Qualtrics: Bootstrapping Growth

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CASE: SM-224 DATE: 1/13/2014

QUALTRICS: BOOTSTRAPPING GROWTH My father and I made a rule when we started...Equity mattered and we wanted a very clean cap table, we treated equity like gold. We had to bootstrap, it was old school thinking, but we figured that if we offered great value… then customers would buy it. But, at a point we realized how big this could be. There was so much that I wanted to do that we weren't doing. So we started really looking at how we could accelerate and expand the company…This is when we started 1 entertaining investor calls. —Ryan Smith, CEO of Qualtrics

In March 2012 the founders of Qualtrics sat together in the Provo, Utah, office of advisor Duff Thompson. They stared down one of the toughest decisions in the ten-year history of the company. Thompson and Qualtrics’ CEO Ryan Smith had spent the last few months fielding calls from venture capitalists and strategic partners who were interested in becoming a part of the Qualtrics story. The culmination of their effort was a $500 million buyout offer, several venture capital (VC) term sheets, and a line-up of prominent institutional partners. This was the first time the group had seriously entertained taking on an external partner. The company was built on an equity-centric foundation—the founders treated equity like gold and relished their autonomy. With a frugal mentality matched by passion for the business, the founders bootstrapped Qualtrics’ growth from an idea forged in the basement of a family home to a company on track to reach revenue of $50 million that year.2 While the group was in the

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All quotations are from authors’ interviews on October 11, 2013; October 14, 2013; October 18, 2013; November 4, 2013; and December 10, 2013, except where otherwise noted. 2 Victoria Barret, “Qualtrics: Tech’s Hidden Gem in Utah,” Forbes.com, May 15, 2012. Maryanna Quigless (MBA ’13) and Professor Jonathan Levav prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This case was made possible by the generous support of the Citi Foundation. Copyright © 2014 by the Board of Trustees of the Leland Stanford Junior University. Publically available cases are distributed through Harvard Business Publishing at hbsp.harvard.edu and The Case Centre at thecasecentre.org, please contact them to order copies and request permission to reproduce materials. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business. Every effort has been made to respect copyright and to contact copyright holders as appropriate. If you are a copyright holder and have concerns, please contact the Case Writing Office at [email protected] or write to Case Writing Office, Stanford Graduate School of Business, Knight Management Center, 655 Knight Way, Stanford University, Stanford, CA 94305-5015. This document is authorized for use only by Jimmy Steier ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

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enviable position of having to choose among several attractive paths, with it came a dramatic shift at the very core of Qualtrics. CEO Ryan Smith and the rest of the founders convened in Thompson’s office to make a decision on the next era for Qualtrics. As the leader of the company and a large shareholder, Ryan wondered—did they need to bring in a partner to take Qualtrics to the next level or could they continue to bootstrap growth? 10 YEARS OF BOOTSTRAPPED GROWTH Phase 1: It all started in a basement in Utah (2002-2006) In 2002 Brigham Young University (BYU) marketing professor Scott Smith was diagnosed with throat cancer and the prognosis was bleak.3 He spent much of his time in radiation treatments, and between doctor’s visits kept busy by tinkering with a few projects. Out of his work emerged the idea for a web-based survey platform. He wanted something that his fellow professors could use to make research a bit easier. His early goal was to build a survey platform that could provide the statistical horsepower that a PhD would require, but that was “easy enough for an intern.”4 At the time, his son Ryan Smith was studying at BYU and in the midst of an internship in Los Angeles. Alarmed by the dim outlook for his father’s health, he decided to leave his internship early and returned to Provo to spend time with his ailing father.5 When he arrived home, Ryan found the early stages of a survey product and despite limited experience in research, started to help his father. With the help of a BYU computer science student, Ryan and Scott built a crude early platform that provided basic functionality. The duo kept operations lean from the start. They used old computer equipment from BYU and worked out of the cramped basement of their family home. (See Exhibit 1 for the early office.) Initial sales were driven largely off Scott’s network of researchers. Ryan recognized the opportunity ahead of the business and wanted to continue to spend time with his father. So he decided to take a leave from BYU to work on the venture. From then on, Scott managed product, while Ryan managed the business. By the time Scott recovered from his treatments, Ryan had closed 20 customers including the Kellogg School of Management and other top universities.6 In 2003, Ryan brought on his friend and former BYU classmate Stuart Orgill as a co-founder. At the time they managed a suite of five websites with names such as Survey Z, Perfect Survey, and SurveyPro. (See Exhibit 2 for the early platform.) With a growing number of brands and a small team they began to face challenges. Ryan called in his older brother Jared to help revamp the product.7 At the time Jared was working in New York for a start-up and dismissed the product as “unscalable junk with hokey names.” But despite the apprehension, he along with a BYU

