Amidst the dozens of SPACs and high flying technology deals, an under the radar industrial software company went public last week and very few noticed. The company is Bentley Systems, is headquartered in Exton, Pennsylvania and as over 4,000 employees worldwide.

Bentley is a leading provider of software for infrastructure engineering, enabling the work of civil, structural, geotechnical, and plant practitioners, their project delivery enterprises and owner-operators. The company counts over 34,000 customers across 170 countries.

Why is this an industrial technology company? Bentley Systems’ software products provide project lifecycle, asset lifecycle and digital twin solutions, servicing the public works and utilities, industrial and commercial/facilities industries.

Like OSIsoft’s long path to the billion dollar exit, Bentley was founded in the 1980s and has had a slow & steady march ever since.

Company History

Bentley Systems was co-founded by the Bentley brothers in the early 1980s. Since then the company has acquired around 40 different industrial software solutions. At the core of the core are three products:

MicroStation: CAD software platform for design & drafting

ProjectWise: engineering project collaboration platform for AEC industries

AssetWise: asset lifecycle tracking for AEC, buildings

In the early 2000s, the company tried to go public, but scrapped the idea and instead took a minority investment from Siemens that totaled $76M.

IPO Process Part 2

Over the past two decades the company has continued to scale and now has a very sizable software business. Over the 12 months ending June 30th 2020, Bentley Systems generated $770M of revenue and earned a gross margin of just over 80%. The company grew about 11% year over year, and so the growth is lagging other, earlier stage industrial technology companies. BUT the company actually has operating cash flow with $174M of operating income, or 22%.

Based on margins and the sticky customer segments, Bentley had a very successful IPO and raised $237 million US at a $5.75 billion valuation. Unlike other IPOs these days, all proceeds were secondary, meaning no incremental cash went onto the company’s balance sheet. Instead, early and long-standing employees were able to monetize a portion of their equity position. In fact, Greg Bentley, founder of the firm, is still Chairman of the company.

My usual analysis here talks about the time from a Series A or multiple appreciation from the last round. However, the company had no traditional venture financing. And so, like OSIsoft, this sector shows that slow & steady can bring a great, public business. The company now trades at 7.5x TTM revenues. Not too shabby, and well-deserved.

The industrial technology M&A tracker that I co-developed with Ty Findley is now updated with this transaction. Link found here

In Matt Ridley’s book, he talks about how larger infrastructure projects have a higher likelihood to get bogged down with excess costs. The costs begin in permitting and ultimately show up in another, comparative form: Smaller form assets allow for greater iteration during development and more adjustments while in operation- continuously lowering costs. This tweaking is innovation at its’ finest.

Both wind energy and solar energy have declined down the cost curve dramatically over the past decade. And they have gone about that cost decline in different ways.

Wind blades are bigger. Blades and a turbine unit are ENORMOUS. Check out the graphic below. It is easy to forget now, but there was a time when energy professionals thought that small-scale, rooftop or backyard turbines could also be a viable solution. Wind has achieved cost declines by scaling a turbine and new materials and systems innovations. The latest GE Haliade-X is the size of a skyscraper and can power thousands of homes.

And solar (images after the wind turbines) has achieved scale by focusing on improvements to the panel (bifacial) tracker (sun-tracking, pneumatic) and systems (inverter technology) to make very rapid iterations in an array’s output. In solar, the unit remains small and the scale has grown in farm footprint, with sites now spanning 1,000s of acres.

Both energy forms will have a place in our energy transition. It’s fascinating how the two technologies are advancing and a reminder how hard it is to predict what happens next.

A few weeks back I indicated how I hoped that ChargePoint would have a successful market debut. Well, here we are! ChargePoint is about to hit the public market with their Switchback Energy reverse merger. The company released some basic information and is aiming to go public at a $2.4 billion valuation and is raising just over $600M in the process.

I like to keep my “highs” medium, and my “lows” medium and manage the emotional highs and low of being in the entrepreneurship game.

But, let me tell you… this is AWESOME for ChargePoint. The electric vehicle market is clearly the future. California is shutting down non-EV sales in a decade. The UK is doing the same. Other states will follow. EVs are the future and ChargePoint is the largest network. It should be a key part of the energy and mobility transition. And so, this access to the public markets is excellent for a number of reasons. Let me explain:

ALIGNED TO AN UNQUESTIONABLE GROWTH TREND

This picture below shows everything re: top-line revenue

CASH IS KING

ChargePoint will have approximately $683 million in cash, resulting in a total pro forma equity value of approximately $3.0 billion. Cash proceeds raised in the transaction will be used to repay debt, fund operations, support growth and for general corporate purposes. The proceeds will be funded through a combination of Switchback’s approximately $317 million cash in trust, assuming no redemptions by Switchback stockholders, and a $225 million PIPE of common stock valued at $10.00 per share.

