Shane Hubbell is a Managing Director at Alkali Partners. Shane has spent over a decade as a technology investment banker, software engineer, and operations professional. Shane has advised on sell-side engagements with an aggregate transaction value of over $5B. He began his career at Goldman Sachs as an analyst in New York.
Shane holds dual BS degrees in biology and economics from Union College and has completed an advanced immersive software engineering program at HackReactor.Follow Follow
Welcome back to the RecruitingDaily podcast! Today, I’m joined by Shane Hubbell of Aklali Partners to discuss HR tech M&A (merger and acquisitions) in 2021.
Shane is currently founder and managing partner at Alkali Partners, which is an independent investment bank that provides M&A and capital raising advisory to high-growth, primarily middle-market technology and technology-enabled service companies.
During his career, Shane has spent over a decade as a technology investment banker, software engineer and operations professional. He has advised on sell-side engagements with an aggregate transaction value of over $5B. Before Alkali, he began as an analyst at Goldman Sachs in New York, carrying dual BS degrees in biology and economics from Union College. Shane also completed an advanced immersive software engineering program at HackReactor.
The big questions we answer today: What unique or compelling things has Shane seen the market do since January 2021? Where’s the take on private equity companies investing in the talent acquisition and human resources space? How does Alkali help people understand what their business is worth?
Of course, there’s a lot more where this came from, but you have to listen to learn. And please drop your thoughts in the comments.
Listening Time: 37 minutes
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Ladies and gentlemen, this is William Tincup and you are listening to the RecruitingDaily podcast. Today, we have Shane on from Alkali Partners and we’re going to be talking about HR Tech, M&A in 2021. We’re almost three quarters of the way in, we’ve got about another two weeks to finish up the Q3 and then we’ll get into Q4. We got some good data for Shane to kind of tell us a little bit about what’s been going on and maybe even why some of it’s been going on. Let’s do some introductions. Shane, please introduce yourself and Alkali Partners.
Sure thing. Shane Hubbell, managing partner, Alkali Partners. We’re a technology investment bank. We specialize in advising technology companies through M&A primarily. Sometimes it’ll include majority recapitalizations but think of it as 50 plus percent of technology companies getting acquired and we are regularly advising companies sort of enterprise value ranges of 20 to 300 million.
Right. And so these are tech and you obviously do a lot of work in the HR tech space, which kind of covers everything from sourcing, now placement. These are companies that one way or another, they come to you and either they’re trying to figure out their valuation and see what they’re worth or maybe who they should acquire or potentially who should acquire them, correct?
Exactly. Exactly. We primarily do what’s called sell side work. Which means we are helping folks who are selling their businesses but we get approached all the time by acquirer strategic buyers, like an ADP or Workday or Ceridian looking for things to acquire, as we do buy private equity funds who might have a portfolio company that they’re hoping to add onto. We have conversations with sort of buyers and sellers, which is a very important part of our job as a market maker.
Right. Right. And so if you were explaining, we’ll just start from January forward, what have you seen this year? And maybe even different than years past but what have you seen this year that’s really just kind of struck you as just really compelling, interesting? A lot of money flowing into the space. Good thing. But just of give us a start with just some observations of what you think the market’s doing.
Yeah, absolutely. Some of these stem from the labor markets themselves and then have impacts within technology as is often the case. One of the interesting ones that we’ve been watching closely is just the blue collar markets, which is often an area where we haven’t seen a lot of technology adoption and just the labor shortage and how that’s driving essentially better conditions for laborers there. We really liked what’s going on generally. It’s helping companies like Vettery and Litmus who are sort of technical and sourcing and recruitment companies. But the larger shift has just been interesting. Government incentives have played a major role in keeping more workers on the sidelines. And it’s further impacted by folks like the baby boomers who are often exiting or leaving the workforce, dismal growth in the working age population, men without college degrees being less likely to work and large increases in disability, disability rates, ultimately driving shortages in those markets. And we think there’s highly likely to be more investment into tech in those areas and then subsequently M&A in the coming months and years.
