Vendor Valuation Rhetoric: Tradeshift, OB10, and Lessons From the Past
Tradeshift CEO Christian Lanng’s comments on what he thinks a reasonable valuation for OB10 would be – in terms of what his firm might pay for it – reminded me of tech valuation bubble days past when crazy personalities traded barbs (e.g., i2 executives criticizing competitors at their customer events). But in the end, we know what happened to i2. They could not ship products in new areas that actually worked on a consistent basis for clients, despite paying astronomical sums for Aspect, among other acquisitions.
Fast forward to today and the faces are different, but the stakes and numbers are the same. After all, with both Tungsten/OB10 and Tradeshift, the ultimate issue is not what someone is willing to pay for a return today, but the bet someone is willing to take based on where an asset will head tomorrow – and the risk tolerance they have for that journey. To this end, Christian’s commentary on Spend Matters this week offered some competitive rabble-rousing, criticizing what he perceived to be the older supplier network OB10 model in comparison to that of his own firm. He’s essentially suggesting that vision was worth more than execution (it may be, I might add – but it might not be).
The irony, of course, is that Tradeshift has asked its investors to take an even greater leap of faith based on topline multiples well into the double digits (reference the Intuit investment at a rumored Workday-like multiple). Tradeshift has indeed been blessed with high valuations from investors based on the potential of an idea rather than the execution of it thus far.
But that’s how the tech game is played. And has been for decades.
Yet today’s rhetorical and valuation game has evolved in part because of the speed of technology development combined with the rise of social media communication. This makes its easier to give individuals a voice and for firms to quickly develop their way into a vision (Coupa, anyone?). At the same time, the rules of the investment game have changed. Finance is no longer a gentleman’s club requiring the right academic degree, hazing as an analyst/associate in the banking world, or the ability to play a decent game of squash.
Idiots toss money around like the Wharton-educated guy who can build a DCF model in his sleep. And just look at how the corporate development and venture arms of companies are placing more scattered bets than ever, in hopes of educating their own teams on how not to get disintermediated or disrupted (one could argue that In-Q-Tel is doing this for government tech adoption as well).
In this new environment, any former product manager who happened to eventually run a successful P&L for a tech firm is now qualified to be an investor spreading capital around as part of a corporate venture arm. Maybe this is smart for reasons under the surface. While I could personally laugh at the valuation Intuit afforded Tradeshift earlier this year based on any reasonable historic market norms, if Intuit learns something from the effort (even if they jettison Tradeshift), it could prove worth it many times over.
The new tech finance world is a farce. Or it’s beautiful. Or both. But at least it’s not what it used to be!
History is paved with investment takeovers that had looked stupid or odd at the time, but would go on to prove otherwise. To take one instance, Ariba once paid $581m for a company with what I think was less than a few hundred grand in revenue but would ultimately end up becoming part of the vision for the Ariba network from a supplier search and matching perspective.
The acquisition target in question, SupplierMarket.com, survived intact within Ariba for at least a quarter or two. I think it was then quietly killed off soon after – but not before its owners, investors, and management had no doubt traded in much of their Ariba stock stash for hard cash. Still, its roots live on in the Discovery portion of the network concept, and the vision was spot on for where Ariba and SAP are trying to take this business network/commerce thing.
I am reminded by another story a few years back when I was doing some work with an investor group that ended up buying one of the larger specialist vendors in a tech sector that had yet to be consolidated. The transaction value set the standard for where SaaS was headed in the market but was regarded as high at the time – so high that one of the largest vendors in the sector (and numerous others) had dropped out of the bidding. But the future owners of the asset were not concerned with being criticized for the top line multiple they were paying. They were running their own numbers, looking at the growth of projected free cash flow from the thing based on customer growth, retention, and increased user adoption. And their models proved correct.
I’ll end by saying that I would sooner trust Christian and his Tradeshift team to build a strong business on their own terms than to speculate about the valuations of firms and ideas—whose nuances my own discussions with him suggest he has not fully delved into. I honestly love the rhetoric, even words based on an incomplete understanding of things. It’s good for driving excitement around the sector. And I like what Tradeshift is up to as well – as much for what they represent in concept and platform philosophy as in execution, at least to date. But I’d personally be spending the time in his shoes day and night growing into my own valuation.
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