As far as Sri Lankan tech exits go, WSO2’s announcement of its impending acquisition by EQT, a leading private equity firm, is the stuff of dreams. The acquisition is also a vindication of WSO2 Founder Sanjiva Weerawarana’s vision that mission-critical software can be open source, and that world-class software can be built out of Sri Lanka.
WSO2’s Founder and other shareholders will exit the company at a return of over 50 times when EQT acquires the firm for $600 million. The acquisition values the company at six times annual revenue, a much higher valuation than secured by software service companies like Virtusa where the exit was 1.5 times revenue. Weerawarana says the valuation multiple vindicates the founding vision of building software products, and doing so based out of Sri Lanka. Following the acquisition announcement, WSO2’s Founder and Chief Executive Officer, Sanjiva Weerawarana joined Echelon for an interview.
There are two things that you had to navigate. One was your decision to be primarily based out of Sri Lanka and the second was your decision to do open-source software. Do you feel vindicated 18 years after founding your strategy with the EQT deal?
Let me provide some context: the angel investors are getting 50 times their investment, in 18 years, a little more than 50X, maybe 60X or so, but it’s pretty decent.
WSO2 has always had great partners funding it. The last round was with Goldman Sachs. And now EQT, one of the largest private equity firms in the world is going to acquire the company. What does this mean for WSO2?
What this fundamentally means is there’s an ownership change. Previously, the company was owned by a set of shareholders, including employees. Now, someone is coming in and buying all the shares. At the highest level, that’s what it means. For employees, it doesn’t have a negative impact. These investors are buying the company to grow it, not shrink or curtail it. They want to invest in expanding the company to four or five times its current size. From a job perspective, this is very positive. It means they’re part of a growing company.
From a customer perspective, there’s often concern when a private equity firm buys a company. The typical model for private equity firms is to optimize costs and maximize prices to leverage and generate money. However, EQT has a slightly different orientation. If you look at what they’ve done, they are not just looking to increase prices by 50% for all customers. We have made that very clear to customers. We will continue to build products and give them away for free because all our products are open source. None of that will change. We’re just aiming to capture more market share and become a bigger company.
We’ve been a profitable and cash-flow generating company since 2016, except for 2022 when we invested heavily in growth, but faced challenges due to the Ukraine war and global inflation. This period required some adjustment for us. We generate sufficient funds to fuel company growth and don’t require injections to run the company. However, we also need cash for M&A, to acquire other companies. In the tech industry, when revenue reaches around $100 million, additional cash is typically added to the company. Therefore, having ample resources is crucial. Additionally, starting something new from scratch always begins at zero, and it usually takes two to three years for any company to generate revenue in the software world. By acquiring a company that already has some revenue, this process can be expedited.
Does this mean that WSO2 is crossing another threshold? Are things going to be different from the past?
I will remain as the CEO, and we anticipate crossing the $100 million revenue threshold this year. We’re almost there. These thresholds represent significant milestones along the journey. However, crossing them doesn’t alter our trajectory if we’re committed to a long-term goal.
You just raised money from Goldman Sachs for the last round. It’s certainly an unconventional source. But why do you say fundraising is difficult?
Fundraising has always been challenging for several reasons; but mainly because the company is based in Sri Lanka. People are unfamiliar with having a tech company from this part of the world because there aren’t many companies based here. Especially back in 2005, such companies were scarce. There were plenty of service companies originating from India, but not many product companies. So, that was one of the major challenges we faced.
Another challenge was that even if a company is located in this region, often the CEO and the leadership team are based in the US. I was frequently asked by potential investors when I would be moving back to the US. My response always was that I had no plans to move back. This stance sometimes deterred investors who preferred to have the CEO present in the US. Additionally, our business model revolved around open source. From day one, we firmly believed that open source was the right approach for software development, distribution, and serving the global community. We remained steadfast in this belief, even as many of our competitors gradually moved away from open source, adopting variations like OpenCore. This unwavering commitment to open source also made fundraising challenging for us.
