By: Eli Robinson | April 1st, 2019
For most intents and purposes last Thursday, March 28th, 2019 was a fairly normal day in the tech world. There were no major product announcements, no major security breaches, no major personnel changes, and no Congressional Testimony.
That, however, is a completely unfair characterization of your Thursday if you’re a sales or marketing professional who uses HubSpot.
HubSpot, one of the world’s foremost SaaS companies, suffered a major technical outage that rendered its platform useless for days. That, your parents will certainly understand.
What they won’t was that the company’s value increased $240 Million in the process.
But we’ll come back to that.
Here’s how Yahoo Finance describes HubSpot:
“HubSpot, Inc. provides a cloud-based marketing and sales software platform for businesses in the Americas, Europe, and the Asia Pacific. The company's software platform includes integrated applications, such as customer relationship management, search engine optimization, blogging, Website content management, messaging, chatbots, social media, marketing automation, email, predictive lead scoring, sales productivity, ticketing and helpdesk tools, customer NPS surveys, analytics, and reporting. It also offers professional, as well as phone and/or email and chat based support services. It serves mid-market business-to-business companies. The company markets its products through inbound go-to-market approach, marketing agency, and sales partners. HubSpot, Inc. was founded in 2005 and is headquartered in Cambridge, Massachusetts.”
Let’s give a little bit more of a layman’s look at HubSpot in the instance you’re not an experienced tech investor.
HubSpot, first and foremost, is a software as a service (SaaS) technology company. What this means is that HubSpot’s software platform is licensed to users and accessed online via a subscription in lieu of being installed on machines. User pays HubSpot money every month. HubSpot gives user log-in.
HubSpot offers software that helps salespeople and marketers to do their job better and easier. HubSpot’s platform helps you keep track of all your current and potential customers and enables its users to communicate with them via various communication channels rather seamlessly. Your parents probably had a Rolodex and a landline. You have HubSpot and a cell phone.
Ask your parents how devastating it would be if they lost their Rolodex.
As I mentioned earlier, HubSpot went down…hard.
Someone (I would imagine with a good sense of humor) at HubSpot described the issue like this:
“At around 11:30 AM EDT on March 28, we experienced an issue with one of our critical infrastructure systems that supports many parts of our platform, causing issues with tools such as email, page publishing, sales tools, reporting, and more.”
It’s a lot easier to translate this into layman’s terms.
It all broke. And tens of thousands of people, on the last two days of Q1 2019, were rendered helpless. Millions if not tens of millions of dollars of value for customers was destroyed. Deals weren’t done. Clients weren’t served. Businesses screeched to a halt. In other words, nothing good happened. Period.
When the market opened on Thursday March 28th, HubSpot’s shares were priced at $161.55/share. Given the ~41.17 million shares outstanding, that would imply a market capitalization of $6.65 Billion.
Between the market open on Thursday and the market open on Monday (when the issue was declared “fixed” by HubSpot), the share price increased to $166.21/share.
That would imply that the value of HubSpot on Monday morning was $6.89 Billion or an increase of $240 Million!
Right? What the heck happened here?
Software is useless on two of most important days of year. Company increases in value 2.8%?
The answer lies in the fact that the software industry today has fundamentally changed from the IT industry your parents once knew.
SaaS is “Sticky”, Very Sticky – When you speak to tech investors, they’ll herald you with the value of customer retention. It’s easy to grow a company when you don’t lose current customers. And man alive, is HubSpot a sticky product. Once you commit to using it as your “rolodex,” it’s really difficult to change to a different solution. You invest hundreds of hours in customizing the system to meet your specific company’s needs. So the idea of changing providers comes with the promise of having to redo all of that work. To lose all of that value. When the software goes down, even at that inopportune moment, it’s not even close to enough activation energy to get companies to change. Customer retention remains high.
Outages Happen – One of the realities of the cloud-based world we live in is that things go wrong quite frequently. Between the constant changes being made to the underlying code and the incalculably complex way that the software is delivered to the users via the web, SaaS products may be best described as Christmas lights that are wired in series. While companies spend hundreds of millions of dollars to make sure that things don’t go wrong, a single error can have devastating consequences. The more you rely on SaaS products to run your life, the more you become desensitized to them. Perhaps the first time a major outage happened, you turned red and nearly exploded. But by the time it happens for the nth time, most customers consider it more of a nuisance than deal-breaker.
Demand for Publicly Traded, Scaled Tech Outstrips Supply – In recent years, investing in technology companies has almost become a cause célèbre. Stockholders, both professional and retail, have decided that overweighting portfolios toward the technology sector is the way to create alpha. And this goes farther than simply the FAANG phenomenon. If you’re a scaled technology company, there is an insatiable appetite to own your shares. HubSpot, one of the primary competitors to SaaS hero Salesforce, gets a major benefit for this. If you were to sell your HubSpot shares on the back of this and were looking to reinvest the proceeds in a similar company, you’d only find astronomically priced competitors prone to the same issues as HubSpot. In a different market, you may take the money and invest it in a utility company. Not these days.
As the leader of a SaaS company myself, it’s events like these that can really teach you about the way that various market participants have evolved and continue to. You can learn a lot about what the markets, company, customers, and competitors do in response to situations like this one. Ultimately, the challenge for all of us is to make as good of decisions as we can in the face of these uncertainties. Balance the needs of as many people as we can. And help our parents understand this new world as best we can!
Eli Robinson is the General Manager of FranFunnel and the COO of Metric Collective. His team uses HubSpot, a lot.