A little over six years ago, Qualtrics CEO Ryan Smith stared at a $500 million acquisition offer – half a billion dollars! – for his bootstrapped company doing $50 million in revenue...
...and turned it down.
Instead, he decided to gamble he could grow his company far bigger and far more valuable.
Qualtrics was on the verge of what was promising to be one of the biggest, most successful IPOs of 2018. He was scheduled to ring the bell on Wednesday, and his company was on track to be valued at around $5 billion or more when the bell rung.
Instead, on Sunday night, a jubilant Smith, hopped on the phone with Business Insider, along with SAP CEO Bill McDermott, to talk about why he sold his company to SAP for $8 billion in a surprise deal.
"We’re here because we want to be. I think the IPO would be every bit as big as this," Smith said.
The deal is expected to close in the first half of 2019.
Qualtrics was on the brink of IPO
Smith was still on the IPO roadshow when he signed the acquisition papers, he said. And Smith wants everyone to know, this was not a fire sale: Investors were crazy about the idea of buying a piece of Qualtrics.
"Our IPO is 13 times oversubscribed already and we hadn’t finished the second week," he told us.
Qualtrics was growing at over 50% a year, had generated $289.9 million in revenue in 2017, and it was profitable. Not only was it profitable that year, but it had been cash-flow positive since it was founded.
A fast-growing, profitable cloud startup doing almost $300 million in annual revenue? That's a real unicorn.
Shares were initially priced at a range of $18 to $21, which as the mid-point would have valued the company at $4.8 billion — about twice its last private valuation as a startup. But iinvestors were so hot the company was likely going to raise the price, Smith implied, and still expected get a big pop the first day. It could possibly have ended up being worth something within striking distance to what SAP will pay.
McDermott goes on a charm offensive
All of that means that Smith felt no need to sell to SAP or to any of the other suitors he's had over the years. McDermott had been doggedly working on Smith to sell for months, they said.
"It wasn’t one conversation. You know I don’t go down that easy," Smith joked. Smith had fended off would-be buyers before, hinting that others who kicked the tires included big cloud companies in Silicon Valley and the Pacific Northwest.
But anyone who has ever met Bill McDermott, the first American CEO of German-based SAP, knows that he can be persuasive, even if it takes some time.
"Trust comes in drops," McDermott said.
The SAP CEO had been impressed with Smith and Qualtrics after an initial lunch together they had some months ago. Qualtrics could give SAP the growth it needs in its cloud business, while giving it a product edge in the cutthroat marketing and sales software worlds, where SAP competes against the likes of Salesforce, Microsoft, and Oracle.
McDermott says he knew he wanted to buy Qualtrics, even as the impending IPO meant that the price was only going to go up.
Convincing Smith was like a courtship: They had a "special dinner" at a mountain resort with Smith's co-founder brother Jared.
They went bike riding and to dinner together with their wives. They met at another Northern California conference where they both speaking, at which point McDermott scored an invite to the Qualtrics' headquarters in Provo, Utah.
During that visit, he and Smith played some hoops, with McDermott still wearing his dress shoes. He still feels guilty about the scuff marks he left on the court, he said.
"And it builds to this crescendo today," McDermott says. "It's two guys totally committed to the mission and to winning."
Smith said that he expected the company to be valued very near the $8 billion he sold to SAP on Day 1 as a public company.
"Ryan drives a hard bargain. He doesn’t care about a numerator, but about the security of his people," McDermott said.
The Smith family become billionaires
Smith founded the company in his father's basement, after his father was diagnosed with cancer, as a way of spending more time with him. Smith then convinced his brother, Jared Smith, a Google exec, to quit his job at Google and help him build Qualtrics — with their father, who survived his brush with cancer, as a cofounder.
Together, the family has maintained tight control over the company, and didn't take any venture capital funding until 2012, when they had been in business for a decade. Ultimately, Qualtrics raised $400 million in venture funding, with the Smith family retaining its control.
However, it is impossible to know exactly what the Smith's take was from this $8 billion sale, even though Qualtrics had published its financial results and named its top shareholders as part of the process of going public.
That's because Qualtrics was creating three class of shares for its IPO. One class was for the Smith family, which included Ryan, Jared and their father. These shares had super-voting rights. The second class was for existing investors, which also gave them super-voting rights, while the third were traditional shares for regular investors.
The net result of this structure: If Qualtrics had gone through with its IPO, the Smith family would have retained 51% voting power over the company, while simultaneously obfuscating how big a stake they actually owned.
We also don't know the exact terms that SAP was offering for each class of shares; just that it adds up to $8 billion in total.
But pushing all those caveats aside for now, and just for fun, we did some napkin math anyway, based on some presumptions.
Between the three classes of shares, there were just under just under 196 million outstanding shares in the hands of investors before the IPO, the compay reported in its IPO documents.
If each share were priced equally in this sale — meaning the Smith brothers were not claiming a higher price for their preferred stock — than an $8 billion deal would value each share a just under $41. And that’s a big if.
The Smith family, through a holding company, owns 88,823,418 shares. At $41/share, the Smith family would net themselves well over $3.6 billion, cash.
No matter how you slice that, Ryan Smith certainly did better than selling his company for $500 million in 2012.
The final word
Ultimately what convinced Smith to sell was this, he says: Not only could he jump straight to an $8 billion payout for himself, his employees and his investors, but Qualtrics would instantly become a global company with access to SAP's 413,000 global customers and 15,000-strong salesforce.
Smith's vision is to create a new market he calls "experience management."
That's where companies take all the data they have on customers, employees, partners, prospects and give themselves a complete view of how well they are serving everyone. Qualtrics offers cloud software that can help a company understand that a group of unhappy employees in one department might be creating a group of unhappy customers in another area.
SAP, as the world's largest maker of financial software, also offers everything from marketing software to HR wares, and is sitting on all the data Qualtrics needs to make this new market a reality.
"I want to go partner with Bill and SAP and go do this," Smith said.
