Valuation Disaster Coming To SNYK Employees – Bend Over!

By Jay Valentine

Bend Over
Option Holders Bend Over

Does anyone remember DevOps? 

Surely the agile coaches infecting LinkedIn trying to sell their best agile practices are still around. But what about the other citizens, the ones called DevOps software employees? What happened to them?

Well, let’s go there for a bit and as we do, let’s bring in our pals from SNYK, an open source security software company selling an undifferentiated product, in a crappy market, with tons of competition, with Gartner Group saying the prevailing winds are against them.

No, the story is not about their totally stupid valuation – one only third tier VCs would support, the story is about the journey many employees are about to take having their stock options vitiated (that means getting screwed).

SNYK Option Holders Will Get SNYKered!

Our story begins with DevOps companies called Puppet, Chef, Perfecto Mobile and scores of others who were going to be billion-dollar IPOs, their CEOs talking about X hundred percent sales trajectories, with $100 million to $250 million in invested VC capital.

In earlier articles, we went through their dismal dynamics so you can read it here if you are not depressed enough with that miserable software category:

If You Work For These Companies You Are Dead Meat!

Today our thesis is bearing empirical fruit. 

First, Perfecto Mobile was acquired. It did not bring the billions the constantly revolving management predicted. It was sold essentially for scrap, for $200 million. The company may have made their VCs whole, but it was certainly NOT the 5x 10x minimum valuation they sought.

Then there are the employee option holders. Talk about getting screwed!

If you were a Perfecto employee you might well have expected your stock options to be 25% of your 5 year earnings. Well, guess what? The stock just about got the base investors out whole, maybe not even that much, so those employees likely came up empty.

And what about our pals at Chef? 

After changing CEOs and Sales VPs more often than most people change their tires, they were sold for $220 million? So where are the billions? Chef is reported to have $105 million in invested capital. The VCs got out whole, and with preferences there was likely nothing for those employee option holders.

How does this crap happen? Why so often? Why are employees brought into a company, with the promise/hope/expectation of a stock option upside only to be exploited and eventually getting little if anything?

Well, if you want to see how this happens, let’s visit our pals at SNYK. We won’t cover much previous ground as we did a piece on their stupid valuation before it doubled to really stupid this past month. Here’s that post:

https://www.linkedin.com/pulse/snyk-snooker-israeli-jay-valentine/?trackingId=E%2BNkfKegMaDBRsDAcu1Rpg%3D%3D

SNYK just did two separate funding rounds within a year catapulting their valuation to $2.6 billion. Wow, the option holders are super rich.

Well, not quite. These are just internal numbers as to how the VCs value each other’s investments so they can have a really great meeting with their new fund investors. 

This is kind of like two people each of whom has a crappy car worth $250.

One says I will offer you $25,000 for your crappy car if you offer me $25,000 for my crappy car! In each case, the offering recipient goes home to the spouse and says “…dear, our crappy car is worth $25,000.” Everyone is pretty happy. It is a wealth effect of sorts.

The trouble comes when you go to the third person, who is not on crack cocaine, and say “…hey, I will sell you my $25,000 car for only $20,000.”

The guy looks at you and says, “your car is crap. It is not worth $250.”

Don’t believe me?

Well if you are a SNYK option holder, take one of those vested options and go to the CFO and say, “hey, I want to sell you my vested option for the strike price if the company were only valued at $2 billion. It’s a deal for you!”

Go ahead. Try it. See if there are any takers.

Back to “how does this happen?”

VCs are in the business of hyping their investments particularly if they are trying to raise funds. They are particularly open to outside news that shows some kind of market upheaval where they might benefit – or get crushed.

A few weeks ago one such event happened. SNOWFLAKE!

Snowflake is not a college kid afraid of harsh spaces. Snowflake is a “cloud database” company that went public at a massive valuation. Even Warren Buffett invested in it with some of the money he made that is more than his secretary paid in taxes.

Why is this significant?

A category was born. 

A category is new beginning for tech companies. 

Most tech companies are just more of the same. 

Salesforce.com started a new category years ago with SaaS. Then everyone followed.

Oracle started a category in relational database; an industry followed.

Snowflake started a category in “cloud whatever.” 

Thus, the second and third tier VCs who watch this stuff said: “Holy cow, there is a category of cloud whatever! If we have a play in cloud open source SCA security, we can be a multi-billion dollar company as well.”

I know, it doesn’t sound so good when you actually drill down into what SNYK actually does, but it happens something like that. Thus SNYK was able to get that last investor in at a preposterous value. This stuff happens all the time.

OK, so let’s look at SNYK’s real value and let’s show you, dear reader, why we believe SNYK will NEVER go public at a multi-billion valuation. 

We take the position they are in a crowded, crappy market, they have never made a dime, they are spending their investments on hype to drive an acquisition and they will end up like Chef, Puppet, Perfecto.

We believe their employee option holders will likely get screwed and while the management and VCs will do great, the employees will not be happy SNYKers.

