Lessons From Sourcebits’ Road To Acquisition

Editor’s note: Ashwin Ramasamy is the founder of ContractIQ, a free service that makes it super easy for enterprises and entrepreneurs to find curated outsourcing partners for their mobile initiatives.

Globo, an enterprise mobility and telecom software services company, acquired Sourcebits, a design-led engineering company that builds mobile apps for enterprise and consumer markets. The acquisition seems to be for capabilities. In a tough hiring market, teams with execution maturity at an enterprise level make perfect sense. The sale also strongly points to the growing appetite of tools, SDKs, platforms and API vendors for acquisition-led growth.

At the time of acquisition, Sourcebits was generating revenue of around $8 million at an EBITDA of $1.8 million.

If you look at it purely from a P&L performance perspective, it’s in line with the industry metrics (comparing with the industry benchmarks of consulting and outsourcing companies, with primary operations in India). But Sourcebits was not another IT services company that was completely bootstrapped. It raised $10 million from IDG Ventures and Sequoia.

Looking at the return on capital, gives a more holistic picture. There are lessons for funded and “to-be-funded” services companies that are focusing on the mobility space. At an exit valuation of $18 million, Sourcebits would have returned approximately 70 cents to a dollar to the investors. Depending on how the liquidation clauses were structured, there is a chance that the founders made little to no money. If you are interested in how these numbers were arrived at, you can check the workings here.

What’s more telling is that they had a revenue of $6.5 million in March 2011, around the time of investment. In three years, its revenue grew at a CAGR of 7.17 percent, which isn’t spectacular, considering the rest of the mobile market has been on a tear.

So how can we reason out a “less than spectacular growth and IRR”? There are organization-specific reasons that we won’t know. However if we indulge in reasoned speculation, a few points emerge that are useful for mobility services firms that are attempting product plays and getting funded.

Unlike ERP-type initiatives, mobility initiatives are smaller in revenue terms and shorter in time. This necessitates a very efficient and effective new business development engine for enterprise mobility firms. Lack of a sales engine cannot be solved by capital. The lackluster revenue growth of Sourcebits partly could have been due to troubles with the sales engine

When capital of proportions as in the case of Sourcebits gets deployed to services organizations, the expectations become high. Marketing spend is cranked up and product initiatives are looked at as non-linear revenue generators. Sourcebits tried both. It even tried the risky route of being “investors” in startups, earning some of its revenue as equity. Turns out these initiatives became distractions that cost the company dearly on mid-term growth.

Based on ContractIQ’s Global Price Benchmarking study, the peer group of Sourcebits prices themselves at approximately $50 an hour for mobile services. It’s unclear if Sourcebits has 167 employees as the acquisition note says or if it’s more (from CrunchBase it seems to be 400+). If it’s 167, at an unlikely case of 100 percent utilization, the revenue should have been $16.7 million. But it’s about 50 percent of that, at $8 million. Distractions such as consumer product forays, risky execution model (of at-cost delivery for startups), slow growth on new logo additions (and hence an unhealthy bench) could have all contributed to an effective billing rate of $25 per hour.

Enterprise mobility is increasingly becoming platform- and tools-led. SaaS-ification (especially backend-as-a-service type of solutions) and API/cloud-centric integration of enterprise information, is shrinking the per-project revenue for custom development companies even as the overall market for custom development holds strong. This, again, points to smaller deal sizes and growing volume.

Had it not been for the funding, which seems to have made no impact on the acquisition, the exit could have been a huge win for all involved. So if you’re a founder of a mobility services company, what can you derive?

â€" SaaS, SDKs and Platforms are shrinking your pie in every transaction

â€" It’s still a good market for you to grow and exit as a bootstrapped company, if you know how to crank up the sales engine for new leadsâ€" If you’re going to have product ambitions, choose your bets judiciously. You can become a platform, tools or SDK player, which gives you an unfair advantage in enterprise pursuits. Unrelated product investments like launching consumer apps or funding startups are very risky distractions. It’s not a good idea to have several seed stage ideas within an organization funded by an investor who typically invests in growing a well-established business. Incentives don’t align well.

As an entrepreneur myself, I know that any exit that isn’t a bloodbath is a great exit. Then, there’s an implicit satisfaction of having helped to build the careers of many and delivered world-class work, and all of the other nice things that don’t appear on a balance sheet.

For all of these, a big salute to Sourcebits. They executed well on those counts. I loved the apps they built, their design language and the brand they painstakingly crafted, one radio ad at a time, one ad spot on TechCrunch at a time.

I hope they got a good deal at the end of it all and a great legacy to tell.