Rippling: A Generational Company?

Zoom, Leon Cooperman, Transmit, and so much more!

Author

Alan Soclof
January 13, 2023

Good Morning!

In a very rare occurrence, I will be starting off the newsletter by recommending a show that is not within the Paramount ecosystem. Shocking. I know.

I am absolutely hooked on "Welcome to Wrexham" on Hulu. Welcome to Wrexham is a reality show following Ryan Reynolds (Yes. That Ryan Reynolds) and Rob McEhenney (Always Sunny) as they buy a legendary Scottish football team that has fallen from grace and try to turn around its fortunes.

The show is light yet deep, funny yet serious, and also has some serious Ted Lasso energy too. I love it.

Finally, I want to give a special welcome to all of our new subscribers (which there are a whole lot of this week!).

Showtime!

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DEEP DIVE

Rippling: A Generational Company?

Introduction

Last week, we took a look at Paylocity, the publicly traded HR & Payroll company, as well as some of their publicly traded peers ADP & Paychex. Together, these three companies represent over $150B in market capitalization and there is a lot to be intrigued by.

All three have strong FCF generation, ADP & Paychex throw off nice dividends, and the industry as a whole is not one that gets a lot of buzz – which I personally like. However, there is a company in this space in the private markets that is showing signs of being a generational company that is looking to disrupt the players above that would make me very nervous if I was an incumbent.

That company is Rippling.

Rippling

Most businesses use several SaaS products to run their employee systems. However, a central issue with these products is the lack of communication between them. If a key piece of information regarding an employee changes in one system, often it will have to be manually updated in other products.

Rippling has built a platform where employee data is at the center, and everything is built on top of that foundation. Rippling calls this central employee data “middleware.” When a key data point regarding an employee is changed, it is instantly updated across every product from payroll and compliance to workflow automation.

Rippling’s product entry point is placed strategically at employee onboarding. Throughout the onboarding journey, Rippling gets access to a customer’s key employee information including social security numbers, location, salary, and manager information, enabling them to create that initial employee data middleware. To continue extending its product surface area, Rippling leverages a “compound product” approach focused on introducing a suite of tools vs. a single point solution.

The company currently has around two dozen product SKUs it offers customers, as well as an app store of third-party SaaS applications that are core to the offering. Rippling will also actively recommend third party offerings when their data shows that this is in the best interest of the client. One Rippling partner, for example, is Brex. Rippling does offer spend management on its platform, but for companies that need more complex tools, Rippling has a deep integration with Brex.

This platform-approach to product has started to demonstrate added efficiency for Rippling customers. When Rippling compared companies that use Rippling to companies that do not, it found Rippling customers with 500-1K employees needed, on average, 24 people in HR and IT departments, compared to non-Rippling customers who needed 45 people in similar roles

Founding Story

Before becoming the founder and CEO of Rippling, Parker Conrad founded Zenefits in 2012. His first company was a cloud-based SaaS business that helped companies manage their human resource needs, like payroll and health insurance. In just two years, the company had grown from zero in sales to over $100 million in ARR across 10K customers. More than 90% of the company’s revenue came from the sale of health insurance.

In April 2014, Zenefits capitalized off of their momentum by raising a $500 million funding round at a $4.5 billion valuation backed by Fidelity, Comcast Ventures, TPG, Andreessen Horowitz, among other notable firms. Zenefits came under great scrutiny in November 2015 when Buzzfeed News released a piece on Zenefits accusing the company of allowing unlicensed brokers to sell health insurance. Buzzfeed claimed the company had numerous salespeople act as insurance brokers in at least seven states.

In February 2016, due to the controversy, Conrad resigned as CEO, being replaced by COO David Sacks. Sacks detailed in a press release that there were “inadequate” efforts around compliance and that they made decisions that were “just plain wrong.” Finally, in October 2017, the SEC fined Parker Conrad and Zenefits $1 million over charges that they misled investors and lied about compliance. Zenefits paid $450K and Conrad paid $533K in the settlement.

Conrad officially launched Rippling in 2016. Believing he’d been treated unfairly in the aftermath of Zenefits, he set out to change the narrative around his reputation and take the lessons from his experiences at Zenefits to create a unified HR and IT platform. Conrad would later describe Rippling as a combination of (1) payroll, benefits, taxes, (2) single sign-on, and (3) computer endpoint security.

Business Model

Rippling charges a core platform fee of $35 a month and then charges a monthly fee for each user starting at $8. That fee will grow based on the number of Rippling products that the customer is using.

A core pillar of Rippling’s business model is cross selling their various product modules, and focusing on growing the number of products that a customer uses. Given the number of products Rippling offers, they have a uniquely in-depth collection of employee data, which enables customers to add additional products more easily. Rippling also has an advantage from being plugged into the customer onboarding process because it can know when a customer may be looking for additional modules (e.g. companies typically look for expense management when they reach their 20th employee.)