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Briana Stewart, “Survey Says: 10 year old sensation is right on Q,” UtahValleyBusinessQ.com, December, 2012. Vince Horiuchi, “Hey World, Are You Ready for Utah’s Qualtrics?,” The Salt Lake Tribune, June 16, 2012. 5 Hamish McKenzie, “Why Provo’s Qualtrics Took $70M it Didn’t Even Want,” PandoDaily.com, July 26, 2013. 6 Issie Lapowsky, “How We Got Funded: Qualtrics,” Inc.com, April 30, 2013. 7 Victoria Barret, op. cit. 4

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trained engineering team re-wrote the entire system. Eight months later the group emerged with a single research product under the Qualtrics name. Phase 2: Scaling Qualtrics (2006-2009) By 2006 Ryan, Stuart Orgill, and Scott were able to grow Qualtrics to $1.3 million in sales, with a skeleton team of 15 people. They reached over 100 customers—all from the cramped quarters of the Smith’s home and without taking on outside capital. The Qualtrics team was able to keep costs low and run the business solely on cash flow from operations. As the founders scaled the team, they reined in costs by weighting much of employee compensation towards variable metrics. This variable compensation model was critical to the company’s success. As Ryan described: I hate to say this, but it was kind of a “feed the winner, starve the loser” mentality. That’s very harsh for a lot of people, but early on we couldn’t afford to pay everyone the same. We basically gave everyone a key to the building and said “hey look, if you are a rock star we’d rather allocate more money to you and if you’re not, it is what it is, and it’s probably just not a good fit.” Early hires were typically recent BYU graduates looking to stay in the Provo area. At the time, much of the United States was experiencing an economic downturn. In this setting Qualtrics was able to hire top graduates with limited competition. Entry-level sales hires were offered a $2,000 base monthly salary and uncapped variable commission. Many hires had pseudo-sales experience as Mormon missionaries based in cities around the world. This prior experience often proved helpful as salespeople worked against lofty sales targets and served a wide range of customers. For some team members this resulted in total compensation packages well above that of their peers at other companies and a fast trajectory for growth. Throughout Qualtrics’ evolution the founding team made a conscious decision not to take on outside capital. As Ryan noted: We had to bootstrap, it was old school thinking, but we figured if we had something good then customers would buy it. If they won’t buy…it’s probably not that great…We didn’t hire unless it made sense. Every employee had to pay for themselves. Ryan further added: As humans, many times we only bring what we need to any given situation. That’s our nature. Growing a business isn’t much different. But, if we are

