It's not all unicorns: The roots of Zerto's disappointing exit

Zerto founders Ziv and Oded Kedem  credit: Eyal Izhar

How did a tech company that began so well and attracted the best investors end up being sold for less than its last valuation?

At one time, a $374 million exit would have made the main headlines. But the sale of cloud data management and protection company Zerto to computing company Hewlett Packard Enterprise (HPE) two weeks ago sank in the spate of news from Wall Street about the recent wave of IPOs. What's more, in complete contrast to the responses of investors to those IPOs, the HPE-Zerto deal was demonstratively ignored by the venture capital funds invested in Zerto, and the investors disappeared as though they had never been, despite the high price in absolute terms and the sale to a US giant. Why? Because the exit was unsatisfactory, to say the least.

The sale, for less than the value of the company in its last fund-raising round, rounds off two chaotic years for a startup that had been considered the jewel in the crown of Israel's software industry. In the middle of the previous decade, Zerto stood out in the landscape of software companies that developed toolbars and browser add-ons, and it attracted the cream of Israel's software engineers and data experts. It brought together broad know-how in the Israeli storage software market, which had produced exits in the billions of dollars and brought giants such as IBM, Dell, and EMC to compete for local engineers, and it positioned itself in the growing cloud market, facilitating a rapid and riskless process for many companies that sought to upgrade their data infrastructure.

Disappointing multiples

From the start, Zerto looked set for a huge exit or a promising flotation, and it attracted the very best investors: around the table sat Pitango, 83North, Battery Ventures, IVP and USVP, venture capital firms that individually and collectively have some of the biggest investments in Israeli high-tech to their names, and who join together only when it's a case of a real beauty.

The sale price supposedly represents a twofold return on the capital invested in the company, market estimates of which range between $180 million and $230 million, but the investment is not divided equally. Funds that entered at early stages, such as 83North and Battery Ventures, received higher returns of their investments, whereas for those that entered at later stages, such as IVP and RTP, the return was lower. Since the company's valuation had fallen since its last fund-raising round in 2020, when, according to PItchbook, it was valued at $410 million, the valuation in the sale was a disappointment for the investors, who, according to Globes' information, obtained a single-digit multiple, when they had expected a multiple measured in tens.

The company's 500 employees, and those who left but had bought shares in it, will share 10% of the sale proceeds - $20-30 million. That's a nice amount, but it will make few of them millionaires, far from the success stories coming from Israeli companies floated on Wall Street in the past month. Still, the employees who remain with the company will receive substantial upgrades in pay and conditions, and it should be mentioned that they will have a real impact on the products of HPE, one of the world's most prominent computing companies, working with large and mid-size enterprises in upgrading their databases and server farms.

Profitable but not growing

2019 was the year of the turn for the worse in Zerto's fortunes. Before then, it had conducted a roadshow in advance of an IPO in New York, and in the pre-coronavirus period it was considering a flotation. The fact that it was profitable (and it still is) enabled it to market the move. A year after it raised capital in the private market at a valuation of $260 million (according to Pitchbook), it sought a valuation of $600 million from investors on the stock market.

At that time, all its competitors were readying for IPOs or private fund raising rounds at very high valuations, and a successful IPO for Zerto was in the air. Most of its competitors were gathering momentum: Rubrik raised hundreds of millions of dollars at a valuation of $3 billion; Cohesity jumped within two years from a valuation of $850 million to $2 billion; US storage technology company Datto was gearing up for a flotation, and is now traded at a market cap of $4.4 billion; and Swiss company Veeam was bought by Insight Partners, one of the outstanding venture capital firms of recent years, for $5 billion.

In that state of affairs, Zerto had to demonstrate not just that it was profitable, but also that it was growing significantly. When that failed to materialize, things began to go wrong. The examination period before the planned flotation came with unfortunate timing. The previous quarter was the first ever in which Zerto showed a decline in its financial performance. When the flotation was cancelled, the effect was felt throughout the company, and still reverberates.

The company was set up with all the necessary infrastructure and with the right technology, but something in the sales department started to creak, and sales did not grow as expected. Within three years, the chief revenue officers in Zerto's offices in Boston left one after another: Paul Zeiter left in 2018; his replacement Ed Carter left a year later; and after him, Coley Burke lasted in the job one year and three months, until the start of this year.

The company generated annual revenue of $100 million, a figure that several unicorns that have had successful flotations in the past few weeks might be jealous of. But to get there, Zerto had to spend heavily on salespeople. "The sales processes at Zerto are long, and take many months," says a source closely familiar with the company. "The processes are outdated, cumbersome, and not online, while the company's website presented the appearance of a company that was not up to date. In the end, you are running after senior systems VPs, and with the decline in sales, there were too many employees and not enough deals."

Layoffs and low morale

At its height, Zerto had offices in several places around the world. Besides its development center in Herzliya Pituah - which has recently moved to modest premises - the company maintained a sales office in Boston, and activity in Florida and Singapore. Although the chief revenue officer lived in the US and kept the management of the sales and marketing operation close to his chest, it seems that there was never harmony between the different parts of the company around the world.

The company's managers in Israel were frequently accused by their overseas colleagues of rigid, centralized management. Human resources management was transferred to Boston, and changed hands several times within a short period of time, which created uncertainty. When the flotation was cancelled, the atmosphere in the company also started to change. The company hemorrhaged workers, underwent a fundamental restructuring in 2019, and in the past two years has shed about 300 employees, 200 of whom were laid off when the coronavirus pandemic broke out in 2020, 50 in Herzliya and the rest in Boston and Singapore.

"Globes" has also learned that at the beginning of this year too, several dozen employees were laid off. Furthermore, at least 100 employees, among them workers in data systems, finance, and human resources, chose to leave. Almost all of those who left or were dismissed were hired elsewhere. Former Zerto employees are now effectively at work in other Israeli technology companies.

Employees who recently left Zerto voluntarily can exercise the options they have accumulated and benefit from the exit, as long as no more than three months have passed since they left.

"Not a unicorn CEO"

The poor atmosphere was also manifest in the low rating awarded to Zerto CEO Ziv Kedem on workplace review website Glassdoor, where he received a score of just 52%. The criticism mainly came from Zerto's overseas offices. For the sake of comparison, the CEO of rival Rubrik, Bipul Sinha, received a score of 85%, while Datto CEO Tim Weller scored 87%.

People familiar with the company and its employees describe Kedem as an approachable person with a well-developed business sense, but with a management style different from that of the charismatic style of the CEOs in the companies that have recently attained unicorn status. "Kedem is a mensch who, at the start, built a good company, with stable foundations and a healthy enterprise culture, and he surrounded himself with good managers. But as the company grew, it became harder for him. To manage a large company you need leadership and character, and that wasn't there in sufficient quantity," people close to the CEO said. Nevertheless, they said, "Had the company succeeded, no-one would have talked about his management style. As soon as a company fails to carry out a flotation, people start focusing on these things as well."

Zerto stated in response: "HPE chose to buy Zerto thanks to its leading software platform for protecting data and for disaster recovery. The company expects to integrate Zerto into the HPE GreenLake Data Services Console to help its customers manage and protect their data from edge to cloud. Looking ahead, Zerto's team will form the anchor of HPE's new center of excellence in Israel."

Published by Globes, Israel business news - en.globes.co.il - on July 13, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Zerto founders Ziv and Oded Kedem  credit: Eyal Izhar
Zerto founders Ziv and Oded Kedem credit: Eyal Izhar
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