Trail of Tears: A List of $90M+ VC Software Financings
As I mentioned in my last post, after Webroot announced their $108M round of financing, I tried to find all of the VC investment rounds in history that have been at least $90M or more. The three that I found on VentureSource indicate that the track record for $90M+ VC rounds into Software companies is more like a trail of tears. All three of the companies I identified have either gone out of business or have been merged/acquired after they have become shadows of their former selves. The three deals I identified include:
Asera: Raised the granddady of all software related VC rounds of $115M in August of 2000. Kind of the swan song of the late 90's bubble. When I was working for Softbank's late stage fund I actually met with Ascera for that round of funding, but passed because I couldn't figure out what market they were in or what their software actually did. Apparently no else could either as Asera was eventually sold for scrap in early 2003.
Buildnet: Raised $107M in December 2000. Buildnet was a combination construction management software and building industry exchange, so it really wasn't a pure software play, but it's close enough. Buildnet filed for Chapter 11 less than 1 year after taking in its $107M.
Zaplet: Raised $90M in October of 2000. Zaplet had a product that enabled rich-email, which was basically, as far as I could tell, HTML e-mail hooked up to a database. Zaplet was merged with MetricStream in early 2004. From what I hear, the most attractive thing about Zaplet was that it still had some cash left over from 2000.
VentureSource also listed Centrepath as a software company that raised more than $100M+ in one round, but it appears that they are more of a network systems management/consulting firm (or at least this is what they become). I also remember that Loudcloud raised $120M , but they were a hosting firm at that point (they are now a software company called Opsware).
If this list is accurate, that would make the Webroot financing the 2nd largest software VC financing in history. Let's hope it turns out better than the other mega-deals did.
P.S. If anyone knows of any $90M+ VC software financing deals I missed, post a comment.
UPDATE: Based on people's comments, I have a couple more companies to add. Remember I am looking for pure software companies that raised over $90M+ in a single round of financing:
Brience: A wireless software company that was launched in 4/00 with an initial $200M investment/committment from GTCR. Brience was acquired for what looks like less than $10M in 2003 by Syniverse, another GTCR funded company. Based on the SEC financials filed by Syniverse, it looks like Brience really only received about $78M in investment and this was spread out over several rounds of funding, however someone in my comments swears this is not the case and even if it is they deserve to be listed just for the shear audcacity of claiming a $200M up front investment.
PacketVideo: Another wireless software company, this one supposedly focused on streaming 3G video to phones. Closed a $100M round in 2/01. Have not heard much from them since other the sale of one of their "divisions" to Acatel in 2003. From the website they look like they are still healthly. I wonder how much of their $100M is in the bank still? (Thank to Jeff for pointing this one out.)
There were a few others mentioned in comments which I am not putting on the list including 12 Entrepenuering (incubator fund, not a software company), PayPal (financial serivces/internet, not software), and AllAdvantage (Internet). In fact the list of Internet deals that received $100M+ in funding is long and mostly undistinguished.
I Spy With My Little Eye $108MM
I have to admit, when I first read reports of Webroot's recent $108M VC round, I had a serious case of bubble "Deja Vu". "$108MM for a software company?!? What on god's earth are they going to do with that kind of money, paper the walls?" After all, the track record of $100M+ VC rounds for software companies has not exactly been a star-studded one.
A quick look at VentureSource shows that only 3 other Software deals have ever raised more than $90M in a single round of VC funding (Asera, Buildnet, Zaplet) and their track records weren't exactly encouraging: all three either went out of business or were basically sold for scrap.
It'll Be Different This Time
All that said, Webroot, does appear to be cut from a different cloth. First, the company has supposedly been cash flow positive for some time whereas the three other deals were all burning millions of dollars a month. Second, Webroot actually has a very well respected product (the anti-spyware product called Spy Sweeper)that is selling like hotcakes. Finally, I suspect that, given the cash flow positive nature of the company, a large chunk of the money went to buying secondary shares from the existing shareholders (perhaps a former founder or something like that). Buying secondary shares has its own risks, but it's often the only way to get a meaningful piece of an already successful business.
