CX: Customer Experience as the next Private Equity Frontier in SaaS
Private Equity and M&A in CX
Over the past ten years, the private markets have rallied around a number of marketing automation companies. These companies automate the lead generation process, ship emails, manage SEO, A/B test marketing campaigns, and engage prospective customers through a central customer relationship management tool (CRM). They’ve been getting picked up by private equity firms and strategic corporates alike. In 2018, Adobe acquired marketing automation company Marketo from private equity firm Vista, who pocketed $2.95bn in profit after just two years of owning the company. Oracle acquired Eloqua, a large player in the marketing automation space, back in early 2013 for $871m. At the time of the announcement, 3Q’12 T9M revenue annualized was $92m, implying a whopping 8.8x revenue. In those days, this was high.
Some CRMs are still playing catch-up to the marketing automation ball: in May 2019, SugarCRM realized it needed to start offering its customers more than a Rolodex management tool, so they acquired Salesfusion. According to one TechCrunch article, what motivated SugarCRM CEO Craig Charlton most was Salesfusion’s 12 week “differentiated onboarding process.”
However, the next frontier of the trend towards customer-centric marketing will need to go beyond onboarding and sales outreach. Companies want to learn from the customer experience and make use of real customer feedback when designing their products and the customer journey. Customers want this, as well. In a five-country survey with over 12,000 responses, the overwhelming majority of respondents said they’d support and buy from a business that evolved based on customer feedback. It’s not just a question of wants; IT departments have shown an appetite for picking up these assets. Gartner estimates enterprise SaaS spend will increase at a 10.5% annual clip in the coming years.
So what are we talking about? I’ll define the customer experience (CX) space much as Hubspot does here: survey collection & analysis; enhancing customer interactions over email, text, and social media; and identifying pain points in their customer journey. I want to take a targeted view in assessing companies which directly focus on improving customer interactions, not just executing long-term big data analysis.
Shea and Company, an investment bank focused on software transactions, publishes a Quarterly Software Review (here). As a starting point, page 28 of this review lists various ‘Sales and Marketing Applications.’
This list should be further trimmed to suit our criteria: Yext and Teradata are more focused on the data intelligence gathering and analysis step. Cardlytics takes a vertical approach, targeting financial institutions. Teradata targets big data giants, per its annual SEC filings. So let’s strip all these out and similarly apply this heuristic to the other companies on the list. The keywords for us are “customer interactions.”
That leaves us with the following players instead, most of which are comparable in size, indicating there is no single monarch in the CX space:
1. SurveyMonkey: provides survey-based software to better understand customers and employees ($446m in 2021E revenue)
2. Medallia: customer experience focused, wresting insights from structured and mostly unstructured data ($477m in 2021E revenue)
3. HubSpot Services Hub: includes 1-to-1 customer interactions, ticketing, FAQ database, conversational bots and live chat, and more (revenue breakout undisclosed)
4. LivePerson: messaging chatbot solution, enabling AI-powered conversations across multiple verticals ($469m in 2021E revenue)
5. Adobe: Digital Experience suite including Analytics, multi-channel CXM, and Customer Journey Analytics ($3.7Bn in LTM revenue as of Oct’21)
In a Medium post I put up early 2020, we saw the companies above trading for 8-10x revenue. Multiple expansion to 9-12x shows this segment is still a hot sector to invest in (though I do not expect this overheating to last indefinitely). It’s worth considering the playbook below to invest wisely in CX.
We can learn a few things from the public companies above surrounding their strategy, based on public transcripts and 10-Ks from late 2019. Forward-looking initiatives discussed there are bearing fruit today.
Rapid Response and Customer Communication
SurveyMonkey acquired GetFeedback and Usabilla in 2019, two companies which both operated in the customer experience portion of the value chain. Part of what drove the SurveyMonkey acquisition of GetFeedback in Sep’19 is the need for time sensitive customer feedback. These acquisitions provided the ability to quickly synthesize customer feedback and questions in real-time and respond (sometimes with the help of AI) via a messaging application. Medallia similarly acquired Zingle, which enables real-time text messaging, for $42m in cash September 2019. If Growjo is correct in estimating Zingle revenue of $7m, that’s a 6.0x revenue multiple paid for this business.
