Rolling Up E-mail Security SaaS: Gary Steele, CEO Of Proofpoint (Part 6)

SM: I have known other companies that have acquired venture-owned companies, and they did it via an all-cash transaction. The CEO worked out a valuation with the acquisition company, then went back to his investors and presented the deal and raised the cash to make the acquisition happen.

GS: Cash is easier, but those deals have their own complexity. You have to believe that at the end of the day that you will get that cash. If you don’t have that money in the bank then you have to raise money, and raising money as part of an acquisition effort can be really hard. Timing is everything.

SM: There is now a class of investor who does this.

GS: There is a class, but the number of times they actually get a deal done remains fairly low. They will talk a big game, but they will value your company, and the target company, in their own perspective. You have yet another set of people to try and align.

We look at stuff all the time. We get very clear, very quickly on what the value is. Internally, we understand what the new company would provide us with. If you have that clarity early, then you know how much time and effort it is worth spending. A lot of times people will ask for some ridiculous number, and because we already have that clarity I can quickly respond by saying, “We can never pay that. I wish you the best” and let them go on their way.

SM: A lot of people are delusional.

GS: The archiving business is outside the Valley, and I think that companies outside the Valley are less delusional. They are more pragmatic and grounded when it comes to valuation and what is fair.

SM: A lot of them are trying to get a foot in the door in Silicon Valley. What is your plan for the future? There is definitely an exit problem right now. There are so many private companies and the public markets are not good. I have always thought that there are too many private companies that have been funded which should not have been funded.

GS: A year ago in security there were 700 companies. You cannot tell me there are 700 product categories in security. When it comes to us, I focus on a couple of things. First, we have a very steady growth rate and we are generating cash. We are not dependent on capital markets for additional money. We are, in many ways, in control of our own destiny.

SM: You are one of the few that are in a position to do a roll-up.

GS: Yes. I also consider that while the public markets are not open today, they will be open at some point. Given our metrics, I think the public markets do offer an opportunity for us. That lets us continue the acquisition strategy. It would provide stronger currency and simplifies things a great deal. It lets us be more aggressive. Today when you look at M&A deals, you have to handicap at some tiny percentage when you are starting out.

SM: At $80 million, you are going to be ready to go public pretty soon.

GS: The decision is up to us regarding that timing. We are not hung up on the markets today because we are not going public today. They will open up, and because we have no dependence on capital markets we can afford to wait until they do. We are building a business for the long term. Our total available market is in the $5.5 billion range, so there is plenty of market for us to go after. We can be patient and just continue to execute.

If you are burning cash and you need an exit because you do not think you are going to raise money, then you are in a very different situation.

This segment is part 6 in the series : Rolling Up E-mail Security SaaS: Gary Steele, CEO Of Proofpoint
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