Alok Ajmera had just presented at a conference in Boston last June when he got the offer of a lifetime. For the past year, private equity firms had been heavily courting the president and chief operating officer of Mississauga-based Prophix Software, which makes software used by finance departments for budgeting, forecasting and automating reports. Now, one suitor from San Francisco was putting on the full court press. He offered to fly Ajerma to the Bay Area to watch game six of the NBA championship series between the Toronto Raptors and Golden State Warriors. At courtside. Yes, that game.
The problem was that Ajmera, his wife and two daughters were moving that week. If he had gone, he would have been cheering as Kawhi Leonard and Kyle Lowry won Toronto’s first NBA championship. Meanwhile, his family would have been digging out of boxes. After agonizing for hours over how he could make it work, he turned down the trip. “I gave up courtside seats for my marriage,” he says. “But I will tell you, I was thinking all night, ‘How do I convince my wife to do the move without me?’”
Talk about a difficult choice. Here’s another: Ajmera and his boss Paul Barber—Prophix’s co-founder, CEO and majority shareholder—haven’t sold any part of the company despite the continuous onslaught of interest from would-be investors. Nor do they want to.
“We haven’t taken a penny. We are not driven by a short-term investor. We’ve had the luxury of playing the long game,” says Ajmera. Gesturing around Prophix’s 10th-storey office, three blocks from Mississauga’s Square One mall, he says, “People here are proud about the fact we haven’t raised capital.” (The lone exception was about $300,000 of startup funding from a handful of angel investors. That was 24 years ago.)
Software may be eating the world, but increasingly, growth equity and private equity firms are eating software companies. Talk to any CEO of a fast-growing Canadian enterprise software company with more than $20 million in annual revenues. They all say the same thing: They’re inundated with cold calls from later stage private capital firms. “I get outreached by [private equity] at least three times a week,” says Carol Leaman, CEO of Waterloo corporate training software company Axonify, which last raked in US$27 million in venture capital financing. The firms have been raising and deploying capital at unprecedented rates and are looking to invest. Simon De Baene, CEO of Montreal’s GSoft, has never raised outside money while building a software firm on track to generate $75 million in revenues this year from products that help corporations migrate their operations to the cloud. He jokes that he gets calls “every single day, every hour. It’s crazy. Money is really cheap now.”
For Prophix, that means it is one of a dwindling number of players within the corporate performance management (CPM) niche of enterprise software to remain “bootstrapped”—or self-financed. Last year, venture-backed San Francisco-based Anaplan, Inc. went public and is now valued at more than US$6-billion. Prophix’s most direct rival—private capital-funded Adaptive Insights—also filed to go public but then sold to payroll processor Workday for US$1.6 billion last year. “All of a sudden, investors are knocking on the door of all these smaller [CPM] firms wanting to throw money at them,” says Howard Dresner, founder and chief research officer of Dresner Advisory Services, a Nashua, N.H.-based technology market research firm.
But Prophix simply isn’t interested. Ajmera thinks his company can reach $100 million in revenue on its own. “That’s very motivating for us. Everyone [else] has the same business model in mind from a funding perspective,” he says. That blueprint involves bringing in private investors with expertise and connections who demand conditions and dilute the ownership of founders and management. “It’s as if that’s the only way to build a successful company,” he says, sounding frustrated. “There is a different model and it could be wildly more lucrative for everyone involved. You maintain control of the business, you can create way more enterprise wealth, you can do more disruptive things. You can employ more people and have dramatically way more impact.”
But there are tradeoffs. Bootstrapping means being out of the headlines, while companies raising big sums get the news coverage that puts them top of mind with future investors and prospective employees. Going it alone also means relying on your own ability to generate funds, a strategy that can limit growth in the face of spendthrift rivals.
Can Prophix resist outside investors forever, or will competition from heavily financed rivals force it to reconsider? “I would say over a long period of time, most bootstrapped founders get converted,” says David Greenberg, general partner with Baltimore-based JMI Equity. “It may take a really long time… but the majority of the time the companies end up not being bootstrapped.”
