A little over six years ago, Qualtrics
CEO Ryan Smith turned down a $500 million acquisition offer for
his bootstrapped company.
He was betting that he and his two cofounders — who
happen to be his father and brother — that they could build
their company into something far, far bigger.
Over the years, he took venture investment at
multi-billion valuations while maintaining a profitable
On Sunday he sold his company to SAP for $8 billion.
While it’s impossible to know what his take is, Business
Insider estimates that the Smith family could have earned more
than $3 billion in this sale.
A little over six years ago, Qualtrics CEO Ryan Smith stared at a
$500 million acquisition offer – half a billion dollars! – for
his bootstrapped company doing $50 million in revenue…
…and turned it down.
Instead, he decided to gamble he could grow his company far
bigger and far more valuable.
Qualtrics was on the verge of what was promising to be one of the
biggest, most successful IPOs of 2018. He was scheduled to ring
the bell on Wednesday, and his company was on track to be valued
at around $5 billion or more when the bell rung.
Instead, on Sunday night, a jubilant Smith, hopped on the
phone with Business Insider, along with SAP CEO Bill McDermott,
to talk about why he sold his company to SAP for $8 billion in a
“We’re here because we want to be. I think the IPO would be every
bit as big as this,” Smith said.
The deal is expected to close in the first half of 2019.
Qualtrics was on the brink of IPO
Smith was still on the IPO roadshow when he signed the
acquisition papers, he said. And Smith wants everyone to know,
this was not a fire sale: Investors were crazy about the idea of
buying a piece of Qualtrics.
“Our IPO is 13 times oversubscribed already and we hadn’t
finished the second week,” he told us.
Qualtrics was growing at over 50% a year,
had generated $289.9 million in revenue in 2017, and
it was profitable. Not only was it profitable that year, but it
had been cash-flow positive since it was founded.
A fast-growing, profitable cloud startup doing almost $300
million in annual revenue?
That’s a real
Shares were initially priced at a range of $18 to $21,
which as the mid-point would have valued the company at $4.8
billion — about twice its last private valuation as a startup.
But iinvestors were so hot the company was likely
going to raise the price, Smith implied, and still expected get a
big pop the first day. It could possibly have ended up being
worth something within striking distance to what SAP will
McDermott goes on a charm offensive
All of that means that Smith felt no need to sell to SAP or
to any of the other suitors he’s had over the years. McDermott
had been doggedly working on Smith to sell for months, they
“It wasn’t one conversation. You know I don’t go
down that easy,” Smith joked. Smith had fended off would-be
buyers before, hinting that others who kicked the tires included
big cloud companies in Silicon Valley and the Pacific
But anyone who has ever met Bill McDermott, the first
American CEO of German-based SAP, knows that he can be
persuasive, even if it takes some time.
“Trust comes in drops,” McDermott said.
SAP CEO had been impressed with Smith
and Qualtrics after an initial lunch together they had some
months ago. Qualtrics could give SAP the growth it needs in its
cloud business, while giving it a product edge in the cutthroat
marketing and sales software worlds, where SAP competes against
the likes of Salesforce, Microsoft, and Oracle.
McDermott says he knew he wanted to buy Qualtrics, even as
the impending IPO meant that the price was only going to go
Convincing Smith was like a courtship: They had a
“special dinner” at a mountain resort with Smith’s co-founder
They went bike riding and to dinner together with their
wives. They met at another Northern California conference where
they both speaking, at which point McDermott scored an invite to
the Qualtrics’ headquarters in Provo, Utah.
During that visit, he and Smith played some hoops, with
McDermott still wearing his dress shoes. He still feels guilty
about the scuff marks he left on the court, he said.
“And it builds to this crescendo today,” McDermott says.
“It’s two guys totally committed to the mission and
Smith said that he expected the company to be valued very
near the $8 billion he sold to SAP on Day 1 as a public
“Ryan drives a hard bargain. He doesn’t care about a
numerator, but about the security of his people,” McDermott
The Smith family become billionaires
Smith founded the company in his father’s basement, after
his father was diagnosed with cancer, as a way of spending
more time with him. Smith then
convinced his brother, Jared Smith, a Google exec, to quit
his job at Google and help him build Qualtrics — with their
father, who survived his brush with cancer, as a
Together, the family has maintained tight control over the
company, and didn’t take any venture capital funding until 2012,
when they had been in business for a decade. Ultimately,
Qualtrics raised $400 million in venture funding, with the Smith
family retaining its control.
However, it is impossible to know exactly what the Smith’s
take was from this $8 billion sale, even
Qualtrics had published its financial
results and named its top shareholders as part of the process of
That’s because Qualtrics was creating three class of shares for
its IPO. One class was for the Smith family, which included Ryan,
Jared and their father. These shares had super-voting rights. The
second class was for existing investors, which also gave them
super-voting rights, while the third were traditional shares for
The net result of this structure: If Qualtrics had gone
through with its IPO, the Smith family would have retained 51%
voting power over the company, while simultaneously obfuscating
how big a stake they actually owned.
We also don’t know the exact terms that SAP was offering
for each class of shares; just that it adds up to $8 billion in
But pushing all those caveats aside for now, and just for
fun, we did some napkin math anyway, based on some
Between the three classes of shares, there were just under just
under 196 million outstanding shares in the hands of investors
before the IPO,
the compay reported in its IPO documents.
If each share were priced equally in this sale — meaning
the Smith brothers were not claiming a higher price for their
preferred stock — than an $8 billion deal would value each
share a just under $41. And that’s a big if.
The Smith family, through a holding company, owns 88,823,418
shares. At $41/share, the Smith family would net themselves well
over $3.6 billion, cash.
No matter how you slice that, Ryan Smith certainly did better
than selling his company for $500 million in 2012.
The final word
Ultimately what convinced Smith to sell was this, he says: Not
only could he jump straight to an $8 billion payout for himself,
his employees and his investors, but Qualtrics would instantly
become a global company with access to SAP’s 413,000 global
customers and 15,000-strong salesforce.
Smith’s vision is to create a new market he calls “experience
That’s where companies take all the data they have on customers,
employees, partners, prospects and give themselves a complete
view of how well they are serving everyone. Qualtrics
offers cloud software that can help a company understand that a
group of unhappy employees in one department might be creating a
group of unhappy customers in another area.
SAP, as the world’s largest maker of financial software, also
offers everything from marketing software to HR wares, and is
sitting on all the data Qualtrics needs to make this new market a
“I want to go partner with Bill and SAP and go do this,” Smith