As a result, our shareholders had concerns whenever we needed to raise funds. We sought investors who were willing to bet on the company for the long term. EQT has been clear in its approach; they have outlined a five-year roadmap for our collaboration. Their goal is to significantly grow the company, aiming at a four to five-times increase in the next five years, which would generate corresponding value. This aligns with my original vision for WSO2, which was to build a company that would endure. Despite multiple opportunities to sell the company, I refused, and it was often challenging to keep it going. However, this partnership with EQT presents a great opportunity for us to work towards building the company into an institution.
Although technically a US company, the company’s ethos remains deeply rooted in Sri Lanka. Approximately 80% of our team is based in Sri Lanka, with around 50% of the senior leadership team also located here.
I’m a technical guy; I was a computer science researcher at IBM Research. I used to write code, and though I don’t code as a job anymore, I still have the capability. When I started the company, it wasn’t solely to make money. However, when you start a company and take people’s investments and offer options, the expectation is that there will be some financial gain. But financial gain was never the sole goal. Another goal was to prove that we could build a successful company in this part of the world. That was one of the defining purposes of WSO2.
To elaborate, I started the Lanka Software Foundation in 2003. It showed that we could contribute to global technology from Sri Lanka. At that time, Sri Lanka was ahead of India in terms of creating open-source software. Today India is much larger, and we can’t compete with them solely based on numbers. We need to find another angle to compete on a global scale.
When we started the company, the idea of giving up on open source and moving away from Sri Lanka were never options for me. However, it did cost the company a lot in many ways. Fundraising would have been much easier, and our competitors who started around the same time grew faster and received higher valuations. They were able to play the traditional enterprise software company game in the US, which we couldn’t do. So, there were pros and cons to our approach.
I set out to prove that building a company in Sri Lanka was possible. It was not an option to abandon that vision. Were our stakeholders always perfectly aligned? No, as a leader, aligning stakeholders to a vision is not easy. It’s a challenging journey.
Talking of our stakeholders, our original investment of $625,000 came from angel investors. One of them was James Clark, a wealthy individual who invested in WSO2 because he found the technical direction interesting and believed in my commitment. Then, my co-founder’s father and a few others also invested small amounts. Their investments were based on their trust in us, not just the idea or the company itself.
In 2006, when we tried to raise more money, I spoke to around 50 VC firms in Silicon Valley. All of them rejected us, except for Intel Capital. They said yes because the person I met, Pradeep Tagare, was looking for a company in this part of the world that would build enterprise technology software. It was luck; if he hadn’t been around, we wouldn’t have been able to raise money.
What’s interesting is that our investors weren’t purely financial; they were corporate investment teams. This includes Intel Capital, Quest Software (later known as Toba), Cisco, Pacific Controls, and later, Goldman Sachs. They all had a strategic interest in the company, not just financial gain. So, there was a slight difference in their approach compared to purely financial investors.
At that point, your valuation was $1.5 million, was it?
We had three co-founders, each allocated $500,000. That’s it. So, how do you go from having a bunch of slides and a spreadsheet with no code to driving it up to a $600 million valuation today? Let me provide some context: the angel investors are getting 50 times their investment, in 18 years, a little more than 50X, maybe 60X or so, but it’s pretty decent. For tech investments, there have been times when people have gotten a thousand X return.
Most companies go bust and to return 50 to 60X is a pretty decent return, right? Are you satisfied with that? Are you happy with how things have turned out overall, and not just financially?
Absolutely! What I’m most pleased about is the fact that we have a five-year plan. It provides us with five clear years, a luxury we haven’t had for a very long time, basically ever. For the first 13 years or so we were losing money. This meant we had to rely on raising money, and there was uncertainty about whether we could sustain the momentum. That was one challenge. Then, in the last five years or so, we’ve had investors who were unsure about their objectives. While our plan was always to IPO the company, the market conditions in the US and global markets have evolved. It’s not conducive to any kind of IPO right now.