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challenged, we find gears that are hidden inside of us. By forcing yourself and your team to dig deep, great things will happen. We become truly innovative. 8 This focus on bootstrapping impacted decision-making during the evolution of Qualtrics. It forced a “nail it, then scale it” model.9 Ryan trained most of his initial focus on reaching universities and figuring out how to deliver the best value for this target customer set. Once he nailed a clear value proposition, he set sales targets and worked aggressively to meet those goals. The lack of outside capital forced the founding team to get creative. At one point, Ryan wanted to market the product at a few trade shows but lacked the cash to pay for registration fees. So he decided to barter, offering free survey licenses in exchange for access. Funding constraints also primed the team to concentrate on customers. During this growth phase, only one person’s attention was focused inside the building, and that was the office manager. Everyone else was focused 100 percent outside the building. This external focus extended even to the finance department, which became largely an accounts receivables team. As Ryan shared “all they did was get the cash in the door in 30 days or less and had variable comp tied to it as cash was king!” When thinking back, Ryan shared: There’s this whole notion with being a bootstrapped company that becomes second nature. You can’t afford downtime. You can’t afford people not working. You’re pivoting all the time because you’ve got to target where you’re productive and where it counts. If anything you’ve got to be so dialed in with where your resources go because being bootstrapped—if you don’t, you will fail. Everyone’s a quota carrier in the whole company as opposed to just sales. It creates a scrappiness that is contagious. This bottom-line focus extended into the founder’s perspective on equity. Scott Smith taught his sons that equity was like gold and should be managed very carefully. He believed that you could always offer out-sized compensation to your team later, but that maintaining a clean capitalization table was a major competitive advantage. Jared Smith described the early view on equity: It was old school. If you look at a shopkeeper, just because somebody comes and works in their little shop, they don’t give them part of their company. So the way that Qualtrics was built was where equity was preserved. This was based on Scott’s past entrepreneurial experiences… just because somebody comes and works for you doesn’t mean they’re entitled to own part of your company.

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Ryan Smith, “Ryan Smith: Nail It, Then Scale It,” The Wall Street Journal, May 30, 2013. Ryan Smith, op. cit.

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With this mindset Qualtrics was able to gain traction and solid cash flow. In 2007 the team finally moved operations to a local office space.10 From there they were able bring on more staff, and build out a corporate offering alongside their academic beachhead. Qualtrics research suite The strong growth experienced by Qualtrics was driven primarily from sales of the Qualtrics Research Suite product. This was sold via a “software as a service” (SaaS) offering primarily to academic institutions. (See Exhibit 3 for product images.) Research Suite for academia Qualtrics’ early focus on universities was due largely to Scott’s experience as a BYU professor. As Ryan noted, “we had a built-in case study sitting with us every day.” Research Suite was sold to graduate-level business schools and undergraduate departments for use in courses and research. By 2008, Research Suite was taught in courses and offered as a bundled package with marketing textbooks. Further, Qualtrics was used in top business schools, including Stanford’s Graduate School of Business.11 With a tagline of “making sophisticated research simple,” they provided students and researchers alike with survey tools to meet their needs. Through Research Suite, users were able to build surveys, distribute them to target respondents, and analyze results. Users could design the look and feel of each survey, select from over eighty question types, and export the data into a range of formats including csv, txt, html, and xml.12 To serve both experienced (professors) and inexperienced (student) users, Qualtrics provided access to a customer support team that was based in their Utah headquarters. From Ryan’s perspective, prior to Qualtrics’ entry, there was no dominant professional survey platform for academia and the market was quite fragmented. Competitors included home-grown solutions. These were described by Ryan as “very nerdy products that were unusable by the masses, or freemium products that were basic tools that would only get you half the way there.” Research Suite for enterprise Qualtrics launched their corporate offering in 2007. For this, they leveraged much of what they had built for the academic product. By early 2012 they grew to serve notable companies like Toyota, Hewlett Packard, and the Wall Street Journal.13 Qualtrics offered corporate customers enterprise-feedback-management tools to centralize data collection and acquire market insights. Qualtrics’ enterprise tools could be integrated with customer databases and information systems. Further they were built with security features to protect data and give customers control over permissions and sharing. The platform was easy enough to enable mass adoption throughout an organization but advanced enough to please professional research experts.