And most importantly the company will now have an incredible amount of cash to continue building out their EV network. The demand exists as the number of Electric Vehicle sales continues to grow.

MATURING INVESTOR BASE

The energy transition has been mostly funded by venture capital and the corporate venture capital markets. To see key institutional investors including Baillie Gifford and funds managed by Neuberger Berman Alternatives Advisors joining the ChargePoint financing is VERY important for our market. These are long-term shareholders that are expected to be on the cap table for the build-out duration.

PRODUCT SUITE WILL EXPAND

With the infrastructure layer being built out, the application layer and software layer will become increasingly important. In the ChargePoint announcements, the company emphasized building out of software solutions, network management solutions and payment solutions. This software layer, including Vehicle 2 Grid and grid management techniques, will be very exciting. And main area where venture capital will fund voraciously.

FINANCING METRICS

Ultimately these are going to be a bit hard to swallow. This was 12 years from the Series A and at one point the company had raised ~$700M in equity to achieve a ~$1BN valuation. Not a lot of value appreciation. This is what “being early is like being wrong” may look like for an investor base. But the company, like the EV adoption market, has made great progress over the past 18 months and consumer demand has pulled ChargePoint towards greater scale. Big kudos to Michael Hughes, a relatively new Chief Revenue Officer there, for getting a lot accomplished.

VALUATIONS

ChargePoint will have around $135M of revenue in 2020, growing to 200M next year. And is targeting to grow to $2 billion of revenue by 2026. This high growth revenue opportunity is the growth the public markets are looking for right now in a low interest rate environment.

This means that ChargePoint’s current $2.4 billion enterprise valuation is 17x current year’s revenue, 12x 2021E revenue and ~1x 2026 estimated revenues. Yes yes, these are frothy. But in a low interest rate environment, the market is searching for 10-year growth opportunities and ChargePoint presents that unquestionable opportunity.

I have updated the Energy Transition M&A file here

Last week there was another $1 billion + Industrial Technology deal. To most people, it won’t look too much like an “Industrial Tech” exit, but it sure is. To the naked eye, the company will look like tradition telecom equipment. Heck, even the buyer is Ericsson, one of the largest telecom firms in the world. But the fact is that the telecom industry will be one of the most active players in the IoT / industrial technology landscape. Every digital factory or distributed asset is now 5G or wirelessly connected: factories, EV chargers, automobiles, solar arrays, municipal fleets.. industrial assets are connected and the telecom firms are the information highway to our digital industrial world.

The company for today’s exit evaluation is CradlePoint, and they have a combination of routers and endpoint adapters that help corporations harness “LTE and 5G to wirelessly connect fixed and temporary sites, vehicles, field forces, and IoT devices, anywhere.” I first came across CradlePoint when our portfolio company, Volta Charging, was evaluating how to manage 5G connectivity for their chargers. Distributed assets like EV chargers now run a suite of software applications and need access to wireless solutions. Everything is now a computer. And computers need network connection to communicate and update.

As seen on CradlePoint’s site, their hardware/software solutions are used in a number of industrial verticals, including: transportation, digital signage, smart cities/buildings, industrial sites, and retail.

The History

The company was founded in 2006 by Pat Sewall and is headquartered in Boise, Idaho. The first well-documented investment round was the 2010 Series B, where a $11.5M investment at a $51M pre-valuation bought OVP Venture Partners and Highway 12 Partners 18% of the company.

In 2011, George Mulhern became CEO and has held the title ever since.

Over the years the company raised an additional $150M, including an $89M round from TCV in Q4 2016. That investment earned TCV ~25% of the business, meaning that the last notable private market valuation for CradlePoint was a $356M valuation. At the time industry reports show CradlePoint’s revenue around $100M.

The Exit

Last week that Ericsson announced that they are going to pay $1.1 billion for CradlePoint. And in the release the financials were revealed: “Cradlepoint’s revenues: $150 million in 2019 and are expected to grow to $200 million.” This means that Ericsson is paying approximately 6x current revenues for CradlePoint’s business. This is a premium for a primarily HW business. My expectation is that Ericsson sees extra value in being the network provider for the high growth, increasingly digital and distributed asset layer.