Yeah. Well first of all, you identify the problem, the market, the hole in the market, then there’s a flood to fill the hole. Then you got excess of those players and then consolidation. It’s interesting that you mentioned the blue collar market because I was talking to the folks at TrueBlue, which is a staffing firm but they’ve built their own again, services firm, but they’ve like a lot of services firm in our space, they’ve built their own technologies. Some acquire, but this one I think was actually built, but they built it kind of like an Uber app for laborers.
Today, you want to go dig a ditch, you can log into your app, say you’re available. Where’s the work? How much is this? Go to the place, do the bit not log into the app another two weeks. It’s totally gig by gig, shift by shift. And it’s fascinating because it’s like Uber or Lyft or like any of those kinds of location-based apps where you just turn it on when you want it and turn it off when you don’t, which I think is fascinating. And from a staffing perspective, it makes sense for them too. Instead of just traditional staffing models of you need bodies, we put bodies there, et cetera.
Yeah. That’s a really interesting take on that, on solving that problem. In the short term, we’re seeing wages go up in this area dramatically and I’m super familiar with this, coming from a family business that’s involved in construction with heavy utilization of labor. The idea is that there’s not really a great LinkedIn for professional laborers. The company that you just mentioned, seems like they have a really novel take on it. And I would expect solutions like that to continue to flourish.
A 100%, a 100%. In fact, I talked to the folks at AMS and they’ve got one called Hourly and it’s spun out. It’s run. It’s interesting to see services firms kind of RPO staffing firms that then decide to build a technology. Technology firms, you kind of see them, they start, there’s a genesis of how a technology firm kind of comes to market. But it’s interesting to see services firms do this because they typically just because it’s a different model, it’s different financial model. It’s different. It’s just interacting with customers in a different way. And so it’s fascinating on many levels. With wages, you hit on wages and I saw a sign on, I think it was an In-N-Out the other day that they’ve increased their minimum wage to $18. Well, I’m like, well first of all, that’s fantastic. That’s almost on the living wage, that’s fantastic. On the second I’m like, well, wait a minute, how much is the hamburger?
You got to sell a lot of burgers, that’s just what I was thinking.
And I love In-N-Out Burger but the talent shortage is real. I was in Florida this summer and one of our favorite pizza places, they were literally Tuesday, Wednesday and Thursday, they were just closed because they couldn’t staff the pizzeria.
It’s bizarre. It’s bizarre. There’s a couple of houses being built down the street from us because we largely work from home. And you never would have thought that there’s either not enough labor or enough material to do things. The GC down there, he said, as he’s getting a painting quote for the house, the painters say, it’s good for eight hours. It’s good for today. And by the way, we might not have enough paint to paint.
And some of that supply chain stuff that’s kind of held over from COVID or maybe even still very real from COVID and there really is a short supply of materials. Some of it’s, I think there’s just some games have been a ship in driving prices up.
Artificially in some of these things. For the folks that are listening and they’re thinking about it because they see the press releases of so and so got $150 million or so and so’s billion-dollar firm, on one level, let’s talk about funding and what you see in funding and why that’s important to firms for practitioners and for all of us to kind of pay attention to what goes on in funding. Let’s just take us into the wonderful world of what funding looks like.
Sure, sure. It’s a spectrum, I think is the first thing to remember. And there’s really early stage funding, which is generally kind of considered venture or angel where the idea is just being proven. It may not have market fit. The company may not have a bunch of or any revenue at that point. And it’s generally a bet on the end market. The investor is saying, “I like this team and I generally like this end market and I want to take a bet on it.” And the important thing to know about those investments, whether they be big or small on a angel or venture side of things, is that they’re typically what’s called primary capital going in. Meaning it’s money going onto the balance sheet.
And you’ll see, just based on the firm itself, if it’s a local angel association, like we have up here in Portland, Oregon, we’re typically writing smaller checks, as opposed to some of the better known names in the Valley, Kleiner Perkins or Sequoia who are known for putting really, really big bets on often unproven companies to really try to just win that market if they believe in it. Generally speaking at the early stages, it’s all again, primary capital going onto the balance sheet and those are all chasing one thing, growth. There’s three sort of things we look for.
