SaaS and cloud stocks finally give back ground

After a heated run, SaaS and cloud stocks dipped sharply during regular trading on Monday.

According to the category-tracking Bessemer cloud index, public SaaS and cloud stocks dropped around 6.5% today, a material blow to the value of some of the world’s most highly valued companies, measured by sector-averaged revenue multiples.

After recovering all their COVID-19-related losses earlier this year, SaaS and cloud stocks kept on rising, reaching new all-time highs with regularity. But earnings season is starting, meaning that the value of modern software and digital infrastructure companies will soon be tested against Q2 results — results that were recorded fully during the global pandemic.

To hear bulls — both private and public — tell the story, COVID-19 and its ensuing workplace disruptions have provided software companies with a huge boon. Namely, that customers current and future have radically changed their procurement models and will need more software solutions, more quickly, than they previously anticipated. (Stay tuned to The Exchange for more on this later in the week.)

The thought that there are more and better customers coming for SaaS and cloud companies made them relative safe havens in otherwise turbulent public markets; while other industries had uncertain demand curves, the thinking went, software companies were being pushed forward by an accelerating secular shift.

Today, however, the broader markets slipped from early-day positions of strength while SaaS and cloud shares dropped sharply. Prior patterns in investor behavior didn’t hold up, in other words.

Why today brought such sharp selling is not clear. No more, really, than reasons for prior days’ gains were clear at the time. Profit taking? Rotation to other sectors? Whatever you want to ascribe to the day’s declines you can make stick.

For our purposes here at TechCrunch, the dropping share prices of public software companies serves as an anti-signal for late-stage valuations in SaaS startups, and a general headwind toward venture investors making more early-stage bets in the sector. Of course, one day doesn’t change the game. But several days of sharp losses could begin to change sentiment, and days when shares of modern software companies drop by 6% are few and far between.

Earnings are next, but for many companies in the SaaS and cloud world, reporting their results just got easier. When expectations drop, everyone loses a bit of worry, right?

Rackspace preps IPO after going private in 2016 for $4.3B

After going private in 2016 after accepting a $32 per share, or $4.3 billion, price from Apollo Global Management, Rackspace is looking once again to the public markets. First going public in 2008, Rackspace is taking second aim at a public offering around 12 years after its initial debut.

The company describes its business as a “multicloud technology services” vendor, helping its customers “design, build and operate” cloud environments. That Rackspace is highlighting a services focus is useful context to understand its financial profile, as we’ll see in a moment.

But first, some basics. The company’s S-1 filing denotes a $100 million placeholder figure for how much the company may raise in its public offering. That figure will change, but does tell us that firm is likely to target a share sale that will net it closer to $100 million than $500 million, another popular placeholder figure.

Rackspace will list on the Nasdaq with the ticker symbol “RXT.” Goldman, Citi, J.P. Morgan, RBC Capital Markets and other banks are helping underwrite its (second) debut.

Financial performance

Similar to other companies that went private, only later to debut once again as a public company, Rackspace has oceans of debt.

The company’s balance sheet reported cash and equivalents of $125.2 million as of March 31, 2020. On the other side of the ledger, Rackspace has debts of $3.99 billion, made up of a $2.82 billion term loan facility, and $1.12 billion in senior notes that cost the firm an 8.625% coupon, among other debts. The term loan costs a lower 4% rate, and stems from the initial transaction to take Rackspace private ($2 billion), and another $800 million that was later taken on “in connection with the Datapipe Acquisition.”

The senior notes, originally worth a total of $1,200 million or $1.20 billion, also came from the acquisition of the company during its 2016 transaction; private equity’s ability to buy companies with borrowed money, later taking them public again and using those proceeds to limit the resulting debt profile while maintaining financial control is lucrative, if a bit cheeky.

Rackspace intends to use IPO proceeds to lower its debt-load, including both its term loan and senior notes. Precisely how much Rackspace can put against its debts will depend on its IPO pricing.

