A Personal Note

Greetings.  Some of you, to the extent that there are people who still come here looking for news, and don't just happen across it from a random Google search, might be wondering what the heck has happened over the past X number of years.  It's a reasonable question.  I'll start with a very personal answer.

In April 2011, my wife was diagnosed with breast cancer.  She was 42.  For the next eight years, this unavoidably dominated our lives.  We had two high-school age girls, and she poured herself into making everything as normal as it could be for them.  She pursued a reasonably successful course of treatment over the next year or so.  I was very fortunate to have a great team at xTuple, who took a lot of burden off me when they could.

Over the following years, things waxed and waned.  It came back, as it all so often does, and then it came back again.  In April of 2019, we lost her.

I won't dwell on the personal toll this took; those of you who have been through similar things can sympathize all too well.  But I will admit that, among many other things, it sharpened my thinking about where my ERP software company xTuple was going, as I was dealing with these massive personal issues.  Like many founders, I had put a lot of my own meager resources into the business - and had invited friends and family into it as well.  Having worked as a corporate VC, I was - shall we say - ambivalent about the idea of bringing in institutional money.  We had come close once or twice, but never pulled the trigger on a big growth investment, opting instead to go it alone.

As all these threads were playing out contemporaneously, I started getting serious about how best to position the company for future growth.  I brought on an outstanding fractional COO to help us get a lot of the day-to-day details of the business in order, and I hired an investment banker to help me explore my options for what that next stage of life could actually look like.

We ran a very successful "process," as they say in the business, and ended up with many serious offers.  The one I liked the best was a company that - brace yourselves, Graveyard readers - was a rollup of ERP and manufacturing-adjacent systems.  (Cue the cries of "sellout!") ... but what I liked about the business (and the very successful private equity group behind them) was that they had a real vision for what the combined company could become.

Longtime readers of this blog know my general point of view on this subject - and it's well-informed by shockingly brazen actions on the part of *much larger* private equity types trying to manage the impossible math of a $500+ million company, say, growing only in the single-digits organically, while still creating generous dividends for themselves (often at the expense of more debt).  I'm not a fan.

But without getting too far in the weeds, I can say that I am a fan of what CAI, the company that bought xTuple, is trying to do.  So much that I rolled a substantial piece of my equity in my company into what is, unavoidably, someone else's bigger company.

Going through this whole process from the seller side was an eye-opening experience for me.  Earlier in my career, I had done the same thing on the buyer/investor side, working as a corporate VC for a mid-sized media company.  Now, a year and a half after selling xTuple, and successfully transitioning the product, the team, and our customers and partners, I found myself thinking about how many other companies were out there wrestling with the same things that I did.

I had long been aware of a group called Corum - an investment bank exclusively focused on technology / software companies.  They did a LOT of market education, not just on tech M&A generally, but by individual sectors, highlighting particular disruptive trends, and generally just laying down breadcrumbs for companies who might be interested in some kind of transaction to be able to find them.  I had talked to them, of course, but ended up going with another firm that was smaller, I thought likely hungrier, and maybe more likely to get us a better result.

So let me be clear - xTuple's shareholders got a great result.  I developed a great relationship with the guy who was the lead on our deal, and we're good friends today.  Who knows if we could have had a different/better result with Corum?  For what it's worth, I will share that the balance of upfront retainer fees versus commission/success fees came out to be about a wash between the two companies.  I've always been fine with generous success fees - I want my banker to be deeply invested in getting me a good result!

All this is prologue for me to announce what you might already know, if you're so limited in fun hobbies that you follow me on LinkedIn.  I recently joined Corum as a VP, and will be working with lots of companies to help them get to a point where they can write rambling blogs like this of their own!  

But seriously, I really enjoy helping other entrepreneurs work through all the challenges that present themselves on a daily basis, and am particularly keen on the idea of helping them (and their shareholders) get rewarded for all their hard work over the years.

Oh, and to close out on a personal note, I'm happy to report that our daughters are both college graduates, out in the world with productive careers, making their father proud.  And I have been fortunate enough to find another wonderful woman with her own fabulous career, who will also abide all my tech geekery, Marvel/Star Trek/etc. background noise, and be my wife.  We celebrate our second anniversary in May.

Another private equity cash-out for Epicor

Well, it's been four years, and they've probably levered up as much as they can, so it will come as no surprise that KKR decided to find yet another new owner for Epicor.  What's a little more of a surprise is the size of the check that CD&R wrote - $4.7 billion.  That's about 13x earnings, according to the Financial Times.

KKR paid $3.3 billion for the company in 2016.  It's worth noting that, as the FT delicately puts it, "Last month Epicor unveiled plans to issue $2.8bn in new debt partly used to pay a dividend to KKR."

Timing is everything, friends.