Moreover, we’re not at the level where, say, ten years ago, or even five years ago, a $100 million company could IPO. One of our competitors, RPG, had revenue of $40 million and was losing $45 million at the time, yet they still managed to IPO and received a valuation of $700 million. Now, a $100 million company, like ours, which is profitable, is still too small to IPO in the US markets. It would need to be $200 million plus. And either you’re growing very fast or growing and profitable. We fall into the latter category.
Our current valuation is 6 times revenue, which is within the range of what’s happening in today’s market. This is a pretty reasonable valuation. Valuations in this area range from 3 to about 20-times revenue. Twenty times is possible if you’re in a very hot area and have a hot founder.
How does EQT create the kind of value that you think can be created from WSO2 in five years?
First, we are working on a five-year plan together. This plan will encompass various components, such as the growth targets we aim to achieve, the strategies we will implement, the business lines we will pursue, and how we will execute them. Additionally, they are an unusual company in the sense that they are a Swedish private equity firm founded by a family and wealth fund. Despite being a public company based in Sweden, EQT sees itself as a steward of the company for five years. Their investors primarily consist of public investment funds and pension funds.
They have developed a robust management model over the years for growing and adding value to the companies they acquire. We look forward to working with them to adopt this model and determine how we want to scale. Moreover, in terms of equity generation and raising, they have ample capital. This means that if we need to raise equity to acquire something significant, we have a partner who can provide the necessary resources. This is a luxury we have not had for quite some time.
Overall, from a company perspective, this partnership is very beneficial. It positions us well to grow the business into an institution over the next several years.
Do you think your employees will also be happier now because they have an exit?
I think we’ve had two instances in our history where we conducted a buyback of sorts. We provided people with the opportunity to sell their shares and receive some return. This helped individuals realize that their stock options held value, which isn’t very common in Sri Lanka. Many people don’t fully understand what a stock option entails. However, having a full liquidity event where everyone receives a meaningful amount of money, or where many people receive a substantial sum, is a rare occurrence in Sri Lanka. I consider this a positive development.
But, again, we view it as just a step along the way. I don’t see it as anything more because we’re not done. For a tech company, one of the constants is that we’re never done. The technology we have now will be different in five years. Currently, the focus is on AI, but what will it be in five years? It could still be AI, or it could be something else entirely. We don’t know. Therefore, we must stay informed and constantly evolve, always striving to progress.
Technological upheavals and overhauls are constant. For now, AI is all the rage, but there is more like quantum computing, and who knows what next? How well is WSO2 positioned to capture the shifting opportunities given your business model?
WSO2 is very well-placed. We follow all technical evolutions, not just AI. We recently released quantum-safe security for several of our products, demonstrating our commitment to understanding quantum technology and its implications. If you’re going to be a serious technology company, you need to understand every aspect of technology. You need to comprehend what it means for power when fusion power becomes available in 10 years. You need to understand everything from AI to space technology, such as having SpaceX leading the way and the potential of having servers in the sky. You need to understand the whole picture because customers will want to adopt these advancements.
Edge computing has been around for a long time, but we are nearing the point where we’ll have servers located just 50km up in the sky, where services like Starlink operate. This kind of low-earth orbit infrastructure is now within reach due to advancements in high-performance networking. What does this mean for accessing enterprise applications, web applications, or even your mobile app, which communicates with servers? These servers could be situated in the cloud, quite literally. Our focus is on understanding and addressing the challenges of deploying, updating, and maintaining software in such environments.
Why couldn’t Sri Lanka scale this? I mean, you’re talking about making a company relevant in a very particular sense, building products, making it relevant for a future that is edge computing, AI, and all that. Sri Lanka seems to have lost its way since the days you founded, is that so?
Indeed, to some extent, I’ve been at odds with all the IT associations in Sri Lanka. They love me, so I’ll continue to increase their affection for me through this conversation. I believe we, as a country, have realized that there is a significant profit to be made by selling people. I consider this akin to intellectual slavery: someone else tells you what to do, and you comply, often for a reduced price. It’s a great job, something we should engage in. However, we are situated next to India, which has a workforce one hundred times larger, and capable of performing such tasks.