Those debts take a company that is comfortably profitable on an operating basis and make it deeply unprofitable on a net basis. Observe:

Image Credits: SEC

Looking at the far-right column, we can see a company with material revenues, though slim gross margins for a putatively tech company. It generated $21.5 million in Q1 2020 operating profit from its $652.7 million in revenue from the quarter. However, interest expenses of $72 million in the quarter helped lead Rackspace to a deep $48.2 million net loss.

Not all is lost, however, as Rackspace does have positive operating cash flow in the same three-month period. Still, the company’s multi-billion-dollar debt load is still steep, and burdensome.

Returning to our discussion of Rackspace’s business, recall that it said that it sells “multicloud technology services,” which tells us that its gross margins will be service-focused, which is to say that they won’t be software-level. And they are not. In Q1 2020 Rackspace had gross margins of 38.2%, down from 41.3% in the year-ago Q1. That trend is worrisome.

The company’s growth profile is also slightly uneven. From 2017 to 2018, Rackspace saw its revenue expand from $2.14 billion to $2.45 billion, growth of 14.4%. The company shrank slightly in 2019, falling from $2.45 billion in revenue in 2018 to $2.44 billion the next year. Given the economy that year, and the importance of cloud in 2019, the results are a little surprising.

Rackspace did grow in Q1 2020, however. The firm’s $652.7 million in first-quarter top-line easily bested in its Q1 2019 result of $606.9 million. The company grew 7.6% in Q1 2020. That’s not much, especially during a period in which its gross margins eroded, but the return-to-growth is likely welcome all the same.

TechCrunch did not see Q2 2020 results in its S-1 today while reading the document, so we presume that the firm will re-file shortly to include more recent financial results; it would be hard for the company to debut at an attractive price in the COVID-19 era without sharing Q2 figures, we reckon.

How to value Rackspace is a puzzle. The company is tech-ish, which means it will find some interest. But its slow growth rate, heavy debts and lackluster margins make it hard to pin a fair multiple onto. More when we have it.

Docker partners with AWS to improve container workflows

Docker and AWS today announced a new collaboration that introduces a deep integration between Docker’s Compose and Desktop developer tools and AWS’s Elastic Container Service (ECS) and ECS on AWS Fargate. Previously, the two companies note, the workflow to take Compose files and run them on ECS was often challenging for developers. Now, the two companies simplified this process to make switching between running containers locally and on ECS far easier.

docker/AWS architecture overview“With a large number of containers being built using Docker, we’re very excited to work with Docker to simplify the developer’s experience of building and deploying containerized applications to AWS,” said Deepak Singh, the VP for compute services at AWS. “Now customers can easily deploy their containerized applications from their local Docker environment straight to Amazon ECS. This accelerated path to modern application development and deployment allows customers to focus more effort on the unique value of their applications, and less time on figuring out how to deploy to the cloud.”

In a bit of a surprise move, Docker last year sold off its enterprise business to Mirantis to solely focus on cloud-native developer experiences.

“In November, we separated the enterprise business, which was very much focused on operations, CXOs and a direct sales model, and we sold that business to Mirantis,” Docker CEO Scott Johnston told TechCrunch’s Ron Miller earlier this year. “At that point, we decided to focus the remaining business back on developers, which was really Docker’s purpose back in 2013 and 2014.”

Today’s move is an example of this new focus, given that the workflow issues this partnership addresses had been around for quite a while already.

It’s worth noting that Docker also recently engaged in a strategic partnership with Microsoft to integrate the Docker developer experience with Azure’s Container Instances.

PQShield raises $7M for quantum-ready cryptographic security solutions

A deep tech startup building cryptographic solutions to secure hardware, software, and communications systems for a future when quantum computers may render many current cybersecurity approaches useless is today emerging out of stealth mode with $7 million in funding and a mission to make cryptographic security something that cannot be hackable, even with the most sophisticated systems, by building systems today that will continue to be usable in a post-quantum future.