These companies are entering a field in which Adobe and LivePerson have already made strides. LivePerson currently focuses 100% of its energy on powering conversational commerce. In fact, 2019 developments at Adobe have involved integrating Customer Journey Analytics with the broader Digital Experience Cloud division. Adobe boasts the only Customer Data Platform that updates in true real-time. This is being reflected years later in increasing customer experience interest and accelerated subscription revenue from the CX segments of these companies:
“…last year there was a lot of interest in that particular digital transformation and customer experience management. I think people recognize that this needs to be an enterprise spend priority for all of the businesses, irrespective of size…”
Shantanu Narayen, CEO, Adobe, 3Q’21 Earnings Call
These marketing software companies realize the increasing importance of immediate responses to customer questions and issues — and they’re delivering product updates to reflect this.
Building out features to satisfy these customer needs is evidenced by R&D expenditures north of 20% of sales in most of these companies’ cases. Hubspot has grown its R&D at a 40%+ CAGR over the past three years. For benchmarking purposes, big pharma companies whose revenues are dependent on innovation similarly invest 20–30% of their revenue in R&D:
The Salesforce Question
A key question these companies are asking themselves is to what degree they want to sell their product as an extension of large trusted players like Salesforce and Microsoft Office. According to SurveyMonkey’s CEO, their CX strategy will largely depend on building relationships with Salesforce and selling customers their analytical capabilities into the “Salesforce ecosystem” (4Q’19 Earnings Call). Similarly, SurveyMonkey is employing this approach with Microsoft, as well, by building an Outlook add-on tool that Outlook users can use from the dashboard. This is not that dissimilar to a remora fish latching onto the bottom of a shark.
The alternative is to offer multiple capabilities yourself. Larger corporates like Adobe have to reconcile themselves to the fact that they’re too big to be a remora fish. These players bolster their customer experience solution by building a full-service offering for enterprises to use. Adobe has done this through acquisitions of Magento Commerce and Marketo Engage — both of which are heavily customizable and enable promotions across an enterprise client’s storefronts.
The downside to keep in mind with this sort of hodgepodge of offerings is that Adobe is still completing merger integration work 9mo after rolling these up, trying to assemble a seamless product offering. For that reason, CEO of Adobe Shantanu Narayen has claimed the company does not envision further merger activity in 2020.
For a private equity firm, this is an important consideration - because the threat of disintermediation by a larger player like Salesforce developing a home-grown competitive solution is real. A move like that would obviate the need for your product. The better approach might be to diversify your offering, so that customers view you as a one stop shop.
Consider KKR’s impending 2021 purchase of Probe CX, an Australia-based BPO and CX company with over 600 clients. Probe offers omnichannel and B2B/B2C capabilities. The company has grown over the past two years not by latching onto Salesforce, but instead scooping up smaller players - like Stellar (BPO contact centers) and Beepo/Salmat’s Contact business (which have expanded its presence in Knowledge Services such as market research capabilities and IT). Combining business process outsourcing with CX broadens the scope of the target company so that there is a steady stream of cash flows that abet the innovation-oriented CX ambitions. This “BPO coupling” is a strategy for companies looking to get scooped by private equity, and for investors looking to increase the value of their CX holdings.
Next-Gen Capabilities
In some cases, mid sized CX players are playing catch-up with one another. But a few have their sights set on rounding out the customer experience offering with next-gen capabilities.
LivePerson has traditionally expanded by adding on new industry verticals to its solution set. The company is now looking to add more verticals in 2020, while doubling down on AI improvements to automate messaging at scale. However, LPSN is also interested in exploring conversational payments paradigms that can drive new dollar revenue. This would allow companies to engage with customers at the point of payment, driving enterprise client revenue meaningfully.
In a 2020 CX survey commissioned by Ecosystem, organizations are excited about using virtual assistants, predictive analytics, speech analytics, and voice biometrics. This is where CX-focused mid to large size players should focus their expansion efforts:
A larger player like Hubspot also provides guidance to smaller companies: an inspection of its Pro and Enterprise capabilities reveals an FAQ knowledge base offering that aggregates customer questions in a central repository for prospective customers. Whether that drives HUBS Service Hub upsells would be a helpful datapoint for SurveyMonkey, Medallia, and Probe CX in drafting product strategy.
With these various candidates prepared to streamline and facilitate the customer journey, the modern day Marketo acquisition in the CX space may not be so far away.