Category: VC

Imagining ‘what if’ on Tripwire

Brenon Daly

Contact: Brenon Daly

As we were skimming through Tripwire’s recently filed IPO paperwork, we couldn’t help but wonder ‘what if….’ Specifically, we were wondering what the company would be like if it had gone for the other exit and taken the rumored offer from BMC more than three years ago. At the time, Tripwire was only about half the size it is now and nowhere near as profitable. But with the benefit of hindsight, it’s almost certain that Tripwire would have been valued at a much richer multiple in a trade sale during a time when M&A dollars were flowing freely (late 2006-07) than by going public in the current bearish environment.

To be clear, that’s not a knock on Tripwire. As we highlight in our report on the proposed offering, the company has a solid growth story to tell Wall Street: six consecutive years of revenue growth, while generating cash in each of those years. Instead, it’s just a reflection of the dramatic change in the valuation environment over the past three years. Consider this: In March 2008, BMC paid roughly 11 times trailing sales and 9x projected sales for BladeLogic, a valuation that wasn’t at all out of whack for the fast-growing datacenter automation vendor. (It was actually lower than what Hewlett-Packard spent on Opsware, a BladeLogic rival.)

While we have no idea what kind of valuation BMC was kicking around for Tripwire at the time, we have to believe it’s above the multiple we have penciled out for the IT security and compliance vendor in its market debut. Because of the bear market, we figure Tripwire will probably come public at about $300m. If that initial valuation holds more or less accurate, it will value Tripwire at basically 4x trailing sales and 3x projected sales – just one-third the valuation that BladeLogic got in its sale.

CDC Software’s rollup is rolling along

Brenon Daly

Contact: Brenon Daly

Since being spun off from its parent company less than a year ago, CDC Software has been rolling along with its planned rollup. It has done a half-dozen acquisitions of small, on-demand software companies to help expand its portfolio of ERP, CRM and supply chain management offerings. (It got bigger eyes earlier this year, when it made a short-lived run at fellow public company Chordiant Software.) In general, the technology has come from startups that have been passed over by the market. That’s certainly the case in CDC Software’s latest – and largest – acquisition, the purchase of TradeBeam last week.

Ten-year-old TradeBeam had burned through a mountain of venture backing and had snatched up the assets of three other vendors, but had struggled to actually build its business. (We understand that the company generated only about $9m in recurring revenue in 2009, and that projections for this year called for $10m in recurring revenue. That got the target around $20m in its sale to CDC Software, according to our understanding.)

Still, TradeBeam was able to develop some fairly useful software, thanks to its generous VC subsidy, that should fit well inside CDC Software. The company had two main product lines, which each accounted for about half of overall sales. TradeBeam sold global trade management software, which helps customers handle regulatory compliance and other aspects of the import/export business, as well as supply chain visibility, which provides additional capabilities around forecasting and collaboration with suppliers.

CDC Software’s recent acquisitions are part of a larger plan to slowly but steadily transition its business from selling software licenses to ‘renting’ software through a subscription model. Recurring revenue will still be a small slice of the overall $220m or so of revenue that the vendor is expected to put up this year. But if CDC Software can pull off its SaaS rollup strategy – and couple that with even a smidgen of organic growth – it could very well see a bump in its valuation. The transition to SaaS has certainly put a shine on the valuation of Concur Technologies and, to a lesser extent, Ariba. For its part, CDC Software, which is still majority owned by CDC Corp, trades at basically 1 times sales and 4x EBITDA.

Social CRM: haves and have-nots

Brenon Daly1 Comment

Contact: Brenon Daly, China Martens

Even though social CRM is still an emerging market, the deals have been flowing. And it isn’t just one-off, conventional activity, but just about every conceivable type of transaction: public-to-private deals, private-to-private deals, a private equity-backed rollup and even (apparently) a wind-down. Among the more notable deals in this broadly defined space has been RightNow reaching for tiny startup HiveLive last September to add a community offering to its core CRM product and Attensity cobbling together the parts of three companies to form a European giant about a year ago. Attensity was back in the market last month, adding Biz360 to bolster its voice-of-consumer product.

Activity picked up again earlier this week, as Lithium Technologies confirmed that it had acquired Scout Labs for a reported $20-25m. As my colleague China Martens reports, the purchase adds Scout Labs’ social-media monitoring and analytics capabilities to Lithium’s management platform for customer communities. We would highlight the fact that Lithium’s buy comes just four months after the company raised its third round of funding, an $18m tranche that brought total funding to $39m.