Rippling also has integrations with over 500+ third-party SaaS applications where Rippling makes money through revenue sharing agreements. The fact that Rippling can monetize these third-party application suggestions makes it easier for Rippling to promote those products when a customer’s needs may be better fit by those third party applications than by Rippling’s proprietary products.

Traction & Valuation

For the 8 months after January 2018, Rippling was averaging 20% month-over-month ARR growth. That growth rate then accelerated in the last 4 months of 2018 to 25%, before achieving a 29% monthly growth rate in January 2019.

In January 2019, Rippling’s net promoter score (NPS) was ~70, implying significant approval and recommendation from customers. The company also had around 60 employees at the time. Additionally, Rippling shared that their average deal size had expanded throughout the year, but did not give specific figures.

In August 2020, Rippling had grown to over 250 employees and had “thousands” of customers, 40% of which were startups. In May 2022, Rippling reached ~$100 million in ARR. The company had more than doubled their ARR from 6 months prior, and had net dollar retention (NDR) of 200%. This retention rate is significantly higher than is typical. The average public software company had a net retention rate of ~120%, with best-in-class companies like Snowflake at ~165%.

According to Linkedin, Rippling had over 1,700 employees as of December 2022, which represents a more than 2x of headcount from the ~800 in October 2021.

In May 2022, Rippling raised a $250 million Series D at a $11.3 billion valuation co-led by Bedrock and Kleiner Perkins, and included participation from Y Combinator, Sequoia, and others. This raise represents a ~75% increase in valuation from the company’s $250 million Series C at a $6.5 billion valuation in October 2021.

At the time of the Series D raise, Rippling had $100 million in ARR. At the time of the company’s Series C, just 6 months before the Series D, Rippling had “more than doubled”their ARR. That would mean that Rippling’s ARR grew from ~$50M to ~$100M in 6-months, and their valuation multiple decreased slightly, from 130x current ARR in October 2021 to 113x current ARR in May 2022.

ADP is a leader in the HR software market, and was valued at ~$100 billion in December 2022. The company generated ~$16.5 billion in revenue during 2022, growing ~10% revenue growth YoY, representing a ~6.5x revenue multiple. ADP also generated cash flow of $2.9 billion in 2022. Competitors like Paylocity generated ~$850M, growing 30% a year. Public comparable companies were trading at ~6-11x LTM revenue as of December 2022.

In private markets, Gusto is the most comparable competitor of Rippling. In August 2021, Gusto raised a $175 million Series E at a ~$10 billion valuation. The company later raised an extension to this round in May 2022 at the same valuation. Gusto hasn’t shared its revenue figures, however shared that in 2021 they did several hundred million dollars in ARR, growing 50% year-over-year. One source estimates that Gusto’s revenue’s ARR is around $290 million for 2022. If the revenue figure is correct, Gusto would be valued at ~34x ARR.

Ultimately, Rippling’s ability to live up to it’s valuation will be a function of maintaining best-in-class revenue growth, and net retention, as well as continuing to expand their platform beyond primarily an HR platform.

Alan's Angle

Rippling is incredible. I think this was the first time, if not one of the first times, I have shared that I think a company has “generational” potential. The speed of new products, the explosive net retention rate, and the leadership and hunger of Conrad Parker are just some of the reasons why I believe this to be the case.

An $11B valuation does make me nervous, especially in this environment, however, if I had the opportunity to invest in the company I likely would. Especially if I had the ability to look under the hood, I think it would be clear that this is the type of company that will more than grow into its valuation. However, I would proceed with serious serious caution as nothing makes me more nervous than a company valued at a significant multiple to sales.

This quote from Bedrock partner (investors in Rippling) just this past week is a big reason why I think I could be interested in investing at a significant multiple:

Series A entrepreneur:

"A friend was using Deel, Gusto, Ramp, Okta and a bunch of other stuff on employees and contractors... then they moved everything to just Rippling."

Rippling can and is disrupting some of the biggest Silicon Valley darlings and they are making it look easy.

Last time I checked, I did not have a $1B late stage growth fund so therefore, I do not need to worry about whether I would invest in Rippling or not. What I do know? I am not touching ADP, Paylocity, or Paychex because Rippling is coming and coming fast.

The power of crossover investing and the insight that it can give you into the other respective markets, shows itself yet again.

-Alan

THE CROSSOVER ARCHIVE

Paylocity, 2023 Predictions, Splunk

Missed a recent edition? That's okay! Now you can just click on these links below to catch up on what you missed!

CHART OF THE WEEK

Supply Chain Normalizing

  • Special shoutout to Capital Letter for putting the chart on my radar!

