Category: VC

The new (unexpected) IPO hotspot

Brenon Daly

Contact: Brenon Daly

Forget Silicon Valley or New York or even Boston. The new tech IPO hotspot is a place that typically only gets flown over by investment bankers looking in the more traditional locations for the next companies trying to make it public. What’s the exotic and (potentially) lucrative new launch pad? Indianapolis. That’s right, the same city that has seen its football team go winless so far this season is putting up big points on the board for IPOs.

One company based in Indiana’s capital has already gone public this month, and another one has just followed up with a prospectus of its own. Angie’s List raised more than $100m in its mid-November offering. (The subscription-based service review site priced its shares at the high end of their expected range, and has seen them trade back down to around the offer price.) And just before Thanksgiving, ExactTarget filed its paperwork for a $100m IPO of its own.

Or, more accurately in the case of ExactTarget, the online marketer has re-filed for an IPO. It originally filed its S-1 almost exactly four years ago, but pulled that in mid-2009 as the equity market melted down. In the intervening years, ExactTarget has gotten substantially bigger. In fact, the company’s revenue in its most recent quarter ($55m in Q3) is higher than its total for the last year it was on file (full-year 2007 sales of $48m).

Another area it has bulked up: its underwriting team. Although ExactTarget originally went with a full slate of midmarket banks to bring it public, it now has bulge-bracket firms J.P. Morgan Securities and Deutsche Bank Securities leading the deal, along with original sole lead Stifel Nicolaus Weisel (or Thomas Weisel Partners, as it was known back then).

Big money, behind closed doors

Brenon Daly

Contact: Brenon Daly

Who needs to go public when there’s so much late-stage money sloshing around out there? That question hit us in the head this week after two startups announced, separately, that they were each raising $50m in new funding. First, it was marketing automation vendor Marketo saying it pulled in $50m in a new round led by Battery Ventures and then on Thursday, vulnerability management company Rapid7 also drew in that amount from Technology Crossover Ventures.

The latest round for Marketo, which effectively doubles the amount of capital it has raised, is particularly noteworthy. After all, Marketo has seen two of its main rivals track to the public market. Eloqua is currently on file for a $100m offering, while Responsys went public in late April, an offering that raised $79m.

In the case of Responsys, it may well consider itself fortunate that it raised money when it did. The company recently indicated that business through the end of the year is likely to be substantially slower than it had been. The warning knocked the stock about 25% below where it priced in April and half the level it had hit in the summer.

Cloud deals arising from the fog

Ben Kolada

Contact: Ben Kolada

Going into the last day of the 9th Cloud Computing Expo, held in Santa Clara, California, we get the feeling that conference attendees will see an M&A shakeout within the next few years. To a degree, this dealmaking has already begun, with a small handful of exhibitors already having been scooped up, including a couple of firms that were acquired just last month. Meanwhile, the remaining vendors, most of whom are young startups, are scrapping to define and prove themselves for what they hope will someday be their own fruitful exits.

The cloud computing market is real and growing. My 451 Market Monitor colleagues, who have the tedious task of sizing the cloud market, estimate global cloud revenue (excluding SaaS) at $9.8 billion for 2011, with nearly 40% revenue growth expected in 2012. Many players in this sector have already taken note of its potential and acquirers’ interest, resulting in an increase in both deal sizes and deal volume for cloud vendors. According to The 451 M&A KnowledgeBase, so far this year a record 465 transactions claimed some aspect of cloud. That’s nearly double what we saw in the same period last year. (To be honest, many of these acquired companies are about as cloudy as snake oil, but there are real cloud deals being done. Platform Computing and Gluster, which both announced their sales last month, sold for an estimated combined deal value just shy of $450m.)

However, in terms of revenue, most of the cloud startups we spoke with haven’t yet really proven themselves commercially. But as these firms transition their focus from product development to marketing and sales, their growth will attract more and more suitors. And double-digit revenue isn’t exactly a requirement for a successful exit, as both the recent CloudSwitch and Cloud.com takeouts proved. Though we understand that none of these companies are looking to sell just yet, we wouldn’t be surprised if cloud-enablement providers such as OnApp, Abiquo and Nimbula are picked off one by one within the next few years. And we were reminded yet again that open source networking and routing vendor Vyatta could someday see a real offer from Dell, though the IT giant would likely face a competing bid from Cisco.