We’ve seen success, Virtusa being a prime example. In fact, Virtusa was acquired by EQT, the same private equity firm and then they took it private. Consequently, they will be a sister company to us, and we’ll collaborate with them. Similarly, IFS is mostly owned by EQT. It’s interesting to note that EQT has a significant presence in Sri Lanka, with two of the largest tech companies being under their ownership.
Unfortunately, we’ve focused primarily on promoting policies and approaches geared towards service companies. If you examine the figures we tout in Sri Lanka’s IT sector, they revolve around revenue. However, the value of WSO2 far surpasses mere revenue. In a robust technology product company, the value typically ranges from 5 times to 20 times revenue. In contrast, for service companies, it’s between 0.5-times to 2-times revenue. Virtusa’s acquisition valuation was 1.5 times its revenue. Its revenue was $1.3 billion at the time of acquisition making the acquisition amount $2 billion. That’s the reality of the business model. In software, it’s acceptable for companies to incur losses, but for service companies, that’s not feasible. Unfortunately, our system fails to grasp this distinction.
Along the way, I was eager to secure a Sri Lankan shareholder for WSO2, ensuring more returns for Sri Lanka. I won’t name names, but we pitched to various corporate entities. One conversation began with, “How much profit did you make?” When we disclosed that we were not making a profit and were losing money, they declined to invest, unable to comprehend our approach.
The prevailing influence on the government has always been, “We need more people, we need more people.” When we initiated the Lanka Software Foundation, the main thesis was that you don’t necessarily need more people to compete globally.
Aren’t you being intellectually arrogant here? Because you are not a normal kind of tech leader in Sri Lanka. So, what’s the pitch then? Do you want people to dream bigger?
Absolutely. The problem is that we now have all these startup accelerators. It’s a fad; there are maybe 10 of them here. People often use Mark Zuckerberg as an example of why you don’t need to finish university to start a successful company. But Zuckerberg didn’t start Facebook by just sitting and thinking, “Hmm, what can I solve today?” According to the story in “The Social Network” movie, he got annoyed after being dumped by his girlfriend and decided to make a “hot or not” website, which eventually became Facebook. Facebook has since evolved into an incredible platform.
The point is that people solve problems because those problems bother them. What we need to create in Sri Lanka is a culture where, if you have a problem you care about you come up with a solution, pitch it to people who can help, and then pursue it. You don’t solve problems by randomly thinking in a coffee shop, “What can I make?”
Given the current economic status of the country and its size, we can’t build a serious software company that sells only to Sri Lanka. We have to think of a global market. Your point about intellectual arrogance because of exposure, like my experience at IBM, is valid to some extent. However, many companies around the world have been formed by people without such exposure but who identified a problem and built software to solve it.
There are many systems developed by one or two individuals that have become widely used globally. Sri Lanka has plenty of people with that capacity. We have hired engineers from nearly every university in Sri Lanka. We are not biased towards the top universities. Given the right environment, opportunity, and challenges, people can achieve great things.
At one point, we created a language for high-performance event stream processing, which was developed as a university project by a group of students. I started WSO2 based on similar university projects. It’s not that it can’t be done; it’s that people in our system aren’t empowered to pursue these opportunities.
What you have achieved in the last 18 years is off the charts by any measure in Sri Lanka. Very few companies have created that kind of shareholder value. Very few organizations have created that kind of opportunity for their employees, giving them big challenges to solve and making them globally competitive. Did you always envision that you could do this, or was the vision an evolution as you got further down the road, as you became more confident about your capability to envision something?
I have repeated this statement many times at WSO2: if you want to land on the moon, aim for the stars. Not in physics, obviously; if you want to land on the moon, you aim directly for it, or you’ll miss it. But the point is, you have to aim high to get somewhere. If you want to go to orbit, you have to think beyond that. Elon Musk is a great example. Think about going to Mars or beyond, right?