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Peter Ma, “Ryan Smith, the King of Bootstrapping,” Examiner.com, February 8, 2013. Brad Plothow, “95 of the Top 100 U.S. Business Schools Have Standardized on Qualtrics to Conduct CuttingEdge Research,” Business Wire, June 18, 2013. 12 Qualtrics.com. 13 Ibid. 11

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When marketing the corporate offering, Qualtrics focused on its enterprise-wide applications, ease of collaboration, and thousands of customizable features. Qualtrics leveraged the credibility built through years of experience serving academic customers. In some cases, Qualtrics even benefited from former academic users introducing Qualtrics to their employers. In the corporate market, Qualtrics faced a diverse set of competitors that spanned high- and lowend offerings. In addition to the providers serving the academic market, they competed with ConfirmIt and Vovici, which were both venture-backed: 



ConfirmIt (annualized 2012 revenue estimated to be $60 million,14 served over 700 customers15): An enterprise feedback management provider that offered sophisticated modeling and research tools. They gave organizations the ability to gather feedback and conduct market research. ConfirmIt primarily served large corporations and market research agencies through on-premise and on-demand offerings. Vovici (acquired by Verint Systems for over $56.5 million in 2011,16 served over 1,500 customers17): A provider of feedback gathering tools for businesses. They offered online surveys, mobile surveys, data analysis, and text analytics to help companies to better leverage feedback to drive decision making.

Phase 3: The largest software company you haven’t heard of yet (2009-2012) By 2009, the strong pace of growth at Qualtrics started to catch the eye of investors. First emails flooded into Ryan’s inbox. Then packages were sent to Qualtrics’ headquarters along with requests for office visits.18 In response, Ryan adopted his own unique approach to investor relations. When these requests first came in, Ryan either ignored them or responded with dismissive comments that, as Ryan admitted, bordered on rude. For example he might reply with inflammatory remarks like “why are you wasting my time—I don’t need your money, I am good on cash!” The biggest names in Silicon Valley were calling on Qualtrics and the founding team turned a blind eye. In 2010 Ryan, an avid golfer, met Duff Thompson at a golf tournament in Puerto Vallarta, Mexico. Thompson was a Utah business legend and an early executive with the company that produced WordPerfect, a word processing application. Between shots Ryan shared a bit about his work building Qualtrics and asked questions. Thompson was impressed by Ryan and after the tournament the duo stayed in touch with Ryan turning to Thompson for informal advice. When it came to determining how to handle the deluge of investor interest in Qualtrics, Thompson offered guidance informed by his experience working with investors.

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“Mobile Boom Speeds ConfirmIt Growth,” ConfirmIt Ltd, May 9, 2012. Bob Thompson, “ConfirmIt’s VoC Product Strategy Focused on Horizons Platform,” Customer Think, June 29, 2013. 16 Bill Flook, “Vovici Acquired in Deal Worth as Much as $76M,” Washington Business Journal, July 19, 2011. 17 Bill Flook, “Vovici Goes on Expansion Spree,” Washington Business Journal, December 3, 2010. 18 Ryan Smith, op. cit. 15

