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Thursday, April 10, 2014

Analysis on Zopim acquistion by Zendesk

This deal is a great validation that it is possible to build a globally relevant business out of Singapore. I first encountered Zopim a few years ago and got JobsCentral to use their voice chat SAAS solution. They have a very simple and effective product and sold it on a freemium model which works great. I started hearing more about them and it is wonderful to know that they have negotiated a fair exit for themselves and shareholders. Here are some details and comments. For once, tech blogs have covered them pretty well :

1) Revenue based on ACRA ending Mar 2013 is 1.8M in revenue as recognized properly. PBT is 362K. So it is quite safe to assume a continued 100+% growth rate and project revenue ending Mar 2014 is about min 3.5 to 4M with profit of at least 700K to 1M. My guess is closer to 1M since there is great economies of scale for SAAS.

Share table as shared by techinasia is accurate.

2) I particularly like this story because i know SAAS is the current highly valued wave. Zendesk is probably going to IPO at min 10 times sales of 73 or about 700-800M. They may even be able to do 1B IPO. So for players in the SAAS space, this is the best time to raise and to exit partially or fully. Zopim is also great because they are profitable.

3) Some have commented that exiting for 15.9M + 13.9M earnout is a little early since clearly Zopim is growing nicely and is profitable. So founders have time. I somewhat agree but i always feel outsiders do not know all the details and feelings which founders have. And anyway once the deal is done, founders should be happy with their decision. So ignore your detractors Royston and gang and enjoy the new found freedom.

Moveover, looking at the structure of the deal, Zopim is being valued 37M SGD. That is probably 10 times multiple to their revenue. Very fair as that is the IPO valuation likely for Zendesk. Of course, the devil is in the details of earnout.  This one only founders and zendesk will know. My guess is that is a proportionate tied to revenue/EBITDA mix and the 13.9M is the cap performance.

10 times sales is actually a very high valuation which currently only biotech and SAAS tech companies are given. But it is not the record for Singapore. That is held by the hungrygowhere guys who sold for about 12 times sales although a smaller total value.

4) The earnout structure of about 50+% first in cash and stock and later the rest over 2-3 years will allow mgmt team to ride the upside both in their business and also in the overall market valuation of SAAS companies. If the market values Zendesk highly in the next 2-3 years, mgmt may find that their 15-20M in stock could double or triple in value. So from this angle, i think mgmt did not sell early but rather is betting on being part of a bigger entity as a route to get better valuation for Zopim.

All in all a very nice deal. And i think as there are more exits that earn the founders 5,10,15M or more, there is room for an article next on how to handle a entrepreneurship linked windfall. The story and learning just started.... Stay tuned.

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