Pilots and customers. Looking at a product. Well, they want to dump money into product and sales but the investor, like you said, they’re not necessarily looking at MR or AR, CAC or lifetime value or any of those types of things. That’ll come later and be very important of course but they’re looking at vision and the team. I think you mentioned the market opportunity and whether or not they believe and whether or not the folks can get there. There’s a lot of belief. Now there was years ago, there was a lot of those larger firms and even some private equity that would dip down with maybe an innovation fund or a smaller fund or a smaller part of a fund where they would dip down into the seed level. And because they were getting usurped by a bunch of those folks.
And so you kind of saw there was this rush at one point to like, you know what? We have an innovation fund and we’ll put a $100,000 or a quarter million into that. Because you know what? It’s a bet. It’s roulette at that point because they want the follow on, they want to be able to do the series A, B, C, et cetera. I don’t know if as much of that is still going on but it was fascinating at the time because one after the other created some form of innovation fund or small fund.
Yeah. Yeah. And you’re going to continue to see that. You’ll see the corporate venture arms deploying small bets across a variety of markets in which they either compete or may want to compete or the larger venture funds looking to just sort of get an inside look at companies within a space. Go ahead.
Just to edification with when you say corporate, like Workday Ventures or Cornerstone Ventures or people like that, are you thinking about those folks?
Okay. I just want to make sure the audience understands that there’s a lot of those, especially the larger ones that have some type of venture arm to them. And some of that’s outsourced R and D. They look at a company that’s small, that’s doing some bid and they’re like, you know what? Yeah, we’ll take a flyer. And if they’ve got first right of refusal or something, if it looks like something they want to buy later on, I think Cornerstone did this with Workpop years ago, they put some money into them and then later on, they acquired them.
And that’s a common thing you’re going to see. And whether it be a first right of refusal or information, these are things that we deal with on a regular basis, as we’re helping companies either raise money or sell because they can have meaningful impacts on that company’s ability to generate liquidity options down the road. At the earlier stages, you’re going to continue to see folks coming with larger funds with sort of these innovation funds or earlier stage funds. Whenever I sort of think about the why somebody is doing something, I always think about what’s in it for them? And a lot of these larger private equity funds, if they’re successful, there’s a really meaningful incentive for them to raise larger and larger funds which then forces them to compete in more competitive markets because the companies that they’re investing into are bigger, they’re better known. It’s the sort of the three things that we look for from investment banking perspective, there’s a little bit less growth but they have more scale and profitability.
I don’t want to get away from the original point but there’s a strong incentive for anybody who’s an investor to raise a bigger fund and you’ll obviously see them go back to the roots to make sure that they have smaller bets in earlier companies so that positioned to make bigger bets down the road.
It’s interesting you say that because like Rajeev at Mayfield, he and I did some work years ago and he invested in, I think he did the series A in Smart Recruiters and one of the things I was on a call with him A, because I was an advisor to Smart Recruiters but B, just kind of giving him an overview of the market. He knew the market pretty well. I asked him, I said, “Well, how do you make the decisions? I’m fascinated by this. How do you make your bets?” He goes, “Okay, so there’s no secret sauce but I’ve got to see some path at least. And it can be fuzzy but I got to see some path to a billion dollars. A billion-dollar value valuation.”
And I’ve just got to be able to see it. And again, there’s some luck involved. There’s some other stuff involved, but I’ve just got to be able to see it. And if I can see it, then I’ll lobby for it internally.
Yeah. And it’s because he’s got a big portfolio. Mayfield is, like you said, it’s a calculated roulette bet where one in 20 of their portfolio companies, these are round numbers, will return the entire fund.
That’s right. That’s right. It used to be in the late nineties, it was a two, six, two. The bell curve, two are abject failures, six are mediocre and two on the other end of it are home runs. And so the home runs is basically the way that they play the game. And again, that’s dating myself but back then they would look at the model and just go, “Yeah, we’re going to take eight of these are going to be eh. We don’t know which eight but there will be two home runs.”
That’s amazing. It’s really amazing to think about the decisions that they get to make.
It’s fascinating. Again, you’re playing with other people’s money. If you do it really well, great. At one point you’ve got to return that money. That’s the one thing about fund managers that I’m not in VSL. I’m in VSL on a lot of other levels but not in VS because at one point, you’re going to want to raise again and that’s all going to be based on past performance.
