While it did not receive a significant amount of coverage in the legal technology press, cloud-based document management company NetDocuments took a significant step forward when it was acquired by Clearlake Capital in early March. Once the dust settled, I talked to Matt Duncan, NetDocuments’ CEO and Marriott Murdock, Senior Director of Marketing, about how the deal came about, and what it means for NetDocuments customers.
“It's been exciting. We were thrilled to find a partner like Clearlake Capital,” Murdock said. “There were others in the mix, there were several offers on the table,” he says, but the Clearlake deal “was the best in terms of continuing our business and continuing to serve our customer base. I think we’re off to a good start.”
When one door closes…
Clearlake’s investment is best understood in context with some detail about NetDocuments’ last significant investor. Frontier Capital, a private equity firm specializing in software and services companies, had invested $25 million in NetDocuments in 2014. “For years, we were approached by various financial firms that wanted to get involved in the business,” Murdock said, “and for years [then CEO] Ken Duncan would just turn them away knowing the time wasn’t right.” According to Murdock, Frontier looks for “companies that have modest, decent growth that are growing conservatively but have reached that plateau of 20-30% [annual] growth, so their model is proven and the technology is proven. We knew the window of opportunity was there, and they helped us blow past that slow growth plateau.”
Murdock notes that the investment helped to build out not only the technical infrastructure, but also the sales organization “so that we could get that real ‘hockey stick-type’ growth.” The cash infusion was timed to allow NetDocuments to “capitalize on that window of opportunity in the market where law firms are not just receptive to the cloud, they're pursuing a cloud strategy. They’re all embracing it to some degree. Any firm that doesn't have a cloud initiative or isn't talking about aspects of where they can leverage the cloud is probably pretty behind. [The cloud] just can't be ignored.”
Frontier’s investment helped NetDocuments achieve 45% growth year-over-year, and establish itself as a significant player in the legal market. Having achieved its objectives, Frontier took the opportunity to sell out to Clearlake for an undisclosed sum. NetDocuments CEO Matt Duncan also felt that it was “time for us to find a financial backer that has the wherewithal to be more supportive of this more aggressive platform strategy where we try to consolidate around document and email management other technologies that are very complimentary and synergistic.”
Clearlake enters the picture
Clearlake Capital is a Santa Monica-based private equity firm with $4 billion under management. In addition to technology companies, the firm’s investment portfolio features companies in the energy, food and consumer services verticals. Duncan points out that NetDocuments’ management team “effectively carried our interest over into the new entity, so we're very much joint owners of the business, but now have Clearlake backing us. One of the things we thought was good about that was that they're going to let the owners and operators that are currently in place manage the business. There are a lot of private equity groups out there that think they are experts in different industries and technologies and think there is a ‘one-size-fits-all’ approach for an industry or a segment, and Clearlake doesn't have that view at all. They just want to support us, but let us still make the big decisions, lead the company, and operate the business on a daily basis.”
Murdock believes that Clearlake appreciated NetDocuments’ cloud-based approach in a document management market still dominated by traditional on-premises solutions. “I think that we have such a unique business model and technology infrastructure stack when compared to the competition,” he says. NetDocuments’ model leverages “a single global application, web scale technology and the ability to implement new technology as it becomes available. An on-premises [solution] simply can’t do that.”
Clearlake also saw value in the lessons NetDocuments learned in building its infrastructure and business model. “They saw very quickly that you can't just go spend a bunch of money and go build it overnight and succeed at it,” Murdock said. “There were all sorts of hurdles we needed to overcome. It took NetDocuments a long time to get to where we are today, but that history, and that time... those were necessary years.”
“One of the things we like about Clearlake is that they're very supportive of our platform strategy,” says Duncan, offering a glimpse into the NetDocuments growth plan. He cites the Decisiv email filing solution, which the company acquired from Recommind, as an example. “We intend to do more of that with [technologies] we build and things that we may buy that are very synergistic with document management, and are a ‘1+1=3’ kind of thing,” he says. “Clearlake really supports that vision we have, and they have the wherewithal to help us fund some of those acquisitions and some of the more aggressive organic growth.”
The vision
Duncan is clear about NetDocuments role in the evolving legal software landscape. “Our vision is to become the trusted cloud platform in the legal market and beyond for secure content management and collaboration on any device. That speaks to the core content management platform, but I think law firms today do want to see some scale from their vendors, and maybe some consolidation from some of the vendors. There's a bunch of technologies that law firms have to deal with and try to put together and make work. Over time, to the extent we can integrate much better with those technologies, or even acquire or build some of those new technology solutions right into the platform, we think that provides more value to the customer in the end, and helps us become a company of greater scale that law firms are very comfortable doing business with. And it doesn't have to be an acquisition, it could just be a better integration through our current partners in our marketplace, providing better API functionality.”
AI, UI and security
The company is planning to show off an updated user interface at ILTACON 2017, and continues to maintain its focus on security, but artificial intelligence is clearly top-of-mind for management and customers alike, especially in light of iManage’s recent acquisition of RAVN Technologies. “Artificial intelligence is something we've been watching for a while,” Duncan says. “We've actually been delivering AI-type functionality for quite some time now, we just haven't explicitly called it AI.” One example is the email filing solution mentioned earlier, which uses a machine learning algorithm to improve its ability to predict which matter folder the email should be filed. He also highlights the fact that NetDocuments leverages the Solr search engine, which has entity extraction and machine learning auto-classification capabilities built in, and notes that they will be looking to do more with those features in the future.
Duncan describes the AI strategy as having three parts. “One is to continue to build AI functionality into our platform, mostly by leveraging the SOLR search and document classification capabilities. The second is as a platform, which is our vision, [to] integrate with various AI and machine learning technologies so our customers are not locked into any one technology. If you look at charts, there are over 30 or 40 legal-focused AI-type companies - different types of companies - and new ones are popping up all the time. We think by being an open platform and providing rich integration with a number of different solutions it will provide a better, more flexible solution for law firms, because there's not going to be a ‘one size fits all’ AI solution for a law firm or even a practice area within a law firm. And the third part of our strategy [is to] keep an eye out for our own AI and machine learning acquisition targets. We’ve been tracking companies in that space for several years, and aren’t focused on any one technology just yet, but it’s certainly something we’re monitoring.”
The future
With a new private equity firm looking over its shoulder, one might expect that NetDocuments would be looking to expand beyond the legal space. “At this point, not so much,” says Duncan. “We get pulled outside legal to a lot of the markets that would be adjacent professional services markets, but right now we are focused on going from the early majority to the late majority in the legal market, and we're pleased to do that. That's our primary focus right now.”
Rather than choosing to expand its existing offerings into different verticals, NetDocuments has chosen to double down in legal. Meanwhile, its competitor iManage has not only continued its push into the cloud, but has also added AI to the factors worth considering when evaluating a document management vendor. With Clearlake as a parent company, NetDocuments should now have access to the capital and strategy it needs to take on its main rival, and the battle for the DMS is about to get interesting.