Given these factors, as well as the 1 million+ enterprise seats that Webroot has supposedly sold in just 6 months, I am prepared to say that the chances of Webroot ending up like the other companies in the $100M+ club are pretty remote at this point in time.
There Is This Small Matter of Microsoft Though...
However, one does have to wonder about the wisdom of sinking $108M into anti-spyware software especially given some recent developments in the space. Perhaps the most worrisome development in the space has got to be Microsoft's recent beta launch of its own anti-spyware software. For anyone that hasn't been paying attention to Microsoft in the past 2 years, they have made improving the security of their client operating system their #1 corporate priority. The only way for Microsoft to do this is to heavily integrate three technologies into its core platform: anti-virus, spam control, and anti-spywarre. Whereas in the past Microsoft was content to let 3rd parties (such as SYMC and MFE) deal with these seemingly minor nuisances, they are now not just committed, but almost compelled to enter these spaces with a vengance and deeply integrate these technologies into their platform.
While to date Microsoft's efforts have been underwhelming, they have been methodically laying the foundation necessary to enter the space and have made several acquisitions in addition the anti-spyware vendor, including a new one in the enterprise anti-virus space that they just announced today. Thus, it is clear that any player in the anti-spyware space is going to have to go mano-y-mano with Redmond at some point in the near future. Even though Microsoft's anti-trust handcuffs make it a somewhat less feared opponent than in the past, just ask Netscape about how unwise it is to underestimating the power bundling.
In addition to Microsoft, many of the other major players in the client security business have already made their moves in the spyware space including MFE which announced a product last year and CA which acquired Pestpatrol. Symantec hasn't made any major acquisitions in the space, but it claims to be close to launching its own internally developed platform shortly. With so many of the big players in the space already paired up, that doesn't leave a lot of "outlet receivers" available in the event that Webroot decides to sell out rather than try to go it alone.
Built to Sell
Of course selling out is pretty much the most likely option for Webroot, perhaps the only option. While Spyware is hot, it's not exactly the kind of core enterprise technology that you can hope to build a platform business on; it is simply a very hot niche product that would fit nicely into well established distribution channels, customer bases, and (in some cases, technical architectures) of established enterprise security firms.
I suspect the VCs are well aware of this situation. Indeed it comes as no surprise to see that two of the VCs that invested in Webroot (Accel and TCV), also invested in Brightmail. Brightmail was an anti-spam vendor that was sold to Symantec for $370M in 2004. It should also come as no surprise that these VCs invested in Webroot shortly after Brightmail's former CFO, Mike Irwin (who is great guy), joined Webroot. Thus, the most interesting thing to me about this investment is to speculate on when Webroot will attempt a similar exit and whether or not the founders of Webroot will willingly go along for the ride.
In terms of the founders, after reading their statements about the acquisition I wonder if they really believe that they are going to be able to take a stand alone anti-spyware company public or if they are just dutifully posturing. My guess is that they do believe it and who knows, they actually might be able to get the company public given its rapid growth, keeping it independent once it is public though is another matter. It's hard to comprehend that this company can or should stay independent over the long run given the industry dynamics it is facing and the fact that it is essentially limited to a single niche. Long term they stand no chance against the large integrated players as spyware is really just an extension of a bunch of other client "scanning" technologies to being with (anti-virus, intrusion detection, registry clean-ups, etc.).
Assuming the above is true, the really interesting question about this deal, is just who do the VCs expect that they will sell this company too? I have a few guesses:
1. Symantec: I have to imagine that the VCs have some pretty good intel on how the (already delayed) SYMC anti-spyware product is doing given that they recently sold Brightmail to SYMC. SYMC has shown that it is not afraid to pay up for companies that it thinks are market leaders, so perhaps the VC's figure that SYMC may abandon their internal efforts and simply buy-out Webroot in order to get their anti-spyware efforts back on track.
2. TrendMicro: Trend is the big anti-virus player in Asia (especially Japan) and it is behind the 8 ball when it comes to anti-spyware products having made no major acquisition in the space. Trend does not have the strong track record of acquisitions that SYMC and MFE does, so perhaps they will limit their interaction with Webroot to some kind of OEM deal, similar to what they did for anti-spam techniology with Postini.
