IPO Bake Off – DocuSign versus Smartsheet

We have two business SaaS players coming public tonight. While their businesses are very different we thought it would be fun to compare them using our typical framework for evaluating new companies.

If you don’t already know them DocuSign (DOCU) is an online system to allow documents to be signed by multiple parties to speed the normal paper-based approach. Smartsheet (SMAR) is an online spreadsheet-based collaboration and productivity tool used by teams for a broad variety of tasks from scheduling to project management.

Both of these deals are attractive on fundamentals and proposed valuation. Our IV on SMAR is $25 and our IV on DOCU is $44. Institutional demand for both deals has been strong enough for the price ranges to be increased. SMAR went from $10-12 to $12-14 and DOCU increased from $24-26 to $26-28.

[For reference: SMAR Roadshow SlidesDOCU Roadshow Slides, Transcripts will be posted shortly and updated with links here.]

Size and Maturity – DocuSign

DocuSign’s $519M in revenue last year is almost 5x the $111M in sales for Smartsheet. The customer ratio is similar with 370,000 for DOCU and 74,000 for SMAR.

Largely due to their larger scale, DocuSign has is now cash-flow positive versus Smartsheet which is consuming cash as they ramp up the business.

In short, DocuSign is in the “$500M to $1B” revenue expansion phase while Smartsheet is in the “$100M to $250M” phase.

Institutions prefer companies that have achieved great scale as they have a more tested, durable growth strategy which is less likely to be disrupted by competition.

Management – Smartsheet

Both companies have experienced management teams. However, we give the nod to SMAR because their team has a much longer history together and at Smartsheet.

SMAR co-founders and board member Brent Frei has worked with CEO Mark Mader since 1995 when they both worked at Onyx software which Frei co-founded and was as CEO from 1994 to 2004.

The rest of the Smartsheet team has been built out with experienced executives from Microsoft, Amazon Web Services, YuMe, NetSuite, and Box.

DocuSign has a strong team and board but they have worked together for a shorter period. For example, the CEO joined DOCU in 2017. The same is true with their CMO and CTO. Other members of the team have been with the company longer but as a team, they all may need some time to forge their working relationships.

Growth – Smartsheet

This one could go either way but we are giving the nod to SMAR because 1) their 60% annual growth rate is much higher than the 40% at DOCU and 2) SMAR has introduced a slew of new related product features and services that should sustain this higher growth rate over the next 2 to 3 years.

The argument for DOCU would be that since they are larger their rate of growth is bound to be smaller but their growth in absolute dollars is higher – $38M last quarter versus $11M for SMAR.

The diagram below illustrates the additional product features that SmartSheet has added to their core spreadsheet product. These open up incremental market opportunity in areas like project management, business intelligence, and administrative applications.

Market Opportunity – Smartsheet

Both companies have similar “current market opportunity” that they estimate at just above $20B. Of course, their efforts are not worth much because they equate roughly to “whatever every company became a customer” which is never the case.

SMAR is much more of a general purpose system that will suit a variety of applications. DOCU is a more focused solution around contracts and agreements. The long-term opportunity for DOCU depends on their ability to “become a platform for agreements” which as a growth aspiration is a bit vague and may be hard to execute.

There are lots of other established players in the “prepare” portion of what constitutes agreements. The “act” and “manage” spaces have been very fragmented so they could be fertile ground for DocuSign to expand into.

Smartsheet doesn’t have much evangelizing to do – their core product and additional tools are general and easily used for a wide variety of tasks. It’s a little like asking “how big is the market for spreadsheets?” It’s essentially unbounded because so many new use cases are created every day for the existing product suite.

Competition – DocuSign

There are some other e-signature solutions out there but the market is dominated by DocuSign and Adobe (who acquired EchoSign in 2011). Adobe has integrated this with their PDF product suite. Anecdotally it seems that very few people are using Adobe as an e-signature platform. Adobe relies on their Creative Suite to drive the bulk of their revenue and profits and may not be as aggressive in promoting their potential as an “agreement platform.”

DocuSign also has the advantage of being a “Switzerland” in working with other large software companies like Microsoft and Oracle since they don’t view DOCU as a competitor.

Smartsheet may not have many direct competitors but they have scores of “substitute solutions” that are viable for many of the use cases they target. Microsoft Excel and Google Sheets are the most obvious. There are also platforms like Zoho (Private) that could be used as a viable solution for many Smartsheet applications.

Google Sheets is probably the biggest threat to Smartsheet. It’s not so much that Google Sheets is a great product but rather the ecosystem of tools and online services that can be integrated with Sheets. General purpose automation solutions like Zapier (Private) can extend and integrate with hundreds of applications to create “code free” solutions for almost any use case.

Although they are somewhat developer-focused, Atlassian (TEAM) acquired Trello in 2017 for $425M. Trello brings 20 million users of their online management tool.

Smartsheet has done a good job of executing on the product and product management to make sure they capture a good share of the market but as a still-small player, they could be disrupted by either Google Sheets or a more open and online Microsoft Excel.

Valuation – DocuSign

We’re going with DOCU here because the 8x price/sales ratio compares to 12x for SMAR. Our IV estimates below show a bit more upside for SMAR but we think there is less short-term risk in DOCU relative to the proposed valuation.

Related Companies

Workiva (WK), Veronis (VRNS), Atlassian (TEAM), ServiceNow (NOW), Zendesk (ZEN), Google (GOOG), Adobe (ADBE), Microsoft (MSFT), Slack (Private) and Zapier (Private).

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