The operator-developer model revolutionizing tech innovation and M&A
SEP. 6, 2024
The operator-developer model fuses industry expertise with software development prowess to create more impactful and specialized tech solutions.
In the ever-evolving landscape of technology and business, a new model is emerging that promises to supercharge how companies approach software development and industry expertise. We call it the “operator-developer” model—a term we’re introducing to describe a growing trend that, while not entirely new in practice, deserves recognition for its transformative potential.
Software as a Service (SaaS) has been a cornerstone of the tech world for decades, and now the operator-developer model is taking it to the next level.
This hybrid approach fuses deep industry knowledge with cutting-edge tech development, redefining how tech companies use software to create value. It’s not about replacing SaaS, but rather enhancing and expanding its capabilities through deep operational expertise.
The operator-developer model combines the scalability and efficiency of SaaS with the domain-specific knowledge of industry veterans. These hybrid entities don’t just build or buy software—they intimately understand their customers' pain points and can bring highly tailored products to market faster.
By merging people who know a domain inside and out with cutting-edge technology development, this model offers a faster and more efficient path to profitability.
The private equity (PE) world is taking notice, recognizing the potential of this advanced model to disrupt industries and deliver outsized returns.
The advantages of the operator-developer model
The operator-developer model offers a unique blend of advantages that amplifies the benefits of traditional SaaS while addressing its limitations:
Deeper domain expertise
Operator-developers tend to be industry veterans with decades of experience. This extensive knowledge of their specific market allows them to relate to customers’ pain points, anticipate their needs, and develop highly targeted solutions that resonate.
Faster iteration and product development
Since they wear both the operator and developer hats, these companies can iterate on their products at lightning speed. They have a direct feedback loop from their internal operations, allowing them to quickly identify what's working and what’s not and make necessary adjustments on the fly.
Greater value capture
Operator-developers don't just create technology—they own the entire value chain. They can capture the lion’s share of the value generated by their innovations, from product development to customer service.
The role of the operator-developer model in private equity
The operator-developer model, building upon the success of SaaS, presents a compelling opportunity for PE firms.
These hybrid entities combine the scalability of SaaS with deep operational expertise, making them particularly attractive investments.
First, they’ve already demonstrated the viability of their model, often boasting a successful track record of operational excellence and technological innovation. This reduces the risk for investors and increases the likelihood of a successful exit, especially when complemented by strategic partnerships with firms like Lumenalta which can facilitate the integration and optimization of new technologies.
As Dave Price, Managing Director at Lumenalta, explains, “When PE firms acquire businesses, they now face the opportunity to supercharge existing SaaS solutions with deep technical knowledge. The operator-developer model allows for customization and integration beyond off-the-shelf SaaS products, potentially leading to significant value creation.”
Operator-developers also tend to have a significant runway for growth. Combining their technology platform and operational expertise allows them to rapidly scale their business, expand into new markets, and capture a larger share of the value chain.
Finally, in a crowded market, technology is a powerful differentiator. Operator-developers have a unique advantage—they can leverage their own technology to streamline operations, improve efficiency, and deliver a superior customer experience.
Case study: Zephyr in the HVAC industry
Zephyr is a rapidly growing home services company that demonstrates the operator-developer model in action. Founded in 2022 by CEO Shawn Weidmann, the company quickly caught the eye of Juxtapose, a forward-thinking investment firm that recognized Zephyr’s potential to disrupt the fragmented HVAC market.
Engaging Lumenalta, Zephyr built a cutting-edge, data-driven platform called HUX (Homeowner User Experience), designed to address the industry’s biggest pain points. Homeowners desired more transparency and control, while technicians needed to access the knowledge and resources needed to deliver efficient, high-quality service.
Juxtapose saw a golden opportunity: they could invest in a company that gave them a foothold in a massive market ripe for disruption while gaining a powerful technology platform they could leverage for significant value.
The HUX platform quickly proved its worth by streamlining operations, improving service quality, and driving customer satisfaction. This, in turn, led to accelerated growth for Zephyr and a substantial return on investment for Juxtapose.
Zephyr’s HUX platform demonstrates how the operator-developer model can enhance traditional SaaS offerings.
By combining a SaaS-based platform with deep industry knowledge, Zephyr created a solution that addresses specific HVAC industry pain points more effectively than a generic SaaS product could.Ultimately, Zephyr’s story provides a blueprint for how the operator-developer model can disrupt an entire industry and deliver outsized returns for PE firms when paired with the right technological expertise.