3. Intrusion Detection Companies: Depending on the architecture (host or network), Intrusion detection looks a lot like the Enterprise version of Spy Sweeper. Not as much like anti-virus, but close enough. Besides, the Intrusion detection guys have got to figure out an avenue for growth and spyware is one of the better ones to come along in awhile. ISS is the main player here, but many of the other enterprise security players also have intrusion detection products.
If Webroot does not sell out and stubbornly tries to remain independent I suspect it may join the scrap heap of other $100M+ software rounds, but I suspect reason (and the VCs) will prevail and they will sell out, albeit only after the VCs can clearly justify a decent return on whatever price they paid.
P.S. If anyone has any bets on A) who will acquire Webroot B) when and C) for how much, please feel free to post a comment. I will reward the winner with laudatory praise for their investment accumen when the deal actually happens.
The Death of Compiled Applications
Compiled applications are dying. They are being ripped apart, piece by piece, until there’s almost nothing left… and it’s good thing. In their place, a new class of execution engines is emerging. These engines can power any kind of application, from spreadsheets to supply chains, and all they need to work their magic is a few lines of structured text. While this trend started at the periphery of applications with functions such as User Interfaces and Data access, it is now migrating to the core of application functionality: business processes, algorithms, semantics, and state. Software will never be the same.
In the beginning, compiled applications were self contained monoliths that included everything necessary to get the job done. Presentation logic, GUIs (such as they were), business logic, configuration information and even data were all bundled into one big pile of compiled code.
Data was the first and most logical component piece to be pulled out of applications and from that a giant industry was created, databases. Later, client-server architectures broke applications into muliple pieces and separated applications functions, but they didn’t actually pull a lot of functionality out of compiled code. With the birth of the web though, applications started to change dramatically.
The web browser changed applications forever by substituting a generic GUI front-end and structured text (in the form of HTML) for a compiled GUI. In this way the browser became merely a generic execution engine. It requested non-compiled text and then translated that text into a unique GUI according to a pre-existing industry standard. By pulling out the presentation logic from compiled apps and making it open and accessible to not only other programmers but basically anyone who could view text, browsers launched the massive wave of innovation and creativity that in turn made the Internet a true “web”. HTML “programmers” swapped HTML tricks and tips liberally. They cut and pasted code from each other’s sites and as time progressed they began to use the power of HTML and HTTP to create composite sites that actually borrowed both content and styles from other sites.
Thus, in just 10 years, the presentation layer of the web has become an incredible laboratory for innovation and creativity with people using the power of HTML’s accessibility and portability to create radical new services, many of which people simply had not thought possible beforehand.
Ripping Out The Heart
With the rise of XML and structured standards for its use in areas such as business processes and APIs (such as BPEL and SOAP), the last vestiges of compiled applications are now under assault. In exposing these inner reaches of the application sanctum as structured text instead of complied code, the standards are setting the stage for a creativity and functionality renaissance on par with what has happened in the presentation layer.
With an application’s core algorithms and processes exposed within structured text, it will now be possible for a great multitude of actors to manipulate, enhance, and transform applications “on the fly”. Not only will this greatly enhance the ability of companies to update and enhance their applications in real time without the need for recompiling, but it allow for business logic, state and processes to be shared across applications and partners. Given that much of this structured text will take the form of XML messages passing between servers and across firewalls it is the message, and not the compiled code that will ultimately become the application.
The Rise of Execution Engines
With the message as the software, the question becomes, what role does complied code have in such a world? The answer is that complied code will increasingly be restricted to standards-based execution engines that simply process XML messages and execute their instructions. Similar to the “dumb” browsers (and emerging RIA containers) on the presentation layer, a new class of execution engines will emerge in the business logic/process layer. These engines will perfect the separation of application content from application infrastructure that application servers initially and yet imperfectly, set in motion.