No Collusion, No Financials in Acumatica Rollup

In a cheery piece that reflects much of the coverage I've seen, the analysts at Diginomica report that cloud ERP vendor Acumatica has been acquired by the private equity firm EQT Partners, which also recently bought European-born upmarket vendor IFS:

[T]his is not an acquisition by IFS, per se, but rather a tight affiliation between the two companies. This is a very important distinction given the "acquisition fatigue" that customers are feeling of late, particularly in the cloud ERP market. The first assumption many might have is that this constitutes yet another merger, and the loss of two independent players for customer choice, but that is not the case.

Well, as one of the leading purveyors and cheerleaders of acquisition fatigue, I'd sound a note of caution here.  Left unremarked in any - ANY - of the coverage of this deal, official or otherwise, is the slightest mention of how Acumatica has been performing financially.  At the risk of saying something unpopular again, HAS THIS COMPANY EVER MADE A DIME IN PROFIT?

Of course, lots of people have reported on the $48 million the company raised over five rounds, more than half of which came from a private equity round with Accel-KKR almost exactly one year ago.  It's not hard to see a scenario where an all-out sale was the least unattractive option as the company likely burned through more than $25 million in losses over twelve months.

There's also this, delicately put by Diginomica:

It is important to note that this deal also removes Acumatica's remaining Russian investors from the equation. While I have nothing against Russian investors and Acumatica's leadership was always upfront when we asked about their role, in the current geopolitical environment, this was always an awkward aspect of Acumatica's growth profile. Now any questions about that are settled.

As a well-known Twitter user might say, Complete and Total Exoneration!

But seriously, sooner or later, these PE-funded rollups will have to get serious about solving the basic business model problem of ERP software.  The answer, I humbly submit, is neither of these two currently popular "solutions":

A) Roll up legacy systems, cut costs to the bone, lever up the balance sheet, pay yourself big cash dividends, finally give up and sell to another financial buyer (e.g. most of the Infor acquisitions)

B) Start a new ERP company from scratch, sprinkle with cloud/SAAS pixie dust, burn through mid-eight-figures of capital buying market share and top-line growth, and ... give up and sell to financial buyer (Acumatica, Intacct, Kenandy - arguably even Netsuite).

We have some thoughts about that over at xTuple, if you'd like to come visit.  We're building a profitable, sustainable business by delivering an affordable commercial open platform ERP solution to hundreds of customers, and focusing intently on their success.

Old-fashioned, perhaps.  But we like it.

Sale-forced: Not enough room on the platform for Kenandy

In a mildly interesting bit of consolidation among ERP vendors on the Salesforce cloud platform, Rootstock is acquiring Kenandy, the second act of MANMAN creator Sandra Kurtzig.  As Brian Sommer delicately put it at Diginomica, Sandy "was encouraged to create Kenandy" by Marc Benioff and Ray Lane, back when he was at Kleiner Perkins.

Silly me, I'd always heard that story (the Benioff portion of which, at least, is said to have happened in adjacent beach chairs) and assumed there was an exit payday built in to that encouragement.  Apparently not.  Back to the delicate Sommer:

I asked Pat [Garrehy, Rootstock CEO] if this deal was a long-considered strategic initiative or was it opportunistic. His response: “Opportunistic.” Pat said that a lot of things fell together recently that made this deal possible. 

That leaves Rootstock and Financial Force as the ERP primary players on the Salesforce platform - and as Sommer notes, they sometimes work together too.  In fact, one hears that Rootstock didn't have its own accounting modules - at all - until just a few years ago.

Here's where your humble blogger makes another pitch for the commercial open source xTuple - an enterprise class ERP that has had a full suite of functionality for over 15 years, and is supported not just by one company, but a global community of Graveyard-proof ERP professionals.  

Sage buys cloud customers, more losses; will its balance sheet stay Intacct?

So some eyebrows arched upward yesterday when UK-based Sage, one of the more conservative ERP rollup shops out there, dug deep to pay $850 million for cloud-accounting vendor Intacct.

That works out to almost 10x revenues.  I can't give it to you as an earnings multiple, because like most of its peers in Software-Magic-As-A-Cloud (SMAAC), Intacct doesn't have any earnings.  Not sure it ever has - if anyone knows otherwise, please let me know either via email or in the comments below.

According to the press release, they had losses of $23 million on revenues of $67 million in fiscal 2016 (June).  Those revenues bumped to $88 million for 2017, but they must have spent like crazy to get them, because they didn't release the loss number.

Clearly Sage, with its stable of legacy products, some of which have received more facial reconstruction than others, was feeling a bit like the dowdy spinster at the ball.  But dang!  A good result for Intacct's patient investors, I guess, who have poured at least $130 million into it over the years.

Now it'll be up to Sage to see if they can make any, you know, profit.  I know, I know, that's so old-fashioned.  Maybe I just need a SMAAC upside the head.