Global Fintech Founder & Investor | ex-Adyen, ex-Franklin Templeton
This week the API-based communications platform giant Twilio formally announced that it would acquire the customer data platform startup Segment for $3.2 billion in all stocks. The market responded quite positively to the news, driving Twilio’s stock price up by 7.7%, bring Twilio’s market cap to a staggering $49 billion.
Founded in 2011, Segment is a San Francisco-based startup with the promise to disrupt traditional CRM with a seamless experience powered by customer data infrastructure. It has raised a total funding of $284 million from Thrive Capital, Sapphire Ventures, Accel & GV, among others. It was recently valued at $1.5 billion, after raising the new round in Apr 2019 to deepen its core data infrastructure platform and, more importantly, to fuel its global expansion. It is estimated that the Segment’s annual recurring revenue could reach $100 million by end of 2020, with more than 75% non-GAAP gross margins on its subscription-based revenue from over 20k customers.
The $3.2 billion acquisition of Segment is by far Twilio’s largest M&A deal, beyond the $2 billion all-stock privatization of the API-centric email platform SendGrid, a major competitor of MailChimp, back 2018. “This is a once-in-a-lifetime opportunity to bring together the two leading developer-focused communications platforms to create the unquestioned platform of choice for all companies looking to transform their customer engagement,” said Twilio co-founder and CEO Jeff Lawson.
The news of the Twilio-Segment acquisition was first broke by Forbes on Friday, Oct 9, only 1 day (by US time) after Twilio’s competitor MessageBird raised a mega Series C of $200M led by Spark Capital, valuing the Dutch company at $3 billion.
Founded in 2016 from Amsterdam, MessageBird has been establishing itself as the international archrival of Twilio, much like its Dutch fellow Fintech superstar Adyen compared to Stripe from San Francisco in their early days. Therefore, Twilio’s acquisition of Segment would also help it strengthen its global foothold to compete against MessageBird armed with fresh dry powder.
Long Term Vision
Besides competing for global market share, the more essential synergy of the combined new company comes from better achieving Twilio’s vision to build the world’s leading customer engagement platform. “Understanding customer data is key to achieving this vision,” as highlighted in the presentation.
Essentially, what Segment can bring to Twilio is the comprehensive single view of a customer. Segment’s unique data infrastructure will be able to empower Twilio’s customer communications platform, so that we no longer need to suffer from the broken customer engagement process because of the lack of customer insights.
A customer would no longer have to waste hours to be pushed back and forth between different departments from the merchant end and to repeatedly describe the customer’s purchase or service history with the merchant. On the other hand, the merchant benefits from better engagement insights with the customer so that it can be more efficient in targeted sales and marketing, offering a more personalized and impactful customer experience.
“The one thing that’s always been missing from Twilio as we’ve been building up this customer engagement platform is understanding of the end-users themselves,” said Twilio co-founder and CEO Jeff Lawson. “We power the communications, but we don’t actually know who the customers are.”
Meanwhile, the acquisition is a brilliant strategic move to take the advantage of Twilio’s recently hyped market cap. The COVID19 crisis has driven the valuation of a lot of SaaS companies up through the roof, including Twilio, whose stock price has grown more than 3X since the breakout of the pandemic. Whether the recent SaaS valuation hype is a bubble or anchored by long-term vision, Twilio is definitely smart to acquire strategic assets with its highly-valued stocks. As I was discussing the similar valuation hype in Fintech in my previous post, Twilio’s example showcased the optimal strategy in the current situation.
Strategic Advantages and Potentials
The strategic thinking of Twilio’s vision, as described by its CEO Jeff Lawson, sounds a lot like how direct-to-consumer (DTC) disrupted the traditional sales channel structures. In the past, brands rely on wholesale brokers or regional agency-representatives, who power sales and marketing, but brands don’t know who the end-customers are.
With the data brought by Ecommerce, individual brands now have much better insights on their customers in terms of their tastes, preferences, and personalities, which can help better build out the brand image. Hence, we saw a group of strong DTC brands such as Warby Parker, Bonobos, Allbirds, and Peloton. Even the big players like Nike are putting a high priority on building out their own DTC-style membership to better understand and reach their shoppers.
The rise of Ecommerce later caused the rise of Fintech, as Ecommerce platforms and individual DTC brands alike were looking for better payment experiences on desktop and mobile ends. Therefore, the mega-platforms such as eBay, Amazon, and Alibaba have built out in-house Fintech functions — some later grew too big and thus had to be spun off such as PayPal and Ant Group, others have formed strong partnerships with now fintech powerhouses, such as Shopify with Stripe, eBay and BigCommerce with Adyen, and (arguably) Weebly acquired by Square.
Beyond just processing payments, Fintech companies are also powerful data sources for Ecommerce companies to better analyze their shoppers so that they can iterate on their marketing and sales strategies.
However, so far, most of the innovation around Ecommerce and Fintech has only centered around either the pre-sales part (marketing) or the at-sales part (payment), but not much has been done on the post-sales part, or shopper lifecycle part. And this could be Twilio’s strategic advantage.
For any brand’s financial success, LTV is the ultimate topline, and CAC is like the necessary evil. Better efficiency in the pre-sales and at-sales processes can definitely help optimize CAC by lower marketing costs and minimize involuntary churn (caused by clunky payment process). There are enough service providers or partners where any brand can find great actionable insights.
Nonetheless, in terms of handling existing customer engagement, or the post-sales part, most still outsource it to call-centers who treat their valued customers badly, or some better ones start using Twilio and MessageBird but lack good data and insights to effectively maximize LTV. Therefore, equipped with the customer data infrastructure from Segment, the new Twilio has the potential to be the ultimate LTV engine for brands.
The only part missing for Twilio now is a Fintech arm, so that it can move beyond its strategic stronghold of post-sales to at-sales. As for pre-sales, much of Segment’s data infrastructure can already help improve Twilio’s product offering in marketing, so what Twilio really needs now is a Fintech product to close the whole sales loop and customer lifecycle.
Similarly, for MessageBird to gain an upper-hand, the newly raised $200 million could be partially used to seek out a Fintech acquisition target, although most of the incumbent ones have grown above affordable price range.
On the other hand, as some payment Fintech companies have explored the idea of leveraging financial data (at-sales) to power more efficient marketing (pre-sales), it is also likely that those who benefited from the recent valuation surge to acquire a customer engagement platform (post-sales) similar to Twilio or MessageBird. Adyen is definitely closer to MessageBird as they are both headquartered in Amsterdam, but Adyen strongly believes in organic growth and has never acquired a company in its almost 14 years of life. Twilio’s sheer size makes it a formidable acquisition target for any payment company, even for PayPal or Ant Group.
Whatever the potential deal might look like or whoever it might be between, one thing we know for certain is that those who have benefited from the COVID-driven valuation surge need to take advantage of the opportunity to transform the buzz into long-term strategic value.