All early shareholders and investors are likely to be quite pleased here, including TCV who likely earns >30% IRR and turns $89M into ~$260M within 4 years. The Series B investors likely converted their $11.5M investment into ~$200M at exit.

On timing: CradlePoint took 14 years from launch to exit; and 10 years from their first institutional investment round. Both of these time data points are slightly longer than other exits in the industrial tech vertical. The company has great metrics in terms of cash efficiency and providing sizable returns for the early and growth stage investors.

I have now updated the “Industrial Tech Exits” Google Doc with this deal. Found here

In June 2007 John Doerr took stage for a Ted talk and got emotional talking about climate change. The battle was on and cleantech 1.0 momentum was in early innings.

I now look back to speeches like this one, press highlights, old investment memorandums, etc. and almost EVERY message was based on price. So many investments were a hop/skip/jump away to being able to compete on price with traditional energy sources. The reason for this messaging was because commodity prices were going UP and meeting renewable alternatives at the higher cost tiers. Here is an Index chart from the IMF on global commodity prices over the past few decades.

As you can see here, cleantech 1.0 was a false front because new energy investors and operators were gaining confidence in a battle that was taking place outside of normal bounds. Therefore, when energy prices fell in the early 2010s, the near-term goalposts for many capital intensive renewable companies moved further into the distance…. bankrupting most. But these cleantech 1.0 investments did ultimately help.

Since the peak of late 2000s and early 2010s, commodity prices have plummeted and (driven by those early investments) renewable prices have chased them down even faster.

This framework us one I use to evaluate an industry’s readiness for change:

Is a new technology viable due to temporarily high incumbent costs or is the new technology sufficiently developed to chase the incumbent solution WAY down the cost curve? (to use a sports analogy: are we competing on a level playing field, or is our opponent handicapped? Don’t celebrate too much if the conditions are non-standard to your benefit!)

What makes now an exciting time for renewables is that nobody is really talking about price competition with traditional fuels anymore. We are way down the price curve: fuel prices are low and renewables are OK competing at those levels. And if there is a discussion around price, it is usually between different types of renewables.

This time is (probably) different.

News outlets have recently indicated that ChargePoint is going public via a Reverse Merger (SPAC) call Switchback Energy Acquisition. (SBE)

Why is ChargePoint a good SPAC target? Right now there are about 90,000 public chargers in North America and ChargePoint represents about 30-40% of that network. If you believe that mobility is moving from hydrocarbon fuels to electrons, then ChargePoint is a key lever in that transition. And should be a household name in the future.

Neither party has yet to release public financials, so I will not comment there. However, the SBE SPAC is a $300M vehicle and the average SPAC attains 10-20% of the target company through the capital investment. Using this framework, it appears that ChargePoint will aim to enter the market somewhere between a $1.5BN to $3BN valuation. The company has raised $700M to date and was valued around $1.2 billion in a financing round announced in Q1. So some of these valuation levels will provide for a nice return to early shareholders.

Some of the earliest investors on the cap table have been involved for over a decade. While the IRR may not be great, these investors saw the opportunity to be the largest EV charging network in the US. And that early conviction should be rewarded as ChargePoint has persevered through the years. I hope they succeed in the public markets.

One of my favorite books of 2020 is a classic, Complexity Theory. The book covers how ideas converge at the edge of chaos. And specifically how technologies come together in unique combinations at almost required points in time to drive forward industry.

Near the end of the book there is a segment on climate change, that I believe is very relevant for our current market status. Right now there are ongoing debates between different fuel types and their pros/cons and various proponents are staking out their positions and getting entrenched. My favorite paragraphs from the book show how we should be approaching climate adaptation by embracing many different technologies. By enabling a suite of differing technologies, we retain optionality to optimize for the long term maxima, as opposed to being stuck in an intermediate peak.

“When you are part of the cycle, as in climate change, it is not a duality of us vs them. It is integration. Accommodation and coadaptation so you optimize for the right peaks and not a local maxima that could extinct you.”

“And so how to maneuver in a world like that: the answer is to keep as many options open as possible. You go for viability, something that’s workable, rather than what’s optimal. A lot of people then say: aren’t you accepting second best? No, you’re not, because optimization isn’t well-defined anymore. What you are trying to do is maximize robustness, or survivalists, in the face of an ill-defined future. And that, in turn, puts a premium on becoming aware of non-linear relationships and causal pathways as best we can. You observe the world very carefully and you don’t expect the circumstances to last.”