Change is in the air for cloud ERP vendor Rootstock - here's why

Cloud ERP vendor Rootstock Software has new capital funding, new owners and a new-ish CEO in the shape of David Stephans. So what’s next for the firm?

Rootstock has been around since 2008. At that time, the company wanted to build a cloud ERP software suite – a novel concept then. Rootstock even started off developing its solution with NetSuite’s architecture in mind. A couple of years later, Rootstock shifted to the Salesforce platform where it remains today.

In 2018, the company acquired a competitor, Kenandy. Both firms had ERP solutions on the Salesforce platform.

The deal

Gryphon Investors is now the majority owner of Rootstock. Other investors (e.g., Salesforce Ventures and existing management) re-invested in the company. Stephans indicated that Rootstock looked at around 100 potential investors. They winnowed the long list to 28 investors and completed a detailed review of each. Rootstock leaders wanted to make sure the new investor would align well with the financial and operational goals of the company.

Financial terms of this deal were not disclosed.

Stephans did indicate that the new funding would be used to propel the company’s growth ambitions. In fact, go-to-market activities will be the company’s #1 priority according to Stephans. When I pressed on this, he said that the company will strive to do more marketing to companies that aren’t already Salesforce accounts. Rootstock has been growing and changing its mix of leads for the last several years.

Growth

Companies acquire capital to: make acquisitions (inorganic growth); grow their existing business (organic growth); pay out a special, albeit leveraged, dividend to investors; eliminate higher cost debt; or, establish a war chest to fend off unwanted suitors or competitors. In this deal, the funding appears destined to aid in both organic and inorganic growth. Stephans confirmed as much to me.

I’m not surprised that some of this capital is earmarked for organic growth. Acquiring new customers, opening offices in new locations/countries, expanding one’s product line, etc. are all expensive propositions. Rootstock has been growing but still may not have enough annual recurring revenue (ARR) from its existing customers to fuel all of the growth it wants to capture.

A cloud vendor generally has to have an extensive, stable group of customers whose subscriptions all throw off a lot of free cash flow to afford to grow at an outsized manner without needing additional capital. When SaaS (software as a service) companies hit this point, it means they can grow without further dilution of equity. The metric, ‘Rule of 40’ (R40), is the key metric to watch regarding this (for more on R40 see this piece). At its most basic level it means that if a company’s profit margin and its market growth rate (CAGR) represent a combined 40 percentage points, then the company can grow without needing new capital.

Kenandy

Kenandy is an ERP suite that was founded by the legendary Sandra Kurtzig (of ASK ManMan fame). If memory serves me right, ManMan was written in Fortran many, many years ago, while Kenandy was built within the Salesforce toolset.

Kenandy was acquired by Rootstock in 2018. Since then, the world changed with the pandemic being one of the biggest changes we all experienced. Rootstock has continued to support the Kenandy product line and its customers. According to Stephans, Kenandy has been a ‘positive financial influence on the company’. Rootstock will keep the Kenandy products stable and technically current. Should any Kenandy customers want to transition to Rootstock, they can but they aren’t being pushed to do so. Rootstock is leaving any migration decisions up to the customers to make.

The new-ish CEO

Stephans may be the new CEO of Rootstock Software, but he’s been with the company for 9 years.  Stephans sees his role to now be a growth-oriented CEO. To that end, he wants to help Rootstock achieve outsized growth in the very large ERP market that goes beyond the Salesforce install base. He also intends to push the company harder into supply chain capabilities as these are an ever more essential requirement in an age of massive supply chain disruptions, inflation, pandemics, etc.

Stephans also intends to look at inorganic opportunities, too.

Pat Garrehy, the original CEO and founder of Rootstock (and someone I genuinely enjoyed meeting up with at different Dreamforces and other events), will now be a board member of Rootstock. His down-to-earth style and first-person knowledge of manufacturing made him a hit with customers. I’ll miss sparring with him.

My take

This is the right time for Rootstock to be singularly focused on growth. The company is close to 15 years old and needs to have its break out moment. All software is relevant for a time before new innovations or changing buyer tastes permanently alter the landscape. As a result, the best software firms grab all the market share they can, when they can. If they don’t, the opportunity to do so may pass them by forever.

This is the time for a cloud ERP solution and Rootstock must seize the moment.

For Rootstock though, the choice of which manufacturers to pursue is important. The company can’t pursue every potential sales lead out there. It must pick its targets well to keep customer acquisition costs low and preserve its capital.

Rootstock’s best targets might be manufacturers who want to implement advanced technologies. These firms are creating factories of the future. They are implementing additional sensors, meters, etc. to better understand the environmental impact of their products, production methods, etc.  These firms are connecting new technologies (e.g., additive manufacturing/3-D printing), adding new production methods (e.g., robotic welding), and, reimagining their processes to create a very different kind of manufacturer. These prospects will be the future of manufacturing and must be the ones that Rootstock should pursue.