It is. It is. It’s a tough job.
Yeah, it looks easy from the outside, not easy. What’s your take on the private equity folks that are getting into our space? It’s been happening for a long time, so it’s not a new trend.
Aggressively. And some of the folks that you’re on the board of advisors on have taken a pretty significant amount of that money.
Yeah. It’s fascinating because normally it would be the kind of the early stage or even VCs but private equity, man, they play a different game. And they each have, Vista versus pick your next favorite one, they all have different models. I’ve found that once you dig into it, it’s they have a different window.
Yeah. And when you boil it down, they’re not that different. When you think about what they’re looking for. Generally, private equity, and I’ll define that further. Private equity I’ll include growth equity into that. These are all very semantic things that I’m saying for folks in my side of the industry but folks with call it a billion dollar plus fund are generally looking for a few things. The three that I just spoke about, scale, growth, profitability. And they’re hoping to make a calculated bet with each of their investments to show at least a 3X cash on cash return over five-ish years. And they don’t have the benefit of kind of that bell curve. They’re seeking to not lose money on any investment because that would really, really, really hurt them. They’re going to be doing investments into much more established companies with longer track records. They’re going to be putting significant due diligence into those processes.
And there’s often a lot of secondary in those deals, meaning they’re buying shares from the founders and once they buy a company, they then financially engineer the heck out of it by buying competitors at a lower cost, by using the market power from buying up those competitors to increase pricing to the end market users. They’ll ultimately be able to borrow money at a much lower cost of capital than the company could previously likely. And they often seek to decrease operating expenses, just by often renegotiating. If they’re using Salesforce for their CRM, the private equity fund might have 15 companies using Salesforce for their CRM. What you’ve seen it as, and I noticed K1 was an investor in one of the visit that you’re on the board of advisors for. I think it was Jobvite, they’re famous for this. They’re very good at acquiring their first platform and then looking at all of the different value points that Jobvite’s end customers are using as a customer. And then they seek to sort of acquire to strengthen the offerings to those customers so that the salespeople can have more meaningful conversations with each customer interaction.
And so they’ll roll those, they’re going to go wide and cover. Again, with acquisitions and then tie the technologies together and then they’re either going to as a roll up and then possibly sell that to another private equity firm or potentially take that public.
Or sell to a strategic acquirer.
Okay. Well that makes sense. It’s interesting that you mentioned on the private equity side and the competitors, when Vista bought Bullhorn, they gave Art three things. To go by MaxHire and Sendouts, your two biggest competitors and do exactly. You wrote the playbook for them, go buy them and then flip them to Bullhorn. And the third thing was rebuild the product from the kernel, which I found fascinating because normally private equity doesn’t literally left the software firm do that. That’s not really a part of the playbook generally speaking. But they let Art rebuild the product, using some of the functionality of some of the competitors and their own and what they know from customers. And they literally tore it all the way down and built it all the way back up.
Yeah. The competitors thing, that made sense. Just take those two out and then flip them. But the investment that they made in the product was actually stunning.
Really meaningful. Wow.
Really meaningful. Well, they sold, so of course they made their money. Valuations, outside of rolling dice, how do you come to a valuation? How do you help people understand what their business is worth or even for the helping on the sell side, what the market will bear, et cetera?
This is a really big part of our job. I’ll start with a caveat that it is subjective. It’s really subjective. And I’ll tell you sort of the mechanics of how we do it and then how we ultimately position it. When we’re thinking about any company, we look at it from a financial perspective first. Let’s use some cut rough numbers. Let’s pretend that company is 10 million in annual recurring revenue. Profitable and growing. We will essentially look at the company’s future growth rate or expected growth rate, looking at things like the quality of the revenue, the sales efficiency.
You’re looking at that particular time. Sorry Shane, you’re looking at CAC to understand how they acquire customers and churn on the backend.
ECV versus CAC. Gross and net churn. And we use that to spreadsheet out what we think the business’ future performance will ultimately look like.
Right, right, right. You know there are $10 million company, that’s now, but you’re looking at three years out or whatever the marker is to then say, “Okay, they’re 10 million now, they literally can be a $30 million company with these tweaks.”