PQShield (PQ being short for “post-quantum”), a spin out from Oxford University, is being backed in a seed round led by Kindred Capital, with participation also Crane Venture Partners, Oxford Sciences Innovation and various angel investors, including Andre Crawford-Brunt, Deutsche Bank’s former global head of equities.

PQShield was founded in 2018, and its time in stealth has not been in vain.

The startup claims to have the UK’s highest concentration of cryptography PhDs outside academia and classified agencies, and it is one of the biggest contributors to the NIST cybersecurity framework (alongside academic institutions and huge tech companies), which is working on creating new cryptographic standards, which take into account the fact that quantum computing will likely make quick work of breaking down the standards that are currently in place.

“The scale is massive,” Dr Ali El Kaafarani, a research fellow at Oxford’s Mathematical Institute and former engineer at Hewlett-Packard Labs, who is the founder and CEO of PQShield said of that project. “For the first time we are changing the whole of public key infrastructure.”

And according to El Kaafarani, the startup has customers — companies that build hardware and software services, or run communications systems that deal with sensitive information and run the biggest risks from being hacked.

They include entities in the financial and government sectors that it’s not naming, as well as its first OEM customer, Bosch. El Kaafarani said in an interview that it is also in talks with at least one major communications and messaging provider exploring more security for end-to-end encryption on messaging networks. Other target applications could include keyless cars, connected IoT devices, and cloud services.

The gap in the market the PQShield is aiming to address is the fact that while there are already a number of companies exploring the cutting edge of cryptographic security in the market — they include large tech companies like Amazon and MicrosoftHub Security, Duality, another startup out of the UK focused on post-quantum cryptography called Post Quantum and a number of others — the concern is that quantum computing will be utilised to crack even the most sophisticated cryptography such as the RSA and Elliptic Curve cryptographic standards.

This has not been much of a threat so far since quantum computers are still not widely available and used, but there have been a number of signs of a breakthrough on the horizon.

El Kaafarani says that PQShield is the first startup to approach that predicament with a multi-pronged solution aimed at a variety of use cases, including solutions that encompass current cryptographic standards and provide a migration path the next generation of how they will look — meaning, they can be commercially deployed today, even without quantum computers being a commercial reality, but in preparation for that.

“Whatever we encrypt now can be harvested, and once we have a fully functioning quantum computer people can use that to get back to the data and the sensitive information,” he said.

For hardware applications, it’s designed a System on Chip (SoC) solution that will be licensed to hardware manufacturers (Bosch being the first OEM). For software applications, there is an SDK that secures messaging and is protected by “post-quantum algorithms” based on a secure, Signal-derived protocol.

Thinking about and building for the full spectrum of applications is central to PQShield’s approach, he added. “In security it’s important to understand the whole ecosystem since everything is about connected components.”

Some sectors in the tech world have been especially negatively impacted by the coronavirus and its consequences, a predicament that has been exacerbated by uncertainties over the future of the global economy.

I asked El Kaafarani if that translated to a particularly tricky time to raise money as a deep tech startup, given that deep tech companies so often work on long-term problems that may not have immediate commercial outcomes.

Interestingly, he said that wasn’t the case.

“We talked to VCs that were interested in deep tech to begin with, which made the discussion a lot easier,” he said. “And the fact is that we’re a security company, and that is one of the areas that is doing well. Everything has become digitised, and we have all become more heavily reliant on our digital connections. We ultimately help make the digital world more secure. There are people who understand that, and so it wasn’t too difficult to talk to them and understand the importance of this company.”

Indeed, Chrysanthos Chrysanthou, partner at Kindred Capital, echoed that sentiment:

“With some of the brightest minds in cryptography, mathematics and engineering, and boasting world-class software and hardware solutions, PQShield is uniquely positioned to lead the charge in protecting businesses from one of the most profound threats to their future,” he said. “We couldn’t be happier to support the team as it works to set a new standard for information security and defuse risks resulting from the rise of quantum.”

