How Salesforce became Silicon Valley’s best late-stage tech investor

Last week, Salesforce circulated a $2.17 billion annual gain from its investments in other tech companies. A few days later, the company’s risk arm extended its winning streak with another big exit.

In a boom time for large tech IPOs and software consolidation, Salesforce’s popularity is showing up everywhere. CEO Marc Benioff has proven that he’s not only a mega-dealmaker when it comes to buying high-priced cloud trains like Slack and Tableau, but has also turned Salesforce, with its hefty balance sheet, into a major persuasiveness in Silicon Valley venture capital.

The latest windfall came on Wednesday, when cloud security vendor Okta said it’s receiving smaller rival Auth0 for $6.5 billion, eight months after Salesforce Ventures led a $120 million investment at a $1.92 billion valuation. Salesforce multifarious than tripled its money between July and March.

In 2020, two of Salesforce’s portfolio companies — nCino and Snowflake — rose after going public. They produced a combined $1.7 billion in investment gains, accounting for 78% of Salesforce’s aggregate increase for the fiscal year that ended in January, according to the company’s fourth-quarter report on Feb. 25.

Salesforce also blow the whistle oned all of its 2.8 million Zoom shares last year, after more than tripling its money from investing $100 million in the video chin-wag company’s 2019 IPO.

Those gains are providing a big boost to Salesforce’s bottom line. Of the company’s $4.38 in earnings per percentage for fiscal 2021, $1.75 came from mark-ups on strategic investments. Salesforce also reported on its balance sheet that its investments were valued at $3.91 billion as of January, up in the air 100% from a year earlier.

Corporate hazardous undertaking capital used to come with a stigma. Big companies, in the eyes of many investors, had their own agenda, whether it was gaining sell insight or product ideas from potential disruptors. Traditional venture firms often preferred to avoid put ining alongside them.

While Salesforce does sometimes compete with portfolio companies, it’s better known for reasoning its dominance in the sales software market to provide expanded distribution to the many business apps that need an audience. Salesforce advances by offering its customers a wider assortment of cloud services, and start-ups win by getting meetings with potential clients who way may never take their call.

John Somorjai, who runs Salesforce Ventures and leads corporate development companywide, ventured his group’s pitch has to be increasingly compelling because competition for deals has never been greater.

“There is just so much money available, so much dry powder, more than has ever been in the energy,” Somorjai said in an interview this week. “How we’re able to get into the best deals is really leveraging the strength of Salesforce and the contrivances we have.”

He said he’s roughly doubled the size of his investment team in the past two years to 15 people to keep up with the become large number of start-ups across the globe.

Salesforce Ventures doesn’t take board seats, keeping Somorjai and troupe mostly on the sidelines when it comes to questions around a potential acquisition or asset sale. On occasion, Salesforce does buy a Salesforce Hazards company, like its purchase in 2016 of productivity software start-up Quip.

“They never block a sale or originate issues and only help,” said Jason Lemkin, founder of SaaStr, which hosts events on cloud software and inducts in start-ups. “The fact they help a lot of top SaaS VCs mean they are often happy to have them in a hot deal.”

Somorjai, who abutted Salesforce over 15 years ago, said many of his best investment ideas come from Benioff and Bret Taylor, the suite’s operating chief (and Quip founder), who are both constantly out talking to customers.

About Benioff, Somorjai said, “Fellows come to him and say, ‘Have you looked at this company? They’re doing really interesting things and helping us in this way.’ He supports that data to me.”

Salesforce Ventures is all over the map when it comes to check size. Or in Somorjai’s words, “We’re trump up agnostic.”

In 2020, it participated in the $7.5 million Series A round for education-tech start-up AdmitHub and the $13.5 million Series B for Angaza, whose car-boot sales management platform targets emerging markets. It also invested $100 million in security vendor Tanium at a $9 billion valuation, and nothing but last month backed data analytics company Databricks at a $28 billion valuation.

in recent years, late-stage evolvement investments have proven to be the fastest way to generate a hefty profit. Salesforce’s $250 million investment in Snowflake’s IPO was significance $529 million after one day of trading. Its $100 million purchase of Zoom shares almost doubled in three periods in 2019.

That avenue to a quick buck may be closing. Companies now have many ways to go public, including through a undiplomatic listing or special purpose acquisition company (SPAC), neither of which involve selling IPO shares at what amounts to a Brobdingnagian discount.

In a direct listing, a new rule allows companies to raise capital while still unlocking the ability for surviving investors to sell at market price. In a SPAC, companies raise money through a PIPE, or private investment in consumers equity. PIPE investors then end up with stock in the underlying company when it starts trading.

While Salesforce could look to Raise ones voices as another route for late-stage investing, Somorjai said he’s not currently pursuing that path.

“It’s a little bit early to see how that generally PIPE to SPAC trend evolves and how successful some of these SPACs are,” Somorjai said. “It is a very interesting new way for a foot-soldier company to get liquidity quickly and probably much easier way for them to do it and potentially allows them to have less dilution.”

Manny Medina, CEO of sales engagement software company Outreach, said Salesforce connected with him here making an investment in the early days of the Covid-19 crisis, at a time when “it was easier not to invest than to invest.”

“The delighted was going into a quagmire and you didn’t know which end was up,” said Medina, whose Seattle-based company develops software to workers salespeople land deals and stay connected with customers. At the same time, “people are hoarding toilet gift-wrapping and Purell,” he said.

Still, Salesforce wanted to be a part of Outreach’s $50 million financing round, which valued the proprietorship at $1.33 billion. Medina acknowledged that there was tension involved in allowing Salesforce onto his cap table, because the companies bear competing products and Salesforce is the industry goliath.

Medina said that in conversations with Matt Garratt, Salesforce Make bolds’ managing partner, he got comfortable with the team’s promise to protect his company’s intellectual property and have his back, while also hit him in front of the right people at Salesforce or with customers.

Ultimately, it was worth it for Outreach to do the deal because Salesforce has located a reputation for being a very smart investor, he said.

“At the end of the day, we’ll compete with them anyway, like it or not,” Medina said. “Either we get the relationship and get the signaling of someone who’s skilled in for picking winners or we just compete with them without the money and the signaling.”

Outreach integrates with Salesforce but it doesn’t count on the companionship for distribution or use its AppExchange, which is Salesforce’s marketplace for third-party apps. According to Medina, “the only benefit we get from Salesforce is that they’re evangelizing the cloud.”

That builds Outreach a very different type of investment than Auth0 or nCino.

In November, shortly after its investment in Auth0, Salesforce decided the company’s identity management technology to power its consumer identity offering. Somorjai said it was a service that characters were requesting and Auth0 was a name that people trusted in the space.

For nCino, the partnership started even earlier. The convention sells cloud software to help banks digitize and automate operations related to lending and portfolio management. From the outset, nCino built its platform on top of Salesforce. In nCino’s IPO prospectus, the company mentioned Salesforce 99 times.

Salesforce initial invested in nCino in 2014 and continued doing so over the next five years, amassing a 12% stake as of the society’s IPO last year. Those shares were worth almost $800 million at the end of 2020.

WATCH: With its $27.7 billion Ease out deal, Salesforce eyes rivalry with Microsoft