SNYK is a stand-alone player (versus a suite) in a market called Software Composition Analysis or SCA. This means it monitors/evaluates/sees the open source software most firms use and it points out vulnerabilities. 

There is no question this is a good thing, actually a vital capability. The problem is that it is something way too many other firms do. SNYK is not an abbreviation for “Software Nobody Yet Knows” about. 

SNYK is in a 15-year old market (SCA), chasing small transactions, with no major differentiators.

Need proof? 

Well our friends in SNYK’s massively overfunded marketing department provided just the starting point: The Gartner Report, August 2020 on the SCA market.

The report, which SNYK paid for, tells this quite unimpressive story. 

You would be shocked at how many marketing departments publish Gartner or Forrester reports saying “…our stuff is just like everyone else’s stuff but we paid to have this report so here it is.” 

Then they put it on their landing page. You cannot make this up.

SNYK’s brain dead marketing department likely did not think anyone actually reads this, but we did so let’s see that they paid for.

Gartner observations: In italics and underlined.

“Open Source — Many open-source tools perform SCA tasks. Despite their limitations, especially as organizations revisit budgets in the wake of COVID-19 business disruptions, open-source tools have become a primary choice for more organizations.”

PRIMARY CHOICE!!!

This means there is a ton of free stuff out there (open source) which is getting better by the day from free developers, and that it is a very price competitive area. COVID has made this free stuff more attractive. Oops.

Stand-Alone Products — These commercial offerings deliver a broader range of important functionality — license checks, remediation guidance, OSS governance and policy enforcement, etc. Examples include Snyk and WhiteSource (both also offer container scanning products that search out issues in container images), as well as Sonatype and Revenera (formerly Flexera), which offer associated capabilities, such as a repository, or governance capabilities (to control OSS use).

OK, Gartner just said a number of firms do SCA. Argue if you want about the edges, but if a bunch do this, there is no way ONE of them is worth $2.6 billion.

Here’s more:

During the past few years, a new round of stand-alone vendors has emerged (e.g., Snyk and WhiteSource), with products optimized for use by developers, in contrast to the application security team (although both remain buyers). Thus, today’s market consists of a mix of vendors, with stand-alone, pure-play products competing against components of a broader AST offering.

Remember where we are people. These SNYK guys say they are worth $2.6 billion and their employee option holders expect yachts. Does Gartner sound like they would be paying up here to buy the stock? Sound like there are a ton of them in the market and they are pretty much all the same.

Although AST and SCA vendors have avoided significant price competition, this will change in the short term. To this point, vendors have competed on the basis of a broader feature set and more robust research and OSS intelligence. Additional competition — resulting from a crowded AST market, stand-alone SCA vendors, new competition from development tooling vendors, and readily available, low-cost substitutions, such as open-source projects — will bring pricing pressure to the market. (In the short term, this trend will be exacerbated by economic effects resulting from the ongoing COVID-19 pandemic.)

Not enough pain? The market is crowded and as this quote shows, the price pressure is to continue to force the price of these products DOWN!

Now we did not make this up. This was actually posted by the SYNK marketing team. Hard to believe, but these types make a ton of money posting reports that say their software is in a crowded space, has few if any differentiators and is under long term price pressure. That means increasing revenues will take more of the steroids from that $250 million in VC dough. 

We guess the SNYK marketing VP never heard of leading with your differentiators!

Maybe Gartner missed something. Let’s go to CB Insights and check on the SNYK patent portfolio. Certainly they have tons of patents for this $2.6 billion valuation.

Hmmm. Looking at the SNYK page and I move to patents and it is just, well, blank.

No patents? If not, what are the unique differentiators that will enable SNYK to dominate a crowded category?

Then let’s see what customers are asking for. 

We log on to a site where people go to get references on this kind of software and we find a dev manager wanting to know if anyone knows the difference between “WhiteSource, SNYK, Sonatype Nexus and SonarQube.” Sound like market domination to you, dear reader?

Now we can post this all day and it is too much to type and far too much for you to read. But the result remains the same.

There is no conceivable way SNYK can dominate this SCA market which is the first, absolutely necessary step in supporting a $2.6 billion valuation. Their own marketing department posted the Gartner report saying as much.

What does this mean?

It means the $2.6 billion valuation is bullshit. 

The management and the board and the VCs know it. They are doing what we call financial valuation marketing – drawing attention to SNYK unsupported by any technical differentiation.

If enough people will buy this tulip bulb for the price of a house, it must be worth it. That did not turn out so well.

Remember the two guys with the $250 cars. 

That is likely what is going on at SNYK and there are a whole bunch of stock option holders who are about to find out just what it means when your stock options denominator goes up massively but the numerator does not. All that invested VC money just made SNYKers (except the scam management) poor.

If you are arithmetic challenged, this means you will get screwed when this place sells for a fraction of the bullshit number you are hearing about.

No yachts. Not even a kayak.

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