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How GRC Software Companies Can Build Better Moats for M&A Opportunities

  • Why GRC software companies should work to provide holistic GRC solutions
  • How implementing some of these strategies can help GRC products be more defensible and positioned for more attractive M&A opportunities

Yahoo!, Facebook, Equifax, Capital One, Amazon… The list of organizations that have suffered cybersecurity incidents goes on and on. The average cost per data breach is now $9.48 million but it’s not unheard of for these incidents to cost a single company hundreds of millions in fines, penalties, and damages—and that’s not counting the impact on company reputation and individual customers.

As the use of technology has exploded, so too have the many risks inherent in doing business. Today, even small companies may need to abide by international laws and simple business models may be subject to complex security requirements. Keeping up with compliance demands presents a significant challenge for businesses, due to the complexity of legal requirements, the increasing sophistication of cyber-criminals, and the rapid pace of regulatory changes.

That’s good news for Governance, Risk Management, and Compliance (GRC) software companies. GRC software assists companies with staying on the right side of the law, adjusting swiftly to changes, and avoiding penalties and reputational damage. According to the 2024 Grand View Research report, the GRC market is projected to grow to $134.86 billion by 2030, at a CAGR of 13.8% from 2023 to 2030.

That doesn’t mean founders of GRC companies can relax, however. Businesses are looking for more holistic approaches to interconnected risks and regulations. By meeting multiple GRC needs, providers can help make their products more defensible and position themselves as attractive M&A targets.

Building a GRC Moat

Establishing itself as the go-to provider for a specific vertical is a great start for a GRC software company. Once established, however, founders need to look for ways to meet a wider range of customer needs, differentiate their company from competitors, and unlock new opportunities for growth and customer engagement.

A GRC software founder can make their business more defensible by adopting strategies that not only protect their market position but also enhance their value proposition to clients. This could help a GRC software founder build a protective moat around their company, potentially de-risking by broadening the total addressable market (TAM) while simultaneously creating a stronger position for a future M&A event.

Approaches to consider include:

Diversifying and Expanding the Solution

Building on and diversifying current offerings are strategic ways to enhance value proposition. Say, for example, a company offers basic compliance management features that support organizations with adhering to legal and regulatory standards. They could build on that expertise to develop an integrated risk management (IRM) solution that goes beyond compliance to include advanced risk assessment tools, predictive analytics, and real-time risk monitoring.

Another example would be a company that offers comprehensive compliance training on healthcare regulations such as HIPPA. They could leverage this experience to apply the same methodologies, technological infrastructure, and educational principles to the financial sector with training on regulations such as the Sarbanes-Oxley Act (SOX) and global standards like the General Data Protection Regulation (GDPR).

Enhancing User Experience

Ensuring that the software is easy to use and the company is easy to work with can be a key competitive advantage. Providing an excellent user experience with intuitive interfaces, along with comprehensive training and support, could enhance client satisfaction and loyalty. Likewise, outstanding customer support, including quick response times, helpful resources, and access to experts, can contribute to client retention and satisfaction.

Offering Customization and Flexibility

Offering highly customizable and flexible solutions that can be tailored to the specific needs of businesses across various industries can set a GRC software apart. This includes being able to scale as companies grow by managing increasing volumes of data, more complex organizational structures, and a growing number of compliance requirements without compromising performance. The ability to adapt to a wide range of regulatory environments and business models could make the software more attractive to a broader audience.

Forming Strategic Partnerships

Strategic partnerships with consultancy firms, law firms, and other software providers could expand the reach and functionality of GRC solutions. These partnerships can provide a holistic approach to compliance, risk management, and governance, potentially making the software more integral to client operations.

Leveraging Artificial Intelligence

AI technologies can support ongoing compliance with evolving regulations and make the most of existing data. Potential uses of AI in GRC software include:

  • Scanning, interpreting, and analyzing vast amounts of regulatory data from multiple jurisdictions in real-time and automatically alerting clients about relevant regulatory changes.
  • Evaluating historical data to identify patterns and predict potential compliance and operational risks before they materialize.
  • Monitoring compliance controls and processes within an organization to detect potential breaches or deviations from established compliance norms.
  • Personalized compliance training programs tailored to the specific needs and risk profiles of individual employees or departments.
  • Chatbots and virtual assistants can provide immediate assistance to employees seeking information about compliance policies, procedures, or regulatory requirements.

What Buyers and Investors Want to See

Buyers and investors look for GRC software companies with strong differentiation and a large TAM. If a product is unique and hard to replace, it is more likely to keep customers for a long time and can grow significantly, driving increased retention rates. Differentiated products can usually also charge higher prices and build loyal customer bases, making it easier for them to compete against bigger companies. In contrast, if a product is very similar to others and can be easily replaced by cheaper options, it may be much harder to succeed in the market, and it could likely reflect in that company's retention metrics.

The size of the market opportunity is also crucial. A large TAM suggests there’s a lot of room for growth and profit, and assuming the company can serve the market well, this could excite the private equity community as there’s enough room to build a big business and see a potential return. A small TAM, however, suggests there is limited room to grow. Understanding their potential TAM enables GRC companies to make smart choices about developing their products, designing their business, and planning for expansion.

To learn more about metrics that are important to buyers and investors, read 5 SaaS Metrics That Influence GRC Software Valuation or listen to our podcast on Key Metrics for Selling a SaaS Business.

This material and the opinions contained herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

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Modified on Mar 15, 2024