/How Salesforce became Silicon Valley’s best late-stage tech investor

How Salesforce became Silicon Valley’s best late-stage tech investor

Marc Benioff, chairman and co-chief executive officer of Salesforce.com Inc., speaks during the opening keynote of the 2019 DreamForce conference in San Francisco on Nov. 19, 2019. Salesforce.com Inc.s annual software conference, where it introduces new products and discusses its commitment to social causes, was interrupted for the second year in a row by protests against the company’s work with the U.S. government.
David Paul Morris | Bloomberg | Getty Images

Last week, Salesforce reported a $ 2.17 billion annual gain from its investments in other tech companies. A few days later, the company’s venture arm extended its winning streak with another big exit.

In a boom time for large tech IPOs and software consolidation, Salesforce’s name is showing up everywhere. CEO Marc Benioff has proven that he’s not only a mega-dealmaker when it comes to buying high-priced cloud companies like Slack and Tableau, but has also turned Salesforce, with its hefty balance sheet, into a major force in Silicon Valley venture capital.

The latest windfall came on Wednesday, when cloud security vendor Okta said it’s acquiring smaller rival Auth0 for $ 6.5 billion, eight months after Salesforce Ventures led a $ 120 million investment at a $ 1.92 billion valuation. Salesforce more than tripled its money between July and March.

In 2020, two of Salesforce’s portfolio companies — nCino and Snowflake — soared after going public. They produced a combined $ 1.7 billion in investment gains, accounting for 78% of Salesforce’s total increase for the fiscal year that ended in January, according to the company’s fourth-quarter report on Feb. 25.

Salesforce also sold all of its 2.8 million Zoom shares last year, after more than tripling its money from investing $ 100 million in the video chat company’s 2019 IPO.

Those gains are providing a big boost to Salesforce’s bottom line. Of the company’s $ 4.38 in earnings per share for fiscal 2021, $ 1.75 came from mark-ups on strategic investments. Salesforce also reported on its balance sheet that its investments were valued at $ 3.91 billion as of January, up about 100% from a year earlier.

Benioff and Bret Taylor generate many investment ideas

Corporate venture capital used to come with a stigma. Big companies, in the eyes of many investors, had their own agenda, whether it was gaining market insight or product ideas from potential disruptors. Traditional venture firms often preferred to avoid investing alongside them.

While Salesforce does sometimes compete with portfolio companies, it’s better known for using its dominance in the sales software market to provide expanded distribution to the many business apps that need an audience. Salesforce benefits by offering its customers a wider assortment of cloud services, and start-ups win by getting meetings with potential clients who otherwise may never take their call.

John Somorjai, who runs Salesforce Ventures and leads corporate development companywide, said his group’s pitch has to be increasingly compelling because competition for deals has never been greater.

John Somorjai of Salesforce
Source: Salesforce

“There is just so much money available, so much dry powder, more than has ever been in the industry,” Somorjai said in an interview this week. “How we’re able to get into the best deals is really leveraging the strength of Salesforce and the tools we have.”

He said he’s roughly doubled the size of his investment team in the past two years to 15 people to keep up with the growing number of start-ups across the globe.

Salesforce Ventures doesn’t take board seats, keeping Somorjai and team mostly on the sidelines when it comes to questions around a potential acquisition or asset sale. On occasion, Salesforce does buy a Salesforce Ventures company, like its purchase in 2016 of productivity software start-up Quip.

“They never block a sale or create issues and only help,” said Jason Lemkin, founder of SaaStr, which hosts events on cloud software and invests in start-ups. “The fact they help a lot of top SaaS VCs mean they are often happy to have them in a hot deal.”

Somorjai, who joined Salesforce over 15 years ago, said many of his best investment ideas come from Benioff and Bret Taylor, the company’s operating chief (and Quip founder), who are both constantly out talking to customers.

About Benioff, Somorjai said, “Customers come to him and say, ‘Have you looked at this company? They’re doing really interesting things and helping us in this way.’ He feeds that data to me.”

