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The following segment was excerpted from this fund letter.
Sold DocuSign (NASDAQ:DOCU)
Our decision to buy or sell shares in a business is based on the same fundamental criteria. We begin ‘sell discussions’ when one or more of the three engine parts of our compounding machine (shown above) is cracked or broken.
In the case of DocuSign, the “Management” part no longer satisfies our requirements in order to remain in our investment portfolio. In the past 6-9 months, the company has had a huge turnover in both employees and upper management. In June of 2021, the board decided to get rid of Dan Springer, who had been a CEO of DocuSign since 2017 and took the company public in 2018. We found this decision strange as we thought that he actually did a great job growing the company over the past 5 years (revenues grew almost 5x from $519 million in 2017 to an estimated $2.4 billion this year).
Dan was faced with a very difficult, unprecedented operating environment just like all the CEOs of SaaS companies. From Q2 ‘20 until Q3 ‘21, during pandemic shutdowns, growth exploded from about 30% to 60%+, as there was a ton of pull-forward demand. The business doubled in about 6 or 7 quarters! As the world opened up after the pandemic, growth slowed quite a bit especially in comparison to these abnormal pandemic quarters. However, on a 3-year CAGR basis, growth was still very healthy (sales grew from $974 million in 2019 to $2.5 billion expected in 2022).
They also had to dramatically increase their sales force (biggest expense) to keep up with all this unexpected growth. New employees did not have a chance to be trained properly, but it still worked well as they had demand easily coming to them. Now that there is a very different demand environment, a lot of this sales force either needs to be retrained for normal sales cycles (land and expand) or be replaced.
Employee turnover also compounded with a lot of people who were with a company when stock was going up and up, and now that the stock is down so much from the highs, their stock options are no longer valuable. Having said this, we are not sure any other CEO could have done a better job managing through such a difficult operating environment.
Dan Springer was also a sizable shareholder in the company — per latest proxy statement (March 2022), he owned 3.6 million shares or ~$350 million worth of stock at the time. As part of our investment philosophy, we only consider an investment in a company if it is run by the management team that owns a meaningful stake in the company — we call them ‘owner-operators’. We strongly prefer for the management to eat its own cooking.
Currently, all insiders and executive officers at DocuSign own less than 1% of stock. Now that Dan Springer is gone, the company has NO owners — just a bunch of newly hired ‘agent-operators’, who will likely make decisions based on how they will be perceived by the public and the board and how it may impact their career prospects, which often runs at odds with the hard decisions that need to be made for the long-term health of the business.
Therefore, we decided to sell this position and reallocate the proceeds towards better ideas in our portfolio that meet all 3 criteria that we described above.
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DISCLOSURES The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our Fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot assure any level of future results. If applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). S&P 500 performance information is included as relative market performance for the periods indicated and not as a standard of comparison, as it depicts a basket of securities and is an unmanaged, broadly based index which differs in numerous respects from the portfolio composition of the fund. It is not a performance benchmark, but is being used to illustrate the concept of “absolute” performance during periods of weakness in the equity markets. Index performance numbers reflected in this letter reflect reinvestment of dividends and interest (as applicable). Index information was compiled from sources that we believe to be reliable; however, we make no representations or guarantees with respect to the accuracy or completeness of such data. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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