When Atlassian announced last week its intent to acquire video messaging app Loom for $975 million, it would have been easy to think that the former unicorn was undervalued. But comparing 2021 valuations to the reality of 2023, when the dynamics between investors and their portfolio companies have changed so dramatically, really isn’t a fair way of looking at the recent deal.
When it comes down to it, Loom still sold for just a hair under $1 billion, and for a company that raised just over $200 million (per Crunchbase), that’s not a terrible return on investment. Sure, it’s not the $1.53 billion figure we saw in 2021, but show us a startup that could live up to the valuations of that time period in the current conditions.
Loom launched in 2016 and attracted some big-name investors along the way, including General Catalyst, Sequoia, Coatue and Andreessen Horowitz. It also got investment from industry luminaries like Figma CEO Dylan Field, Front CEO Mathilde Collin and Instagram co-founders Kevin Systrom and Mike Krieger. That’s some pretty heady company.
The company last raised in May 2021, and as Lou Reed once sang, “You know, those were different times”: It scored $130 million at the aforementioned gaudy unicorn valuation. Remember in May 2021, most offices were still closed. Large numbers of people were still working at home. Video messaging was hot. Everything was looking good.
The reality of the last two years changed the equation, and the value dropped as the interest rates rose. But that doesn’t mean it’s a bad deal, says Julie Mohr, an analyst at Forrester Research. “The acquisition cost is not too far off; I don’t think it is a bad deal for investors. Of course, investors always want to maximize their return,” Mohr told TechCrunch+.
But just how good was this deal, and what is Atlassian getting for its close to a billion bucks?
Video killed the radio star
Times are changing. As baby boomers age out of the workforce, younger workers who have grown up with TikTok and YouTube are comfortable using video as a medium to communicate, and that goes for leisure as well as work. And in that sense, this was a smart move by Atlassian.
“Teaming and collaboration is moving to async video, and that was the one big piece missing for Atlassian,” said Ray Wang, founder and principal analyst at Constellation Research. “Loom brings the key teaming features from transcription to engagement that Atlassian needed.”
The company is hyper-focused on collaboration, and the video should help enhance that, Mohr said. “If you look at the broader Atlassian offerings, many of the core capabilities can be enhanced with video, including knowledge artifacts in Confluence, customer-facing how-tos through the service portal, onboarding training for developers — the possibilities of breaking down the text-only barrier with rich experiences of knowledge storytelling — improves the overall offering from Atlassian and speaks to younger generations that are video first and grew up with video as a preferred learning medium over text,” she said.
And when you sprinkle AI on top of that, it’s only going to get better, she said, as it offers richer capabilities like video summaries, identifying the “highlights” of a video, enhanced indexing and metadata capture, translation and video creation.
“If you combine a video creation platform with GenAI, you can see how collaboration could be enhanced,” she said. “Not just workflows between teams but video interactions that capture knowledge transfer in new ways and help to make more meaningful and lasting connections between collaborators.”
That actually sounds like a lot of bang for your $975 million, but was this a good deal? The devil is always in the details, but it appears everyone should walk away happy on this one.
Let’s make a deal
Loom last raised private capital when the market for such transactions was incredibly bullish, meaning that startups were able to raise funds at historically elevated prices. By the time it sold, those dynamics had more than corrected to prior norms.
The difference between the 2021 market for tech shares and the 2023 market for tech shares is stark, and recent data from PitchBook makes the difference clear: During the last tech boom, the private-market data provider calculated that trailing price-sales multiples for companies in its “VC-Backed IPO Index” rose from a 2017–2019 median of 6.3x to a 2020–2021 median of 13.02x.
Today? The figure is 5.01x, measured from the start of 2022 through the end of the third quarter of this year. It’s harder to build value when your revenue is worth a fraction of what it was just a few years ago.
We don’t know Loom’s operating results, so it’s hard for us to do any math on what sort of revenue multiple the former startup had when it last raised and when it sold. But we do know that it is not immensely profitable. Per Atlassian, the “acquisition is expected to be slightly dilutive to non-GAAP operating margins in fiscal years 2024 and 2025.” That means Loom is going to cost the company a little bit of profitability through its fiscal 2025.
The fact that Atlassian did not provide any notes regarding revenue growth acceleration to its business after the deal closes implies that while accretive, Loom likely won’t provide a massive revenue boost when the deal closes.
None of this is shocking. If Loom had been growing so quickly that it had scaled to a revenue base that would prove material to Atlassian’s forward results, it would not have sold for a discount to its prior private-market price. Similarly, if the company was very profitable, we would not anticipate the deal’s consummation at the price and timing that we saw.
Money, it’s a hit
What we do know is that Loom last raised when its market was hot and sold when it had cooled. The company was not self-sufficient (profitable) and had probably not reached IPO-scale in revenue terms. Thus, a sale price of $975 million is starting to sound pretty good.
The math even appears to work out for most parties. A recent CB Insights analysis of the deal reported that Loom’s final private round brought with it a 1x liquidation preference for the last capital it raised. So, those investors are getting made whole while earlier investors — or investors who invested across rounds in the startup — are making money. And CB Insights estimates that each of the founders could have walked away with over $50 million apiece. Naturally we’re talking ballpark figures here, but they are enough to show that in an effectively $1 billion exit, lots of folks walk away with a nice stash of cash.
It’s worth keeping in mind that billion-dollar exits of tech companies are infrequent. Recall the splash that Facebook buying Instagram for $1 billion made. Certainly, tech has become more valuable in dollar terms as an industry since then, but we shouldn’t look down our noses too much at a nearly ten-figure exit when most unicorns that once raised at valuations of $1 billion or more are now worth considerably less.
One thing that we do not know is the cash balance that Loom is bringing to the deal; the more cash on hand it had before the deal was struck, the lower the effective enterprise value of the deal would become. However, as the company had not raised in several years, we presume that it was not sitting on a dragon’s hoard of spare cash.
And today the IPO window is once again closed, late-stage capital is scarce, and M&A is also muted. Mix in those factors, and it looks like Loom managed something rather impressive with its sale to Atlassian, especially when you compare it to the value of competitors in the video message space. CB Insights estimates that the next closest competitor, Vidyard, is valued at $300 million with Mmhmm in third place at $100 million. Everyone else drops from there. When you consider those numbers, the sale price looks even better.
Not that we should be surprised. In its Q4 fiscal 2023 earnings report released in August, Atlassian wrote that in its recent operating period it did what it set out to do: “play offense.” What’s more, it saw “massive opportunities in cloud, enterprise, and [IT service management] that will drive Atlassian’s growth for years to come” while “tech’s labor market is such right now that we’re able to hire amazing talent who might not otherwise be available.”
Offense? Big opportunities? The ability to snag talent? That sounds like a company with its checkbook at the ready. We’re more curious today if there’s another Loom-sized deal in Atlassian’s future, more than we are if Loom should rue its sale to the larger company. Looks like it actually did quite well for itself.