Digging into the RightNow Salesnet deal

RightNow's motives in acquiring Salesnet have more to do with defending its own customer base than going head-to-head with Salesforce.com in the volume small business market

People have often asked me if I knew how much revenue Salesnet was making. RightNow's acquisition of the CRM vendor has answered their question: not very much. Information given by the CFO alongside Monday's after-the-bell announcement reveals that Salesnet was barely profitable on operating costs of about $1.25 million a quarter. That implies annual revenues of just over $5 million.

RightNow CEO Greg Gianforte
The figure tallies with RightNow's projection of $1.5-to-2 million extra revenue this financial year as a result of the deal, once you add on the value of already-paid and deferred revenues at the time of the acquisition. RightNow is paying $9 million cash to acquire Salesnet.

The figures also suggest that a rapid acquisition had become Salesnet's chosen exit route. To show a profit when sales were barely covering operating expenses, Salesnet must have savagely trimmed back investment in product development. I can imagine that reserves were running short, too. The company last raised funding in March 2004, when it announced a $10 million private equity round. In total, investors put $30 million into the company, which must leave them disappointed in the sale price it finally achieved (especially those who'd put money into earlier rounds).

Having said all that, the deal looks good for RightNow, and not only because of the keen price. Salesnet's founders Jonathan Tang and Rich Perkett must also be pleased to have found a good home for their venture. RightNow looks after its staff and has taken on both the co-founders and their team.

Salesnet's key strength was its integration of workflow technology into salesforce automation (SFA). Whereas most people think of on-demand SFA as little more than a browser-based contact manager, the addition of workflow adds extra structure to the way users interact with their sales contacts. As RightNow's CEO Greg Gianforte (pictured above) explained on Monday afternoon, "Where Salesnet differentiates itself is in the more complex B2B environment where there is a definitive process of selling. That enables you to standardize best practices across a sales organization." Or as Salesnet's marketing pitch puts it, make all hundred of your sales reps as successful as your top twenty.

This kind of structured selling is a great fit for the knowledge-based customer support that is RightNow's core offering. It also explains why, even though Salesnet competes head-to-head with Salesforce.com, it averages 65 seats per customer in its direct accounts rather than Salesforce.com's 19.5, which I discussed in my posting last week. That average is much closer to RightNow's own and is a clear sign that RightNow isn't planning to mount an attack on Salesforce.com down in the volume small business market. Its motives in making the acquisition have more to do with stopping its rival encroaching on its own customer base as Salesforce.com steps up its sales overtures to larger enterprises.

That doesn't bode well however for the partner channel that Salesnet has built up, and which Gianforte described as "intriguing" in Monday's analyst call. This is the side of Salesnet's business that delivered the larger volume of its seats (and explains how in January it could claim 40,000 subscribers compared to Salesforce.com's 440,000 — almost one-tenth — and yet be generating barely one-seventieth of Salesforce.com's revenues. By the way, it also explains the discrepancy between the "4,000 to 5,000" customers Salesnet claimed then compared to the "several hundred" Gianforte spoke of acquiring on Monday). Unless Tang and Perkett can find a way of rapidly persuading Gianforte that the channel will add real value to RightNow's proposition and profitability then I suspect it's not going to remain a focus.

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