Cloud Insights Q Assessing Volatility s Impact on Public, Private SaaS Markets

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1 Q Assessing Volatility s Impact on Public, Private SaaS Markets Cloud Insights In This Report Large-cap SaaS significantly outperforms small- and mid-cap stocks amid Q3 volatility Private capital inflows continue to outpace public equity raises Public investors no longer reward growth at all costs

2 FRONT LINE INSIGHTS Assessing Volatility s Impact on Public, Private SaaS Markets Like all sectors, software as a service (SaaS) was significantly impacted by the surge in market volatility during the third quarter. Concerns about China s slowing growth and investor unease about the U.S. Federal Reserve s decision to delay the start of its efforts to raise interest rates combined to cast a pall of uncertainty over the global growth environment. Falling prices for oil and other resources only added to this macro uncertainty. terms. The small- and mid-cap portions of the SaaS index were down 15.4% and 8.7%, respectively, while the large-cap portion of the index, which includes the sector s bellwether stocks, lost only 3.2%. The increased volatility in the third quarter effectively closed the IPO window for SaaS companies. Year-todate, there have been six SaaS IPOs in 2015, only two fewer than the number of IPOs in the first three quarters of In 2014, however, a dramatic recovery in valuations in the second half of the year led to six IPOs in the fourth quarter, which brought 2014 s year-end total to 14. While a similarly dramatic market recovery in Q wouldn t be unprecedented, such a rally appears unlikely given that investors concerns about China s growth and Fed policy do not appear to be headed for quick resolutions. With SaaS valuations down between 20% and 30% from their recent highs, companies considering an IPO likely will wait until volatility subsides and valuations improve before going public. The dramatic inflows of later-stage, private In this issue of Cloud Insights, we look at how the return of volatility has affected public and private investment activity in SaaS companies. In addition to looking at trends related to valuations and transaction volumes, we also examine investors increased focus on sales and marketing efficiency within publicly traded SaaS companies. Near-term Visibility on SaaS IPOs is Murky During the third quarter, the index of SaaS companies was down 5.4%, while the Nasdaq fell 7.8%. Further dissecting the SaaS index, it is clear and not surprising that as volatility increased during the quarter there was a flight to quality, in relative 1 SaaS Index Performance, Q While the SaaS index as a whole outperformed the broader market during the tumultuous third quarter, valuations of small- and mid-cap SaaS companies were hit especially hard as uncertainty about the global growth outlook increased in August and September % -8.7% -7.8% -5.4% Nasdaq SaaS Index - All Companies -3.2% Large-Cap SaaS Mid-Cap SaaS Small-Cap SaaS Source: FactSet; Note: all indices are weighted by current market capitalization

3 SaaS Private Investments of $70 million+ Despite public-market volatility, high-quality private SaaS companies with scale continue to receive large funding rounds at attractive valuations. The dramatic inflows of later-stage, private capital at attractive valuations have made it easier for SaaS companies to bide their time and wait for more favorable market conditions before testing public markets, provided they manage cash burn appropriately. 0 Source: Capital IQ 5 Number of Transactions /30/2015 YTD Despite uncertainty about when and at what kinds of valuations these companies will be able to go public, high-quality private SaaS companies with scale continue to generate widespread interest from venture and late-stage growth investors and garner attractive valuations. AvidXchange, Medallia, Zscaler, Apttus, and PlanSource each secured private investments of at least $70 million during the third quarter. In our next issue of Cloud Insights, we will provide a year-end overview of the trends that shaped the M&A and capital-raising landscape in In the meantime, we will continue to monitor volatility s impact on the dealmaking environment for SaaS companies. capital at attractive valuations have made it easier for SaaS companies to bide their time and wait for more favorable market conditions, provided they manage cash burn appropriately. As a result, we expect that SaaS IPO activity in 2015 both in terms of dollar amount and number of offerings will be significantly lower than 2014 levels. Looking ahead to 2016, it is too early to have much clarity about how accommodative public-equity markets will be. It is clear, however, that there is a large and growing backlog of private SaaS companies with significant scale. Once volatility and valuations improve, we expect to see a marked increase in SaaS IPO activity. Public Investors No Longer Rewarding Growth at All Costs While growth is still king in the minds of public investors, there now is an increased focus on profitability and the economics of customer acquisition. Investors are no longer rewarding strategics that pursue growth at all costs. Rather, investors now are applying more scrutiny to the efficiency of a company s sales and marketing efforts. Companies that are generating a loss today need to demonstrate not only that the market opportunity justifies the investment, but that the growth is being pursued using an efficient sales and marketing model. We can confirm based on our on-going conversations with public investors and company management that this mindset is indeed taking hold. Private Investments See Muted Impact of Volatility Volatility s impact can be less severe in private markets than in public markets, and the full extent of that impact is generally delayed by several months. That being said, during the third quarter we began to see the early stages of volatility s ripple effect on private investment activity in the SaaS industry. William Blair 2

