March 6, 2013, 7:45 AM
By Scott Denne
When data storage company Actifio raised its new $50 million Series D round, investors valued the company at roughly $500 million. As high as that valuation was, it could have been even higher.
Ash Ashutosh, founder and chief executive of Actifio, got plenty of interest from investors.The company received offers at valuations that were 15% more than what it ultimately took for its latest round, but its management accepted this deal because it didn’t want the valuation to get too far ahead of the company’s own growth rate, according to Ash Ashutosh, Actifio’s founder and chief executive.
“I would have to start doing unnatural things to try to meet those expectations,” Ashutosh said. “This ($500 million) was a number we could comfortably create a four-to-six-times return.”
Ashutosh is one of a growing number of entrepreneurs in the enterprise software sector carefully weighing whether opting for the highest valuation possible might limit a company’s options in the future. That dilemma is more relevant than ever, since momentum in the venture market is shifting to the enterprise sector after years of soaring valuations in the consumer Internet sector.
Actifio makes storage systems that make one “golden copy” of a company’s data. That copy can be accessed by other applications that need copies of data, such as disaster recovery, archiving or software development and testing. This spares businesses the expense of keeping multiple copies of the same data for each of those applications. The Waltham, Mass.-based company finished last year with bookings up eight-fold from a year earlier, to about $17 million.
“They have simplified a product line that can do the tasks that, if I was to go to (storage giant) EMC would take four or five product lines that are poorly integrated and at significant greater cost,” said Rick Kimball, a founding general partner of Technology Crossover Ventures and lead investor in the round.
While the appeal of companies like Actifio is driving greater competition among venture investors, the resulting higher valuations can cause tensions among investors and even harm companies. New investors who paid a high price to get into a company may be inclined to hold out for a blockbuster IPO exit as a way to recoup their investment, while founders and early investors who have worked for years to build a company would be more inclined to accept a good acquisition offer.
In the $10 million Series B round that marketing software company Wildfire Interactive raised a few months before its July 2012 sale to Google , the company was offered term sheets with investments between $30 million and $40 million and post-money valuations as high as $400 million.
Instead the company took a valuation of $200 million, according to a person familiar with the investment. If the company had taken those larger valuations, the sale to Google never would have happened, the person said. Google paid more than $400 million for Wildfire, according to the person.
“There’s so much late-stage capital that tends to be momentum-driven that when they find a hot company they’re willing to pay up, but they want all kinds of provisions that ensure their multiple,” said Bob Ackerman, a managing director of early-stage venture capital firm Allegis Capital, speaking generally about the current environment. “If that gets in the way of an exit or delays an exit, is it worth it?”
Turning away higher valuations isn’t the only way some enterprise startups are managing their growth. Some entrepreneurs are keeping a lid on the bidding by finding a range the company is comfortable with and then bringing the investment opportunity to just a few venture firms.
AppDynamics, an application management company that recently raised $50 million at a $550 million valuation, was looking for an investor that would view an IPO as a milestone, not an exit. Once it found one in Institutional Venture Partners, a firm that has a history of buying stock in the IPOs of its companies, it didn’t look much further, said Jyoti Bansal, its founder and CEO.
His company was being pursued by many other venture firms. While the valuation it took was very high, it could have taken time to talk to more investors and get it up further, but it chose not to and focused on getting the best firm and partner, Bansal said.
“If you raise money at too high a valuation, you’re setting expectations that you can only sell to a few acquirers,” said Peter Falvey, founder of Falvey Partners, a technology-focused investment bank.
Like Mr. Bansal of AppDynamics, Billy Bosworth, CEO of database company DataStax, also opted against a “Sand Hill crawl”–taking a series of meetings up and down the Menlo Park, Calif., street that is home to many of the biggest venture firms–to maximize the valuation, he said. The company raised $25 million last fall.
“I want a fair price, but at the same time I didn’t want to sell to the highest bidder and create a bad dynamic on the board,” said Bosworth, who declined to disclose the valuation of the latest round.
Before joining DataStax in 2011, Bosworth was an executive at Quest Software, a database tools company and frequent acquirer of venture-backed companies. Sometimes he would see potential acquisitions where the valuation wasn’t tied to math that any reasonable person could understand.
“That meant either I would just walk away or hope that whatever fickle winds got them that valuation would wear off, and buy them in a pinch when they couldn’t raise more money,” he said.
New investor Technology Crossover Ventures led the Series D round for Actifio. It also included participation from existing investors Advanced Technology Ventures, Andreessen Horowitz, Greylock Partners and North Bridge Venture Partners. With this round, the company has now raised $107.5 million.
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