For example, self contained BPEL servers will likely emerge. Such servers will merely serve as execution engines that process and forward BPEL messages. Such messages will contain the business logic about the process in question and will likely also contain information on the state of the process as well the specific data associated with that particular process. The messages may also evolve to contain the specific algorithms used to evaluate or transform data. With all this “code” embedded in the message, the BPEL engine will be able to process the message without any a priori " knowledge of that particular process.
Already at the data layer a crop of start-ups is building distributed query engines that link together disparate internal and external databases. Many of the start-ups, the most prominent of which is Composite Software, have taken to saying that their products help build “composite applications”. While this statement perhaps mischaracterizes the current capabilities of distributed query engines it does foreshadow and anticipate the day that truly composite applications will be able to be constructed on the fly by running XML messages through standardized execution engines (including distributed query engines) and then returning the results to what ever application, or should I say message, that requested them.
Problems in Paradise
While the death of complied applications may bring great benefits in terms of the flexibility and accessibility of applications, it will also bring great risks. With the “crown jewels” of an application now exposed to the world in the harsh light of structured text, hackers and IP thieves may have a field day. In addition, while enabling a whole new class of users and partners to modify application code may lead to tremendous innovation and creativity, it may also lead to tremendous confusion and almost impossible quality assurance/performance management.
An Explosion of Innovation
Solving such problems, in addition to creating the base execution engines, will be the responsibility of a whole new class of infrastructure software products. While many of these may be extensions to existing development or infrastructure platforms, in all likelihood many will be brand new platforms engineered from the ground up to accommodate a distributed, message centric, non-compiled view of applications.
As these new products come on line and as developers and business partners become comfortable with their use, they will help to set off a new wave of innovation which will be just as, and perhaps more, profound than that set off by browsers and HTML. For while the browser and HTML helped create the “web” by turning the presentation layer in a massive interconnected corpus of content, data, and applications, the dark secret has been that the web is really only skin deep. For beneath the presentation layer applications still exist as tightly compiled islands that rely largely on presentation layer “hacks” to create the illusion of integration. But with rise of execution engines in the business logic/process layer and the migration of application content into messages, the web will at last become fully integrated from top to bottom which should provide an incredibly rich palette for the creation of service offerings the likes of which we can’t even imagine today.
Software Stocks Update: January 2005
Software stocks started off the year with a thud with the average stock off 6% in January and the Software Stock index overall off 6% compared NASDAQ’s to 5.2% drop. The worst performing software sectors this month were Supply Chain (-15.7%), Operating Systems (-15.4%), CRM (-11.8%) and ERP (-11.6%). You can get a detailed spreadsheet with all the numbers here .
In terms of my hand picked virtual software stock portfolio, the portfolio had one of its best months ever with the average stock up 9.5% and the overall portfolio up 13.8%. This month marks the one year anniversary of the portfolio. During that year the portfolio was up 45.5% which is not too shabby when you compare it to the 4.2% decline in the NASDAQ or the 2% decline in the Software Stock Index during that same time frame.
I am not making any changes to the portfolio this month as I want to see how all the 1st quarter reports come in which won’t be until mid-February.
Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: This is a turn around story in the hot business intelligence space. The story took a hit last quarter though when the company missed top line estimates and didn’t inspire confidence about Q4.
Performance: Since 1/26/04: -28.1%, Dec vs. Jan: -0.8%
Comments: Dead money in December. The Q1 report will determine whether or not this stock stays in the portfolio or makes a losing exit.
Company: SumTotal Ticker: SUMT
Investment Thesis: SumTotal was formed by the merger of Docent and Click2Learn which closed in mid-March. I liked Docent before the merger because as it was relatively cheap, had good products, and was in a space still seeing good corporate spending (E-Learning). The combined companies promise to be solidly profitable after the debris from the merger clears which should help the overall valuation as they cement their leadership position in the e-learning space.
Performance: Since 1/26/04: -28.3%, Dec vs. Jan: 5.0%
Comments: Potentially climbing its way out of the dog house. Q1 report should hopefully be clean of any merger related issues and they should show a pro-forma profit.