‘Stage agnostic’

Salesforce Ventures is all over the map when it comes to check size. Or in Somorjai’s words, “We’re stage agnostic.”

In 2020, it participated in the $ 7.5 million Series A round for education-tech start-up AdmitHub and the $ 13.5 million Series B for Angaza, whose sales management platform targets emerging markets. It also invested $ 100 million in security vendor Tanium at a $ 9 billion valuation, and just last month backed data analytics company Databricks at a $ 28 billion valuation.

in recent years, late-stage growth investments have proven to be the fastest way to generate a hefty profit. Salesforce’s $ 250 million investment in Snowflake’s IPO was worth $ 529 million after one day of trading. Its $ 100 million purchase of Zoom shares almost doubled in three days in 2019.

That avenue to a quick buck may be closing. Companies now have many ways to go public, including through a direct listing or special purpose acquisition company (SPAC), neither of which involve selling IPO shares at what amounts to a huge discount.

In a direct listing, a new rule allows companies to raise capital while still unlocking the ability for existing investors to sell at market price. In a SPAC, companies raise money through a PIPE, or private investment in public equity. PIPE investors then end up with stock in the underlying company when it starts trading.

While Salesforce could look to PIPEs as another route for late-stage investing, Somorjai said he’s not currently pursuing that path.

“It’s a little bit early to see how that whole PIPE to SPAC trend evolves and how successful some of these SPACs are,” Somorjai said. “It is a very interesting new way for a private company to get liquidity quickly and probably much easier way for them to do it and potentially allows them to have less dilution.”

Investing and competing

Manny Medina, CEO of sales engagement software company Outreach, said Salesforce connected with him about making an investment in the early days of the Covid-19 crisis, at a time when “it was easier not to invest than to invest.”

“The world was going into a quagmire and you didn’t know which end was up,” said Medina, whose Seattle-based company develops software to help salespeople land deals and stay connected with customers. At the same time, “people are hoarding toilet paper and Purell,” he said.

Still, Salesforce wanted to be a part of Outreach’s $ 50 million financing round, which valued the company at $ 1.33 billion. Medina acknowledged that there was tension involved in allowing Salesforce onto his cap table, because the companies have competing products and Salesforce is the industry goliath.

Medina said that in conversations with Matt Garratt, Salesforce Ventures’ managing partner, he got comfortable with the team’s promise to protect his company’s intellectual property and have his back, while also getting him in front of the right people at Salesforce or with customers.

Ultimately, it was worth it for Outreach to do the deal because Salesforce has established a reputation for being a very smart investor, he said.

“At the end of the day, we’ll compete with them anyway, like it or not,” Medina said. “Either we get the relationship and get the signaling of someone who’s know for picking winners or we just compete with them without the money and the signaling.”

Outreach integrates with Salesforce but it doesn’t count on the company for distribution or use its AppExchange, which is Salesforce’s marketplace for third-party apps. According to Medina, “the only benefit we get from Salesforce is that they’re evangelizing the cloud.”

That makes Outreach a very different type of investment than Auth0 or nCino.

In November, shortly after its investment in Auth0, Salesforce chose the company’s identity management technology to power its consumer identity offering. Somorjai said it was a service that customers were requesting and Auth0 was a name that people trusted in the space.

For nCino, the partnership started even earlier. The company sells cloud software to help banks digitize and automate operations related to lending and portfolio management. From the beginning, nCino built its platform on top of Salesforce. In nCino’s IPO prospectus, the company mentioned Salesforce 99 times.

Salesforce first invested in nCino in 2014 and continued doing so over the next five years, amassing a 12% stake as of the company’s IPO last year. Those shares were worth almost $ 800 million at the end of 2020.

“They decided to build their entire business on the Salesforce platform, so it made a lot of sense to invest in that team and what they were doing,” Somorjai said. “I would still say the vast majority of our investments do start in the early stage.”

WATCH: With its $ 27.7 billion Slack deal, Salesforce eyes rivalry with Microsoft

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