While Lithium was raising fresh money – and putting it to work on an acquisition – it appears that another social CRM startup was coming up empty in its effort to get more cash and has pulled the plug. Helpstream, which apparently raised about $10m in two funding rounds from Mohr Davidow Ventures (MDV) and Foundation Capital, has shut its doors, the former CEO has written in a blog post. Helpstream’s website no longer works and MDV has erased Helpstream as a portfolio company, despite leading the vendor’s second round. (Calls to the VCs went unreturned.)

If indeed Helpstream has dried up (as it were), we might point to two reasons why the company struggled. For starters, it was basically a SaaS helpdesk provider that then tried to get into the online customer service community-building game. And if its customers were confused by that, they would have been additionally puzzled by Helpstream’s ‘freemium’ business model. In the end, Helpstream managed to land just 40 paying customers, compared to 200 customers using the free version of its product.

IPO woes

Brenon Daly

Contact: Brenon Daly

For the second straight time, a tech company hoping to come to market has scaled back the money it planned to raise. TeleNav, which started trading Thursday, originally planned to sell shares at $11-13. The mobile navigation service vendor then cut the range to $9-10 before ultimately pricing its seven-million-share offering at $8. The erosion on TeleNav’s terms comes two weeks after Convio also had to reduce the price tag on its IPO.

Of course, in the period between the two IPOs we saw an almost inconceivable market plunge that erased 1,000 points from the Dow Jones Industrial Average in just five minutes. (OK, the collapse might not be inconceivable, but it is proving to be inexplicable. Was it the black-box, high-velocity firms or just a bunch of ‘fat-fingered traders’ that bled the Dow last Thursday?) And while that uncertainty continues to weigh on the overall market, it’s basically stifling the IPO market. After all, if investors are fleeing from billion-dollar companies that are household names, are they really going to embrace unknown and unproven would-be debutants?

But as we note in a new report on the IPO market, Wall Street – as it often does – appears to have swung too far in its avoidance of risk. Investors have been demanding a ridiculously steep discount on the valuations of the companies that want to come public. Take the case of TeleNav, which closed its initial day of trading with a market cap of just $400m. If we back out the cash that TeleNav already held ($46m) along with the cash that it just raised ($45m), the company starts its life on Wall Street with an enterprise value of just $310m. By our back-of-the-envelope calculation, that’s just 2 times sales and 5 times cash flow – a slap-in-the-face valuation for a profitable company that’s growing sales at 50%.

When we look at the capital markets today, we aren’t particularly concerned with the day-to-day trading. Stocks go up and stocks go down, just as risk in the market (real or perceived) ebbs and flows. Nonetheless, it’s hard to look at the tech IPO market and not be struck by the fact that companies are putting together smaller offerings and debuting at notably lower valuations than they would have in the time before the US economy slumped into its worst decline since the Great Depression. And we don’t see that changing anytime soon.

Recent tech IPO events

Date Company Comment
May 2010 TeleNav Cuts expected range, and then prices below it
April 2010 Convio Prices below range, goes public at sub-$200m market cap
April 2010 SPS Commerce Debuts at sub-$200m market cap
April 2010 IntraLinks Files for $150m IPO, the third time it has filed an S-1
April 2010 QlikTech Files for $100m IPO
April 2010 Nexsan Postpones $55m IPO after setting initial range

Double-door exits

Brenon Daly

Contact: Brenon Daly

When companies look for an exit, there is usually door number one (IPO) or door number two (trade sale). But in some rare cases, it’s not either/or, it’s both. That’s playing out in two very different ways around Symantec’s acquisition of encryption vendor PGP. The purchase by Big Yellow was the first of a doubleheader day in which it also picked up its OEM partner, GuardianEdge Technologies. (Incidentally, the PGP buy was Symantec’s largest acquisition since reaching across the Atlantic for on-demand vendor MessageLabs in October 2008.)

But back to exits. With the sale of PGP, we expect the next big liquidity event for an encryption vendor to be the IPO of SafeNet. We’ve heard recent talk of an offering for the company, which was taken private by Vector Capital in early 2007. Since its buyout, SafeNet has done a few deals of its own, including the contentious acquisition of Aladdin Knowledge Systems in August 2008. We understand that SafeNet is running at north of $400m in revenue.

