Another ‘down round’ IPO?

Contact: Brenon Daly

Another unicorn is set to gallop onto Wall Street, as MongoDB has put in its IPO paperwork. The open source NoSQL database provider plans to raise $100m in the offering, on top of the $311m it drew in from private-market investors over the past decade. As has been the case in other recent tech offerings, however, some of those later investors in MongoDB may well find that the IPO represents a ‘down round’ of funding.

Any discount for MongoDB likely won’t be as steep as the discount Wall Street put on the previous data platform provider to come public, Cloudera. Investors currently value the Hadoop pioneer at $2.2bn, slightly more than half its peak valuation as a private company. For its part, MongoDB, which last sold stock at $16.72, has more than 100 million shares outstanding, giving it a valuation of roughly $1.7bn.

While not directly comparable, Cloudera and MongoDB do share some traits that lend themselves to comparison. Both companies have their roots in open source software, and wrap some services around their licenses. (That said, MongoDB has gross margins more in line with a true software vendor than Cloudera. So far this year, it has been running at 71% gross margins, compared with just 46% for Cloudera.) Further, both companies are growing at about 50%, even though Cloudera is more than twice the size of MongoDB.

Assuming Wall Street looks at Cloudera for some direction on valuing MongoDB, shares of the NoSQL database provider appear set to hit the public market marked down from the private market. Cloudera is valued at slightly more than six times its projected revenue of $360m for the current fiscal year. Putting that multiple on the projected revenue of roughly $150m for MongoDB in its current fiscal year would pencil out to a market cap of about $920m. Given its cleaner business model and less red ink, MongoDB probably deserves a premium to Cloudera. While MongoDB certainly may top the $1bn valuation on its debut, reclaiming the previous peak price seems a bit out of reach.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Webinar: PE activity and outlook

Forget Oracle, IBM, or any of the other big-name, publicly traded acquirers that – until now – have always set the tone in the tech M&A market. If a tech deal printed in 2017, the buyer is more likely to be a private equity firm than any of the well-known serial acquirers on the US stock market. This is the first time in the history of the multibillion-dollar tech M&A market that financial acquirers have been busier than these strategic acquirers.

To understand how the ever-growing influence of buyout shops is reshaping both M&A and the tech industry, join 451 Research for an hour-long webinar on Thursday, September 7, 2017, starting at 1:00pm ET. Registration is available here: https://www.brighttalk.com/webcast/10363/274289.

One and done for tech M&A in August

Contact: Brenon Daly

For tech M&A in August, there was one big print and then everything else. The blockbuster transaction, which saw Vantiv pay $10.4bn for UK-based rival payments processor WorldPay Group, accounted for almost half of the $22.7bn spent on tech deals around the globe this month, according to 451 Research’s M&A KnowledgeBase.

After the massive fintech consolidation, however, the value of transactions declined sharply. No other deal announced in August figures into the M&A KnowledgeBase’s list of the 25 largest transactions announced in the first eight months of 2017.

The slowdown at the top end of the tech M&A market pushed this month’s spending level to the lowest total for the month of August since 2013. More recently, the value of deals in August came in slightly below the average monthly spending so far this year.

Altogether, tech acquirers across the globe have spent just less than $200bn so far this year, according to the M&A KnowledgeBase. At this point in both 2016 and 2015, spending on transactions had already topped $300bn.

With eight months now in the books, 2017 is on pace for the lowest level of M&A spending in four years. The main reason for the slumping deal value is that many of the tech industry’s most-active acquirers have largely moved to the sidelines, especially when it comes to big prints. IBM, Hewlett Packard Enterprise and Oracle all went print-less in August.

In contrast, the rivals to those strategic buyers, private equity (PE) firms, continued their shopping spree. PE shops announced 77 deals in August, an average of almost four each business day. That brings the total PE transactions announced this year to 600, a pace that puts 2017 on pace to smash last year’s record number of deals by roughly 30%. (For more on the record-setting activity of buyout shops, be sure to join 451 Research for a webinar next Thursday, September 7, at 1:00pm ET. Registration is available here.)

Private equity does a number on the public markets

Contact: Brenon Daly

Private equity (PE) is doing a number on the public markets. No longer content with siphoning dozens of tech vendors off the exchanges each year, buyout shops are now moving earlier in the IPO process and targeting companies that may only be thinking about someday going public. These rapacious acquirers are not only harvesting the current crop of tech vendors on the NYSE and Nasdaq, but also snapping up the seeds for next season’s planting as well.

