This morning Egnyte, a Bay Area-based hybrid-cloud storage and collaboration company, announced that it has raised a $75 million Series E led by Goldman Sachs.
The new capital comes after a multi-year period during which Egnyte reached self-sustaining financial results. The company last raised $29.5 million in a December 2013 Series D. In total, Egnyte raised $62.5 million before its current round.
Most startups, regardless of target market, raise around every 18 months. For Egnyte to not raise for five years is therefore a pretty rare result. It’s even more surprising when you take into account its focus: corporate software, a startup niche that is famously cash-hungry.
To understand why Egnyte raised after avoiding investors for five years, we have to rewind the clock. Hang tight, we’ll get back to the news.
Egnyte announced that it reached free cash flow positivity in the second half of 2016, an impressive feat for a still-private company. Venture-backed startups that sell software and storage solutions to other companies normally don’t generate cash; it’s nearly a law.
After reaching that milestone, Egnyte announced it had reached GAAP (inclusive of all costs) profitability in the final quarter of 2016 and the first quarter of 2017. During that period, Egnyte was actively shedding unprofitability and growing under its own steam.
As Crunchbase News pointed out at the time, Egnyte had grown more slowly than analogous companies that have raised more. But sometimes raising and spending $100 million makes for better headlines than business.
For Egnyte, some things haven’t changed (it’s capital efficient) and some things are different (it has over $75 million in the bank). We wanted to know why the company changed its tune, raising more external funds instead of self-financing. Here’s what we found out.
Crunchbase News spoke with Vineet Jain, Egnyte’s CEO, in advance of the fundraising announcement, hoping to understand why the company decided to raise a full $75 million.
In short, Jain pitched his board that he could “bend the growth curve” up with extra cash given its healthy operating results (cash generation) and a compound growth rate around 30 percent.
Jain said his vision was to “put more money into” his company without having “burn go up like crazy,” hopefully pushing Egnyte’s growth rate from 30 percent to the mid-forties.
Moving from 30 percent growth to 45 percent growth is a 50 percent bump. And as investors in the public markets currently value growth over profits, Egnyte is setting itself up to make its business more attractive to that cohort of investors. With $75 million in new cash-on-hand, it seems doubtful that the firm is in any danger of going public tomorrow; however, Egnyte can likely now accelerate its growth without fretting over dips into negative cash flow territory for a few quarters.
Per Jain, the raise took less than three months to secure, and he had a number of term sheets to choose from. After targeting a slightly lower dollar amount, Egnyte wound up taking a bit more, giving itself more room to experiment, according to its CEO.
But why now? The company gave us a few hints.
According to Egnyte’s CEO, the company has produced improving SaaS metrics—think net retention, dollar-based retention, that sort of thing.
Those terms, and their improvement, mean that Egnyte is generating revenue more efficiently than before. It also means that money invested into growth at Egnyte will have a larger long-term impact than before. So it’s a good time to raise capital to invest into the business.
Finally, it’s also a lovely time to raise money. As we’ve written extensively on these pages, venture funds are getting bigger, huge rounds are happening more often than ever, and no one wants to give up that big check if the terms make sense.
For Egnyte, the question is now how effectively can it spend its new capital. I asked Jain if the company was in any danger of accidentally flittering it all away. He said that the company’s mindset won’t change, but that it was nice to be able to double down.
To check in on that claim, I asked Egnyte’s new board member, Goldman Sachs’ Holger Staude, if the company’s capital efficiency to date was a “key driver” in his decision to invest in the company. His response: “Yes.”
Staude’s team was also confident that Egnyte would not lose its discipline along the way. Staude said the firm’s “[r]ecent additions to the product portfolio, growth in reference customers in the U.S., and promising traction in international markets” are all “attractive opportunities to deploy [Goldman’s] capital.”
More simply, Goldman thinks there are a number of places for Egnyte to responsibly invest in its business. Given that, it’s not worried that the firm will WeWork its new capital.
I keep thinking that each piece that we write about Egnyte is the last before it goes public. This time, however, I expect it to disclose more growth metrics before it drops an S-1. So we’ll be back sooner rather than later.
Top Image Credit: Li-Anne Dias.
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