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As Jared Smith described: [Thompson’s] argument to Ryan was “look, I’ve been through this. When everything is good and on the upswing, like what happened at WordPerfect, you tend to think you’re invincible. [But] you don’t know what you don’t know. Instead of just telling all these investors to go away, you probably ought to think about putting some people at the table that can help you go the distance…when [investors] call, instead of upsetting them, why don’t you just send them to me.” Thompson took over investor communications. In contrast to Ryan’s gruff approach, Thompson kept relationships warm so that if Ryan wanted to consider linking with investors, he would have a solid starting point. In the meantime, Ryan started to think about what Qualtrics could become. Ryan shared: I had a vision for what it should all look like, even down to the swag we were giving out.19 There was so much that I wanted to do that we weren’t doing. We [the founders] had a mindset that everything was on our personal credit cards. We needed to move off the model of running the business like a pawn shop and respect the billion dollar opportunity that was before us…what would happen if we bet on ourselves and turned it up a notch? This desire to accelerate growth at Qualtrics came from a belief that Qualtrics offered meaningfully differentiated value to customers. Among peers, Qualtrics stood out for several reasons including its differentiated sales organization, its innovation in product development, its integrated product offering, and its prompt customer service. Sales organization Qualtrics developed a sales organization that was very proactive. The team focused on to reaching top U.S. companies via tele-sales. Sales representatives were constantly monitored via internal systems, and there was no cap on compensation. These attributes led to a sales organization that was highly entrepreneurial. Rather than rely on best practice, the team innovated and Qualtrics developed its unique approach to reaching target customers through a Utah-based inside-sales model. Product innovation Research Suite was built with a level of statistical rigor that made it an incredibly powerful tool for the most exacting of researchers—professors. This rigor was manifested in the variety of reporting options for survey results and the wide range of question types offered during the survey design process. Product development was largely spearheaded by Jared Smith who brought with him a unique set of skills that drove innovation. As TechCrunch noted “Jared

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Swag in this context is an acronym for “stuff we all get” and is meant to indicate products that a company might give away for free, often for promotional purposes.

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Smith is one of those elite Valley tested engineers that every founder dreams about joining their startup but deep down knows there’s only a one percent chance he/she ever actually will.”20 Integrated products Qualtrics built a range of products that integrated tightly with the Research Suite flagship tool. This level of compatibility enabled Qualtrics to satisfy the growing needs of each client without friction. To achieve this, Qualtrics engineers leveraged as much as they could from their existing code-base as they developed new products. After introducing several successful products, the Qualtrics product development team proved that the company possessed the technical ability to develop and market a suite of integrated products. They weren’t just a single-product company. Customer service Qualtrics University was a team within the company that was charged with training and customer service. They were compensated based on ticket-response efficiency and prowess in exceeding customer expectations. Beyond compensation, Ryan created systems to promote prompt customer service. One of the most notable processes was the “gong alert.” As described by Business Insider, “If calls go unanswered, a gong goes off and red sirens start blaring….everyone’s expected to pick up the phones.”21 This, along with other approaches drove Qualtrics to deliver excellent customer service which helped Qualtrics to stand out. FOUR ALTERNATIVES FOR THE NEXT PHASE OF QUALTRICS By 2011, Qualtrics was experiencing triple digit annual growth, enjoyed a wide profit margin, and with 100 percent of equity owned by the founding team, had a capitalization table that most entrepreneurs could only dream of. To further buttress its position, Qualtrics launched a new product, Qualtrics 360. This product helped human resource teams to better manage the employee evaluation process. With the addition of Qualtrics 360, Qualtrics entered a new vertical and enhanced its ability to become a “one-stop shop” for customers. Qualtrics grew to serve end-markets that ranged from academia through to the C-suite of large corporations. They had solidly emerged as a strong competitor in several verticals. Qualtrics’ market positioning Qualtrics began by serving the U.S. higher-education survey market. They targeted the over 2,500 universities and colleges in the U.S. This group in aggregate spent an estimated $1.6 billion on software, a portion of which was allocated to survey tools. 22 Qualtrics gained a dominant position in the academic-survey niche. As Ryan described, “No one really owned the university market...comps weren’t really brought up when we approached universities. Academics tended to have more home-grown tools.”