Company: SPSS Ticker: SPSS
Sub-sector: Business Intelligence
Investment Thesis: SPSS is another player in the business intelligence space with a particular emphasis on predictive analytics, something that is particularly hot right now. The stock has been battered by a restructuring that the company went through last year as well as an accounting restatement. My thesis is that the new product set is strong and the accounting trouble is overblown.
Performance: Since 4/30/04: 12.2% Dec vs. Jan: 2.0%
Comments: Still like the stock although the expectations for the latter half of this year are high.
Company: Stellent Ticker: STEL
Sub-sector: Content Management
Investment Thesis: Stellent is a relatively sleepy, but well established, content management company that is attractively priced. Q1 was the first quarter of positive cash flow in awhile and Q2 saw pro forma, but not GAAP positive, EPS. With $20-25M/quarter in revenues, Stellent has a lot of room to work on expenses and should be able to return the company to solid GAAP profitability at which point the stock should recover from its current 1.5X ev/sales to something much closer to 2X.
Performance: Since 6/30/04: 0.1% Dec vs. Jan: -3.1%
Comments: Gave up some ground this month, but nothing of major concern. Revenue growth was decent in Q4 but not great. Company was barely GAAP profitable, but profitability should improve during the rest of the year.
Company: Neteller Plc. Ticker: NLR.L
Sub-sector: Financial Services
Investment Thesis: Every portfolio needs a flyer and this sure counts as one. Neteller is Europe/Canada’s answer to PayPal and it has been making a killing by servicing markets, particularly online gambling, that PayPal has been pressured into exiting by the US Justice Department. I know, I know, this is not a software stock, but I still follow online financial services quite closely and I feel compelled to point out this stock because it is such an attractive buy.
Performance: Since 6/30/04: 235.5% Dec vs. Jan: 42.3%
Comments: The portfolio’s big 2004 winner started off 2005 with a bang. This stock is “en fuego” and still only trades at 23X 2005 EPS. I will hang on for the ride a bit more, maybe 30X, but at some point the risk/reward on this stock is going to shift the other way.
Company: Sportingbet Plc. Ticker: SBT.L
Sub-sector: Internet Gambling
Investment Thesis: Continuing my trend of UK-based non-software stocks, I feel compelled to add Sportingbet.com to the portfolio. Sportingbet is the largest online gambling operator in the world and just last month executed an accretive deal to buy one of the largest online poker sites on the net (Paradise Poker). At 16-17X 2005 EPS this stock is very attractive relative to its growth rate (25-30%) and especially attractive relative to other internet commerce plays. In addition, in November the World Trade Organization ruled that it is illegal for the US to prevent US citizens from placing bets on non-US Internet sites. While the US is appealing the ruling, it raises the possibility that US citizens will be able to legally gamble on-line which could lead to further industry growth. I don’t like the big options overhang in this stock or the poor margins (due to sports betting business) but this is a chance to own the #1 player in an important online commerce player at an attractive valuation. Too bad I didn’t buy it at the same time I bought Neteller as it is up about 50% since the middle of 2004. Acquisition by one of the major US gambling concerns (once online gambling is legal), seems a distinct possibility.
Performance: Since 11/30/04: 50.9% Dec vs. Jan: 25.9%
Comments: 2nd best performing stock in January. Q4 is traditionally its strongest quarter thanks to heavy sports betting. It’s still not even 20X EPS, which still seems like a great deal for the #1 online gambling site on the net.
Company: Autonomy Ticker: AUTN
Sub-sector: Content Management
Investment Thesis: Autonomy is a UK-based purveyor of advanced enterprise search software a space I know well from some of my VC investments. The enterprise search space is crowded and getting even more competitive with the entry of folks like Google. Autonomy’s secret sauce, its categorization software, is increasingly being duplicated by it competitors. Autonomy continues to trade at a premium to the market at 3.9X enterprise value to sales however its decline has brought it to a more reasonable level. This premium appears to be largely an artifact of the fact that autonomy is a bit of a cult stock in its home country of the United Kingdom.
Performance: Since 1/26/04: +40.4% Dec vs. Jan: -4.0%
Comments: The stock drifted up again in January thanks in part to a somewhat vague, yet positive pre-announcement. It may make sense to consider removing this from the portfolio next month.