Consider the recent activity of the tech industry’s most-active PE shop, Vista Equity Partners. Two months ago – on the same day, as a matter of fact – the firm ended Xactly’s two-year run as a public company and snagged late-stage private company Lithium Technologies, a 16-year-old vendor that had raised some $200m in venture backing. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimates of terms on the Vista Equity-Lithium deal here.) And just yesterday, Vista Equity once again went startup shopping, picking up software-testing firm Applause.

To be clear, neither Lithium nor Applause would have been considered dual-track deals. Both startups undoubtedly needed time to get themselves ready for any eventual IPO. And while it might seem like a PE portfolio provides a logical holding pen for IPO candidates, buyout shops don’t really look to the public markets for exits. As far as we can tell, Vista Equity hasn’t ever taken one of its tech vendors public. The same is true for Thoma Bravo. Instead, the exit of choice is to sell portfolio companies to other PE firms or, to a lesser degree, a strategic acquirer. (Buyout shops prefer all-cash transactions rather than the illiquid shares that come with an IPO so they can speed ahead raising their next fund.)

The PE firms’ expansive M&A strategies – directed, effectively, at both ends of the tech lifecycle on Wall Street – aren’t going to depopulate the public markets overnight. However, those reductions aren’t likely to be offset by an increase in listings through an uptick in IPOs anytime soon. That means tech investing is likely to get even more homogenized. It’s already challenging to get outperformance on Wall Street, where passive, index-driven investing dominates. With buyout shops further shrinking the list of tech investments, it’s going to be even harder for money managers to stand out. With their latest surge in activity, PE firms have made alpha more elusive on Wall Street.

To see how buyout shops are reshaping other aspects of the tech industry and the long-term implications of this trend, be sure to read 451 Research’s special two-part report on the stunning rise of PE firms. (For 451 Research subscribers, Part 1 is available here and Part 2 is available here.) Additionally, a special 451 Research webinar on the activity and outlook for buyout shops in tech M&A is open to everyone. Registration for the event on Thursday, September 7 at 1:00pm EST can be found here.

No more high-rolling in infosec M&A

Contact: Brenon Daly

Casinos, which are always looking to have patrons spend more money, are notorious for making exits difficult to find. For that reason, the Mandalay Bay was the perfect setting for this week’s trade show for the information security industry, Black Hat. Why do we say that? Infosec companies — at least the big ones — are having difficulty in finding exits, too.

Not to overstretch the metaphor of the host city for Black Hat, but the infosec industry has stepped away from the high-roller tables. So far this year, just one infosec company (Okta) has made it public, while those that have headed toward the other exit haven’t enjoyed particularly rich sales. This year’s small bets are reversing the recent record run for M&A spending on infosec transactions.

Spending on overall infosec acquisitions in the first seven months of the year has put 2017 on pace for the lowest annual total in a half-decade, according to 451 Research’s M&A KnowledgeBase. This year’s paltry total of just $2.3bn in aggregate deal value means that 2017 will snap three consecutive years of increasing infosec M&A spending. Our M&A KnowledgeBase shows that in 2016, infosec buyers spent $15bn, more than any other year in history, while 2015 also came in as another strong year in 2015 with $10bn in transaction value.

To put the current dealmaking decline into perspective, consider this: The largest infosec print so far in 2017 wouldn’t even make the list of the 10 biggest infosec transactions of 2015-16. And while this year’s largest acquisition – CA’s $614m purchase of Veracode – represents a decent exit, it’s fair to say more was certainly expected from the application vulnerability startup. (Veracode had filed its IPO paperwork several months before the sale on the quiet, according to our understanding.) Similarly, this year’s second-largest VC exit saw TeleSign agree to a sale that valued it lower than its valuation in its previous funding round.

The reason why so few sizable infosec startups are looking to exit is mostly because they don’t have to exit. Thanks to ever-increasing CISO spending, venture capitalists are back writing big checks to subsidize infosec startups. And when we say ‘big checks,’ we mean the size that used to come in IPOs or the rounds that got announced during the 2014-15 boom in late-stage investing, when single rounds of $100m were announced from across the startup landscape. While those growth rounds were relatively plentiful across the IT scene two or three years ago, infosec is the only industry where the big checks are once again rolling in. In just the past three months, a half-dozen infosec startups have each raised rounds of about $100m.