Exactly, exactly. It’s subjective. There’s a lot of assumptions that have to go into it. We sort of, we generally look at a five year period from today to five years. The reason we do that, it’s the exact same underwriting criteria that nearly every private equity fund in North America uses. From there, once you know what the company’s future growth rate is going to look like and ultimately where we think the company is going to be in five years, it’s pretty simple math using what we call a leverage buyout analysis. You assume the buyer’s going to use some debt to acquire the business. And the last piece, the most important piece is we have to assume that the private equity fund is going to buy it for some multiple. Generally a multiple of annual recurring revenue.
Right. And that’s with technology in particular, it’s three to 10X or it can be anything because I’ve personally seen it be lower and higher in the same deal. I know there’s science to it. I totally know that there’s science to it but I also know that there’s an emotional part that’s unaccounted for.
Emotional on both sides. We’re selling founder owned businesses oftentimes and it’s somebody’s life’s work that you’re selling. And I think it’s one of the things that’s fun for us in doing this job. And the market itself is subjective. While we’re using as much science and trying to put guardrails around the parameters that we’re using, even when we go to market, we’ll often see a 300% spread on the low bid to the high bid. And from that high bid, let’s take that $10 million business and using your multiples three to 10, we might see our first round bids between three and seven times ARR. And we might ultimately close that deal at 10 or 12. The basic truisms that we always say is your exit as an entrepreneur, is somebody else’s entrance into this business. And it’s not about the past, it’s about using the past to explain the future of your company and the product and its future importance in your industry. And that means different things to different people and different acquirers.
I used to tell people, please beat me up on this but I used to tell folks that one of the signs of a great acquisition a year later is if they could keep some of talent. I’ve been doing this long enough to where, you’d look at an acquisition at first, kind of tilt your head at why they did that. And then a year later they’ve kept some of those senior executives, some of those senior product technical people and it’s like, okay, it makes sense. Totally makes sense. They overbought but it makes sense. I like it. Now it makes sense. And some of them, they don’t keep the talent and it fascinates me, they let what at least appears to me is really talented people leave.
And I know that’s all a part of the negotiation. I totally get that, but it’s like, why would you let them go? Why would you ever let that talent go? Keep them for a year or two but why would you ever let her go? But what do you look at when you’re looking at putting those deals together in terms of the talent? The technology and revenue and all that stuff, that’s totally, I get that. But the talent itself, the folks that make the firm the firm, what do you look for in those deals?
There are two things that don’t show up on a company’s balance sheet that are arguably its most important assets, the product and the people. We see this all the time. And one of the ways that you can get a sense for the buyer’s desire to acquire to this field or this product, this company that we’re representing, is based on the number of job openings that they might have with similar types of folks.
We sold the company earlier this year, where the buyer had 20 job openings listed for the exact specific field that the company was operating in. And it was no surprise that they ended up paying a pretty hefty premium to acquire that business. The answer is, it all depends. If it’s a tech company that’s acquiring a competitor, arguably the people are going to be less important than if it’s a solution that’s going to really allow them to get a beachhead into another market and the folks are really important there. I can tell you, you’re generally going to see a higher price when the buyer sign.
To keep the people.
When they sign real value to the people.
What do you think about congestion? In a sense of, let’s just take a category of software that you see a lot of investment in right now, Canvas just announced a round of funding and it’s a DNI recruiting platform. We could go wave by wave, CRM, ATS, different assessments. It doesn’t really matter but where do you feel like there’s a jump the shark moment where there’s not say too much money in the space but too many people are chasing it with too many different things and you want to kind of back off of that.
It’s the easiest way for me because I have the benefit of often conversations with founders, is just looking at the ultimate results of a business. As you start to see more and more money going into a space, there’s always going to be winners and losers. And the thing that always makes me scratch my head as to whether there’s going to be any real, what’s going to happen ultimately leads me to the question of what’s going to happen in a space is when I see one of the laggards or a company with little to no operating experience in history, continue to raise more and more money at bigger and bigger valuations. Certainly at the early days of a company, you would expect results to lag behind funding. But as you get three, four, five years into the venture, you would expect there to be some real meaningful results.