The sale of PGP also means that investment firm DE Shaw has now recorded one of each potential exit over the past month. In late March, portfolio company Meru Networks went public, and now fetches a market valuation of about $250m. (The offering by Meru came after many other wireless LAN providers got snapped up.) DE Shaw also owned a chunk of PGP, meaning it will also get a payday from Symantec’s $300m purchase of the encryption vendor.

salesforce.com puts together pieces on Jigsaw

Brenon Daly

by Brenon Daly

Just three months after salesforce.com raised $575m in a convertible note offering, the CRM vendor is dipping into its treasury for the largest deal in its history. The $142m purchase price for Jigsaw Data is more money than salesforce.com spent, collectively, on its previous seven acquisitions. (Add to that, there’s a potential $14m earnout that Jigsaw could pocket.) Yet, even after it pays for this pickup, salesforce.com will still have more than $1bn in cash on hand. The transaction is expected to close this quarter.

We understand that Jigsaw finished up last year with about $18m in revenue, and salesforce.com indicated that it was expecting $17-22m in non-GAAP revenue from Jigsaw for the three quarters that the company will be on the books this fiscal year. According to our calculations, salesforce.com is valuing Jigsaw at roughly the same level that the target is currently valued by public investors, at least on one basis metric. Salesforce.com is paying about 7.9 times trailing sales for Jigsaw while its own market cap is about 8.3 times trailing sales. (Of course, shares of the on-demand CRM vendor are currently changing hands at their highest-ever level, having more than doubled over the past year.)

For Jigsaw, the sale to its longtime partner also represents a solid return for its backers, who wrote the checks that funded the company’s growth to 1.2 million members and more than 21 million contact records. Jigsaw’s three investors (El Dorado Ventures, Norwest Venture Partners and Austin Ventures) put in a total of $18m over the past six years. Strictly in terms of money in/money out, that means Jigsaw is returning almost eight times its investment. Not many startups have been able to deliver those kinds of returns recently because they’ve typically been overfunded and exit multiples have increasingly been under pressure.

Juniper returns to the M&A table

Brenon Daly

Contact: Brenon Daly

After almost a half-decade out of the market, Juniper Networks is back buying. The communications equipment vendor announced plans last week to hand over ‘less than $100m’ for Ankeena Networks, its first purchase since picking up Funk Software in November 2005. The company declined to be more specific on the deal value, but at least one source indicated that the price for Ankeena was indeed less than $100m, but not by much.

Whatever its final price, Ankeena undoubtedly got a rich valuation, as it essentially launched a year ago. Sales of the company’s software for serving and managing content delivery were fairly small. Ankeena also undoubtedly delivered a rich return for its three backers: Mayfield Fund, Clearstone Venture Partners and Trinity Ventures. The trio put just $16m into Ankeena.

In the four-and-a-half years that Juniper has been sidelined, its rivals have been busy. Ericsson has inked some 17 deals in that period, including the $2.1bn acquisition of Redback Networks. Meanwhile, Cisco has sealed 39 deals in that time, spending more than $40bn. Most observers would chalk up Juniper’s M&A hiatus, at least in part, to the fact that it came up way short on its biggest gamble, the $4bn all-equity purchase of NetScreen Technologies. (On a smaller scale, Juniper also has precious little to show for its $337m cash-and-stock pickup of Peribit Networks, a WAN traffic optimization vendor that we understand was running at less than $15m in sales.)

Realizing a return on NetScreen was going to be difficult from the outset because Juniper overpaid for the security provider. In a transaction that had more than a few echoes of the Internet Bubble era, Juniper paid 14 times trailing sales and more than 50 times trailing EBITDA for NetScreen. And when it tried to make the deal work, Juniper found itself struggling to integrate NetScreen’s firewall product into its core networking line, and was unable to reconcile NetScreen’s indirect sales model with its own direct model. Maybe buying Ankeena is the clearest sign yet that Juniper, which replaced its longtime CEO in September 2008, has finally closed the NetScreen acquisition and moved on.

Is third time a charm for IntraLinks?

Brenon Daly

Contact: Brenon Daly

Maybe the third time will be the charm for IntraLinks. The company, which is perhaps best known for its ‘virtual deal rooms,’ filed to go public late last week, the third time it has put in an S-1. It plans to raise $150m in the offering, which is being led by Morgan Stanley, Deutsche Bank Securities and Credit Suisse. IntraLinks had also been on file back in the Bubble Era, filing its IPO paperwork in mid-1999 only to pull it a year later, and again for a few months in late 2005.

