How Salesforce Became the Best Tech Investor in Silicon Valley’s Late Stage
Marc Benioff, Chairman and Co-Chief Executive Officer of Salesforce.com Inc., speaks during the opening address of the DreamForce Conference 2019 in San Francisco on November 19, 2019. Salesforce.com Inc.’s annual software conference will be showcasing new products and software discussed its commitment to social causes, was interrupted for the second year in a row by protests against the company’s work with the US government.
David Paul Morris | Bloomberg | Getty Images
Last week, Salesforce reported $ 2.17 billion in annual profits from its investments in other technology companies. A few days later, the company’s venture arm extended its winning streak with another big exit.
In a boom for big tech IPOs and software consolidation, the name of Salesforce is popping up everywhere. CEO Marc Benioff has proven that not only is he a mega-dealmaker when it comes to buying high-priced cloud companies like Slack and Tableau, but he has also made Salesforce a major force in Silicon Valley’s venture capital with its extensive track record.
The most recent windfall came on Wednesday when cloud security provider Okta announced it was acquiring smaller rival Auth0 for $ 6.5 billion, eight months after Salesforce Ventures made a $ 120 million investment in a valuation of $ 1.92 billion. Salesforce more than tripled its money between July and March.
In 2020, two of the Salesforce portfolio companies – nCino and Snowflake – rose sharply after going public. They combined $ 1.7 billion in investment income, according to the company’s fourth quarter report on Feb.25, representing 78% of Salesforce’s total revenue increase for the fiscal year ended January.
Salesforce also sold all of Zoom’s 2.8 million shares last year after the money it made from investing $ 100 million in the video chat company’s IPO in 2019 more than tripled.
These gains significantly increase Salesforce’s bottom line. Of the company’s earnings per share of $ 4.38 for fiscal 2021, $ 1.75 came from strategic investment markups. Salesforce also reported on its balance sheet that January investments were valued at $ 3.91 billion, up roughly 100% year over year.
Benioff and Bret Taylor generate many investment ideas
Corporate venture capital used to be associated with a stigma. In the eyes of many investors, large companies had their own agenda, regardless of whether they received market knowledge or product ideas from potential disruptors. Traditional venture firms often preferred not to invest alongside them.
While Salesforce sometimes competes with portfolio companies, it’s better known for leveraging its dominance in the sales software market to provide advanced distribution for the many business applications an audience needs. Salesforce benefits from offering a wider range of cloud services to its customers, and startups win by holding meetings with prospects who might otherwise never answer their calls.
John Somorjai, who leads Salesforce Ventures and leads company development across the company, said his group’s pitch needs to keep getting more compelling as the competition for deals has never been greater.
John Somorjai from Salesforce
“There is so much money, so much dry powder, more than ever in the industry,” Somorjai said in an interview this week. “Getting the best deals leverages the power of Salesforce and the tools we have.”
He said he had roughly doubled the size of his investment team to 15 in the past two years to keep up with the growing number of startups around the world.
Salesforce Ventures does not take any seats on the board of directors and keeps Somorjai and his team on the sidelines for the most part on questions about a potential asset acquisition or sale. Occasionally, Salesforce buys a Salesforce Ventures company, such as purchasing productivity software start-up Quip in 2016.
“They never block a sale or create problems and just help,” said Jason Lemkin, founder of SaaStr, which hosts cloud software events and invests in startups. “The fact that they are helping many top SaaS VCs means they are often glad to have them in a hot business.”
Somorjai, who joined Salesforce over 15 years ago, said many of his best investment ideas came from Benioff and Bret Taylor, the company’s chief operating officer (and Quip founders), both of whom are constantly talking to clients.
Somorjai said of Benioff, “Customers come to him and say, ‘Have you looked at this company? They do really interesting things and that is how they help us.’ He’s feeding me this data. “
“Independent of stage”
Salesforce Ventures is all over the map when it comes to checking size. Or in Somorjai’s words: “We are independent of the stage.”
In 2020, the company participated in the $ 7.5 million Series A round for education technology startup AdmitHub and the $ 13.5 million Series B round for Angaza, their Sales management platform is geared towards emerging markets. In addition, the company invested $ 100 million in security provider Tanium, valued at $ 9 billion, and backed data analytics company Databricks just last month, valued at $ 28 billion.
In recent years, late-stage growth investments have proven to be the fastest way to make a big profit. Salesforce’s $ 250 million investment in Snowflake’s initial public offering was $ 529 million in one day of trading. $ 100 million in Zoom stock purchases nearly doubled in three days in 2019.
This way to a quick buck could close itself. Companies now have many options for going public, including through a direct listing or a Special Purpose Acquisition Company (SPAC) that doesn’t sell IPO shares at a huge discount.
In the case of direct listing, a new rule allows companies to raise capital while existing investors still have the option to sell at market prices. In a SPAC, companies raise money through a PIPE or a private investment in public equity. PIPE investors then have shares in the underlying company when it starts trading.
While Salesforce might see PIPEs as another avenue for late investing, Somorjai said he isn’t currently following that avenue.
“It’s a bit early to see how this whole PIPE-to-SPAC trend is going to play out and how successful some of these SPACs are,” said Somorjai. “It’s a very interesting new way for a private company to get cash quickly, and probably much easier, and potentially allow them to have less dilution.”
Invest and compete
Manny Medina, CEO of distribution firm Outreach, said Salesforce reached out to him to invest in the early days of the Covid-19 crisis, at a time when “it was easier not to invest than to invest”.
“The world got into a quagmire and you didn’t know what end was coming,” said Medina, whose Seattle-based company creates software that sellers can use to do business and stay connected with customers. At the same time, “people are hoarding toilet paper and Purell,” he said.
Still, Salesforce wanted to be part of Outreach’s $ 50 million funding round, in which the company was valued at $ 1.33 billion. Medina admitted there was tension about keeping Salesforce on its cap table as companies have competing products and Salesforce is the industry goliath.
Medina said that while speaking with Matt Garratt, the managing partner of Salesforce Ventures, he became familiar with the team’s promise to protect his company’s intellectual property and have his back, while also getting it in front of the right people at Salesforce or bring with customers.
Ultimately, it was worth it for Outreach to close the deal as Salesforce has earned a reputation for being a very intelligent investor, he said.
“At the end of the day we will still be competing with them, whether you like it or not,” said Medina. “Either we get the relationship and get the signal from someone who knows how to pick winners, or we just compete with them without the money and the signal.”
Outreach integrates with Salesforce, but doesn’t rely on the company to distribute or use AppExchange, the Salesforce marketplace for third-party apps. According to Medina, “the only advantage Salesforce has is that they evangelize the cloud.”
That makes outreach a very different type of investment than Auth0 or nCino.
In November, shortly after investing in Auth0, Salesforce selected the company’s identity management technology to strengthen its customer identity offering. Somorjai said it was a service that customers requested and Auth0 was a name that people in the room trusted.
For nCino, the partnership started even earlier. The company sells cloud software to help banks digitize and automate lending and portfolio management processes. From the beginning, nCino built its platform on Salesforce. In nCino’s IPO prospectus, the company mentioned Salesforce 99 times.
Salesforce first invested in nCino in 2014 and continued to do so for the next five years. After the company’s IPO last year, Salesforce had a 12% stake. Those stocks were worth nearly $ 800 million as of the end of 2020.
“They decided to build their entire business on the Salesforce platform, so it made a lot of sense to invest in this team and what they do,” said Somorjai. “I would still say the vast majority of our investments start at an early stage.”
SEE: Salesforce sees a rivalry with Microsoft with its $ 27.7 billion Slack deal