How $50 billion Salesforce is turning into one of the most aggressive investors in Silicon Valley
Salesforce had invested a small amount in InsideSales' previous round, through its VC arm Salesforce Ventures, so Elkington wasn't too surprised by their interest.But their next move did.
"As we further discussed, they said, 'Let us just lead this round' - which is not a typical thing [for them] to do," he said.
Salesforce ended up leading the $60 million Series D round announced in March, which made InsideSales one of the "unicorn" startups worth over $1 billion.
According to Crunchbase, it was only the fourth time Salesforce had led a venture funding round in its seven-year history. But in 2015 alone, Salesforce has led four rounds already.
Salesforce's investment in InsideSales is only one example of how the $50 billion cloud software behemoth has become one of the most active - and aggressive - corporate VCs in Silicon Valley lately. Its increased spending and unique approach of focusing almost entirely on cloud software companies has significantly boosted its presence in the VC community.
"Making larger investments is the biggest change recently," said Menlo Ventures' managing director Matt Murphy, who invested in the same round for InsideSales when he was general partner at Kleiner Perkins. "They are definitely one of the most active and collaborative corporate VCs in the valley."
Ballooning "strategic" investments
During the three months ended April 30, 2015, Salesforce spent approximately $145 million in privately held companies (including both equity and debt investments).
The actual cash spent on "Strategic Investments," made up of investments in both public and private companies, also jumped to $144.5 million last quarter, nearly 9X growth from the year-ago period when it spent only $16 million on it.
In the year ended January 31, Salesforce spent about $93.7 million on strategic investments - only about 65% of what it spent in the last quarter alone.
And the investments seem to be working so far. According to its last quarterly report, the fair value of Salesforce's total investments in privately held companies was approximately $452 million, as of April 30, 2015. Three months prior to that, on January 31, 2015, its investments in private companies had a fair value of roughly $280 million.
"Salesforce put $145 million to work, and the whole [fair] value of it jumped by a little under $175 million. So the fair value of their existing value is going up, and they're aggressively putting more money to work," investment firm Stifel's managing director Tom Roderick told us.
Even compared to some of the other corporate VC powerhouses, Salesforce's investment seems pretty high. Intel Capital, historically one of the most active corporate VC firms, spent $134 million during the first six months of 2015, while Qualcomm states in its latest filings that it is committed to spending only $105 million to fund "certain strategic investments" in fiscal 2015.
Salesforce currently has over 130 companies under its venture portfolio, 31 of which came in the last four quarters. It states that its investments range from $200,000 to $50 million, with eight investments individually exceeding $10 million."Corporate VC arms' sweet spot is usually $1 million to $5 million," Menlo Ventures' Murphy said. "What's more unusual is Salesforce leading rounds and its willingness to invest $10 to $50 million."
And Salesforce doesn't seem to be slowing down anytime soon. "We plan to continue to make similar investments throughout the remainder of fiscal 2016," it writes in its earnings report.
A unique approach
The biggest difference between Salesforce Ventures and the rest of the corporate VCs is that it almost exclusively invests in cloud software companies - the same industry segment that Salesforce itself is in.
"The whole goal of the program is to increase the cloud ecosystem and to deliver more solutions for our customers," John Somorjai, EVP of corporate development & Salesforce Ventures said. "So we're really careful on making sure we're investing in companies that really help that cause, and not just the next great startup."
That means investing mostly in subscription-as-a-service (SaaS) providers that help grow the Salesforce platform's overall reach. Most of them are built on top of the Salesforce1 platform and are part of the AppExchange marketplace.
Some of the biggest names its invested in include Box (which went public this year and now worth around $2 billion), Docusign (whose last reported valuation was $3 billion), and Dropbox (reportedly last valued at $10 billion). In fact, according to CB Insights, Salesforce has the highest number of investments in companies worth over $1 billion, surpassing Google Ventures for the top spot this year.
That focus in the SaaS sector, in fact, helps its portfolio companies to share knowledge and learn from each other too. And in some cases it even leads to direct top line growth.
Nick Mehta, CEO of Gainsight, a software that helps companies renew customer contracts, recently attended a two-day event hosted by Salesforce Ventures in Sausalito. There, he was able to meet over 100 SaaS company CEOs, all under Salesforce Ventures portfolio, and make connections that he was able to build upon for the long term."[Salesforce] does a really good job of connecting everyone. They got maybe roughly 100 SaaS CEOs together from their portfolio, so we could just network with other SaaS companies," Mehta said. "I actually met one CEO there, talked about our company for half an hour, and then a few weeks later, they ended up buying our product," he said.
Keeping Wall Street happy
The $145 million cash they invested last quarter is only a fraction of the $731 million it generated in operating cash flow ,too.
But the fact that Salesforce is increasingly looking for ways to find the next future growth engine through these investments sends a positive sign to the market, Stifel's Rodericks says, especially as Salesforce becomes a more mature company.
"They're sitting on a ton of money on their balance sheet, so to a certain degree, investors would like to see them make these strategic investments in companies around this space," Roderick said.
And that could potentially lead to more acquisitions, he noted, as Salesforce Ventures has been more active on the buy side too lately. It acquired sales intelligence software RelateIQ for $390 million last year, after spending $2.5 billion on marketing software ExactTarget two years ago.
"This certainly gives them more visibility in the companies that they might look at as partners or potential acquisitions down the road," he said.
We should be able to get to find out more about it on Thursday, when Salesforce reports its second quarter earnings. Analyst estimates are pretty much in line with Salesforce's forecasts at $1.6 billion in revenue for an EPS of $0.18.