Company: RSA Security Ticker: RSAS
Investment Thesis: I have always wanted to short RSAS. I covered the security sector when I was an analyst and basically came to hate the sector due to the fact that almost every company blows up once every 12-18 months and does so with no warning whatsoever. RSA used to be called Security Dynamics and its main product remains a "hard token" called Secure ID which they already have sold to just about everyone on the planet that is going to buy one. Right now the street is infatuated with an AOL deal which I think has no legs.
Performance: Since 8/1/04: +5.4% Dec vs. Jan: +12.2%
Comments: Ah sweet justice. RSAS hit its Q4 #s but guided down for the rest of year causing the stock to drop. I will probably keep this short on a month or two more and cover given that it will start its ride back up at some point (like it always does).
Company: Salesforce.com Ticker: CRM
Sub-sector: Vertical Applications
Investment Thesis: Salesforce.com is a, mostly, hosted sales force management application. It's a good product, most of my start-up companies used it, but it is expensive the longer you use it and the larger your company gets. CRM is 2nd most highly valued stock in the software space despite the fact that it is facing increased competition from the big boys of enterprise software and that it’s very hard to rapidly grow subscription-based revenues. Any misstep and this stock will down 25% in a heartbeat.
Performance: Since 1/26/04: -5.3% Dec vs. Jan: 19.1%
Comments: I may actually end up making money on this short. Just a few months ago this short was killing me as it rose above $20 after getting added to the portfolio at $13. Since then though, it has been giving ground, the latest decline thanks to tepid guidance for 2005 and increased competition from Siebel and Netsuite (which is funded by Oracle). It still trades at over 105X 2005 EPS which I think has to look increasingly expensive in light of the heightened competition and lower forecast growth.
Company: Wave Systems Ticker: WAVX
Investment Thesis: I first encountered Wave when I wrote my initial analyst report on Wall Street in the mid-1990s. Wave has remained in business largely by claiming that it is developing revolutionary security technologies, kind of like a bio-tech company that never gets out of trials. With a grand total of $1.4M in revenues over the last 3.5 years, almost $14M in cash burn during the first nine months of this year and only $6M in cash left, Wave finally appears to be approaching judgment day. It may take a few more quarters, but I fully expect Wave to follow in the footsteps of CMRC or to wash out the existing common with a new financing.
Performance: Since 10/1/04: -15.4% Nov vs Dec: 8.2%
Comments: Last month I wrote about WAVE doing a very fishy PIPE deal and I got a lot of comments from proponents of WAVX (called Wavoids), some constructive, some not so constructive. It was actually fascinating to correspond with these folks as they passionately believe that WAVX is on the cusp of dominating the market for so-called Trusted Platform Management (TPM) software. What struck me about these conversations was just how passionate these people were in the face of some what can only be described as an epic failure by WAVX over the past 10 years. For a short pick, I don’t like the idea of having such a passionate following on the long side because these folks will behave irrationally and try to support the stock even when they should be heading for the hills. In addition, at around $1, it really only takes a few hundred grand to move the stock one way or the other. That said, I am going to wait this out a bit and see what the company does to raise money again which should happen some time in late Q1 or early Q2.
Company: Convera Ticker: CNVR
Sub-sector: Content Management
Investment Thesis: I ran into Convera when I was on the board of Stratify. I was unimpressed with Convera’s business then and I am unimpressed with it now. They have a decent market niche in the government sector but have never been able to really expand out from there and face increasing competition from the likes of Google, Verity, and Microsoft. The stock is up strongly in the past few months thanks to the company’s announcement that they are going to enter into the web search market. This hype has disguised very poor license sales of the core product and a continued high burn rate (averaging about $4M-5M a quarter). Eventually the chickens will come home to roost and investors will realize that these guys are a just a third rate enterprise search vendor.
Performance: Since 11/30/04: -1.9% Dec vs. Jan: -2.2%
Comments: Another flat month. This stock really hinges on whether or not people buy the story of Convera getting into the web search market. The bet is that enterprise business will stagnate before their web search product starts to take off and the stock will fall in the interim.