• Brett Schafer

Deep Dive: SharpSpring

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Watch on YouTube


Show Notes

(Ryan) What they do: SharpSpring provides a B2B SaaS platform for marketing automation. Basically it’s a single dashboard/hub that allows companies to monitor all their marketing and sales activities. It’s designed for SMB’s but they sell primarily to a marketing agencies (resellers). And there’s some agency specific features which is a bit of a differentiator apparently. But the platform consists of basically 3 products. 1.) SharpSpring: That’s their core dashboard. 2.) SharpSpring Mail+: This is less comprehensive and basically a subset of their core platform used specifically for email marketing. 3.) Perfect Audience: Product for retargeting customers. An add-on that’s charged on a per-use basis.

Scenario: A marketing agency partners with SharpSpring. That agency buys a license from SharpSpring which includes 3 extra licenses to sell to their own clients. That agency reaches out to Dunder Mifflin to see if they need any help digitizing their sales and marketing process. DM says yes. The marketing agency who is a partner with SharpSpring then recommends using the sharpspring platform for all S&M workflows (emails, inbound collections, lead gen, converting those to sales and recording them, setting goals, tracking progress, etc.). Dunder Mifflin receives pricing that is totally up to the discretion of the agency. If the agency sells more than 3, then there is a monthly per-client fee charged to the agency.

(Ryan) History: Rick Carlson founded SharpSpring in 2012 with the help of the current CTO Travis Whitton. They built it with because they saw a whole in the market, Carlson said, “This gaping hole in the market has become more and more apparent to me over the years of managing SMBs. We’d be spending hundreds of thousands of dollars on outbound marketing activities to drive leads to the sales team, but we’d have zero visibility into what was working and, more importantly, what wasn’t. So we started looking at the analytics in a different way and developed a whole different approach to tracking results. The transformation was nothing short of stunning. Within a month, we were able to cut our cost per lead in half and within three months sales were up 80%.”

In 2014 they had become pretty successful, and caught the eye of a public company called SMTP who acquired them. And over time SMTP changed its name to SharpSpring, changed their ticker to SHSP, and sold off the SMTP part of their business. Sorry if any of that’s wrong. Hard to find info on micro caps.

(Brett) Industry/Landscape/Competition:

  1. Global marketing automation industry is not large, at $4 billion in spending a year

  2. Expected to grow at ~10% CAGR through 2027 (just estimates)

  3. SharpSpring has a more bullish view, thinsk industry can get to $16 billion in spending by 2025

  4. As with a lot of SaaS companies, there are big and small competitors

  5. Hubspot is the big one, market cap of $20 billion so potentially acquirer of SharpSpring

  6. Looks like Salesforce, Adobe, and Mailchimp all have competing products too

  7. Act-on, Active Campaign are two other pure plays (they are private)

(Ian) Management and Ownership:

  1. Rick Carlson, the founder, remains the CEO and president today

  2. Worked in internet security prior to Sharpspring

  3. CTO is also a founder

  4. CFO has been with the company since being hired from the accounting department of Purdue, his alma mater

  5. 16% insider ownership

  6. A couple related party transactions, mostly related to convertible notes held by a company owned by the CEO and CTO

(Brett) Valuation:

  1. Market cap of $163 million so not even a small-cap, ticker SHSP

  2. EV will be slightly lower

  3. P/S of 5.4

  4. P/GP of 7.2

  5. Been hovering right around break-even on cash flow so no bottom line metrics

  6. About 11% embedded dilution in options/RSUs outstanding if all get exercised

(Ryan) Earnings:

  1. $30.2M in TTM revenue, their 2020 revenue increased 24% YoY

  2. They had 76% gross margins in the quarter. Striving for 80%+ long-term

  3. $7M in operating losses over the last 12 months

  4. Negative $3M in OCF

  5. Finished Q1 with over 2,000 agency customers, 500 direct customers, and 10k total businesses across all platforms

2021 guidance:

  1. Expecting $34-$36M in revenue

  2. But they started really ramping up S&M spend in January

Long-term targets:

  1. $100M in ARR

  2. 20-25% operating margins

(Ian) Balance sheet and liquidity:

  1. $27mm in cash

  2. $13mm in debt

  3. Mostly leases

  4. A 1.9mm line of credit

  5. 5% interest rate

  6. PPP loan due in 2021 for about $3mm

  7. Deferred revenue jumped up a lot in 2019 (3x+)

  8. Acquired some of it from Perfect Audience

  9. Raised about $14mm through equity offering (10%ish dilution at $15 a share)

(Ad)

Product Experience/Anecdotal Evidence:

  1. (Ryan) Apparently higher rated than HubSpot. They brag about this.

  2. (Ian)

  3. (Brett) Scrolling through Gartner reviews looks like they are most highly rated vs. competition. Users seem to love the product which is always a good sign. One called it the “powerful and affordable Hubspot alternative”

Competitive Advantages:

  1. (Ryan) Designed for agencies. Not a huge advantage in the grand scheme of things, but a differentiator. There aren’t a lot of advantages here. So I’m gonna start the new segment: What does success look like for this business? Huge TAM obviously. So it would be stealing customers away from Hubspot and going direct to the end-users. Cut out the middle man.

  2. (Brett) Their pitch to be the low cost provider should hopefully give them an advantage if/when the business scales

  3. (Ian) This is a competitive space, don’t really have one other than what Ryan and Brett will talk about. Given their size I guess they can be nimble

Future growth opportunities:

  1. (Ryan) Perfect Audience. They acquired this company in 2019 and it charges clients on a per-use basis. It’s designed for retargeting confirmed leads, should be a nice addition to the platform.

  2. (Brett) Just got Instagram added as an integration for social media. This was apparently the #1 most requested feature. Also brings up the downside of all these companies like SharpSpring: Google and Facebook have total dominance of the industry.

  3. (Ian) Multi-tiered pricing, they see it as an opportunity to gain more market share to allow customers to choose the features that they want/need. Following in the model of everyone else in the industry

Highlights and lowlights:

  1. (Ryan) Highlights: I like Rick Carlson. I thought his letter was well written. I think they set realistic goals for themselves. Lowlights: It’s a really crowded market and onboarding takes a while. The client pays for the onboarding costs, which is fine but makes it harder to sell. The winner of this market is going to have the most intuitive solution.

  2. (Brett) Highlights: strong unit economics and value proposition/reviews vs. competitors, great cohort financials which have been improving over time, definite path to 20%+ margins Lowlights: Partnership strategy is underwhelming, was expecting more but maybe I need to investigate further, I think this is a business that could learn a lot by studying Avalara and just do their niche and partner with every single platform possible, I was surprised at how expensive it currently is but management just mentioned they are moving to a better tiered pricing system (a small red flag this wasn’t already implemented)

  3. (Ian) Highlights: Revenue growth (five-year CAGR of 46%), LTV to CAC of 8x, competitor purchased at 12x sales by adobe in 2018. Hubspot path to success. Fairly significant insider ownership. Lowlights: Very competitive market. Small company. Keyman risk.

*Chit Chat Money is sponsored by 7investing. Use our link or enter promo code “CCM” at check-out to get $10 off your first month of the service.

Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.

#SharpSpring #SHSP

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