SAP Buys Qualtrics; 2018 Catapulted to $65B in $1B+ M&A Volume

Another week, another blockbuster software acquisition! This time SAP has agreed to purchase Qualtrics for $8B. Qualtrics is a Utah based provider of experience management software. Qualtrics writes and sells software to ask questions of employees and customers to help businesses improve customer experience, employee satisfaction products, and brand. Qualtrics had intended to go public this week. The company generated $342M in the last twelve months and had grown 27% annually. Qualtrics fetched 23x trailing twelve months revenue multiple. This is the second largest among those I have tracked. The only one greater is the Microsoft/Github acquisition, which is based on press reports of Github’s revenue. Each of the other data points is substantiated through public investor disclosures. It’s the largest ever VC backed software acquisition. Congratulations to the Qualtrics team! Let’s put the 2018 acquisition environment into context. It’s the best M&A market in the last seven years for
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Do You Lose Sales Opportunities Because of Sales Execution or Product Insufficiency?

You have a good pipeline of prospective customers. You pitch them but things aren’t working out. You can see it in your low close rates. They are below 15-20% conversion from sales accepted lead to closed customer. You need to answer an important question: are you losing these opportunities because of sales execution or product insufficiency? Those are the two possibilities. Either the company’s sales techniques are failing to persuade customers to buy the product. Or the company hasn’t built the right product to suit the market’s needs. Why is the conversion ratio the right litmus test? A lead becomes accepted by sales when a member of the sales team (inside or field) declares it to be a qualified lead worthy of pursuit. In other words, it has been qualified to be in the ideal customer profile and so should have a reasonable chance of closing. In each of these Continue reading "Do You Lose Sales Opportunities Because of Sales Execution or Product Insufficiency?"

Red Hat’s Acquisition – A Triumph of Open Source

Over the weekend, IBM announced the largest software acquisition of Red Hat, an open-source software company, for $35B. It is the largest software acquisition in history, and the third largest technology acquisition (Dell/EMC at $67B and JDS/SDL for $41B were both larger hardware mergers). IBM will spend 31% of their current market cap for Red Hat and pay a 70% premium to Red Hat’s closing price on Friday. It’s a triumph of the open source strategy. Three of the largest software acquisitions of the last ten years have been open source. They have all occured in 2018, a year in which more than $60B of $1B+ software M&A has transpired. This price values the company at a 10.6x enterprise value/trailing twelve month revenue multiple. Relative to other multiples paid this year, this acquisition price isn’t an extreme. But the aggregate price certainly is. Red Hat employs nearly 12,000 people Continue reading "Red Hat’s Acquisition – A Triumph of Open Source"

SaaS Freemium/Free Trial Survey is Here

Earlier this year, I wrote about MadKudu’s analysis of free trials and asked if readers were interested in another benchmarking survey on the topic, and the response was overwhelming. Over the last few weeks, my colleague Patrick Chase, and I (along with help from many people in the community) have been busy putting the survey together. I’d like to thank Ryan Janssen for lending a hand. If you’d like to participate, please fill out the survey here. Surveys are due November 2. It takes about 6 minutes complete. All the data collected is anonymized. Those participating will receive access to the raw, anonymized data. In a few more weeks, we’ll publish our findings on this blog. We hope to illuminate trends in freemium/free-trial such as: the optimal length of a free trial; the increase in conversion rate of a trial lead touched by sales; the use of free trial Continue reading "SaaS Freemium/Free Trial Survey is Here"

Normalization of Valuations in the Public and Private Software Markets

I’ve written quite a bit about the public market software multiples. They’ve increased to near historic levels with forward revenue multiples approaching 9x. As the public markets have appreciated, something has happened that I didn’t expect. Some public companies are now fetching the mulitples of the most attractive private companies. I thought valuations between the markets would normalize because of a deflation in both public and private. Today, we have the beginnings of normalization by inflation. In the private markets, high growth software companies are often priced as a function of the ARR at the end of next year. In industry parlance, this is NTM ARR, or next twelve months annual recurring revenue. Sought-after later stage private companies raise capital somewhere between 10x-20x NTM ARR. That’s a broad range. Multiples vary with growth rate, capital efficiency, market size, demand, and other characteristics. It’s dynamic. In the private markets, multiples have Continue reading "Normalization of Valuations in the Public and Private Software Markets"

What Does AirBnB’s ‘Shares for Hosts’ Idea Imply for Blockchain?

