Amazon Web Services partner Logicworks announced on Wednesday that it has raised $135 million from private equity firm Pamplona Capital Management.
This is only the second round of investment that the profitable 23-year-old company has taken (the first was $7.6 million from Seaport Capital in 2011). And the round wasn’t even Logicworks idea.
Investors had been pestering the company so heavily with investment and buyout offers since the middle of 2015 that the board gave in and hired a banker last spring to investigate their options, CEO Kenneth Ziegler told Business Insider.
“We ran a formal process to explore options for the business because we had so much inbound activity from the biggest private equity folks to Fortune 500 companies. It got to the point where myself and the management team, we couldn’t possibly keep up while trying to run the business,” Ziegler said. “The best time to look is when you have a lot of interest. We didn’t even know where it was going to go.”
Pamplona won the company’s hand because they “had been very aggressive looking at different partners in the [Amazon] eco-system. They basically scoured the earth, looking for someone that had a recurring software revenue model around Amazon Web Services,” he said.
Logicworks had actually gotten multiple offers at the same price/terms, he said, but Pamplona was doing this as more of an investment than a buyout, keeping existing management in place. The founder had long ago left daily management (though he still had a stake). Ziegler joined the company in 2001 as a salesperson, worked his way up to CFO, COO, and then CEO in 2014. Many of his managing team had been with the company for years, too.
No single person cashed out and got rich from this $135 million, we understand. But because Logicworks hadn’t been raising rounds and rounds, stockholders were not diluted, either.
“There was so much equity available, it wasn’t a toxic investment. It wasn’t a layer cake,” he says.
Pamplona Capital is known in Europe as a buyout private equity firm, but this investment came from its new $1 billion venture investment fund launched in May, Ziegler says. Pamplona’s best-known previous investment from that fund was Dyn, a tech company Oracle just acquired for over $6o0 million.
Eat or get eaten
Logicworks made a name for itself for its “managed cloud automation” software. That’s a fancy way of saying that after it helps companies move to the Amazon Web Services cloud, its software helps them monitor their cloud usage to ensure apps run properly and with minimal monthly fees.
But it wasn’t always that way.
About five years ago, Logicworks was still a classic hosting company. Ziegler looked around and realized that Amazon Web Service was slowly killing his business.
AWS was just hitting its stride, moving past its reputation as cheap app hosting for startups.
“The traditional hosting industry was at a terrifying moment back in 2011-2012. You were still growing your installed based off traditional hosting, but it became more and more obvious that AWS was going to eat the lunch of so many incumbent providers,” he said.
“I was watching our salesforce just get punched in the face every day trying to sell our infrastructure over AWS,” he said.
Even the company’s own engineers were looking at AWS and saying that “Amazon was superior technically” to Logicworks.
It dawned on him, instead of fighting the shark in the water, he needed to join forces with it. So the company built a software product that helps companies manage their AWS usage and that software business took off.
The bonus: this was a less expensive, more profitable business than hosting.
“The company took 20 years to get to $12 million and three years later we’re approaching $50 million. Most of that growth is around AWS,” he said.
And capital expenditures (CapEx) “went from around 25% of revenue down to less than 6% of revenue over the last four years.” Plus earnings before interest, taxes, and amortization “went from neutral to several million dollars,” he said.
The big gamble
Still, this shift in the business model wasn’t easy. Half of the company’s engineers, who had made their careers installing and maintaining hardware, felt threatened and openly revolted at the idea.
The other half, who made their careers running Linux and maintaining software, were looking at AWS and saying, “this thing is unbelievable,” Ziegler says. They helped convince the hardware guys that the company had to change.
They told their reluctant hardware counterparts:
“We can be out ahead of Amazon on one feature and that would last for 48 hours. We can partner with them and get on that freight train,” Ziegler remembers.
But, there was another issue. It’s not like Amazon was dying to have this former competitor as a partner.
“It was 2012. We had to prove ourselves,” Ziegler said. “We told them, ‘let us bring you some business and when we’ve done that, we’ll ask you to embrace us as your partner.”
Logicworks went to one of its biggest customers and talked it into moving to Amazon.
AWS found the experience eye-opening. Most of its customers were small startups that had grown up on its cloud. It didn’t have a roster of enterprise customers with big enterprise-sized IT budgets.
But Logicworks did have them. “So, we shot ourselves in the foot. We took high-gross-margin, fully paid-for installed business and disrupted ourselves to move over to Amazon and get a seat at the table.”
When swimming with sharks prepare to be bitten
The risk of being an Amazon partner remains today. Amazon is adding ever more services and, unlike the IT vendors of yesterday (the Ciscos, EMCs, and HPs), it thinks nothing of competition with its partners.
In fact, just this week, it launched its own managed service, a competitor to Logicworks.
Ziegler said he knew about it and helped with it and isn’t worried.
“There will be certain clients AWS will service themselves and there will be thousands of others that have to be serviced through the eco-system. With AWS, if you view every single movement they make as a threat, you’re going to lose in this new world of competition,” he warns.
The trick is to embrace the idea of competition and look for ways to take advantage of it, either offering add-on services to AWS or in going after customers that AWS isn’t targeting.
“Don’t partner with Amazon if you think there’s no chance they are going to get to your business. The fact is, Amazon is going to compete with you. I don’t care what business you are in,” he says.
“But if you are part of the partner ecosystem, you’ll be able to compete and grow and do well. The breadcrumbs in the AWS eco-system are going to be huge for Logicworks,” he said.
Logicworks will be using the investment to expand its engineering and sales staff nationally.