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Abu Dhabi, UAEMonday 17 December 2018

How a family business has minted new billionaires

Ryan and Jared Smith are selling Qualtrics International, which they started from scratch with their father, to European giant SAP for $8 billion

DUBLIN, IRELAND - NOVEMBER 05: Ryan Smith, Co-Founder and CEO of Qualtrics peaks on stage during the third day of the 2015 Web Summit on November 5, 2015 in Dublin, Ireland. The Web Summit is now in it's 4th year and is technology's most global gathering. In numbers, it has 42,000 attendees from 134 countries, 1,000 speakers, 2,100 startups and 1,200 media. (Photo by Clodagh Kilcoyne/Getty Images)
DUBLIN, IRELAND - NOVEMBER 05: Ryan Smith, Co-Founder and CEO of Qualtrics peaks on stage during the third day of the 2015 Web Summit on November 5, 2015 in Dublin, Ireland. The Web Summit is now in it's 4th year and is technology's most global gathering. In numbers, it has 42,000 attendees from 134 countries, 1,000 speakers, 2,100 startups and 1,200 media. (Photo by Clodagh Kilcoyne/Getty Images)

The tech industry’s newest billionaires are a pair of brothers who started a software company in their parents’ basement in Utah. Now Ryan and Jared Smith are selling Qualtrics International to European giant SAP for $8 billion - and they’ll get to keep running the business.

Ryan, 40, is the chief executive and public face of a start-up that - unusually - resisted taking venture money for over a decade before finally agreeing to deals with Accel and Sequoia Capital. Last valued at $2.5bn, Qualtrics makes customer-survey software used by the likes of Microsoft to General Electric, helping boost its revenue more than eight-fold over the past seven years.

He is something of a fixture in a Utah start-up scene that encompasses Ancestry.com, Insidesales.com and recently listed Domo. His ardour for the "Beehive State" means Qualtrics is a supporter of such events as the Silicon Slopes Utah conference, which showcases local companies as well as the region’s snowboarding and skiing. Ryan, who reportedly once turned down a $500 million offer for his company, his family members and other major shareholders are now poised to get about $3bn for their shares. Not bad for a CEO who got paid $100,000 in salary last year.

“You do not forget your first meeting with Ryan Smith,” Sequoia Capital partner Bryan Schreier wrote in a blog post. “A go-to-market savant, Ryan complements his brother’s understated-engineer mindset. But they, their father Scott, and their co-founder Stuart, clearly have a shared set of values.”

Qualtrics had filed for an initial public offering in the US and was planning to raise about $500m.

FILE PHOTO: SAP's CEO Bill McDermott speaks at the Viva Tech start-up and technology summit in Paris, France, May 24, 2018. REUTERS/Charles Platiau/File Photo
SAP's CEO Bill McDermott. Reuters

SAP CEO Bill McDermott preempted the IPO with an all-cash offer that was more than 75 per cent higher than the company’s projected valuation. Mr McDermott said SAP had to pay up because the Qualtrics roadshow was going well. But the company’s shares slumped more than 5 per cent the day after the SAP deal was announced as analysts questioned the price tag.

"Might be a valid strategic rationale and top-line growth is impressive, but it's still expensive," said one trader.

Bernstein analyst Mark Moerdler, who rates SAP "outperform", said the acquisition would fill a void in SAP's portfolio.

"While SAP has paid premium prices for their acquisitions they have acquired quality assets and have been overall successful acquirers. We see this acquisition as incrementally positive for our thesis," he wrote in a note, Reuters said.

Ryan is known as the more gregarious and outgoing in a family of brainiacs - both his parents held doctorates and his father lectured about market research at the University of Oregon. The Smiths moved to Utah around the time Ryan’s father opted to work at Brigham Young University, and in 2002, the pair started Qualtrics, originally targeting academics that needed to conduct field research. “We figured that if you could serve them, you could serve anybody,” Ryan said in 2013.

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As the company grew, Ryan eventually convinced his brother to quit a product director’s job at Google and run the technical side of things. Jared, now 43, is the company’s president. The Smith patriarch - a cancer survivor - came up with the idea to serve his fellow academics, while Jared wrote the code and Ryan sold it to customers.

“We just said, 'hey, there’s no rules. There’s no playbook,'” Ryan said in an Accel series profiling entrepreneurs.

Qualtrics’ approach is based on what it calls “experience management” or XM, according to Mr Schreier. That involves analysing every aspect of the customer experience to drive loyalty and referrals, which it deems crucial at a time when social media gives individuals more power than ever to speak out.

That approach worked. Qualtrics expects 2018 revenue in excess of $400m and forecast a forward growth rate of more than 40 per cent. Ryan and his family hold shares in Qualtrics through a holding company managed by the two siblings and father Scott. That’s worth more than $3bn based on SAP’s purchase price - although it’s possible other family members own shares as well.

Qualtrics is not the only start-up to create multibillion-dollar headlines recntly. Last month Bytedance closed $3 billion (Dh11bn) of funding from SoftBank Group and other major investors at a valuation of $75bn, cementing its position as the world’s biggest privately backed start-up, according to sources said.

The deal, which also involves KKR and General Atlantic, represents a major infusion of cash that will quicken the Chinese media giant’s expansion beyond its home turf. SoftBank aimed to invest about $1.8bn depending on the availability of secondary shares, one of the people said, declining to be named because the talks were confidential. The bulk of its investment would be in primary stock, the people added. Bytedance remains in talks with other interested investors, which could offer more funds in future, the people said.

Six-year-old Bytedance, owner of news aggregator Toutiao and video sensation Tik Tok, has surpassed Uber to become the world’s most valuable startup, according to CB Insights, which values Uber at $72bn. Having become a major player in China’s internet scene, it’s now planning to use its influx of cash to take on Western rivals. Its biggest overseas hit is a video service called Douyin - known as Tik Tok beyond China - that’s syphoning attention from the likes of Tencent Holdings and Facebook, according to Bloomberg.

Back at Qualtrics Ryan will continue to run the company as an entity within SAP’s larger cloud business group, maintaining headquarters in Utah’s Provo as well as Seattle. That allows the Smith family to retain a formula that’s served it well. Sequoia singled out the company for running on its own money at the start, eschewing the cash-burning common to Silicon Valley’s hottest outfits - a phenomenon that often requires multiple rounds of outsized funding.

After college, Ryan said he wanted adventure and went to South Korea to teach English. One of his early lessons in entrepreneurship came there. While most foreign tutors were scraping by on next to nothing, he decided to try private tutoring by putting flyers offering his teaching services in mail boxes.

“I put those in, like, 5,000 apartments within a couple week period. I ended up making a lot of money,” he said in the Accel video. “That was one of my early, better actions. Hey wait, there’s another way of doing this and it worked.”

Qualtrics’ other unusual element is its home base, far from a Bay Area regarded as the cradle of the American tech industry. The family-owned business has become deeply involved in everything from sponsoring the Utah Jazz to local philanthropic initiatives. Ryan has often spoken publicly about his state’s potential.

“It’s awkward for a lot of people here,” Ryan said, citing a lack of diversity and lifestyle quirks.

“We need to make it easier for people to be here, because we have all the makings to make this a major tech hub.”