e-discovery 2.0

Yesterday, I explained what I think Iron Mountain’s acquisition of Mimosa says about valuations in the archiving / e-discovery industry. Today, I will address the other questions that people commonly ask about the deal – why did Iron Mountain (Stratify) do it, and what does it mean for the electronic discovery industry?

In their letter to customers announcing the deal, Ramana Venkata (President of Iron Mountain Digital) and TM Ravi (CEO of Mimosa) point to two main benefits from combining the companies. On the archiving side, Iron Mountain can now offer Mimosa as an on-premise solution in addition to its existing hosted service. If it can integrate the two, then it can offer “location-independent” archiving which “will help you transparently and seamlessly move data between the on-premises data center and the cloud.” One additional benefit to Iron Mountain, which is not mentioned in the letter, is that it could even leverage Mimosa’s technology for its hosted offering, and replace Mimecast who it currently pays to provide this service.

On the e-discovery front, Iron Mountain now has a suite of 2 products and 1 service: Mimosa NearPoint for collection and preservation; the Stratify eVantage appliance for ECA (Early Case Assessment); and, Stratify Legal Discovery Services for review and production. This makes Iron Mountain a competitor to Autonomy, Clearwell, EMC/Kazeon, and everyone else listed in Gartner’s recent MarketScope covering e-discovery software companies. I’m sure the hope is that there’s synergy between the different products so that, for example, Mimosa’s experience in on-premise software will help Iron Mountain drive adoption of its new Stratify eVantage appliance behind the firewall.

Will the combination work? As Barry Murphy (a former Mimosa employee) points out in his excellent post on this topic, a lot depends on execution. But there are at least 2 reasons to be doubtful. First, the competition is far ahead, and will be hard to catch. As Barry, points out: “Iron Mountain will have a tough road ahead to compete with the likes of Autonomy, which bought successful archiving company Zantaz and has now had almost two years of development time for its hybrid on-premise/SaaS archiving offering.” The same is true on the e-discovery side, where companies like Clearwell have hundreds of corporate customers for on-premise ECA and review.

The second reason to doubt why the combined company will be any more successful than either were before the acquisition is that Mimosa and Iron Mountain Digital serve very different markets. Most of Mimosa’s customers are small to medium sized companies; most of Iron Mountain Digital (ie., Stratify)’s revenue comes from law firms. So it’s not obvious that by combining them you create a company well-suited to serving large corporations, which is the sweet spot for e-discovery and archiving.

It will be interesting to watch events unfold.

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On February 21, Iron Mountain Digital (formerly Stratify) announced it had acquired Mimosa Systems for $112 million. The deal was widely rumored at LegalTech New York last month, so it came as no surprise. I know several people closely connected with Mimosa and I’m happy for them that the company has found a good home.

From an industry perspective, there are two interesting questions about this deal, and I’ll cover the first of them in this post: what does the price suggest about the valuation of archiving/e-discovery companies?

To answer that question, you have to consider Mimosa’s history and financial performance. The company was founded in December 2003, and proceeded to raise $51.5 million in venture funding over 5 years from Clearstone Venture Partners, August Capital, JAFCO, Mayfield, and few others. Initially, it had great traction in the market and, at various industry events around Silicon Valley, I would often hear about how well it was doing. But then, as often happens with startup companies, Mimosa lost its way, and the growth slowed. I don’t know exactly why that happened; it could have been the recession, competition from Microsoft Exchange 2010’s new archiving features, or something completely different. But the signs were unmistakable: there were layoffs, pay cuts for the remaining staff, and (according to Venture Source) a series of 4 small debt financings totaling $10.4 million between May 2009 and January 2010.

The deal documents, which were sent out to all shareholders to approve the acquisition, reveal the financials. In 2009, Mimosa generated $20.6 million in revenue and $32.7 million in expenses, meaning it was burning about $1 million dollars every month.

So, to answer the question that many in the archiving / e-discovery community are asking, that means Iron Mountain Digital paid 6 times trailing revenue to acquire Mimosa. That’s about the same multiple it paid for Stratify in October 2007, about the same multiple Dell paid for MessageOne, and a lower multiple than EMC recently paid for Kazeon. It is reasonable to expect that the revenue multiple would have been much higher if Mimosa had been profitable, or growing more quickly.

Overall, I think this is a great outcome for Mimosa’s shareholders who must be delighted. My congratulations to them, and to the entire Mimosa team.