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Derek Andersen, “The Story Behind Qualtrics, the Next Great Enterprise Co.,” TechCrunch.com, March 2, 2013. Owen Thomas, “Pick Up the Phone! Enterprise Startup Qualtrics Gongs Employees if They Don’t Answer Customer Calls,” Business Insider, August 7, 2012. 22 Vincent Kiernan, “Spending on Technology Rebounds at Colleges and May Set Record This Year,” The Chronicle of Higher Education, March 20, 2006. 21

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From the academic market, Qualtrics grew to serve the broader online survey software market. This market included companies like SurveyMonkey and was valued at $2 billion in 2011 with 9.6 percent annual growth expected.23 When Qualtrics introduced robust collaboration and marketing assessment tools, it graduated to serve the Enterprise Feedback Management (EFM) market alongside companies such as ConfirmIt and Medalia. EFM software and processes gave organizations the ability to centrally manage market research deployments, review results holistically, and set workflow processes. Often these systems were integrated with Customer Relationship Management (CRM) systems and Talent Management Systems. The online survey market and the EFM market were sub-segments of the market-research industry. The U.S. market-research industry was valued by IBISWorld in 2013 at $20 billion, and the global market was valued at $50 billion.24, 25 Further, with the entry of its Qualtrics 360 product, Qualtrics waded into a new segment, the $4 billion talent management systems market.26 Within this market Qualtrics faced competition with offerings from such large companies as Oracle via their Fusion product and SAP via their SuccessFactors offering. By 2012, Qualtrics had proven to be a leader in the U.S. online survey market and had a foothold in other attractive markets. These adjacent markets were largely centered in the Enterprise Resource Planning (ERP) space and included the CRM market, and the Talent Management Systems market. (See Exhibit 4 for detail on Qualtrics’ current and adjacent markets.) The founders’ perspectives on Qualtrics’ future Scott, the largest shareholder, saw his “little project between radiation treatments” turn into one of the biggest corporate success stories in Utah. His company had earned a place among the likes of such Utah titans as Vivint (acquired by Blackstone for $2 billion) Ancestry.com (acquired by Permira for $1.6 billion) and Omniture (acquired by Adobe for $1.8 billion). 27,28,29 Scott had poured ten years of his life into Qualtrics and at 65 years old, with a long career behind him had achieved success beyond what he could have ever imagined. Given his large equity stake, an exit event would place him squarely in the top 0.01 percent of U.S. population wealth and give him the latitude to live quite comfortably. Ryan, the second largest shareholder and CEO, had a vision for what Qualtrics could become. However, he had his hands full juggling several roles within the company and strategizing on what the future would hold for Qualtrics. He believed that Qualtrics could be much bigger than it was, but saw many gaps in the organization.

23

“Online Survey Software Industry: Acquisitions Will Abound, as Industry Demand Continues to Soar,” IbisWorld, December 21, 2011. 24 “Market Research in the US: Market Research Report,” IbisWorld, November 2013. 25 “Market Research and Polling Services,” First Research Inc, August 5, 2013. 26 John Bersin, “The 2013 Talent Management Systems Market: Explosive Growth and Change,” Bersin by Deloitte, November 29, 2013. 27 Michael Wursthorn, “Blackstone to Buy Vivint in $2 Billion Deal,” The Wall Street Journal, September 18, 2012. 28 Jason Notte, “Ancestry.com sells for $1.6 Billion,” MSN Money, October 22, 2012. 29 “Adobe Acquires Omniture Software,” Adobe Inc., October 23, 2009.