Imperva: the strong, silent type

Brenon Daly

Contact: Brenon Daly

As far as tech IPOs are concerned, the two latest offerings could hardly be more different. Last week, we had the debut of Groupon – the daily deals site that is either the next Amazon or the next Pets.com, depending on the point of view. The debate around Groupon raged loudly and publicly, dominating last week’s financial news broadcasts and financial sites. In contrast, Imperva quietly crept onto the public market on Wednesday, with little fanfare. (The company didn’t even get to ring the opening bell on the NYSE, where it started trading today. Instead, it’ll be doing the honors on Thursday.)

For all of the differences in attention for the two companies, however, there’s one important similarity: performance. Both offerings priced above their expected range and then surged in trading. Groupon, which has created more than $15bn in market value, is still above water. In its offering, Imperva has also put up a strong debut. The data security vendor priced its five-million-share offering at $18 each, above the expected range of $14-16. In midday trading, Imperva stock was changing hands at $24.50. With more than 22 million shares outstanding, Imperva’s offering created more than a half-billion dollars of market value.

A splashy IPO for Splunk

Brenon Daly

Contact: Brenon Daly

After spending the past two weeks baking off, Splunk has picked Morgan Stanley, J.P. Morgan Securities and Credit Suisse to run the books on its upcoming IPO, according to sources. The offering is expected to raise $150m for the San Francisco-based company, with the paperwork likely coming in January. Splunk will finish this year at about $110m in sales, an increase of some 65% over 2010. For 2012, projections call for the company to top $160m in sales.

The fast growth – an eager anticipation of the company’s rumored IPO – indicates just how far Splunk has grown beyond its roots as a basic event management vendor. Although most people currently know the company as a simple, easy-to-use search engine for IT data, it has been broadening the information sources it collects, including ever-increasing volumes of machine-generated data. Additionally, we recently profiled the beta release of Splunk Storm, a monitoring tool for cloud-based apps that runs on Amazon Web Services.

While the company has been fairly clearly focused on an IPO, several sources have indicated that Splunk has nonetheless attracted attention from both Dell and Oracle in recent months. However, for both financial and philosophical reasons, the company is expected to remain independent. Splunk has a number of executives that have already helped sell companies for more than $1bn, notably Hyperion Solutions, ArcSight and Opsware. Several bankers who have met with various executives say there is a sort of ‘been there, done that’ attitude toward a trade sale, and they want to build a stand-alone business for the long run. That sentiment also comes through in the rumored clearing price for Splunk: a robust $1.5-2bn.

ViVu bolsters Polycom’s Web-based videoconferencing credentials

Contact: Thejeswi Venkatesh

After sitting out of the market for four years, Polycom’s M&A wheels are turning once again. The acquisition of ViVu on Monday was the company’s third purchase this year, and helps Polycom round out its videoconferencing offerings. With many observers expecting video collaboration to become ubiquitous, the purchase helps Polycom extend its offerings into the Web videoconferencing arena – in-line with its declared strategy.

Terms of the deal were not disclosed, but we understand that ViVu was generating less than $2m in revenue. Cupertino, California-based ViVu, which came to market in 2010, had raised just $3.2m in venture funding and was looking to score a second round at the time of its acquisition. (Other companies in the space, including Vidyo and Blue Jeans Networks, have been successful at landing substantial amounts of funding.) Given these dynamics, we suspect that ViVu received a healthy multiple and we wouldn’t be surprised if other suitors, including TIBCO Software, were involved in the bidding process.

The transaction comes at a time of dramatic changes in the videoconferencing market. Microsoft closed its pickup of Skype – the largest-ever purchase for the tech giant – just last Friday. ViVu provides a plug-in for Skype and Polycom has worked with Microsoft on its Lync offering for a number of years. Polycom believes that the two deals will expand its market opportunities.