It’s not difficult to understand why financiers would be interested in Prophix. The company has increased recurring revenue from software subscribers by more than 45% annually since switching its offering to the cloud in 2016. It should reach $50 million in revenue this year, derived from more than 1,600 mid-market customers (typically companies with between $100 million and $1 billion in annual sales). That makes it one of Canada’s largest cloud software providers. Based on the going price for private equity investments, the cash-flow positive company is likely worth hundreds of millions of dollars.
True, Prophix isn’t a household name like Facebook or Amazon—or even as well-known as other up-and-coming Canadian tech firms. But research firms Gartner and Dresner rank it, respectively, as a “visionary” and “leader.” It leads its sector in “net promoter score”—a measure of the likelihood customers would recommend it. It also has a 9.4 rating from software review site TrustRadius. Barber’s 97% CEO approval rating on Glassdoor, a site that tracks workers’ views of their employers, is higher than Canada’s best-known tech CEOs, including Shopify’s Tobi Lütke and David Ossip of Ceridian.
So there’s plenty of data suggesting Prophix would be a good investment. And the company’s DNA isn’t coded to resist outside money. In fact, Barber has twice seriously considered tapping private capital markets during the company’s 32-year history.
The first time happened in the late 1990s, when the down-to-earth British immigrant, now 66, did the rounds of Canadian venture capitalists to help finance his company’s evolution from a distributor of others’ software to a developer of its own “decision-support” tool. But Canada’s venture capital industry was young and Barber found the financiers he approached “really didn’t understand much at all. We had to constantly educate them about the software business and what our software did.” After talking to maybe a half-dozen, he gave up. “We realized there was no way we could ever raise capital from them,” Barber says.
Instead, he funded development using the maintenance revenue collected from clients after installing software from the other guys. His view of venture capitalists hasn’t changed much; he likens them to speculators who financed railway mania in the 1800s. “It’s just the way the world works,” he says.
The second time was in 2016. Prophix was in the latter stages of converting its business to offering its software over the cloud. That’s a difficult transition, because it requires a software firm to eschew big up-front payments in favour of much smaller monthly sums over multiyear subscriptions.
Barber worried his revenues would drop by 25% and he’d need outside funding to cover the transition. But as private equity suitors began probing his books, Barber had doubts. He found their expectations “onerous,” he says, with demands for guaranteed minimal returns and preference shares putting their interests above other stakeholders’. “They were asking for too much,” Barber says.
By this point, the company was coming to the end of its transition to the cloud. The temporary revenue drop was only one-third of what Barber had expected. Prophix would be fine without the outside capital. Besides, he’d seen other entrepreneurs forced out after selling controlling stakes to private investors. “People who could have made a reasonably good living for the rest of their lives are pushed out because the investors get very impatient and want it to grow faster,” he says.
Meanwhile, Barber doesn’t seem at all interested in taking any money off the table. “He’s not monetarily motivated,” says Ajmera. “Sometimes we’ll come back from a meeting [with would-be suitors] and he’ll say, ‘What would we do with that kind of money?’ If we were to sell all of a sudden for $500 million, he’s like, ‘Carol [Barber’s wife] is just going to donate it all.’”
Barber’s conclusion about strings-attached private capital was: “Well, it’s not for us, we don’t want to do it, we’ll carry on and succeed—and we did.”
If Barber is genteel, modest and old-school, Ajmera, the son of Indian immigrants who grew up in Oakville, Ont., comes across as pragmatic and savvy. He was obsessed early on with getting rich and retiring young—Freedom 35 was his motto. He built websites for his dad’s friends as a teenager, created software for naturopaths to run their businesses and later dabbled in real estate. He framed dollar bills and contracts to motivate himself. Graduating from McMaster University with twin bachelor degrees in engineering and management as well as engineering physics, he went to work for Prophix in 2004, training new customers to use the product. He thought he’d leave after a couple of years to run his own software business. Instead, he kept landing increasingly senior jobs within Barber’s firm. He became COO in 2014 and then president two years later. Today, he owns about 10% of the company and no longer has wanderlust.
