More cash is flowing into the online marketing business with Act-On Software hauling in a $42 million investment led by Technology Crossover Ventures and eying an initial public offering perhaps next year.
Based in Beaverton, OR, Act-On, a maker of marketing automation tools, is following what is becoming a well-worn path towards the public markets for software as a service (SaaS) companies. These include competitors such as San Mateo, CA-based Marketo, which went public last May, and HubSpot, the Boston-area company advancing its IPO plans.
“We seem to be following a script of companies that are growing to plan,” says founder and CEO Raghu Raghavan. “You know, every 18 months or so we seem to go back to the capital markets and add to the war chest. And it’s relatively easy when the performance is there.”
Existing Act-On investors Norwest Venture Partners, Trinity Ventures, US Venture Partners, and Seattle-based Voyager Capital also joined the late-stage financing round.
The company has been on a predictable, fast-growth track for nearly three years, Raghavan says. Act-On says it has more than 2,000 customers, mostly small to mid-sized marketing teams—15 people is the sweet spot, Raghavan says—but some of which are within large businesses.
Act-On says it more than doubled revenue in 2013, though it declines to disclose baseline revenues. “That’s one of the advantages of being private,” Raghavan says, adding, “We look at the IPO as the next funding round and we would rather not be thinking about an IPO until we are of a size and a scale and a heft that makes us a long-term, viable public company.”
Other private Saas and online marketing companies, however, are disclosing revenues.
HubSpot, for example, says it grew revenue 50 percent in 2013 to $78 million. Seattle-based Moz pulled in $29 million, up 33 percent. Both companies pride themselves on transparency.
Meanwhile, many of their publicly traded peers are seeing enterprise value to revenue multiples—a way of valuing a company that compares its equity, debt, and cash on hand to its sales in a given period—in the high single and low double digits. That represents among “the most generous multiples of most sectors in the market,” notes Redpoint Ventures partner Tomasz Tunguz in a blog post last week parsing a correction in SaaS company valuations.
Marketo, a publicly traded Act-On competitor, reported 2013 revenue of $95.9 million, up 64 percent. Its enterprise-value-to-revenue multiple was 11.5 on Monday after its stock closed at $30.75 a share, according to Yahoo Finance. But the company had a net loss of $47.4 million in 2013.
Another example is Responsys, the online marketing company that Oracle acquired earlier this year for $1.5 billion (and that Raghavan co-founded in 1998). It reported revenue through the first nine months of 2013 of almost $150 million, up 26 percent from the comparable period in 2012.
Raghavan says the generous revenue multiples that public SaaS marketing companies are enjoying are trickling down into private company valuations. “A few years ago, my [current] valuation would have been an IPO valuation,” he says.
He noted IBM’s acquisition of Silverpop, an Atlanta-based marketing automation company, for around $270 million, according to the Atlanta Business Chronicle.
“My pre-money valuation in this round is higher than that,” Raghavan says.
So what’s driving these valuations?
“I think in some sense you’re being rewarded for being in a big market,” he says, adding: “If you look at marketing, it is still a green field.”
Act-On counts at least 200,000 potential customers just in North America. Frequently, potential customers have no comparable technology, or they’ve cobbled together bits and pieces to carry out the marketing campaigns that Act-On’s offerings orchestrate over multiple online channels. These make for easy sales for Act-On and its competitors, provided they can reach the right customers with the right offering, the company says.
“If you don’t spend to grow, you’re just leaving an opportunity on the table,” Raghavan says.
Act-On intends to spend its new capital on increased sales and marketing, and on product development.
The funding round is more than double the $16 million Act-On raised in late summer 2012 and brings total investment in the company to $74 million.
Raghavan says Act-On was glad to land an investment from Technology Crossover Ventures (TCV), which has a history of holding stock in its portfolio companies through and past their public stock market debuts.
“This is a big round. The last thing you need is the company files to go public and all the existing investors bail out at the IPO,” he says. “You don’t want that….It makes the stock offering not as attractive.”
TCV general partner David Yuan is joining the Act-On board of directors.
Act-On has 260 employees at offices including its Beaverton headquarters, San Mateo and Roseville, CA; Spokane, WA; Phoenix, AZ; Redding, U.K.; and Bangalore, India. Raghavan says he expects the company to make 70 to 80 new hires this year.
