Four years ago, Ping Identity was at a crossroads. A venerable player in the single sign-on market, its product was not a market leader, and after 14 years and $128 million in venture capital, it needed to find a new path.
While the company had once discussed an IPO, by 2016 it began putting out feelers for buyers. Vista Equity Partners made a $600 million offer and promised to keep building the company, something that corporate buyers wouldn’t guarantee. Ping CEO and co-founder Andre Durand accepted Vista’s offer, seeing it as a way to pay off his investors and employees and exit the right way. Even better, his company wasn’t subsumed into a large entity as likely would have happened with a typical M&A transaction.
As it turned out, the IPO-or-acquisition question wasn’t an either/or proposition. Vista continued to invest in the company, using small acquisitions like UnboundID and Elastic Beam to fill in its roadmap, and Ping went public last year. The company’s experience shows that private equity offers a reasonable way for mature enterprise startups with decent but not exceptional growth — like the 100% or more venture firms tend to favor — to exit, pay off investors, reward employees and still keep building the company.
But not everyone that goes this route has a tidy outcome like Ping’s. Some companies get brought into the P/E universe where they replace the executive team, endure big layoffs or sell off profitable pieces and stop investing in the product. But the three private equity firms we spoke to — Vista Equity, Thoma Bravo and Scaleworks — all wanted to see their acquisitions succeed, even if they each go about it differently.
Viable companies with good numbers
Private equity firms are generally looking for companies that appear to have solid financial foundations with decent products, but for whatever reason are undervalued. Vista’s Alan Cline says they love enterprise SaaS companies with decent ARR, low expenses and an above-average level of growth.
He noted that about 10 years ago, Salesforce began successfully selling into large companies, and it really opened the door for other SaaS companies that came later. At that point, his firm shifted from mostly looking for on-premises enterprise applications companies to looking mostly at undervalued SaaS companies selling to the enterprise.
As he points out, there are roughly three types of startups: companies that start and fail; companies that do really well and get acquired or go public; and companies that fall somewhere in the middle. The companies that fall in the third category might not be leaders, but they have a decent business, which Cline says might catch the attention of a firm like his.
He says they don’t need the firm to be growing at 100% to capture their attention, just some solid steady growth is what they look for, and that can be a lifeline for companies that built something fairly substantial, but aren’t growing fast enough for venture capitalists to keep investing.
“Maybe you’ve built a successful business, but you’re either not in a category that one of the really big corporate acquirers is excited about, or you’re growing but you’re not growing 100% a year. That opens the door for the world of private equity to say hey, we can come in and find a great way to be your investor as you’re continuing to grow and scale your business — and 20% growth or 40% growth to us is really great. We like it if you can do that on a consistent basis with a high-value software product,” Cline explained.
It’s worth noting that Ping told us in 2015 that it was approaching $100 million ARR with 40% yearly growth, which put it right in Vista’s sweet spot when it acquired the company in 2016.
Seth Boro, managing partner at Thoma Bravo, says that his firm looks for similar types of companies, but works with a mix of older startups, privately held firms and undervalued public companies, and uses its investment muscle to build them up.
“Our strategy has remained really consistent over [the life of the firm], which is to buy great product companies with high recurring revenue that have management teams that we can partner with because normally we are working with the management team,” Boro said.
An example of this approach is Apttus, a once high-flying quote-to-cash startup built on the Salesforce platform. The company had a total of $404 million in venture investment, and at one time expected to exit through acquisition or IPO. When that didn’t happen, Thoma Bravo came along and offered it an exit lifeline.
While the exact price wasn’t revealed, Thoma Bravo took a major stake in the firm. With the backing of the private equity firm, earlier this year Apttus was able to buy Conga, a company that deals with the contracts and signature part of the buying process for $750 million. In this case, Thoma Bravo used its financial strength to help Apttus combine with a similar company to cover more of the market. That’s what private equity firms can bring to the table for a company like Apttus.
Give a little, get a little
When you get bought by a private equity firm, you do pay a price of sorts for the exit opportunity. These firms are giving you money, but in exchange for that investment, they are going to impose their way of working on your company. That would happen with a corporate acquisition, too, of course, but these firms have a methodology to help beef up all aspects of the organization from finance to sales and marketing.
It may not always be easy for a company executive team used to making its own decisions to suddenly be told to do things completely differently, but these firms have a time-tested playbook, and you have to be ready to adhere to that. In Vista’s case, your company begins working with the Vista Consulting Organization, a group with over 150 people whose job is to overhaul the internal operations of the companies they acquire, based on their best practices.
To that end, Vista has hired functional experts in all the different areas of a software business. Whether it’s the go-to market function in sales and marketing, hosting operations or high-end services project management capabilities, it offers help and advice to every company it invests in.
“We want to understand what their strategic plan is and how our consulting organization can help them accelerate their plan. And what we’ve done with this consulting organization is we have basically accumulated over our 20 years a collection of the best practices — what are the observed practices from our portfolio, things that have worked really well for others,” he said.
Thoma Bravo’s Boro says that his firm works in a similar way to Vista, helping to get more out of the company than it was achieving on its own.
“Normally we are working with the management team, and then looking to bring our best-in-class metrics and proprietary operating procedures to the company to turn them into best-in-class operators,” Boro said.
More hands-on approaches
While private equity firms clearly get deeply involved in the operations of their acquisitions, some get even deeper than simply consulting. Scaleworks is a firm that looks for startups that wouldn’t interest companies like Vista or Thoma Bravo. Instead it looks for deeply undervalued early startups with a good idea and bad execution.
“There are very few buyers for companies below, say, $15 million in revenue because they’re inherently potentially unstable,” says company co-founder and general partner Ed Byrne. These companies have a strong product, but maybe lack strong leadership or the ability to go to market, and Scaleworks comes in to help them get to the next level. It looks for modest growth in the 10-30% range, where it thinks it can still build a substantial business.
Byrne sees his company as more venture equity than private equity where his firm comes in, buys the company, installs a new leadership team and focuses on growth. The idea is to get that $10 or $15 million of revenue to $20 or $30 million and they see that as a reasonable return on their investment, he said.
The approaches vary of course, but depending on where you find yourself as a startup founder, firms like these can offer you a way to exit, sometimes gracefully, sometimes less so.
Ping found a way to exit on decent terms and still got to go public. Today, it has a market cap of $2.81 billion. It’s hard to know how Apttus is doing as it remains a private company, but a private equity firm like Thoma Bravo enabled it to exit in the end, even if it wasn’t exactly the way the founders had originally envisioned.