Select Polycom acquisitions

Date announced Target Deal value Focus
October 17, 2011 ViVu Not disclosed Web-based videoconferencing capabilities
June 1, 2011 HP (visual collaboration business) $89m Videoconferencing
March 23, 2011 Accordent Technologies $50m Non-real-time capabilities
February 7, 2007 SpectraLink $220m Wireless IP telephony

Source: The 451 M&A KnowledgeBase

The next ‘big data’ buying binge?

Ben Kolada

Contact: Ben Kolada

After last year’s storage and data-warehousing feeding frenzies provided outsized returns to target companies’ venture investors, a new breed of ‘big data’ vendors is renewing venture capitalists’ interests. So-called NoSQL and NewSQL database firms had already been catching investors’ attention, securing millions of additional dollars in VC financing. Eventually, we expect the fast growth that drew interest from VCs to also draw interest from corporate buyers. However, the price potential acquirers will have to pay is constantly rising.

VCs are attacking big data pains again, this time by investing in a number of promising database startups. 10gen, Couchbase and Neo Technology, for example, each secured more than $10m in financing in the third quarter. The size of these recent rounds, which were almost certainly substantial up-rounds, is due in part to the fact that some of these startups have already proven themselves and are posting triple-digit growth rates. My colleague Matt Aslett recently wrote that Basho Technologies is aiming to increase its revenue seven-fold this year. And we’ve got our thumb on the pulse of another startup that expects to nearly quintuple its annual revenue, surpassing its initial 300% growth projection.

While most of the NoSQL and NewSQL startups are still in the single-digit millions of revenue, continued growth rates will likely increase their current valuations. Further, additional venture investments needed to fuel that growth will lead to even wider gaps in valuations between potential acquirers and sellers. In our recent survey of corporate development executives, half of respondents expected the valuation gap between buyers and sellers to widen. And from our view, already sky-high valuations in hot sectors such as big data and cloud computing will almost certainly rise, regardless of what happens in the public markets. If so, potential suitors such as Oracle, Informatica or Teradata will have to reach deeper into their pockets to snare promising database properties.

Select recent NoSQL venture investments (rounded to nearest $m)

Company Latest round Total
10gen $20m $31m
Couchbase $15m $30m
DataStax $11m $14m
Neo Technology $11m $13m
Basho Technologies $7.5m $13m

Source: 451 Group research, listed by size of round

The next ‘big data’ buying binge?

-by Ben Kolada

After last year’s storage and data-warehousing feeding frenzies provided outsized returns to target companies’ venture investors, a new breed of ‘big data’ vendors is renewing venture capitalists’ interests. So-called NoSQL and NewSQL database firms had already been catching investors’ attention, securing millions of additional dollars in VC financing. Eventually, we expect the fast growth that drew interest from VCs to also draw interest from corporate buyers. However, the price potential acquirers will have to pay is constantly rising.

VCs are attacking big data pains again, this time by investing in a number of promising database startups. 10gen, Couchbase and Neo Technology, for example, each secured more than $10m in financing in the third quarter. The size of these recent rounds, which were almost certainly substantial up-rounds, is due in part to the fact that some of these startups have already proven themselves and are posting triple-digit growth rates. My colleague Matt Aslett recently wrote that Basho Technologies is aiming to increase its revenue seven-fold this year. And we’ve got our thumb on the pulse of another startup that expects to nearly quintuple its annual revenue, surpassing its initial 300% growth projection.

While most of the NoSQL and NewSQL startups are still in the single-digit millions of revenue, continued growth rates will likely increase their current valuations. Further, additional venture investments needed to fuel that growth will lead to even wider gaps in valuations between potential acquirers and sellers. In our recent survey of corporate development executives, half of respondents expected the valuation gap between buyers and sellers to widen. And from our view, already sky-high valuations in hot sectors such as big data and cloud computing will almost certainly rise, regardless of what happens in the public markets. If so, potential suitors such as Oracle, Informatica or Teradata will have to reach deeper into their pockets to snare promising database properties.

