Zeta Global Raises $140 Million For Acquisitions

Summary

• Advertising technology company Zeta Global has raised $140 million in new equity and debt facility funding.
• Zeta wants to use the funding to acquire promising 'team and tech' solutions to add to its suite of marketing technologies.
• The company completed 2016 by growing revenues 50%, to $300 million and is continuing to grow despite macroeconomic uncertainty.

Technology ‘unicorn’ Zeta Global (NYSE:ZETA) has announced a large new funding round totaling $140 million, of which $115 million is new equity and $25 million is a debt facility.

I last wrote about Zeta in October 2016 in my article, Zeta Global Has Worldwide Ambitions But An IPO Will Wait.

The company, which was founded in 2007 by CEO David Steinberg and former Apple (AAPL) & Pepsi-Cola (PEP) CEO John Sculley, uses ‘people-based, precision marketing’ technologies to help major brands and advertisers enhance and better target their multi-channel marketing efforts to increase ROI.

Below is a brief video interview of the two founders:

(Source: 5W Public Relations)

CEO Steinberg recently hired Donald Steele as the company’s first Chief Revenue Officer as the firm finished 2016 with $300 million in revenues.

In October 2016 Zeta also appointed Jarrod Yahes as Chief Financial Officer. Yahes was previously CFO of Jackson Hewitt, a nationwide tax preparer.

Although the company is not in a rush to IPO, Steinberg is laying the groundwork for that eventuality, should the market be receptive to the firm’s offering at an appropriate valuation.

I recently spoke again with the CEO about recent milestones, the new financing and other related topics.

(The following has been edited for brevity.)

Since October 2016, we’ve seen the surprise election of Donald Trump, followed by what appeared to be a ‘Trump bump’ in business activity in January - February, and then a bit of a ‘fallback’ in the past few months. What has changed for Zeta in terms of overall business conditions over the past 6 months or so?

Other than a macro political shock, Zeta hasn’t seen a downturn immediately before or upswing after. Most of our sales process is a three- to six-month cycle. We have not seen clients spending any less than in the past, and in fact, many have been spending the same or more on their digital marketing initiatives, as marketing spend continues its transition from analog to digital.

In 2016, Zeta showed top line revenue growth to $300 million representing a 50% annual growth rate. What was 1Q 2017 revenue growth vs. prior, and do you expect to be able to maintain a 50% year-over-year growth rate for 2017?

We haven’t closed the books on 1Q 2017 yet, but it will beat 4Q 2016 and it was up dramatically vs. 2016.

Zeta’s growth has been tremendous. In 2014, we had a little over $150 million in revenues; in 2015, we reached $200 million and hit $300 million in 2016.

I don’t attribute that success to any one change in the business or political environment. It’s more about the continued shift from analog marketing to digital and our ability to offer what brands and advertisers need to improve their ROI.

Have you been working on any new products or capabilities, especially in the area of machine learning?

Zeta has nine patents in ML (Machine Learning) and we’ve been working on it for a very long time. It isn’t some shiny toy we’re playing with or talking about because it’s the cool new thing.

For example, we utilize ML in our Marketing Cloud by helping clients to monetize customer engagement using massive pools of data. We’re focused on utilizing the growth in processing power and ability to run reports in milliseconds that used to take hours.

We’re approaching the problem in two ways: using software to make specific recommendations and providing a pure analytics offering.

What Zeta offers to clients is twofold:

1. Identify which prospects are most likely to buy and how to deliver that programmatically in just a few milliseconds.
2. Figure out which of a client’s existing customers are most likely to leave and how to save them.

Are you seeing any material changes to the market landscape? Any threats from below?

Zeta has four primary competitors - IBM (IBM), Oracle (ORCL), Salesforce (CRM) and Adobe (ADBE).

We’re the small guy coming up on them. The market opportunity is huge.

You’ve now closed on $140 million in new investment, which has become a rarity as late stage investors pull back on all but the most capital-efficient and promising unicorns in the face of a still slow-moving IPO market and questions on valuation sustainability. How did you find the fundraising market this time?

Zeta has earned a nice step up in valuation vs. the last round. The super-unicorns such as Uber (UBER) generally have had unlimited access to capital. Regular unicorns have had more difficulty recently. We’re seeing it much harder for companies to raise vs. a few years ago.

We're in the enviable position of being profitable, cash flow positive and fast-growing with a very large market opportunity. Although we spent a little more time to close this round, we’re thrilled with the addition of our new capital partner GPI Capital and returning investor GSO Capital Partners, which is a group under Blackstone (BX).

The new financing is primarily for acquisitions. Have you identified any specific targets or target characteristics?

We manage our acquisition pipeline like most companies manage their sales pipeline. We’ve acquired nine companies in 9 years, but we’re really selective. We’ll look at 100 deals before we do one deal.

We are keenly interested in intriguing ‘team and technology’ acquisition opportunities regardless of the size of their customer base.

While we have invested in existing vendors and it is always nice to de-risk integration risk with vendor partnerships that become acquisitions, most of our vendors are large companies, so we have typically looked outside our existing vendor base for M&A opportunities.

With this round, you’ve raised $250 million in total funding - will this get you to an expected IPO?

Our current capital structure is approximately $150 million in equity and $100 million in debt capacity, with not all the debt drawn down.

This capital is really about having the resources to do selective acquisitions. It is probably the last round before we test the public markets at some point.

In any event, Zeta is very well capitalized, growing quickly, profitable and generating cash flow, so we have the staying power we need to continue providing value to our customers.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.