DocuSign acquires Liveoak Technologies for $38M for online notarization

Even in the best of times, finding a notary can be a challenge. In the middle of a pandemic, it’s even more difficult. DocuSign announced it has acquired Liveoak Technologies today for approximately $38 million, giving the company an online notarization option.

At the same time, DocuSign announced a new product called DocuSign Notary, which should ease the notary requirement by allowing it to happen online along with the eSignature. As we get deeper into the pandemic, companies like DocuSign that allow workflows to happen completely digitally are in more demand than ever. This new product will be available for early access later in the summer.

The deal made sense given that the two companies had a partnership already. Liveoak brings together live video, collaboration tooling and identity verification that enables parties to get notarized approval as though you were sitting at the desk in front of the notary.

Typically, you might get a document that requires your signature. Without electronic signature, you would need to print it, sign the document, scan it and return it. If it requires a notary, you would need to sign it in the notary’s presence, which requires an in-person visit. All of this can be streamlined with an online workflow, which DocuSign is providing with this acquisition.

It’s like the perfect pandemic acquisition, making a manual process digital and saving people from having to make face-to-face transactions at a time when it can be dangerous.

Liveoak Technologies was founded in 2014 and is part of the Austin, Texas startup scene. The company raised $13.5 million during its life as a private company, according to Crunchbase.

This acquisition is part of a growing pandemic acquisition trend of sorts, where larger public enterprise companies are plucking early-stage startups, in some cases for relatively bargain prices. Among the recent acquisitions are Apple buying Fleetsmith and ServiceNow acquiring Sweagle last month.

‘No code’ will define the next generation of software

It seems like every software funding and product announcement these days includes some sort of reference to “no code” platforms or functionality. The frequent callbacks to this buzzy term reflect a realization that we’re entering a new software era.

Similar to cloud, no code is not a category itself, but rather a shift in how users interface with software tools. In the same way that PCs democratized software usage, APIs democratized software connectivity and the cloud democratized the purchase and deployment of software, no code will usher in the next wave of enterprise innovation by democratizing technical skill sets. No code is empowering business users to take over functionality previously owned by technical users by abstracting complexity and centering around a visual workflow. This profound generational shift has the power to touch every software market and every user across the enterprise.

The average enterprise tech stack has never been more complex

In a perfect world, all enterprise applications would be properly integrated, every front end would be shiny and polished, and internal processes would be efficient and automated. Alas, in the real world, engineering and IT teams spend a disproportionate share of their time fighting fires in security, fixing internal product bugs and running vendor audits. These teams are bursting at the seams, spending an estimated 30% of their resources building and maintaining internal tools, torpedoing productivity and compounding technical debt.

Seventy-two percent of IT leaders now say project backlogs prevent them from working on strategic projects. Hiring alone can’t solve the problem. The demand for technical talent far outpaces supply, as demonstrated by the fact that six out of 10 CIOs expect skills shortages to prevent their organizations from keeping up with the pace of change.

At the same time that IT and engineering teams are struggling to maintain internal applications, business teams keep adding fragmented third-party tools to increase their own agility. In fact, the average enterprise is supporting 1,200 cloud-based applications at any given time. Lacking internal support, business users bring in external IT consultants. Cloud promised easy as-needed software adoption with seamless integration, but the realities of quickly changing business needs have led to a roaring comeback of expensive custom software.

OwnBackup lands $50M as backup for Salesforce ecosystem thrives

OwnBackup has made a name for itself primarily as a backup and disaster recovery system for the Salesforce ecosystem, and today the company announced a $50 million investment.

Insight Partners led the round with participation from Salesforce Ventures and Vertex Ventures. This chunk of money comes on top of a $23 million round from a year ago, and brings the total raised to over $100 million, according to the company.

