Liquidity

Alternative Investment Shop Scaleworks Buys Nextopia, Its Second Acquisition Of The Year

Scaleworks, a San Antonio-based firm that offers a non-traditional form of capital and debt for SaaS companies, has acquired e-commerce search shop Nextopia for an undisclosed amount in its second acquisition out of its recently closed second fund.

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Toronto-based Nextopia is focused on providing real-time recommendations and personalization. The buy is complementary to Scaleworks’ first acquisition out of the fund, in which it raised $80 million earlier this year, according to Lew Moorman, a Scaleworks general partner and co-founder. In May, Scaleworks also picked up SearchSpring, a Denver-based company that provides access to advanced searching for online retailers’ websites.

In a post, Moorman said the two buys are helping Scaleworks put together a “toolset to help merchants of all sizes sell as effectively as the biggest players.”

Alternative Investment Strategy

Before we get into more detail about the buy, let’s quickly discuss Scaleworks’ model. The firm, founded in late 2015, is an example of a new alternative investment trend. (Plus, it operates out of a cool space that used to be a hotel.) Rather than back companies by giving them money and then taking a stake in the venture, it instead acquires SaaS companies (usually with between $4 million and $10 million in ARR) where a founder is ready to move on or feels like a plateau has been reached in the company’s growth, or it provides what it describes as “venture loans.”

In the case of its acquisitions, Scaleworks taps someone to serve as the new CEO and essentially “revive” the company. The firm is proud of the fact that, unlike traditional private equity buyouts, it actually adds employees over time over making a bunch of cuts.

“We really see ourselves between PE and VC,” Moorman told me. “But unlike a lot of private equity, which tends to buy companies and cut cash flow as much as possible, we tend to actually invest in the company. Every company we’ve bought has more employees today than when we acquired it.”

Scaleworks is also realistic in that it’s not out to necessarily create the next unicorn, according to Moorman. Instead, its goals usually involve getting a company to about $10 to $30 million in revenue.

“We just want to build a really solid, good business,” he said. “Our model allows us to have the patience to do that.”

With its first $60 million fund, our EIC Alex earlier this year reported, Scaleworks bought eight companies which collectively grew 52 percent to $80 million in revenue in 2018. At the time, Alex wrote “with its fresh $80 million, the firm is aiming at larger deals than before, according to a Scaleworks spokesperson (the $4 million ARR floor).”

Of those eight, three Scaleworks companies have so far exited:

  1. Assembla. The company was purely a SVN product when Scaleworks acquired it. The firm says it beefed up security, built out its customer base and along the way it acquired a few companies. Last November, it sold to Houston-based Idera.
  2. Mailgun. While Scaleworks didn’t 100 percent own the formerly San Francisco-based company, it’s ownership stake was large. Earlier this year, Thoma Bravo picked up a majority stake in Mailgun, which now has over 100 employees in San Antonio.
  3. Followup.cc. And lastly, this email productivity app was acquired by Lever Technology in May 2018.

Cody Halff, the CEO that Scaleworks put in place to lead Followup.cc, has stayed on at Scaleworks and currently leads the corporate development at the firm, which basically means he’s spending all his time looking for companies to pick up.

I was curious about how Scaleworks sources its potential acquisition targets, and Halff told me it’s a combination of inbound and outbound efforts.

“A lot of companies come to us directly, which is great,” he said. “But we also do highly targeted outreach. Often we’ll start conversations with a company, create a relationship and then when it’s the right time, we’ll reach out.”

Latest Buy

Peter Messana, also the CEO of SearchSpring, will be leading Nextopia, Scaleworks’ latest buy. While there are no current plans to merge the two entities, which do have “a little overlap,” Messana believes there are ways the two companies can work together.

Moorman agrees.

Scaleworks will effectively put both SearchSpring and Nextopia’s headquarters in San Antonio.

“We like to be close to the companies we acquire so that we can engage and interact,” he said. “Most of the companies we acquire have strong engineering teams but may not be as strong on the go-to-market side. That’s true in both cases as well.”

Nextopia uses AI and machine learning to power hundreds of websites for customers such as Gerber, Noritake and Jimmy Jazz. It also offers personalized product recommendations automated merchandising for users, and has partnerships with companies such as BigCommerce, Yahoo and Shopify Plus. While it’s historically focused on D2C, it is now seeking to enter the B2B space.

“These days, everybody does search, but it comes down to recommendations and the personalization aspect,” he said. “While the Amazons, Walmarts and Wayfairs of the world are dominating the general ecommerce space, D2C is a huge opportunity, and B2B also an extraordinary opportunity. There’s a lot of excitement around ecommerce in general, especially when it comes to tools to help retailers compete with unique shopping experiences. I doubt these will be our last two acquisitions in the space.”

Featured image: Lew Moorman, general partner and co-founder of Scaleworks.