To get a sense of just how much the company – and, by extension, Wall Street – has changed since the frothy time of the late 1990s, we went back and pulled IntraLinks’ original prospectus to compare it to the most-recent paperwork. It hardly seems like the same company.

In 1999, IntraLinks lost five times more money than it even brought in as revenue (a $21.3m net loss on just $4.1 in revenue for the year). The company even managed the highly impressive trick of running its business at a negative gross margin. The kicker on that upside-down business model is that it was actually pretty common back in the late 1990s. Plenty of companies running at even larger losses than IntraLinks made it public during that era.

Like a lot of us, IntraLinks seems positively grown up now compared to the time when companies were throwing equity around like it was funny money and stock prices only went up. It finished 2009 with $141m in revenue, meaning that it now generates more sales every two weeks than it did during the entire year that it first filed to go public. And while the vendor still hasn’t managed to hit profitability, it has narrowed its operating loss to just $3.4m last year. For the record, IntraLinks’ gross margin hit a respectable 65% in 2009, a sharp reversal from the Bubble Era, when it actually sank deeper into the red with every sale that it made.

Nokia browses for an advantage

Contact: Jarrett Streebin

In an effort to increase its appeal in emerging markets, Nokia has bought Novarra, the first of two deals in as many weeks. With the acquisition, Nokia obtains Novarra’s faster and more-efficient browser, which is important in emerging markets where bandwidth limitations exist. Nokia is also playing catch-up with players like Apple and Research In Motion that already have their own browsers.

Nokia ships more than 400 million phones annually, many to customers in emerging markets such as Africa, Asia and South America. Having a fast, low-bandwidth browser like Novarra will enable Nokia to better attract carriers in these regions and with the smartphone craze just starting to take off, the company gains an edge on competitors whose browsers require more bandwidth.

Although the deal value wasn’t released, we understand that Nokia paid roughly four times trailing sales for Novarra. The 10-year-old startup had received $88 million in funding from JK&B Capital, Qualcomm, Fort Washington Capital Partners, Kettle Partners and Colorado Investment Securities, with $50m of this coming in a round in 2007.

This move will also affect Novarra’s rivals such as Opera Software and Mozilla. The impact on Mozilla will be limited because its browser targets 3G smartphones like Nokia’s N900 to provide a rich, unconstrained mobile browsing experience. Opera is currently the market leader in mobile browsing, with more than 50 million active users, many of whom are using Nokia phones. Now, Nokia will have its own browser to compete. Although this will cut Opera’s market share, Vodafone has already announced that it will be preloading Opera on many of its phones in emerging markets. It could be that Vodafone needs a browser of its own, too.

Is QlikTech a billion-dollar baby?

Brenon Daly

Contact: Brenon Daly

IPOs are not what they used to be. The companies looking to go public recently have had to scale back their expectations, cutting both the amount of money they hope to raise and what they expect to be worth as they start life as a public company. The implications of these slimmed-down debuts extend far beyond the IPO candidates themselves. Smaller offerings trim the fees available for underwriters, which rely on these hotly contested mandates to offset the cost of supporting research and trading for public companies. And perhaps more alarmingly, the lower IPO valuations make it difficult for venture capitalists and other investors to realize decent returns in what was once a fairly sure path to outsized performance.

At least that’s the situation for most IPO candidates. (For instance, we’re not knocking either Meru Networks, which went public last week, or Nexsan, which is slated to come out this week, but both are valued by the market at less than $300m.) However, there are exceptions. Just as a few companies were able to make it public in 2009, while most would-be debutants just had to ride out the recession as private businesses, there will be rich valuations doled out to IPO candidates, even during this time of discounts.

From our perspective, the next player that’s likely to enjoy a warm welcome on Wall Street is QlikTech. (At $100m, the offering itself is one of the largest enterprise software IPOs in some time.) In fact, if we pencil out the initial valuation for this fast-growing, profitable analytics provider, we come up with a number that’s in the neighborhood of $1bn. QlikTech may not hit that magical mark on its debut, but we suspect that it won’t fall too far below it. Look for our full report on the company and the offering, including our projected financials and valuation for QlikTech, in tonight’s Daily 451 sendout.