  • Nothing gets me more pumped these days than a normalization of supply chain. What have I become...

PORTFOLIO

The Crossover Portfolio

Note: The Crossover Portfolio is a mock portfolio of how I would be investing and not with real money. All trades are shared publicly @ The Crossover Twitter as they are recognized.

  • $PARA & PENN - Going into yesterday's CPI report, we sold a slug of $PARA and $PENN. The market has had an incredibly strong start to the year, and I was not going to let a bad inflation report take that away from us. This was especially the logic in positions where we are heavily concentrated that I feel have room for significant downside in a rough economy. In the words of Seth Klarman, it is not always how much you can make, but sometimes how much you can lose.

  • $SRAD - Sportradar had an investment conference at Needham this past week, and I listened to the whole thing. Although it was an enjoyable listen, I learned nothing new. That might be an hour I wish I had back.

VENTURE CAPITAL

LionTree & Transmit

The Rundown: LionTree invests a "majority stake" in Transmit.Live, an adtech company focused on sports streaming, at a $350M valuation.

Key Points:

  • Transmit uses software to create and monetize the streaming of sports through the development of unique in-stream ad inventory

  • Current clients include CBS Sports, NHL, and Univision

  • Cost of sports rights increased from $16.95B in 2019 to $21.3B in 2022

Alan's Angle: LionTree CEO Aryeh Bourkoff is one of the most powerful people in the media space. LionTree has been involved in some of the biggest media deals of the past several years including AT&T's divesture of Warner Media and advising MGM on their sale to Amazon. They are also pretty active to in the intersection of sports and media represented not only by this deal, but their investments in Fanatics as well.

Simply put, LionTree knows what they are doing and when they make a move I am watching. This is interestingly a unique time to be investing in the sports streaming/ad space market. The ad market in the short term has collapsed, however, in the long run the need to monetize sports rights based off of their continued appreciation in cost will be integral.

I really like this deal for LionTree, and it is most definitely a sign that you can expect more ads during your sports streaming experience, albeit in a targeted and not too intrusive manner.

Bonus Point: Check out this article from Hollywood Reporter on Bourkoff

Legendary Perspective

Leon Cooperman on Current Markets

Leon Cooperman is a Wall St. legend. He spent over 25 years with Goldman Sachs where he was a big part in building Goldman's asset management division (GSAM). In 1991, Cooperman founded Omega Advisors which he ran through 2018 before converting it to a family office. Cooperman has a net worth of over $2B.

Cooperman was on CNBC last week, and I thought his interview was very interesting. Here are a couple of excerpts from the interview:

“Coming on the show and being negative now is like yelling fire in a crowded theater, and I think the major plus I see out there is that most people are negative and the market very rarely accommodates to consensus.”

First and foremost, I think this was the wrong analogy to use regarding the crowded theater as it just doesn’t make sense in this context, but we will give the legend a pass.

I think Cooperman, however, regarding the market is spot on. There are an overwhelming amount of reasons why the market should have a bad year in 2023. Hence, why the consensus is the consensus.

It is also important to remember though that last year many of the big banks predicted that the S&P 500 would close over $5,000. As we all know, this was very wrong and the S&P 500 didn't; even close over $4,000. As we like to say here at The Crossover, no one knows anything.

Our best chance for a good year likely comes from the fact that earnings aren't as bad as expected, signs of economy being in rough shape show themselves early on, and the Fed chills out. Another possibility? The market already took into account all the bad news.

Regardless, we should see a volatile year, and I really appreciate Cooperman's perspective.

“Pharoh had a dream that we would have 7 lean years followed by 7 fast years, and I think anyone looking for a new bull market anytime soon is looking the wrong way.”

The rest of today’s newsletter will turn into a biblical sermon breaking down the intricacies of the metaphor above, and how it could apply to our own lives.

Kidding.

Regardless of religious beliefs, I think many can feel that there are lessons to be learned from Biblical passages and stories. There is a natural balance to the world and regardless of how crazy things get one way or another, balance is restored. (I kind of just got Thanos energy from the last sentence).

I think this was a wise analogy to point out by Cooperman, and is important for all of us to set our expectations for the next several years.

MEMES OF THE DAY

Hopefully

GOLDEN NUGGETS

Carmelo Anthony and Lebron's sons playing against each other in high school basketball is too cool. And it makes me feel old!

  • Found this quote from Kyle Harrison of Contrary very interesting on the 2022/2023 venture markets

  • Great read on the storybehind Adobe's acquisition of Figma

  • This FanDuel ad featuring Gronk looks and sounds like it will be great during the Super Bowl

  • Nothing like a good NFL meme.

  • Watching David Andrews getting emotional when asked about McCourty and Slater made me emotional

Thanks for the read! Let me know what you thought by replying back to this email.

— Alan

Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.