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The Arizona-based Tim Crown, who made his bones listing a firm called Insight Enterprises on the Nasdaq at a US$35m valuation a decade ago (its market cap is US3.5 billion), has a theory about why so many startups are suddenly in a spot of bother.
“Governments across the world printed tremendous amounts of money, and there was tremendous venture capital funding of small software startups. And what’s happened in the last six months is that funding has pretty much dried up,” he told the Herald.
“So there’s a ton of orphan companies out there that were geared up to grow to the moon if they had enough capital, enough resources, enough management and enough time. But with what’s happening out there right now, those companies don’t really have a lot of options.
“What do they do? Do they continue to do what they’re doing? Do they try to seek more capital? And this is where Blackpearl comes in. I think it’s gonna be a target-rich environment in 2023 and 2024.”
Crown was in Auckland this week in his role as chair of NZX newcomer Blackpearl Group, which styles itself as an acquisition company.
Founder and CEO Nick Lissette says market slowdowns and plummeting valuations of private businesses due to global recessionary pressures have created unprecedented opportunities in the market.
Exhibit A for this strategy is recent acquisition Newoldstamp - a maker of an email signature generator whose CEO and most of its 20 staff are based in Lviv, Ukraine, meaning it faces war on top of all the pressures listed above.
The product complements Blackpearl’s own product Black Pearl Mail, and takes the group’s total staff to 57.
Lissette says Blackpearl is focusing on email - which will allow cost savings as multiple products share various technologies - but could buy firms in the broader communications field.
“Typically these companies will have $750,000 to $1.5m in annual recurring revenue - and there’s a hit list of about a dozen of them that we’re eyeballing, and obviously we walked the walk by acquiring Newoldstamp,” said Lissette.
In the US, the venture capital industry has come to a screaming halt. Here - in part because it never reached the same highs during the recent boom - it’s been more of a fall-away. Blackbird recently celebrated raising $75m for its second NZ fund (which included a $30m contribution from the soon-to-be exhausted, Government-backed Elevate) - shy of an earlier prediction it would raise “at least $80m”, and the fund’s $100m hard cap. (A Blackbird spokeswoman said more money could be raised before the close in early 2023).
A number of other funds have reported reasonably robust raises, but with most of the capital raised earlier in the year before the big chill hit. Today, venture capital belt-tightening has led to the unfamiliar sight of people in the startup community hustling for work on LinkedIn. NZ High Tech Awards judge Shona Gundry recently posted to LinkedIn that “Sadly, due to delays in the A round at [my] current company, I find myself without employment just before Christmas”. She and two colleagues posted CVs. Another startup veteran, Nick Shewring, replied, “I’m in the exact same situation myself.”
No money is being raised with the listing. But founder and chief executive Nick Lissette says the listing could provide a vehicle for future capital raising. In the near term, its primary purpose is to provide scrip for deals.
Lissette describes the Newoldstamp deal - due to close on January 5, 2023, and the immediate impetus for the listing - as something of a template in that it was an equity-heavy deal, involving just 13 per cent cash. (It was also heavy on earnouts. Of the total purchase price of $4.8m, just $1.5m was paid up front).
“As we mature, the size and scope of those acquisitions will change.” Blackpearl will look to hook larger fish, and in broader areas of cloud software.
The firm was founded as Black Pearl Mail back in 2012.
It has raised some $20m over its lifetime, from backers who have included high-profile investors such as Crown, former Westpac NZ CEO Peter Clare, former NZ Super Fund director Simon Botherway and the family office of former Berkshire Hathaway Automotive chair Larry Van Tuyl.
It recently raised $6m from investors including ACC and Sir Owen Glenn.
In 2015, Westpac rollout out Black Pearl Mail, hailing it as a tool for easier standardisation of email signatures, and the ability to embed TV commercials in marketing emails.
The deal was not renewed. Lissette told the Herald earlier this week that was the best outcome for both parties.
“We were mutually happy that it ended. We build for small to medium businesses, and while it’s attractive to have those big names onboard, the reality is they can consume an awful lot of your internal resources.”
Blackpearl’s email signature platform moved on to Microsoft Azure in 2017 before the company shifted its headquarters from Wellington to Arizona in 2019.
SMEs are Black Pearl Mail’s target today (though Crown notes that new acquisition Newoldstamp includes Federal Express and Uber rival Lyft among its customers).
Over time, Blackpearl Group will target larger acquisitions, Lissette says. And Crown has been there before, building Insight (an IT services and consulting outfit) into a Fortune 500 company
Today, however, it’s a small cap, with small-potatoes revenue. Annualised recurring revenue was running at $2.8m as of this month, Lissette said - including around $1.1m from Newoldstamp. Blackpearl lost $2.9m in the year to September 30, but Lissette says much of the red ink was tied to one-off costs in the build-up to the listing.
There are big growth plans from here, but Lissette and Crown won’t say how big, or how fast. As a compliance listing, Blackpearl isn’t obliged to file a full prospectus (although it has posted a Listing Profile and some historic financials) and its CEO and chairman declined to give any forecasts.
Blackpearl will be one of just three new listings on the NZX this year and the only primary listing of an NZ-registered company. (A reverse-listing is also scheduled for next Tuesday, when WasteCo will back into Goodwood Capital.)
There have been no initial public offers during 2022. The only listings have been a secondary listing by Australian fuel retailer Ampol and the Booster Innovation Fund – an early-stage managed investment scheme.
“The, Nasdaq has become so expensive, and you’ve really gotta have this huge market cap to build from or you can’t get the message out that you even exist,” says Crown - who is based in Scottsdale, Arizona, but was in Auckland this week for the listing.
“If you are really after growth, and especially growth via acquisition, then compliance listing on the NZX is the way to go,” Lissette said.
“It’s way more affordable than doing it anywhere else; it’s a relatively affordable market to get awareness in, and it gives you an exchange with a degree of liquidity.”
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