That happened to both Jobvite and HireVue. They over raised. They raised too much money or too fast, whatever. It didn’t pace at the way that it should’ve. And so they found themselves at a certain point where they were unattractive because the amount of money that had been dumped into them didn’t match. The stories didn’t match. Didn’t align. And both of them struggled. K1 one rescued Jobvite but they also rescued a bunch of other firms at the same time. But it’s kind of interesting to see, because you see some big numbers right now, Eightfold, Paradox, Phenom. There’s a bunch of folks getting large amounts of money and I’m fascinated just by watching it, going, do they even know what to do with that much money?
Because I know I don’t but then again, I’m not going to have to make those decisions. It’s interesting, when do you know it’s too much money? As a founder, what should you be looking at to then say, “Okay, I want a hamster wheel of raising money.” That’s one of the things I’ve talked to entrepreneurs about all the time. When you start, you’re never not raising money. However, there’s a pace to it that you’ve just got to make sure that you pace yourself. What do you usually advise folks, especially entrepreneurs and founders as to how they kind of make sure that they don’t get over their skis?
I think we generally advise to be conservative as you think about how much you raise and when. And have really objective benchmarks and goals that you’re seeking to get or hit with this next round of funding. And with some companies, if they can raise these massive mega rounds with little results, that’s their choice. But generally when you raise money, it’s going to come with protective provisions for the investor. They’re generally going to get at least their money back through some sort of preferred share and a liquidation preference. Often there’s a preferred return, eight, 10% with investors at least guaranteed to get that amount back as well.
As a founder, I think it’s just important to ask yourself the question of how fast do I want to crank up my treadmill here? And how long do I think I can actually run? And if you’re swinging for the fence and you have appetite for that risk, then go for it. But for the vast majority of founders and companies, software companies that we work with, that ends up not being the right cadence of fundraising. And generally we see them utilizing things like convertible debt or smaller rounds, in more often increments. And a lot of the companies that we work with, we see them getting to profitability much more quickly as a result.
Yeah. It’s like they tell you in triathlons when you’re swimming, you go slow to go fast and it’s sometimes that’s hard to kind of get into an entrepreneur’s head. It’s like, listen, the money’s there and you’ll know again, if you’re your MRR’s at a certain place, don’t worry, your phone will be ringing because folks will want to put money into your play. It’s then you have to make decisions on how to then make the right decisions of who you want as an investor, which is kind of an altogether different conversation we can have next time on how they make the decision on who should be and who’s aligned with them culturally or values wise or otherwise. But last question before we roll out is what are you excited? Because HR Tech’s in two weeks-ish. Usually there’s a lot of, at least historically there’s always been a lot of PR and a lot of press releases and stuff that kind of floods out at about this time. What are you excited about for the next three and a half months before we get to the end of the year?
I think the last thing that we’re really excited about is the continued transformation of the home being the new office and software companies benefiting from that, consolidating as a result of that, as we think about things like employee engagement, folks like cultural IQ, more flexible hiring with on shift or shift gig and performance management like Lattice and Workboard. I think we’re going to see more mid tier platforms like you’re already seeing Gusto create a huge number of integrations across the board as it comes to flexible hiring, ATS, employee engagement, performance management. I’m excited to see a partnership announcements. I’m excited to see funding into some of these companies that are disproportionately benefiting. And as an employer, I’m really interested to see how that impacts us and the way that we actually retain and recruit as well in these markets.
I love it. Well, next time we’ll talk about something different, but Shane, thank you so much for carving out time for us and giving us some insight into the market.
Appreciate you having me. Thanks, William.
And thanks for everyone listening to the RecruitingDaily podcast. Until next time.
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William is the President & Editor-at-Large of RecruitingDaily. At the intersection of HR and technology, he’s a writer, speaker, advisor, consultant, investor, storyteller & teacher. He's been writing about HR and Recruiting related issues for longer than he cares to disclose. William serves on the Board of Advisors / Board of Directors for 20+ HR technology startups. William is a graduate of the University of Alabama at Birmingham with a BA in Art History. He also earned an MA in American Indian Studies from the University of Arizona and an MBA from Case Western Reserve University.