Last week, AirBnB proposed granting their most valuable hosts shares in the company, much like employees. This requires a change in securities law. It’s a novel idea that has a history, promise and some risks. In 1998, an online travel agency, TravelZoo, tried this. They granted free shares to 700,000 people who signed up to use the service. Administration of these shares proved a headache for the company. Many of those who received the shares were unaware of conversion deadlines. The company honored its commitments anyway. The company bore some additional regulatory burden. In 2004, six years later fewer than 1000 of these shareholders had traded their shares for cash. Not a ringing success. Twenty years later, the Internet is far broader and more robust. 15% fewer American households own stock. Startups remain private longer. The SEC is actively investigating ways to provide main street with access to startups. Continue reading "What Does AirBnB’s ‘Shares for Hosts’ Idea Imply for Blockchain?"

In Early Markets, Services Can Be a Competitive Advantage

In early markets, customers prefer entire solutions, not best in class point products. These solutions often include significant professional services and education. At the beginning of a new wave, most customers don’t understand the technology well. So, they seek experts to guide them. Companies that provide services and education often win the early market. They develop customer relationships, reinforce their expertise with a strong brand, define the purchasing criteria in their favor and ultimately grow faster. In the earliest days of commercial Hadoop, Cloudera educated the market through services. As they grew the user base, they developed subscription products, which now account for about 75% of revenue . In the IoT (internet of things), C3IoT and UpTake have pursued similar strategies. In the cloud native world, Heptio provides consulting and training for Kubernetes, a new infrastructure technology. In each case, the new technology is complex and understood by few. During this Continue reading "In Early Markets, Services Can Be a Competitive Advantage"

Our Investment in Gremlin – Leveraging Chaos to Create Resilient Systems

Dr. Richard Cook, formerly an associate professor at the University of Chicago, published a paper in 1998 entitled How Complex Systems Fail. In his paper, Dr. Cook lists 18 observations from his research in medicine about failure of complex systems. His insights are directly applicable to running software at scale, and those observations informed our latest investment in Gremlin. Some of his Cook’s are obvious. Complex systems are intrinsically hazardous systems. Complex systems are heavily and successfully defended against failure. Catastrophe requires multiple failures – single point failures are not enough. Others are surprising. Catastrophe is always just around the corner. Humans are both the producer and the defenders against failure. All practitioner actions are gambles. Change introduces new forms of failure. All of this applies to software. Every company is becoming a software company. Every company relies on software to make money. If that software fails, companies lose money. Continue reading "Our Investment in Gremlin – Leveraging Chaos to Create Resilient Systems"

Three Observations About the Adobe/Marketo Acquisition

About two years ago, Marketo was publicly traded and valued at roughly $1.1B. Vista Equity paid $1.8B to take the company private, a 64% premium. At the time it was taken private by Vista, Marketo generated $241M in trailing revenue, growing at 35% annually. Its net income margin was -31%. Last week, Adobe announced they acquired Marketo for $4.75B. By the time of the sale, revenues had grown to $321M, growing at about 21% annually and profitable. Presumably, the company traded investments in growth for profitability to service the new debt. The Marketo story highlights three important trends in SaaS. First, PE can generate spectacular results in software. Vista generated a estimated return of about 3.1x on $1.4B in equity for an IRR of about 72% in 25 months. According to reports from Reuters, Marketo/Vista borrowed $400M, and used equity for the remaining $1.
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How the Economics of Professional Services Have Changed in Software

A founder asked me recently if there were any trends in professional services across public SaaS companies. I had examined the gross margins and share of revenue from professional services about 3 years ago. Professional services are consulting fees software companies charge to customers for software configuration, customization and education. What has changed over the past 3 years? First, we have more comprehensive data set, since many more companies have gone public. Second, many newer software companies generate substantial fractions of their revenue from PS. Appian is close to 50%; Pegasystems is at 37%; Horton is at 24%; Mulesoft at 20%. In the past, companies with higher professional services components to their revenue have been valued less highly because PS revenue isn’t recurring and is lower margin than software revenue. In addition, the gross margins from professional services look different than three years ago. The variance is much higher. One
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