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Huddle in trouble: Did the journey from startup to scaleup cause the UK cloud firm to lose its way?

What does the future hold for cloud collaboration firm Huddle, once a darling of the UK tech startup scene but now seemingly in need of a financial bailout?

An important determinant of how successful a technology startup is likely to be sometimes has little to do with the quality of their technology or the problem it solves, and a lot to do with the timing of when it hits the market.

A company can have great technology and a defined addressable market, but if the timing is off it can have big implications for how receptive the target audience is to it, regardless of how well it is marketed.

UK-based cloud collaboration firm Huddle can be cited as an example of a startup whose early public sector success can be attributed (at least in part) to being in the right place at the right time.

Founded in 2006, the company initially started out pitching its wares to the small to medium-sized enterprise (SME) market, before turning its attention in 2010-2011 to winning over the mid-market and enterprise space with a file sync and sharing platform pitched as a lower-cost alternative Microsoft Sharepoint.

A year prior, the Conservative-Liberal Democrat coalition government came to power, and began pushing through efficiency-focused public spending reforms as part of a wider, multi-year campaign to reduce the government budget deficit.

This heralded yet another push to open up public sector IT contracts to a larger pool of smaller suppliers to ensure value for money and support the growth of the SME economy.

Against this backdrop, Huddle’s repositioning of its technology as a “Sharepoint killer” was not only timely, but landed well with public sector organisations under pressure to reign in their spending and do more to commercially support SMEs.

Even more so, when the firm’s then CEO, Alastair Mitchell, made the claim that swapping SharePoint – a technology he described as “complex, clunky and dying” – for Huddle across government would save £100m in the long run.

This cost-saving declaration coincided with the announcement of a commercial agreement in April 2011 that gave any government department wanting to use Huddle access to preferential pricing, training and support, fuelling the growth of its public sector customer base.

Outside of the Huddle bubble

The period from 2010 to 2014 is described by Alan Pelz-Sharpe, principal and founder of IT analyst Deep Analysis, as a “boom time” for companies in the cloud-based file sync and share space (FSS) where Huddle operates, and during this time the company banked $89.2m in venture capital funding.

“The market was booming,” he tells Computer Weekly, with EMC, Egnyte, Citrix and Dropbox all pitching up to flog FSS technology to the enterprise.

Huddle’s financial results for this time period saw the company’s turnover grow year-on-year over successive reporting periods, with the firm reporting 66% and 85% turnover growth in 2011 and 2012, while reporting losses in the region of £3.4m for both years.

This period also coincided with the opening of the company’s San Francisco office and US hiring spree, as it set about trying its hand at getting the US public sector to ditch Sharepoint too.

By this time, Huddle was established as an SME IT service provider with a track record in winning government contracts, with the launch of the G-Cloud procurement framework in March 2012 providing it with another means of securing public sector business.  

According to the firm’s number crunching of the Digital Marketplace sales figures, Huddle secured 14% of the 95 G-Cloud contracts transacted through the framework between January 2013 and April 2012. 

It also declared itself the “most successful” software-as-a-service (SaaS) supplier on G-Cloud in May 2013, based on the fact almost a quarter (23%) of the money spent on this category of service was coming Huddle’s way.

Further contracts wins with the US Department for Justice, Federal Aviation Administration and the Florida Senate, culminated in Huddle declaring 2013 as a record year for securing government deals.

By the reckoning of Georgina O’Toole, chief analyst at IT research house TechMarketView, Huddle picked up around £500,000 of the £4m of cloud deals secured through G-Cloud in 2013.

By the end of its 2015 financial year, the company was nowhere near close to profitability, having banked a loss for the 12 months to 31 December 2015 of £8.6m

The following year saw Huddle report a 110% uptick in year-over-year turnover growth in its financial results, with the majority of business coming from UK customers looking to renew their existing licenses or expand their use of its platforms through acquiring add-ons.

The year also saw Huddle secure its fourth round of VC funding (Series D), which it pledged to invest in doubling the size of its product team, and growing its presence in the US and Europe.

“When the company secured $51m in a Series D round of funding in December 2014, Huddle cited another year of double digit growth, a rapidly expanding client base, and the expectation that it would move into profitability at the back end of 2015,” says O’Toole in a reseach note sent out to subscribers of TechMarketView’s HotViews service.

The reality is, by the end of its 2015 financial year, the company was nowhere near close to profitability, having banked a loss for the 12 months to 31 December 2015 of £8.6m.

The results also laid bare just how quickly the company appeared to be burning through the $89.2m in funding it had received so far.

As revealed by Computer Weekly in April 2017, the 2015 report showed Huddle had until the end of the month to secure an additional $5m in funding or find a buyer if it stood any change of meeting its financial obligations for the next 12 months.  