It shouldn’t come as a surprise that Salesforce Ventures chipped in when the majority of the company’s backup and recovery business involves the Salesforce ecosystem, although the company will be looking to expand beyond that with the new money.

“We’ve seen such growth over the last two and a half years around the Salesforce ecosystem. and the other ISV partners like Veeva and nCino that we’ve remained focused within the Salesforce space. But with this funding, we will expand over the next 12 months into a few new ecosystems,” company CEO Sam Gutmann told TechCrunch.

In spite of the pandemic, the company continues to grow, adding 250 new customers last quarter, bringing it to over 2000 customers and 250 employees, according to Gutmann.

He says that raising the round, which closed at the beginning of May had some hairy moments as the pandemic began to take hold across the world and worsen in the U.S. For a time, he began talking to new investors in case his existing ones got cold feet. As it turned out, when the quarterly numbers came in strong, the existing ones came back and the round was oversubscribed, Gutmann said.

“Q2 frankly was a record quarter for us, adding over 250 new accounts, and we’re seeing companies start to really understand how critical this is,” he said.

The company plans to continue hiring through the pandemic, although he says it might not be quite as aggressively as they once thought. Like many companies, even though they plan to hire, they are continually assessing the market. At this point, he foresees growing the workforce by about another 50 people this year, but that’s about as far as he can look ahead right now.

Gutmann says he is working with his management team to make sure he has a diverse workforce right up to the executive level, but he says it’s challenging. “I think our lower ranks are actually quite diverse, but as you get up into the leadership team, you can see on the website unfortunately we’re not there yet,” he said.

They are instructing their recruiting teams to look for diverse candidates whether by gender or ethnicity, and employees have formed a diversity and inclusion task force with internal training, particularly for managers around interviewing techniques.

He says going remote has been difficult, and he misses seeing his employees in the office. He hopes to have at least some come back, before the end of the summer and slowly add more as we get into the fall, but that will depend on how things go.

As Q3 kicks off, four more companies join the $100M ARR club

Welcome back to our $100 million annual recurring revenue (ARR) series, in which we take irregular looks at companies that have reached material scale while still private. The goal of our project is simple: uncovering companies of real worth beyond how they are valued by private investors.


The Exchange is a daily look at startups and the private markets for Extra Crunch subscribers; use code EXCHANGE to get full access and take 25% off your subscription.


It’s all well and good to get a $1 billion valuation, call yourself a unicorn and march around like you invented the internet. But reaching material revenue scale means that, unlike some highly valued companies, you’re actually hard to kill. (And more valuable, and more likely to go public, we reckon.)

Before we dive into today’s new companies, keep in mind that we’ve expanded the type of company that can make it into the $100M ARR club to include companies that reach a $100 million annual run rate pace. Why? Because we don’t only want to collect SaaS companies, and if we could go back in time we’d probably draw a different box around the companies we are tracking.

$100M ARR or bust

If you need to catch up, you can find the two most recent entries in the series here and here. For everyone who’s current, today we are adding Snow Software, A Cloud Guru, Zeta Global and Upgrade to the club. Let’s go!

Snow Software

Just this week, Snow Software announced that it has crossed the $100 million ARR mark, according to a release shared with TechCrunch. The Swedish software asset management company has raised a few private rounds, including a $120 million private equity round in 2017. But, unlike many American companies that make this list, we don’t have a historical record of needing extensive private capital to scale.

Unpacking how Dell’s debt load and VMware stake could come together

Last week, we discussed the possibility that Dell could be exploring a sale of VMware as a way to deal with its hefty debt load, a weight that continues to linger since its $67 billion acquisition of EMC in 2016. VMware was the most valuable asset in the EMC family of companies, and it remains central to Dell’s hybrid cloud strategy today.

As CNBC pointed out last week, VMware is a far more valuable company than Dell itself, with a market cap of almost $62 billion. Dell, on the other hand, has a market cap of around $39 billion.