Doors shutting for VC exits

Contact: Scott Denne

Venture capitalists haven’t faced an exit environment as challenging as they’ve seen this year since the start of the decade. Through the first half, VCs are on pace to sell the fewest number of portfolio companies in seven years. Yet at the high end of the market, the exits have never been bigger, driving the total value to a near-record level. Only five venture-backed companies have ever sold for $3bn or more and two of those deals – AppDynamics and Chewy – printed this year.

The dollar value of sales of venture-backed companies sits abnormally high at $16.2bn through the first half of the year. According to 451 Research’s M&A KnowledgeBase, that’s the highest value of VC exits in the first half of any year since 2002, with the exception of 2014. Yet the number of sales from VC portfolios sits at 285, the slowest start to the year since 2010.

The deceleration continued through the end of the second half as only 33 venture-backed companies were sold in June, the least of any month in the past eight years. And the decline in volume (as well as the abnormally high value of exits that came with it) extended across both enterprise- and consumer-tech startups – although in the latter category the decline marks a continuation of a four-year streak that became more pronounced as the most frequent acquirers of consumer tech stepped back from the market.

Google, the most active buyer of venture-backed startups over the previous four years, inked just three such deals this year (of five total transactions). Facebook hasn’t done a single one, while Yahoo sat on the sidelines for the 18 months leading up to its just-closed sale to Verizon. Apple and Amazon have been in the market, although neither has printed a deal for more than $250m since 2015. Subscribers to 451 Research’s Market Insight Service can access a detailed look at first-half venture exits.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Tech IPOs need to take the summer off

Contact: Brenon Daly

In the tech IPO market, as with most trends, it’s better to be early than late. That’s not always the case, of course, but typically the first few startups that emerge from a prolonged pause for new offerings do so with a ‘bankable’ story for Wall Street. It’s as if they are going public out of desire, rather than necessity. By the end of the cycle, however, the motivations for IPOs don’t often reflect that same confidence, a fact that investors tend to sniff out and discount accordingly.

As we ease into a summer break for new issues, it’s worth noting that we have certainly seen that cycle in the IPO market so far this year. By and large, the handful of enterprise-focused startups that have been first to (public) market in 2017 have raised more capital, created more market value and rewarded shareholders more than the companies that have followed. MuleSoft, Alteryx and Okta all emerged onto Wall Street with solid offerings in the spring, representing the first enterprise tech IPOs following last November’s US election. (New offerings had been on hold as investors assessed the impact of the unexpected election results on their existing portfolio of companies before placing more speculative bets on IPOs.)

On the other side, the companies that have emerged from the pipeline more recently haven’t found Wall Street to be such a welcoming place. The most recent tech offerings — storage startup Tintri and online meal delivery vendor Blue Apron — both cut the pricing of their IPOs, but even that hasn’t been enough. (The discount for Tintri was particularly sharp, leaving the company, which had raised $260m in the private market, with just $60m in proceeds from public-market investors. Built on some $320m in total funding, Tintri currently has a market value of slightly more than $200m.)

The valuation declines for both companies have continued uninterrupted on the stock market, leaving Blue Apron and Tintri underwater from their IPO prices, never mind the much higher valuations they received as private entities. In contrast, MuleSoft and Okta are both roughly twice as valuable as they were when they last received funding as private companies. For the tech IPO market to get back on track in the second half of 2017, it might be well-served to take the summer off and look to restart in the fall, rather than dragging out the current cycle.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA

Trust-busting in the Trump era

Contact: Brenon Daly

Despite President Trump often positioning himself as ‘dealmaker in chief,’ his administration just cast a chill over M&A. The Federal Trade Commission has said that it plans to block the proposed combination of DraftKings and FanDuel, the two largest websites for betting on fantasy sports. The deal was announced last November, just two weeks after the election of Trump supposedly signaled a more business-friendly climate in Washington DC.

That expectation has helped drive Wall Street to record highs, with the broad-market US indexes all surging about 20% since the vote. The confidence in the stock market was initially expected to extend to the M&A market, which has historically been closely correlated with Wall Street. In April, for instance, a plurality of respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster said Trump’s economic policies have stimulated dealmaking. The 41% who reported a ‘Trump bump’ to M&A was almost twice the level that said the president’s policies have slowed acquisition activity.

