Why Is Pivotal Worth $2.8B While Your Crappy Software Service Firm is Worth Zilch (According to “The Market”)?
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If you have a custom software services firm (i.e. you do programming for hire) and go talk to the financial markets about what your company is worth, you’re likely in for disappointment. But I’ve worked all these years, you say. But we’re a tech firm, you say. Don’t all technology businesses get bought and sold for 28X multiples?!
Some might. Likely yours won’t.
On the flip side, private equity groups (PE) are always on the lookout for stable, profitable, high-margin businesses. Custom technology services firms can often run at profits of 40% or more, yet 9 out of 10 PE groups won’t touch a software services business with project-based revenue. Scary, they say.
All which may leave you wondering; how in the fuck is Pivotal (Labs) worth $2.8 billion dollars? Aren’t they just programmers for hire? Don’t they do project-based development work? Couldn’t Ford have hired 700–1000 amazeballs developers on their own instead of buying < 10% (!) of some third-party?
These are great questions! Why, look at how Pivotal is even described in the press onslaught noting Ford’s contribution to the software company’s Round C (*more on that funding in a second). Emphasis mine:
“One of the first projects to come out of the collaboration between Pivotal and Ford was the recently released FordPass, which Ford is billing as super innovative. In reality, it allows you to monitor your car from a smart phone app, access car sharing services and find parking spaces, among other things. While these are all useful services they aren’t innovative in the true sense because they’ve been done in various guises before. What is new is the programming methodology that went into developing FordPass, and Ford is hoping that by making this substantial investment in Pivotal, it will be able to continue to build on this initial success.”
Are you — custom software development shop owner — laughing (or crying) your ass off?
Ford paid $182M for a programming methodology? (Yup!) You mean fucking AGILE? We do that! (Of course you do!) And still, somehow, they thought an investment was needed to keep their vendor around?
It gets better (worse?)!
“Pivotal, which has now raised $358 million provides customers with the technology and a programming methodology for changing the way they develop products. The main idea is bringing a digital mindset and software design sense to companies that have operated in a more traditional fashion.”
Ha! A “digital mindset” for “traditional businesses.” Your company does that too, right? Go ahead, call up a VC and tell them your $5M/year software business (40% margins, remember?) has a “digital mindset” and is therefore a PRIME target for acquisition by an old-line industrial. Then, hang up when the VC asks about “recurring revenue;” see if the call lasts longer than 25 seconds.
Well, Pivotal must have some kind of recurring revenue to get that kind of multiple, surely?!
Nope. As recently as 2011 (the year before they were bought by EMC), Pivotal’s publicly stated rate was $60K/month/programming pair. To hear their former head of biz dev tell it, their shop is just like yours:
“What we say when asked the generic question ‘What does it cost to use Pivotal’ is that projects start at around $150k for web applications and $60–120k for mobile app, depending on platform. What does that really mean? Not a ton because every project is different and this is just a number with no context, no notion of multiple releases, the varying nature of engagements, etc.”
You probably say the same thing to prospective clients! And here’s one (satisfied) former Pivotal client giving a hilarious answer on Quora:
“It frankly is one of the most bizarre professional engagements I have ever encountered during a long career in software development, and this makes Pivotal not a viable outsourcing shop for many projects. If you have any constraints on either time or money, Pivotal is probably not the right partner for you, because you will end up in a paupers’ cemetery having died of ulcers.”
*Pivotal’s Round C
Sort of odd for a company started in 1989 to be taking VC cash in 2016, no? And who the hell is a software services firm to be raising money anyway?
To answer those questions, we have to look at why EMC (storage provider) bought Pivotal (programming provider) in the first place and why other similar relationships have happened. In short, diversification:
A.) High-margin, big-ticket hardware sales are all but dead. Know any rich Baby Boomers or Gen-Xrs who made mad loot from 1984–2003 selling servers (mainframes), racks, switches, hardware, “iron,” and/or PCs en masse? Those sales don’t happen today, which means:
B.) IBM (et al.) have had to look for different revenue options, i.e. professional technology services, talent placement (body shopping), system architecture and consulting, outsourced IT management, and custom programming for hire.
In other words, in order to re-grow their share prices, big-ass firms are now having to look at new revenue streams including technology services… including project-based work… which we all thought (and the financial markets still think) is not worth anything.
In short, here’s the major disconnect:
- When HUGE hardware companies were worth a lot, SMALL hardware companies were valued similarly
- Now that HUGE software services companies are worth a lot, SMALL software services companies are still worth peanuts (if anyone wants to buy them at all)
Strategic Acquisitions
Pivotal is worth a bazzillion dollars because they do pair programming (which programmers hate), are enormous (2000 employees) on their own right (scale = higher valuations), have successfully traded on Silicon Valley’s economically attuned brand of innovation (something state leaders like Bathroom McPanicFace don’t understand) and “boast 7 of the top 10 U.S. Banks, 3 of the top 5 auto companies, and 5 of the top 10 telcos” as clients in spite of doing lowly project-based work. They might IPO in 2017 (as a subsidy/spin-out of Dell Presents VMwarEMC), and that’s why investors are hot on this software services firm, which was just once like your software services firm, but which the same investors say is much, much better.
Okay genius, tell me how to make my technology services firm valued like Pivotal
First, you have to decide if you’re a lifestyle business or a tech behemoth in the making. All small businesses have to decide that (not just tech ones), but sometimes founders at custom web and mobile development firms don’t know until I ask.
Second, assuming you want to scale inorganically and sell to a strategic buyer (a company who would rather fold in your people and processes instead of rolling their own), you’ll need the right buyer at the right time with the right organizational problem, and a differentiator that screams why you’re a better investment than a company making individual hires on its own.
For Institutional Capital looking for returns
Technology services firms need to be back on your list. Project-based, medium-churn companies with high-margins should not be overlooked. And where others see project-based-danger, you should see a niche opportunity to buy, and form, and rollup to create the next software services mega-acquisition.
Which is why I’m Helping Tech Services Businesses Strategically Grow and Find Liquidity Options
Tech services firms are the great undervalued asset of our time. I spent 5+ years at a custom development shop I adored doing projects with Fortune 500 companies, and we paid a lot of mortgages, including mine.
Still, when we spoke with institutional capital including VCs and PEs, most everyone only wanted to hear about three year contracts & retainers (the kinds IBM’s old services division would sign in the 80s) or recurring revenue, as if it was the destiny/duty of every services firm to take their own SaaS moonshot (while ignoring the opportunity-cost of lost, project-based revenue).
Cash on the table. That’s what technology services firms offer. No “user growth” metrics, no alternative valuations employed by unprofitable unicorns, no handwringing about “market traction” for an unproven product.
You know software will continue to eat the world.
Custom software (done right), made locally, made with passion, also continues to make a lot of people very wealthy.
It’s about time the tech services industry and the financial industry better understood each other.
I’ve set out to change that.