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Ryan described: We didn’t have marketing, only three percent of our sales came from outside of the U.S. and we were very un-optimized. Basically we were a super talented, super fun, super hard working group but we didn’t have the right plumbing in place. Ryan believed that it was because they did everything in an unconventional manner that they were so successful. Despite this, he suspected that they needed outside, experienced support to scale to the next level and for “insurance” on this risky move. In January 2012, the founding team came together to decide on a plan for their next chapter. Despite a wide disparity in views, the group decided to explore bringing on an external partner to help grow the business. With the blessing of the other founders, Ryan joined Thompson for a series of meetings with the VC investors and institutional partners with whom Thompson had built relationships over the last few years. The pair set an aggressive 60-day timeline to find potential partners who could offer terms that would satisfy all of the founders. Qualtrics weighs four go-forward options Option 1: Venture capital investment Starting in 2009, venture capitalists contacted Qualtrics on a consistent basis. For example, Accel Partners, a $6 billion Palo Alto-based venture and growth equity fund, contacted Qualtrics early on. The firm had an offline big-data thesis, and partner Ryan Sweeney led the charge. He worked with associate Arun Mathew to source investment opportunities. As Mathew described: [Qualtrics] had all the signs of a company that was going to explode. They showed rapid headcount growth, which is a good indicator of cash flow for a bootstrapped company. They maintained strong customer service ratings as they grew and they had a great product. Plus, they did all this from Utah! With Sweeney’s support, Mathew pursued Qualtrics intensely. He sent over 15 e-mails before getting a response. Once he got his first “no” from Ryan he continued to reach out until finally, in 2011, Sweeney and Mathew were invited to meet with Thompson. During that meeting, no hard figures were shared, and Thompson offered only an overview of the company and its growth story. Despite the limited information, by the conclusion of the meeting Sweeney was impressed. He immediately sent a note to Ryan Smith detailing how Accel could be valuable as a partner and reaffirming his interest in the company. Over the course of the next year, Sweeney spent time with Ryan to build a strong relationship and learn more about Qualtrics. Sequoia Capital, a $4 billion Menlo Park-based VC fund also pursued the opportunity to invest in Qualtrics. Qualtrics co-founder Jared Smith had previously worked with Sequoia partner Bryan Schreier at Google. Schreier and fellow partner Pat Grady reached out to Ryan to express their interest. Sequoia was also drawn to the fundamentals of the company and the partners believed in a bigger vision for Qualtrics. During a dinner with the Qualtrics founders, several

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partners from Sequoia shared their vision for what Qualtrics could become. At the dinner, Sequoia Partner Mike Moritz pushed Qualtrics with a provocative suggestion. As Thompson recalled, Moritz remarked: You have a great company that could become really important in the world. You need to decide if you just want to be interesting dinner conversation or if you want to be relevant for a long time. Sequoia and Accel were joined by several other firms that pursued Qualtrics. By early 2012, Thompson and Ryan had secured five VC term sheets from highly distinguished firms. Option 2: Institutional financing In early 2012, Qualtrics had strong cash flow that more than paid for operations. However, Ryan believed that with the help of a deep-pocketed institutional partner like a large bank or private equity fund, he could significantly scale Qualtrics while minimizing disruption to his operations. As Ryan shared: The ability [for a partner] to be able to write the next check and take you the distance is important because fundraising is very distracting and can take you down for quarters or months when you are in hyper-growth mode—it can become pretty toxic for a small company. Ryan and Thompson engaged with two very prominent institutional investors. These partners brought two things that Ryan felt Qualtrics would need for the long term—global reach and deep pockets that could be useful for acquisitions and international expansion. Qualtrics would gain access to leaders of Fortune 500 companies, and advisory support from financial sponsors. Many of these advisors had ushered some of the most distinguished companies in the world to multi-billion dollar valuations. Ryan saw this experience as extremely valuable. Further, by working with an institutional partner, the founders wouldn’t have to give up control of their company and would largely maintain operational autonomy. From a financing perspective, Ryan and Thompson believed that partnering with an institution would offer an excellent path to long term capital. As Ryan noted, “They are able to write the second or the third check. If we need more money quickly they could invest straight from their balance sheet.” Option 3: $500M strategic offer While Thompson and Ryan were in the midst of talks with VCs and institutional partners they received an unsolicited acquisition offer. As Ryan shared with Business Insider, the offer was set at $500 million.30 The strategic buyer reached out with the option of bringing Qualtrics into their portfolio. The potential acquirer provided Ryan and Thompson with the key financial elements and a potential deal structure. As Thompson noted, “This [offer] was a diversion from

30

Julie Bort, “This Guy Turned Down a $500M Offer for His Startup and is Thrilled About It,” Business Insider, July 26, 2012.