Challenges of the operator-developer model
While the operator-developer model offers significant advantages, it also comes with its own set of challenges, such as:
- Balancing operational and development priorities: These companies must find ways to balance the day-to-day demands of running a business with the long-term vision of developing and evolving their technology platform.
- Acquiring and retaining the right talent: The operator-developer model demands a unique blend of skills, from business acumen and operational expertise to software development chops. Bringing in new roles like these can be a tough cultural adjustment.
- Leveraging expertise efficiently: Operator-developers excel at integrating technology with operations, often by skillfully engaging third-party specialists.This approach allows them to enhance operational efficiency by tapping into specialized knowledge without overburdening internal resources. The result is a more agile and scalable integration of technology and operations.
- Balancing customization and scalability: While the operator-developer model allows for highly tailored solutions, companies must also maintain the scalability that makes SaaS so powerful. Finding this balance is crucial for long-term success.
The impact on innovation and product development
The operator-developer model turbocharges innovation in SaaS product development. By combining the scalability and efficiency of SaaS with deep industry knowledge, these companies have a unique advantage in creating highly relevant and impactful solutions.
Industry-specific solutions
Operator-developers aren’t building software based on theoretical ideas of what customers need. They intimately understand the pain points, challenges, and opportunities their customers face.
Agile iteration, rapid innovation
Unlike traditional software companies that rely on third-party feedback and market research, operator-developers can directly observe how customers use their technology on the ground. They can quickly identify pain points and gather feedback, allowing them to rapidly iterate on their products and release new features and functionalities faster than the competition.
Customers at the core
In the operator-developer model, the customer is king. These companies are deeply embedded in their customers’ operations, giving them a front-row seat to their needs, challenges, and aspirations. This customer-centric approach lets them develop innovative, relevant, and user-friendly products.
M&A strategies in the operator-developer landscape
The operator-developer model reshapes how companies operate and innovate and rewrites the rules of M&A. Acquiring these hybrid businesses can give investors a foothold in burgeoning markets, leverage a proven tech stack, and generate synergies with other portfolio companies.
Identifying potential targets
For investors, identifying promising operator-developer acquisition targets requires looking beyond the traditional financial metrics. It’s about recognizing the potential of the technology platform, the depth of the team’s domain expertise, and their hunger for innovation.The right technology platform can be a force multiplier that transforms a good business into a great one. It’s a key differentiator that allows companies to streamline operations, enhance customer experiences, and unlock new revenue streams.
Valuation considerations
Valuing an operator-developer company requires a nuanced approach. While traditional SaaS metrics like ARR and churn rates remain important, investors must also assess the value of the company’s industry expertise and its ability to create tailored high-impact solutions.Get it right, though, and the rewards can be exceptional. Price notes, “If the technology is best in class or truly transformative to the business model it may change how a company is valued by the marketplace and lead to meaningful multiple expansion.”
Post-acquisition integration
Once a PE firm acquires an operator-developer company, the real work begins. The challenge lies in seamlessly integrating the technology platform with the operations of existing portfolio companies.
It’s not as easy as plugging in new software—you need to weave the technology into the very fabric of their operations, ensuring it drives efficiency and unity across your entire portfolio. Doing is best left to outside experts like Lumenalta.
“Lumenalta excels at creating the right tech-driven value-creation plan that provides a clear path for adoption and future growth,” Price explains. “We then help our clients understand how to implement and use the technology effectively. Once they have Lumenalta’s perspective and our guidance on processes to support the tech, they can realize cost synergies faster and accelerate their go-to-market motion. Without strategic planning and implementation support, you can end up with integration debt and unrealized upside to your M&A strategy.”
What lies ahead for tech innovation and investment
The operator-developer model is poised to disrupt numerous industries. Price highlights “antiquated services and industrial businesses, as well as fragmented sectors with roll-up potential, such as healthcare and insurance” are areas ripe for this model’s disruptive power.True tech transformation and a data-driven approach are essential ingredients for success in this new landscape. “Data modernization (getting data clean and in the right architecture) and having an actionable path to AI-driven analytics and operations (how do we get insights and ROI) is what the C-suite wants,” says Price.
While traditional SaaS solutions will continue to play a crucial role in business technology, the operator-developer model represents the next evolution in this space.
By combining the scalability and efficiency of SaaS with deep operational expertise, this hybrid approach offers a powerful blueprint for businesses to leverage technology in transforming their industries and creating lasting value.
Realizing this potential often requires collaboration with third-party partners like Lumenalta, who can help businesses effectively integrate and scale these innovations to create lasting value.