And yet, regulators are moving to spike a combination of two startups that just might represent the only way for either of them to survive. It sounds a bit dramatic, but then, the landscape is littered with startups that have spent their way out of business. Even raising $1bn in venture backing — as DraftKings and FanDuel combined to do — doesn’t guarantee survival. Not when startups with low-margin transactional business models spend money hand over fist on advertising against each other in what is a barely differentiated service.

While the two companies decide whether to fight the FTC ruling, some startup executives and their backers may need to reconsider their potential exits. For the most part, regulators during the Obama administration didn’t trouble themselves with the rare bits of consolidation in Silicon Valley. (The two largest VC-backed sites for freelance work — oDesk and Elance — got together in 2013 without any review from Washington.) Based on the DraftKings-FanDuel decision, however, dealmakers might need to plan on more trust-busting in the Trump era. For instance, the far-fetched talk about a pairing between Uber and Lyft should now be considered dead before it ever gets born.

The one and only exit for infosec’s unicorns

Contact: Brenon Daly

In just the past month, four different information security (infosec) startups have all pulled in single rounds of funding that typically would have only been available from an IPO. In addition to filling company coffers, however, the roughly $100m slug of capital raised by each of the quartet — CrowdStrike, Tanium, Netskope and Illumio — may also influence company strategy, at least when it comes time to seek an exit. Rather than pursue a sale of the business, which is the most likely outcome for any startup, these infosec unicorns will likely eye the door that leads to Wall Street.

In other words, when it comes to the two exit options available to these security startups, they should be modeling themselves more on Okta than on AppDynamics. The reason? Of the 17 sales of VC-backed vendors valued at more than $1bn since January 1, 2014, not a single startup has come from the infosec market, according to 451 Research’s M&A KnowledgeBase. Mandiant came close to a 10-digit exit in its early 2014 sale to FireEye, but the announced value of that deal stands at $989m. (Of course, FireEye paid for the vast majority of that in stock, which lost half of its value within four months of the transaction and has never regained its early-2014 level.)

Infosec is conspicuous by its absence among the big-ticket purchases of venture-backed companies. Virtually every other major tech sector has realized some unicorn exit, including mobility (WhatsApp, AirWatch), e-commerce (Jet.com), storage (Cleversafe), the Internet of Things (Jasper Technologies) and cloud (Virtustream). The largest sale of a VC-backed infosec firm over the past three and a half years, according to the M&A KnowledgeBase, is Trustwave’s $810m sale to Singtel in April 2015. (Although Trustwave did raise venture money, notably from FTV Capital, it hardly fits the classic definition of a startup. Instead, it is more accurately viewed as a rollup, having consolidated 16 other businesses since its founding in 1995.)

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Private equity’s latest venture 

Contact: Scott Denne

The bulging coffers of buyout funds are delivering a record amount of exits to venture capitalists, providing some measure of relief as strategic acquirers scale back dealmaking and the IPO market remains a selective venue. Yet relying on a different category of buyers could have venture investors rethinking how to value the products – startups – they sell to them.

So far this year, private equity (PE) firms have spent $4.8bn on 40 companies that have taken venture money. That nearly matches last year’s record dollar total ($5.2bn), according to 451 Research’s M&A KnowledgeBase, and is on track to pass the number of such deals in 2016.

Returns from both PE shops and strategic acquirers range from prodigious to paltry, although usually at vastly different multiples on the high end of the market. Take the two largest VC exits this year, Cisco’s $3.7bn acquisition of AppDynamics and PetSmart owner BC Partners’ purchase of Chewy for an estimated $3.4bn. Both delivered outsized returns, but Chewy went off at nearly 4x trailing revenue, which is above market for an e-commerce transaction although not in the same neighborhood as the 17.4x AppDynamics garnered.

In AppDynamics, Cisco is gambling that the application performance management vendor will mature into that lofty price. PE firms are less inclined to make such a wager. While PE shops are buying venture-backed companies – they account for a record 14% of venture exits so far this year – they’re looking for proof, not potential. Those tougher standards could start to trickle down to valuations in venture fundings as PE firms determine a larger share of the outcomes.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.