Ajmera’s tenure running Prophix has coincided with the CPM sector’s emergence as a hot software niche. It “was a sleepy backwater for years,” says Dresner. “But CPM has gained tremendous interest, especially of late, as investors look for something that is going to deliver.” He notes that target customers aren’t corporate IT professionals but more conservative finance departments.
It frustrates Ajmera that media spotlight his rivals and their big funding rounds while ignoring Prophix. “Let me ask you directly,” he says at the beginning of our mid-September interview, arranged after months of outreach efforts by the company. “If we had just closed a $100-million round of funding, how much more interested would you be in writing about us?” His point is that business media treat those investment dollars as the only points on the board that matter.
Fair enough, but it’s not just the media that are biased. Companies that raise outside money have cachet—it’s a plot point in their narrative that matters to prospective employees and customers. Some prospective employees have hesitated to join Prophix out of concern the company hasn’t inked a big equity financing deal. And when Prophix tried to raise debt financing, Silicon Valley Bank turned it down—the financial institution won’t lend unless there’s an outside equity partner to hold the company accountable, says Ajmera. “I keep having these conversations where people are like, ‘Oh, you haven’t raised capital, therefore clearly something is wrong,’” he says. (The company did borrow $10 million this year from CIBC and the Business Development Bank of Canada.)
Of course, companies that raise money also get to spend it. They don’t have to be efficient; we live in a growth-at-all-costs era. Software companies are valued more for their ability to expand revenues than turn profits. While Prophix spends about 45% of revenue on sales and marketing, its rivals outlay twice as much.
Competitors also go after Prophix’s employees. About five years ago, the company lost 40% of its sales staff to better-paying rivals. One sales rep who was under performance review left for a rival that offered him a $150,000 salary and $150,000 bonus, nearly double his pay. “If I run out and say, okay, I’m going to give everyone a $50,000 to $100,000 raise, I’ll put the company out of business,” says Ajmera.
But is Prophix being too conservative? “If you’re in a cycle of industry hyper-competitiveness, it’s a land grab,” says Mike Wessinger, CEO of PointClickCare, which has become one of Canada’s largest software companies while backed by U.S. private capital firms. “Bootstrapping is fine in the early days when you’re figuring out the category and product-market fit. It drives some great discipline in the organization, and not giving up too much control makes sense. But if your rival just raised $100 million to go after the market, and you don’t, you’re at a serious disadvantage.”
David Greenberg from JMI, which backed Adaptive Insights, argues the heavy upfront marketing costs are worth it in the CPM space: “It’s a big market, so the cost to win awareness and deals is higher than in other sectors.” More important, customers tend to stay with vendors a long time. “Spending two years of revenue to land a customer feels relatively expensive to somebody who’s bootstrapping,” he says. “But the view would be over time we’ll get 20 years of revenue. Effectively the lifetime value of the customer justifies a big investment to acquire them. We, and others, decided it’s very worth doing that.”
On the other hand, private capital-fuelled growth can hurt company culture. Prophix prides itself on keeping its workforce motivated as competition heated up. Ajmera’s employees “are looking for meaningful work, camaraderie, consistency, balance in their lives,” he says. There are other ways to attract and retain people as well, he adds, including a pool of profits set aside for donation to employees’ pet causes.
Another factor favouring the bootstrapped company: If the economy pitches downward, many of Prophix’s high-spending rivals could see revenue growth curtailed, forcing them to cut costs. At that point, Barber says, private equity firms might be more interested in firms like Prophix with decent economics that can sustain slower growth—and maybe the ability to snap up weakened competitors.
That’s why he and Ajmera have started attending investment conferences in the past two years. They want to pick up industry intelligence and maintain warm relations with financiers. They may still need to tap those resources—but on Prophix’s terms, when the time is right. “They may look up and say, ‘Hey, these guys have been going for a long time, there are no other institutional investors, this is a very attractive company for us to invest in,’” says Barber. “It could actually be very positive for us.”
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