Apttus IPO dream ends in private equity buyout by Thoma Bravo

In a sudden and unexpected plot twist, the long-running saga of whether enterprise quote-to-cash vendor Apttus will finally IPO has been settled by the sale of a majority stake to leading private equity firm Thoma Bravo. The news comes two months after founding CEO Kirk Krappe abruptly left the company, which is one of the largest and longest-established ISVs to have started out by building its software natively on the Salesforce platform. It has since added Microsoft and IBM as platform partners.

Few details of the transaction will be released until after it formally closes in October, so all we can do here is to recount some of the history and speculate on the likely prognosis. Elaborating on yesterday's announcement of the deal, a prepared comment from an Apttus spokesperson last night reveals only that:

Apttus views this development positively and believes Thoma Bravo can instill greater operational excellence, strengthen our market leadership and allow us to continue providing indispensable value to our customers.

Private equity buyout strategies

Although private equity buyouts have traditionally had a reputation of loading up faltering companies with debt to extract maximum value from an entrenched customer base, current valuations of SaaS vendors have led to a more growth-oriented strategy emerging among a number of PE investors. This has created what SaaS expert Jason Lemkin describes as a third path to liquidity for founders alongside the traditional options of acquisition or an IPO. These PE investors look for businesses that can benefit from sharper management rigor. While they'll still bear down on unnecessary costs, they're content to continue investing in product development and revenue growth. Lemkin explains the upside:

Their goal is to invest just a little more, build out a management team, and ideally, IPO or sell it again for 3x-10x their investment in a few years.

Thoma Bravo has been one of the leading exponents of this strategy and a big spender on larger businesses, building on a two-decade history of investment in the software industry. It paid $3 billion to acquire data analytics provider Qlik in 2016, and notable deals this year include majority stakes in process automation platform Nintex in February and identity and access management platform Centrify last month.

An earlier acquisition that illustrates the strategy in action is application performance management company Dynatrace, acquired as part of Compuware in a $2.4 billion buyout in 2014 and then allowed to chart its own growth path as a separate business. According to Bloomberg, Thoma Bravo is now considering an IPO that could value Dynatrace at up to $4 billion.

Pursuing an IPO

There's no word on how much Thoma Bravo paid for Apttus, but it's sure to have been a tidy sum. After bootstrapping for its first eight years, Apttus took its first venture funding in the fall of 2013 to fuel a faster growth trajectory. After a series of rounds, total funding has mounted to $404 million, including $75 million in debt raised in February this year. According to Techcrunch, Apttus was last valued at $1.3 billion in 2016, and it seems likely the buyout would have been at a valuation in the $1-2 billion range.

Recent rounds have been seen as continuing to leave headroom for a long-awaited IPO, but Apttus had encountered several obstacles on the path towards listing its stock, including two changes of CFO in as many years. Shortly after appointing Terry Schmid to the role in November last year, CEO Kirk Krappe confessed that management had been through a learning curve as to what was needed to pass muster as a public company:

Through the process we’ve been running in the last months, there was a realization that what would be ideal [as CFO] would be someone who’s taken companies public. I think a lot of us underestimated [what’s involved] — certainly me, I’ve never done that — and the last six months has been a very intense and interesting experience.

I last spoke to Krappe during a visit to the company's headquarters ahead of its annual conference in May. He was putting the final touches to his pitch, positioning Apttus Omni as the platform of choice for automating all the unique and complex processes of the enterprise middle office, as distinct from front-office CRM and back-office ERP. In doing so, Krappe was portraying Apttus more as a peer to Salesforce and other enterprise software leaders — a stance bolstered by a multi-cloud strategy that saw the company's applcations running on Microsoft Azure as well as Salesforce and more recently tapping IBM cloud resources too.

Abrupt departure of CEO Krappe

It appears from the brief statements issued yesterday that the middle office strategy remains intact. But having led the company to this point, Krappe is no longer there to realize whatever ambitions he may yet have harbored.

His abrupt departure was announced July 2nd to be replaced by a three-person Office of the CEO consisting of co-founders Kent Perkocha and Neehar Giri along with COO Raj Verma, who I interviewed in January. Verma was brought in last year as part of moves to strengthen the management team. He was previously COO at Hortonworks and spent twelve years at middleware vendor Tibco. Meanwhile board member George Kadifa was named Chairman of the Board. Coincidentally, Kadifa was CEO of application service provider Corio almost twenty years ago at the same as Krappe was CMO there, which is when I first encountered them both.

There's no word on why Krappe left Apttus in July, but given the timing it seems most likely that it was in response to a decision by the board to pursue a private equity exit. After hinting at an IPO for getting on for five years now, it would have been pretty untenable to front such a switch in strategy.

Once the transaction closes, Thoma Bravo will appoint David Murphy to join the Office of the CEO team in the role of Executive Chairman. He is the former President and COO of cybersecurity and network management vendor Blue Coat Systems, which the PE firm acquired for $1.3 billion in 2012 and later sold for an estimated $2.4 billion.

While no details of the deal have been released, it's usual for Thoma Bravo to buy out the early venture investors and departing founders, which given how long the company was bootstrapped in its early years should imply a hefty payout for Krappe, along with venture investors Iconiq and K1. Corporate investors such as Salesforce, Microsoft and IBM may remain — yesterday's announcement included a statement from Tyler Prince, EVP of Industries and Partners at Salesforce, welcoming the deal. Later round investors, which include PremjiInvest, the personal investment fund of Wipro chairman Azim Premji, and Middle Eastern sovereign wealth funds KIA and GII, may also retain stakes.

My take

Back in January, speculating on potential acquirers of Apttus, I wrote:

Personally, I think the story stays more interesting if Apttus gets to make its public debut. But either way, the drama’s not over yet.

There's certainly been plenty of drama over the summer. It's always a big moment when an enterprise software business parts ways with its founding CEO, but Krappe leaves the company with a well-defined vision for its future. And the discipline that Thoma Bravo brings may well be exactly what Apttus needs for the next phase in its journey.

There will be a period of uncertainty that competitors will take advantage of until the transaction closes. With both Dreamforce and Microsoft Ignite/Envision taking place at the end of September, Apttus is set to have a more muted presence at both events than it would ideally like. The new leadership must move quickly to set out its strategy as soon as the transaction formalities are completed.

In the longer term, it's still conceivable that Apttus' public debut has merely been deferred rather than canceled. Once Thoma Bravo has done its work, an IPO is one of the potential exit routes. In the meantime, the pressure on management to continuously chase after that elusive IPO is lifted.

For now, I'm adopting a wait-and-see stance. By the end of the year, we'll have a measure of how the new management regime at Apttus stacks up and where it's headed. Think of this as the cliffhanger end of a season rather than the end of the run. I don't think this story is done yet.