SAP’s $8 billion acquisition of Qualtrics – a market analytics operator – has sent shockwaves across the tech world. It’s yet another sign of aggressive consolidation. Note that the year has also seen major deals from companies like Microsoft, Adobe, Cisco and IBM.
“Most of the innovation is happening at high-growth startups,” said Jyoti Bansal, who is the CEO and co-founder of Harness. “And the trend of legacy companies paying high prices to buy that innovation is going to continue to increase. It is a smart move on SAP’s part to use their cash. Without innovation, they will become irrelevant slowly.”
Now this consolidation trend is certainly good news for startups. But then again, a target for M&A really does need to have advantages that are tough to replicate (at least on a timely basis), say a sticky application, a talented workforce or a strong brand in the category.
No doubt, such factors apply to Qualtrics. Consider that the company has a unique background, especially when compared to a typical Silicon Valley startup. Two brothers, Ryan and Jared Smith, founded the company in their parent’s basement in Utah in 2002. The initial focus was the niche market of academic research. The belief was: If Qualtrics could solve the complex problems in this category, it could do so in virtually any category.
There was another advantage to this target market – that is, the company’s technology was introduced to many students. They would then go on to use the software as they entered the workforce. It’s a strategy that has helped spread other applications like Office.
All along, Qualtrics bootstrapped the operation. It was not until ten years later that it would raise capital, from Accel and Sequoia Capital. In fact, this money is still on the balance sheet!
According to the shareholder letter in the Qualtrics’ S-1, Ryan and Jared noted: “We have always known that uncommon results require uncommon sense. That is why we have always done things a little differently. From our earliest days, we knew that if we were going to do something special we had to write our own playbook, not follow someone else’s.”
However, Qualtrics was not only about organic growth. The company realized that to remain competitive it would need to do its own dealmaking.
“A lesson here is to quickly fill strategic product or market gaps with acquisitions,” said Deepa Subramanian, who is the CEO of Wootric. “Qualtrics recently did this when they bought Delighted, which gave them access to the turnkey SMB market, and a while back StatsIQ, which put them at the forefront of statistical visualization and ML technology. Both acquisitions positioned and elevated their base offering for the future, making the joining of forces with SAP that much more valuable.”
So given the company’s profitability, growth (revenues up 40% to $290 million for the first nine months of this year) and loyal customer base (at over 9,000), it was in an ideal position for its IPO, which was planned for a couple weeks ago. It was also helpful that by going through the due diligence process – which is extensive – Qualtrics made it easier for potential suitors to evaluate the company. This has been the case with other companies, such as AppDynamics and Adaptive Insights, that sold out before launching their public offerings.
Granted, as for Qualtrics, the decision to sell out does seem like a no-brainer. The IPO had an estimated valuation of $5+ billion.
But when it comes to the tech world, there are various factors to consider besides the price tag. “The IPO isn’t the endgame for a lot of startups anymore,” said Yevgeny Dibrov, who is the CEO and co-founder of Armis. “Tech companies going public are facing strong headwinds. Qualtrics saw that after its competitor SurveyMonkey went public.”
Finally, a deal must involve deep synergies. Let’s face it, many tech deals ultimately fail. The founders will also likely become part of the buyer’s organization.
“Team chemistry and similar company values are huge considerations in any merger,” said Craig Walker, who is the CEO and founder at Dialpad. “When Bill McDermott and Ryan Smith shared the story of their first meeting earlier this year and how they immediately bonded over shared interests and business philosophies, it sounded like they had those commonalities. Assuming those feelings are genuine, that chemistry will definitely help them through the next phase of integrating teams and technologies. At the end of the day, it doesn’t matter how good an offer looks on paper. If there’s not a genuine commonality of values and direction, you shouldn’t get married.”