4 ANALYSIS Large-Cap SaaS Significantly Outperforms Small- and Mid-Cap Stocks Amid Q3 Volatility Surging market volatility in August and September dragged down valuations across the technology sector. Within the SaaS sector, the impact was particularly acute among small-cap companies while large-cap valuations proved to be much more resilient. SaaS Index vs. NASDAQ, Q /6 7/13 7/20 7/27 8/3 8/10 8/17 8/24 8/31 9/7 9/14 9/21 9/ All Saas Large-cap Mid-cap Small-cap NASDAQ Market Analysis Each quarter we look behind the numbers to examine the market dynamics that are driving trends in the dealmaking landscape in the SaaS industry Source: FactSet. Note: all indices are weighted by current market capitalization Private Capital Continues to Outpace Public Equity Continuing a trend that accelerated in 2014, private capital inflows into SaaS companies have far exceeded the amount of public equity raised so far in During the third quarter, there were five private investments of $70 million or greater in SaaS companies. Private vs. Public Capital Raised in SaaS (in millions) $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $959 $ $3,411 $2,066 $1,990 $ IPO and Follow-Ons $3,581 $4,053 $3, $5, Private Placements $1,989 $5,426 9/30/2015 YTD Source: Capital IQ and Dealogic 3

5 Public Equity Overview The SaaS IPO market has slowed precipitously in 2015, with all six of the year s IPOs occurring during the second quarter. Amid increased volatility and decreased valuations, companies are waiting for market conditions to improve before going public. Top-performing publicly traded SaaS companies, however, have been able to complete follow-on offerings with the majority of the proceeds going to pre-ipo investors. SaaS Public Equity Raised (in millions) Notable Q SaaS Follow-On Offerings $5,000 $4,000 $3,581 $3,971 Company Transaction Value (in millions) $3,000 $2,000 $1,000 $0 $959 $83 $ $970 $102 $ $1,990 $673 $1,317 IPO 2012 $1,878 $1, Follow-On $2,055 $1, $1,989 $1,502 $487 9/30/2015 YTD 2U $119 Paycom Software $171 Paylocity $128 Q2 Holdings $97 Benefitfocus $74 Source: Capital IQ and Dealogic M&A Overview SaaS M&A activity so far in 2015 is down compared with the first three quarters of 2014, which yielded $23.8 billion in transaction value. One notable difference between 2014 and 2015 has been the decrease in $1 billion+ acquisitions. There were five such transactions in all of 2014 and only two so far in SaaS M&A Transactions (in millions) Notable Q SaaS Acquisitions $35,000 $30,000 $25,000 $20,000 $15,000 $16,067 $21,985 $17,005 $30,118 $14, Transaction Target Company Buyer Value (in millions) GT Nexus Infor $675 $10,000 $8, Yodlee Envestnet $576 $5,000 $ /30/215 YTD data Advance/ Newhouse $500 CECity Premier $576 Source: Capital IQ Total Value Total Volume Smart Tuition Blackbaud $190 William Blair 4