How is Dell, which owns 81% of VMware, worth less than the company it controls? We believe it’s related to that debt, and if we’re right, Dell could unlock lots of its own value by reducing its indebtedness. In that light, the sale, partial or otherwise, of VMware starts to look like a no-brainer from a financial perspective.

At the end of its most recent quarter, Dell had $8.4 billion in short-term debt and long-term debts totaling $48.4 billion. That’s a lot, but Dell has the ability to pay down a significant portion of that by leveraging the value locked inside its stake in VMware.

Yes, but …

Nothing is ever as simple as it seems. As Holger Mueller from Constellation Research pointed out in our article last week, VMware is the one piece of the Dell family that is really continuing to innovate. Meanwhile, Dell and EMC are stuck in hardware hell at a time when companies are moving faster than ever expected to the cloud due to the pandemic.

Dell is essentially being handicapped by a core business that involves selling computers, storage and the like to in-house data centers. While it’s also looking to modernize that approach by trying to be the hybrid link between on-premise and the cloud, the economy is also working against it. The pandemic has made the difficult prospect of large enterprise selling even more challenging without large conferences, golf outings and business lunches to grease the skids of commerce.

Fleetsmith customers unhappy with loss of third-party app support after Apple acquisition

When Apple confirmed it had acquired Fleetsmith, a mobile device management vendor, on Wednesday, it seemed like a straightforward purchase, but Fleetsmith customers quickly learned a key piece of functionality had stopped working  — and many weren’t happy about it.

Apple systems administrators began complaining on social media on the morning of the acquisition announcement that the company was no longer allowing them to connect to third-party applications.

“Primarily Fleetsmith maintained a third-party app catalog, so you could deploy things like Chrome or Zoom to your Macs, and Fleetsmith would maintain security updates for those apps. This was the main reason we purchased Fleetsmith,” a Fleetsmith customer told TechCrunch.

The customer added that the company described this functionality as a major feature in a company blog post:

For apps like Chrome, which are managed through the Fleetsmith Catalog, we handle all aspects of testing, packaging, triage, and deployment automatically. Whenever there’s an update (including security patches), we quickly add them to the Catalog so that our customers can enforce the latest version. In this case, we had the Chrome 78.0.3904.87 patch up within a couple hours of the update dropping.

As one system administrator pointed out, being able to manage Chrome browser security in an automated way was a huge part of this, and that was also removed along with third party app support.

As it turned out, Apple had made it clear that it was discontinuing this feature in an email to Fleetsmith customers on the day of the transition. The email included links to several help articles that were supposed to assist admins with the transition. (The email is included in full at the end of this article.)

The general consensus among admins that I spoke to was that these articles were not terribly helpful. While they described a way to fix the issues, they said that Apple has turned what was a highly automated experience into a highly manual one, effectively eliminating the speed and ease of use advantage of having the update feature in the first place.

Apple did confirm that it had responded to some help ticket requests after the changes this week, saying that it would soon restore some configurations for Catalog apps, and was working with impacted customers as needed. The company did not make clear, however, why they removed this functionality in the first place.

Fleetsmith offered a couple of key features that appealed to Mac system administrators. For starters, it let them set up new Macs automatically out of the box. This allows them to ship a new Mac or other Apple device, and as soon as the employee powers it up and connects to Wi-Fi, it connects to Fleetsmith, where systems administrators can track usage and updates. In addition, it allowed System Administrators to enforce Apple security and OS updates on company devices.

What’s more, it could also do the same thing with third-party applications like Google Chrome, Zoom or many others. When these companies pushed a new update, system administrators could make sure all users had the most recent version running on their machines. This is the key functionality that was removed this week.

It’s not clear why Apple chose to strip out these features outlined in the email to customers, but it seems likely that most of this functionality isn’t coming back, other than restoring some configurations for Catalog apps.

Email that went out to Fleetsmith customers the day of the acquisition outlining the changes:

 

Attempts to reach Fleetsmith founders for comment were unsuccessful. Should that change we will update the article.