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what we were working on, but it was a legitimate approach by a very good company led by people who we like and respect.” When considering this option, the founding team recognized that this would mean a loss of the autonomy that they enjoyed for the last ten years of their evolution. However, with the founding team holding all of the equity in Qualtrics, this option would net each founder a considerable fortune. For Scott Smith, as majority shareholder, this option would result in an especially attractive liquidity event and exit. Option 4: Continue to bootstrap Prior to founding Qualtrics, Scott Smith had a few formative entrepreneurial experiences that shaped his perspective on external investors. He recognized that bringing others into the business came with the benefit of resources for growth, but also brought the risk of interpersonal and incentive challenges. As the largest shareholder, Scott also maintained the decision authority to ensure that ownership was not diluted. Qualtrics generated enough cash to grant the founders a healthy compensation package and had enough clout within the Utah community to hire top talent from BYU and nearby corporations. With Ryan Smith as CEO, and Google-trained Jared Smith as head of product, Qualtrics had high-caliber leadership that could steer the company towards further growth. By 2012, Qualtrics already had many of the ingredients required to scale. As they contemplated the option to continue to bootstrap growth, they recognized that this plan could yield an even higher valuation down the line without the need to give up their independence and equity-centric roots too early. The next chapter Scott held the final vote on next steps. However, in a selfless gesture he turned the decision over to his sons, Jared and Ryan. By virtue of having bootstrapped a company with strong cash flow and growth potential, Jared and Ryan sat in an enviable position. They had their pick of partner from among five prominent VC funds, they held a $500 million buyout offer from a respected company, they had offers from institutional partners with very deep pockets, and their company was generating healthy cash flow so they could continue to grow the business independently. No matter the path, they planned for the company to grow quickly and drive towards a billion dollar business.31 From the beginning of the Qualtrics story, the founding team treated equity like gold—their most valuable asset. They bootstrapped for ten years. They made tough tradeoffs. They got creative. Ultimately they succeeded in growing their idea generated in a basement into a prominent company with a high level of outside interest, including an offer with a $500 million valuation. Now Ryan and the founding team faced a tough question—would they be willing to part with their most treasured commodity to achieve scale or would they grow it alone?

31

Derek Andersen, op. cit.

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Qualtrics: Bootstrapping Growth SM-224

Exhibit 1 Qualtrics’ first office

Source: Qualtrics

Exhibit 2 The early offering- a collection of websites

Source: Qualtrics

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Qualtrics: Bootstrapping Growth SM-224

Exhibit 3 Product overview (2013) Product marketing

Source: Qualtrics

Sample Research Suite dashboard

Source: Qualtrics

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Qualtrics: Bootstrapping Growth SM-224

Exhibit 4 Market overviews (2012) US online survey market

Source: Compiled by case writer from PRWeb, Ibis World, corporate websites, and Qualtrics interviews

Global market-research market

Source: Compiled by case writer from First Research Inc, Ibis World, corporate websites, and Qualtrics interviews

This document is authorized for use only by Jimmy Steier ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

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Qualtrics: Bootstrapping Growth SM-224

Exhibit 4 (continued) Market overviews (2012) Talent management systems market

Source: Compiled by case writer from Bersin by Deloitte, Wikipedia, corporate websites, and Qualtrics interviews

Customer relationship management market

Source: Compiled by case writer from Forbes, Wikipedia, corporate websites, and Qualtrics interviews

This document is authorized for use only by Jimmy Steier ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

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Qualtrics: Bootstrapping Growth SM-224

Exhibit 4 (continued) Market overviews (2012) Global enterprise resource planning market

Source: Compiled by case writer from Forbes, Wikipedia, corporate websites, and Qualtrics interviews

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Qualtrics: Bootstrapping Growth SM-224

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Exhibit 5 Competitor Market Value (2014)

Source: Capital IQ (company data) and Google Finance (currency conversion), public market data as of 1/23/2014

This document is authorized for use only by Jimmy Steier ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.