6 WILLIAM BLAIR SAAS AND CLOUD INVESTMENT BANKING William Blair By the Numbers Drawing on our deep sector expertise and the strength of our relationships with buyers around the world, William Blair has built a leading SaaS and cloud banking franchise. Business owners turn to us for outstanding execution for their M&A and capital raising objectives. Recent transactions include: $127,954,750 Follow-on Offering $70,000,000 has received a minority investment from 200+ William Blair technology team completed transactions since SaaS transactions since SaaS companies under coverage September 2015 September 2015 $76,000,000 $85,560,000 has received an investment from Initial Public Offering July 2015 June 2015 Not Disclosed Not Disclosed has been acquired by has been acquired by May 2015 May

7 William Blair SaaS Equity Research Coverage Company Ticker Analyst Alarm.com ALRM Bhavan Suri AppFolio APPF Bhavan Suri athenahealth ATHN Ryan Daniels Benefitfocus BNFT Adam Klauber Carbonite CARB Bhavan Suri ChannelAdvisor ECOM Justin Furby Connecture CNXR Adam Klauber Cornerstone OnDemand CSOD Justin Furby Demandware DWRE Justin Furby The Descartes Systems Group DSGX Bhavan Suri Ellie Mae ELLI Brandon Dobell Fleetmatics FLTX Bhavan Suri HealthStream HSTM Ryan Daniels MiX Telematics MIXT Bhavan Suri NetSuite N Justin Furby Opower OPWR Pfau, Matthew Paylocity PCTY Justin Furby RealPage RP Brandon Dobell RingCentral RNG Bhavan Suri Salesforce.com CRM Bhavan Suri SciQuest SQI Bhavan Suri ServiceNow NOW Justin Furby SPS Commerce SPSC Bhavan Suri Textura TXTR Bhavan Suri Ultimate Software ULTI Justin Furby Upland Software UPLD Bhavan Suri Veeva Systems VEEV Bhavan Suri WageWorks WAGE Robert Napoli Workday WDAY Justin Furby Zendesk ZEN Bhavan Suri With more than 150 senior bankers around the world, William Blair has completed more than 900 advisory and financing transactions totaling more than $215 billion in value for our clients* Dan Connolly [email protected] Chris Lane [email protected] Scott Mattson [email protected] Andrew Arno [email protected] Peter Dalrymple [email protected] * In the past five years as of October 1, 2015 William Blair 6

8 Disclosure William Blair is a trade name for William Blair & Company, L.L.C., William Blair Investment Management, LLC and William Blair International, Ltd. William Blair & Company, L.L.C. and William Blair Investment Management, LLC are each a Delaware company and regulated by the Securities and Exchange Commission. William Blair & Company, L.L.C. is also regulated by The Financial Industry Regulatory Authority and other principal exchanges. William Blair International, Ltd is authorized and regulated by the Financial Conduct Authority ( FCA ) in the United Kingdom. William Blair only offers products and services where it is permitted to do so. Some of these products and services are only offered to persons or institutions situated in the United States and are not offered to persons or institutions outside the United States. This material has been approved for distribution in the United Kingdom by William Blair International, Ltd. Regulated by the Financial Conduct Authority (FCA), and is directed only at, and is only made available to, persons falling within COB 3.5 and 3.6 of the FCA Handbook (being Eligible Counterparties and Professional Clients). This Document is not to be distributed or passed on at any Retail Clients. No persons other than persons to whom this document is directed should rely on it or its contents or use it as the basis to make an investment decision. About William Blair Investment Banking William Blair s investment banking group combines significant transaction experience, rich industry knowledge, and deep relationships to deliver successful advisory and financing solutions to our global base of corporate clients. We serve both publicly traded and privately held companies, executing mergers and acquisitions, growth financing, financial restructuring, and general advisory projects. This comprehensive suite of services allows us to be a long-term partner to our clients as they grow and evolve. From , the investment banking group completed more than 330 merger-and-acquisition transactions worth $73 billion in value, involving parties in 36 countries and five continents, was an underwriter on more than 20% of all U.S. initial public offerings, and raised nearly $100 billion in public and private financing.