The simple answer to your question is, that even when we started LSF (Lanka Software Foundation), the goal was to become a provider of platforms for the world. My point to various people was that it is possible to do this with 5, 10, or 20 engineers from Sri Lanka. You don’t have to be in California or work for IBM or Microsoft. Today, you might mention Google, Amazon, Microsoft, or Apple. It is possible, and people don’t achieve these things because they don’t try.
A good example is Israel. While not a country we might look to for political reasons, technology-wise, a country of 10 million people has produced an incredible amount of value in tech creation and tech exits, amounting to tens of billions of dollars annually. Ireland, a country of 6 million people, also has an amazing number of tech exits. So, Sri Lanka, a country of 20 million people, absolutely can do it. When we started, that was always the goal. I used to say we wanted to become the number-one middleware company in the world. That was our internal tagline. If you tell a customer you’re going to become number one, they’ll laugh you off the streets.
Before I started WSO2, I was doing a project at IBM called the Colombo Project. When we pitched it to IBM’s technical leadership team, one of the leaders asked if I thought we could start from the JVM (Java Virtual Machine) and build an entire middleware stack to replace WebSphere with a small team. I said, “Yeah, why not?” Sometimes, you have to be foolish enough not to know how difficult something is going to be. When we started WSO2, I didn’t know how hard it would be to become the number-one middleware company in the world.
You have to have some degree of belief—sort of a crazy belief—to go off and do something. You can’t be encumbered by history. When Intel invested, I visited their campus, and one of the founders, Robert Noyce, had a line: “Don’t be encumbered by history. Go off and do something wonderful.” If you look at our history, you’ll think it can’t be done. That’s a common mindset: “Can’t do it in Sri Lanka.” Of course, you can. You can do anything in Sri Lanka. It’s an amazing place.
As CEO, you’ve got to have a clear handle on where technology is heading. Because you’ve got to make that call and say, you know, we’re going to invest in this although it looks like a pie in the sky right now, that is what we’re going to do. You also talked about your challenges, raising financing and selling a product out of Sri Lanka. How did you juggle these three big responsibilities that you just couldn’t farm out to somebody?
At WSO2, our goal has always been to out-innovate ourselves before someone else can innovate over us. In tech, the barrier to entry is very low. It takes just a kid with a great idea, good programming skills, a laptop, and an internet connection to create something that could change the game.
One of the key things we must do is create an atmosphere where innovation is possible. As a senior person involved in driving innovation, you have to operate in that way as well. You need to be aware that everything you believe could be wrong and will eventually be wrong. So, you must stay on top of evolving tools.
I believe in being dispassionately passionate. This means you’re passionate about what you’re doing, but dispassionate enough to step back and say, “This seems like nonsense, let’s back out of it.” Another way to explain it is having strong opinions, weakly held. You have strong opinions, but if given a reason to change them, you’re willing to do so. Otherwise, you become like an old person stuck in the mud, clinging to a position taken 10 years ago.
People who work with me sometimes get frustrated because I change my mind. My response is, if you don’t change your mind when presented with new information, you’re being an idiot and not a good leader. You should change your mind when new data shows your previous position is no longer correct.
Are you optimistic about Sri Lanka as a destination to build great software and technology?
Sri Lanka as a country has many things going right for it. We’ve had many screw-ups and made many bad decisions, but we have so much going for us. One thing we are not doing correctly on the tech side is how we are building software for the government.
I’d love to see the government adopt a model similar to Israel’s, where the government spins out or funds companies to create solutions for themselves. That’s how you become a country that continuously produces innovative solutions. We have a problem: the best solutions come when the problem is clear.
In almost every conversation, we step back and say, “Well, we’re going to try to solve this problem.” If you can’t clearly articulate the problem you’re trying to solve, you have no idea why you’re having a discussion. It’s like sometimes you debate with someone, and after a while, you can’t remember what you’re debating about. You’ve got to always know what the problem is.
If we start technology innovation in Sri Lanka by saying, “Okay, we need a solution for this problem, let’s start a company for that,” rather than just calling a tender and giving it to somebody, we can create innovation out of Sri Lanka. We are in a unique place with a unique set of problems. It’s a great opportunity for us.