Select recent NoSQL venture investments (rounded to nearest $m)

Company

Latest round

Total

10gen

$20m

$31m

Couchbase

$15m

$30m

DataStax

$11m

$14m

Neo Technology

$11m

$13m

Basho Technologies

$7.5m

$13m

Source: 451 Group research, listed by size of round

Double-barrel SIEM deals

Brenon Daly

Contact: Brenon Daly

In a highly unusual twist of timing, both IBM and McAfee announced significant acquisitions of security event and incident management (SIEM) startups within hours of each other Tuesday morning. First up, IBM said it was adding Q1 Labs as part of a new initiative around ‘Security Intelligence.’ (The announcement confirmed the rumored pairing between the two companies that we noted on Monday.) That was followed just two hours later by McAfee’s reach for NitroSecurity.

The transactions, which are both expected to close before the end of the year, take the two largest privately held SIEM vendors off the market. According to our estimates, Q1 was tracking to about $70m in sales this year while NitroSecurity was likely to generate roughly $30m. Between them, the two startups counted more than 2,300 customers. Further, Q1 and NitroSecurity were the highest-ranked private SIEM providers in a recent survey of IT buyers by TheInfoPro, a division of The 451 Group.

All of that goes a long way toward explaining why both startups got valuations substantially above prevailing market multiples. Collectively, Q1 and NitroSecurity took in a total of about $75m in funding over the decade or so they had been in business. As we understand it, the aggregate price for the pair is somewhere in the neighborhood of 10 times the amount they raised.

Is Q1 the one for IBM?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

Despite posturing for a public market debut for some time, we understand that Q1 Labs may instead be headed for a trade sale. IBM is reportedly set to acquire the fast-growing ESIM vendor in a deal to be announced this week. The price for Q1, which recorded sales of some $60m over the past four quarters, couldn’t be learned. Goldman Sachs was in line to be lead underwriter for the IPO but instead will get the print, according to our understanding.

Assuming it closes, the deal would come almost exactly a year after ESIM kingpin ArcSight sold to Hewlett-Packard. (In that process, we gather that IBM was a bidder for ArcSight through the late rounds, as was EMC. McAfee was interested as well but was priced out relatively early on.) HP paid roughly 8 times trailing sales for ArcSight. Slapping that same multiple on Q1 values the Waltham, Massachusetts-based company at nearly a half-billion dollars. IBM had paid a similar multiple for Netezza and BigFix and only a slightly lower one in its most recent significant security acquisition, Guardium.

Rumors about a possible sale of Q1 have swirled for a number of years, with suitors ranging from Cisco to Oracle to McAfee. However, the most consistent name attached to Q1 has been its largest OEM partner, Juniper Networks. Indeed, sources indicated earlier this year that Juniper was considering an acquisition but a wide gap emerged over the valuation. Apparently, Juniper was offering about $300m, while Q1 was holding out for a number significantly higher than that.

SaaS giant salesforce.com thinks small

Brenon Daly

Contact: Brenon Daly

Just several months after putting money into Assistly in its second round of funding, salesforce.com decided Wednesday to pick up the whole startup for $50m. The purchase should help the SaaS giant extend its customer service offering, Service Cloud, to small businesses. Founded in 2009, Assistly had drawn in more than 1,000 customers, although not all of those are paying. (Salesforce.com declined to give a breakdown on paying vs. nonpaying customers, but indicated revenue at the startup was a tiny amount.)

The acquisition marks the third time salesforce.com has stepped into the M&A market to bolster its customer service product. Three years ago, it reached for InstraNet, a startup that was led by Alex Dayton, who continues in an executive role for the customer service offering at salesforce.com. A year ago, salesforce.com quietly added Activa Live. (Although terms weren’t disclosed, we suspect the bill for that purchase probably only ran in the single digits of millions of dollars.) The net result of those acquisitions – along with healthy organic growth – is that Service Cloud is now the largest single product outside salesforce.com’s core sales force automation product.

Additionally, salesforce.com says Assistly will be part of its upcoming launch of a ‘small business cloud’ product. In that, Assistly will be joining the collaboration offering that salesforce.com picked up with its acquisition of SMB-focused startup Manymoon in February. The reason for the new downmarket products is pretty clear when you remember that salesforce.com gets roughly one-third of its overall revenue from small businesses.