effectiveness of their customer service and engagement efforts.

Better yet, it’s an easy investment for small business owners to make. “They don’t necessarily realize that there’s no upfront cost,” Heinze reminded. Instead of huge initial outlays for servers and software licenses, a company can get its CRM and other vital business software systems up and running on the cloud on a subscription basis.

Finally, and perhaps most importantly, small businesses that have adopted the cloud have “eliminated the single point of failure,” said Heinze. Although cloud outages can occur, a little downtime is preferable to losing a critical server or the developer who kept the inner workings of a key piece of software a closely-guarded secret. Poorly documented IT practices are another red flag, she added.

Emulate the Cloud’s Recurring Revenue Stream

Another way that you can boost your small tech company’s monetary worth is to mimic the billing- and product-delivery practices of cloud providers.

“We tend to like businesses that are cloud-friendly,” said Heinze. Typically, they derive more of their revenues from a “subscription-based SaaS model than from a licensed maintenance model.

The benefits of steady, recurring revenues—presumably from a happy and stable customer base—are immediately obvious to potential investors. Small business owners don’t have to worry about explaining any worrying lulls or unanticipated spikes in demand to potential investors.

A service-based approach also reflects well on a small business’ leadership team. It shows that they planned for growth from the start by adopting and investing in technologies that scale as their customer base grows—and by documenting every step of the way. If their platforms can grow to accommodate thousands of customers or more, Heinze and other investors will notice.

Pedro Hernandez is a contributing editor at Small Business Computing. Follow him on Twitter @ecoINSITE.