Why AI Is Leading Some Tech Funds to Look at Cleaning Companies, Pest Control Businesses and Elevator Maintenance — and What That Says About What Buyers Really Value
A few weeks ago, I was on a video call with an international mid-market private equity fund specialized in software. I was presenting them with an opportunity we are working on at Bondo Advisors.
The call did not go exactly as I expected.
The first twenty minutes went well. Then came the usual questions: recurring versus non-recurring revenue, churn, and NRR (Net Revenue Retention). In the end, without too much hesitation, they told me the opportunity was not the right fit for them, mainly because of the company’s size. Nothing unusual there — some opportunities fit and others do not. Fortunately, our list of potential investors and buyers is long.
I had already resigned myself to ending the call with the typical line about speaking again in the future, mentioning that we had other mandates that might fit them better and that we would connect them when appropriate. But then something unexpected happened.
“By the way, does your M&A boutique also work on businesses outside software? We’ve been exploring opportunities beyond software for the past few months.”
I was genuinely surprised. This fund was a well-known tech specialist with more than two decades of investing in software and technology companies. There had been no indication whatsoever that they were looking at anything else. Hearing a specialized software fund opening up to traditional businesses was definitely not what I expected that day.
I asked them to explain the logic behind it.
Why They Started with Software
They told me that twenty years ago they raised their first software-focused fund because software businesses were the type of companies where, by looking at the previous ten years of data — ARR, churn, net retention rate, customer cohorts — you could predict with considerable confidence what the next ten years would look like.
These were businesses where revenue did not depend on the founder being a master networker, nor on the sales team having to reconquer half the customer base every single year.
“When you buy a software company with strong customer retention, you’re buying a cash-generating machine with visibility on revenues several years ahead, even without selling a single additional license.”
Why They Are Looking Beyond Software
Nothing surprising so far, but I was eager to hear the explanation behind such a striking strategic shift.
“We are still a software fund, but for some time now we’ve been broadening our thesis toward businesses in other sectors that share similar characteristics in terms of recurrence and predictability — you know, because of AI…”
They explained that it was not because they believed software was going to disappear — far from it. The issue was that when a software business today has 90% recurring revenue, the difficult question is whether that recurrence will still be 90% a few years from now.
With the speed at which AI is changing what one software product does and what the next one can do, there is now greater uncertainty regarding the long-term stability of that recurrence.
“We still believe software is a fantastic asset class, but today it’s harder to look ten years ahead with the same confidence we had just a few years ago. What we want is to diversify the portfolio a bit.”
They admitted that the traditional businesses they are now exploring are, frankly, less attractive, less scalable, and typically operate with tighter margins. However, they possess something that some software verticals have partially lost: a reasonable certainty that what is recurring today will remain recurring in the medium term.
AI may eventually affect these sectors too, they told me, but today that impact is far less obvious.
The Cheat Sheet from the Conversation with the Fund
After explaining their thesis, they moved on to describing the five specific types of businesses they were interested in. I spent half an hour taking notes, thinking:
“This guy is unintentionally giving me an incredible masterclass.”
They were looking for businesses with:
Recurring Revenue Through Operational Integration
Businesses where the provider is so deeply embedded in the client’s day-to-day operations that switching becomes a major inconvenience. It is not necessarily that the client is loyal because of an extraordinary service or a hyper-differentiated product — it is simply too costly to leave in terms of time, disruption, and operational risk.
Examples they gave me included:
Recurring Revenue Through Criticality
Businesses where the service is essential for operations or for preventing a potentially severe problem. If the provider fails, the consequences are immediate and highly serious.
Examples included:
Recurring Revenue Through Regulatory Obligation
Businesses where clients pay because they are legally or regulatorily required to do so, not necessarily because they genuinely believe they need the service.
This type of recurrence is especially resilient because it depends less on the commercial relationship and more on compliance with the law. Changing providers may involve inconvenience and a learning curve, while clients are generally not seeking a differentiated or exceptional service — they simply need compliance.
The sectors they liked included:
Recurring Revenue Through Low Relative Cost and Low Incentive to Switch
Again, businesses where the service does not need to be spectacular — it simply works, costs relatively little, and changing providers creates more hassle than benefit.
These are boring businesses, and that is exactly what makes them attractive to buyers.
Some examples they mentioned:
Recurring Revenue Through the Conversion of CapEx into OpEx
Businesses where the provider converts a large upfront purchase into a monthly or annual fee. The recurrence does not come from the critical nature of the service itself but from the financing model.
The result for the buyer is that customers renew year after year.
Examples included:
What This Means If Your Business Is Not One of These
Obviously, not every business can be highly recurring. Entire sectors operate in environments where companies must win back customers every single year. There is nothing inherently wrong with that, but it is important to understand what it means in the context of a sale process.
From the hundreds — perhaps thousands — of conversations I have had with buyers and investors, I can confidently say this: recurrence is valued more highly than growth driven purely by new customer acquisition.
If you have to choose between showing a buyer that you are excellent at acquiring new customers or excellent at retaining existing ones, show them the latter.
Ideally, of course, you excel at both.
But if a buyer has to choose between two businesses both growing at, say, 10% annually, and one achieves that growth through a sales team that every year replaces the 50% of customers who leave plus an additional 10%, while the other grows by increasing prices and selling more to existing customers without acquiring many new clients, the buyer will almost always prefer the second business.
It is far more predictable, carries much lower risk, and depends far less on key individuals.
A Conversation Worth Having
I came out of that call without having advanced the transaction I initially joined the meeting for. But I left with useful notes in my HubSpot for our investor mapping efforts — and also with several insights into what is happening in the market that felt worth sharing.
What struck me most was that the investor was not abandoning software. It remains their core focus, and they are still deeply committed to the sector.
But it was the first time I had heard a software-specialized fund openly tell me they were looking at sectors as different as building cleaning, industrial maintenance, occupational risk prevention, or pest control.
What do ERPs and cockroaches possibly have in common?
I’ll ask him that question on our next call.
By Joshua Novick-Bondo Advisors
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