In August 2017, the company appeared close to announcing some news on this front, after publishing (and then deleting) a blog post naming US-based private equity firm Turn/River as a majority shareholder.

“Growth was shown [in the results] to have slowed considerably – in FY15 it was just 5% (to £10.2m) and that growth appeared to be attributed to recurring revenues from existing clients rather than new wins,” O’Toole continues.

Computer Weekly contacted Huddle for further information about Turn/River’s involvement in the company, but was told it would not be commenting at this time.

The trouble with Huddle

So how did the firm get from predicted profitability in 2015 to reporting its biggest loss to date, and – as uncovered by Computer Weekly in April 2017 – find itself needing to raise another $5m in funding to keep the business going for another 12 months?

“It’s not uncommon for startups in Silicon Valley to burn through a lot of cash in the early days of building the product and getting a few reference customers. In fact, that is a normal strategy,” says Pelz-Sharpe.

“What is unusual is for a firm that has a product built, tested and up and running with a paying customer base to still be burning through the cash at high rate.”

Huddle’s US expansion plans are likely to be partially to blame here, and suggests the firm fell into a trap of trying to achieve too much too soon in the wake of some initial success, he continues.

“Though Huddle had raised a lot of money, it was still a small company [at the time of its US expansion] and struggled to build its home base and expand in the US at the same time. Focus was lost and the enormity of the opportunity and challenges overwhelmed them” he says.

Despite being one of the UK tech scene’s brightest stars, when the firm set up shop in Silicon Valley, it soon found itself in the position of being a small fish in a big pond, and struggled to stand out from the rest of the startup crowd, he adds.

Aside from geographic expansion, the company also sought to extend itself into other vertical markets, beyond government, which – with the benefit of hindsight – may have led to the company overstretching itself.

“As soon as they moved to the US, the firm was touting the fact that its product had use cases across multiple industries from healthcare to engineering and beyond,” says Pelz-Sharpe.

“As an analyst, I hear this all the time from startups and it’s always worrying because a small business cannot grow by marketing to everyone. They need focus. Had Huddle simply continued to focus on Sharepoint replacements for government departments they may have prospered,” he adds.

The fact it needed to regain focus was not lost on the senior management team at Huddle, says O’Toole, based on TechMarketView’s past dealings with the firm.

When current CEO Morten Brøgger took over the company reins from Mitchell, and his co-founder Andy McLoughlin, in 2015, he set about refocusing the business and streamlining the product’s functionality, says O’Toole.

“He started refocusing the business on the US and UK government markets plus the professional services sector,” she says. “[He] also ensured that Huddle continued to add new functionality and to remove functionality that would never be best of breed.”

Focusing on what it does best is especially important in the face of strengthening competition in the enterprise FSS space from rivals with deeper pockets and bigger research and development (R&D) budgets, such as Microsoft, Dropbox and Box.

“The Huddle product was good and remains a good product, [but] Box, Dropbox and Microsoft – with OneDrive, Sharepoint Online and Office 365 – invested far more money in R&D and marketing,” says Pelz-Sharpe.

­­­Huddle has rivals closer to home, such as Kahootz, Alliantist and Wazoku, which are giving it a run for its money in the UK, adds O’Toole.

“The general trend is for these companies to try to offer greater functionality at lower cost, [and Huddle] looks to have underestimated the impact of this increasing competition.”

What the future holds for Huddle

Given how entrenched Huddle’s technology appears to be in central government and beyond, it is a fair to say there will be a number of public sector IT chiefs keen to know what the future holds for the firm.

Share-holding Huddle employees, past and present, have privately shared details with Computer Weekly about the “communications” they have received from the firm in recent weeks regarding the aforementioned private equity deal with Turn/River.

While official confirmation from Huddle on that deal is yet to drop, industry watchers are of the view the company is most likely to be acquired rather than cease trading altogether.

“If a supplier gets in trouble but has a solid proposition that clients really value, the service in question will survive in some form as another company will see the value in buying the company, technology and established revenue stream,” John Glover, sales and marketing manager of G-Cloud-listed Huddle competitor Kahootz, tells Computer Weekly.

“This is the situation with Huddle, where they just over extended themselves and their main exposure was not actually their size, it was that they were clearly driven by the priorities of their bank and their investor’s exit strategy.”

“If a supplier gets in trouble but has a solid proposition that clients really value, the service in question will survive in some form”
John Glover, Kahootz

If Turn/River does acquire a majority share in the company, Huddle may find the deal opens more doors for the company and its technology in the US, adds Glover.

“As a US company they will now become beneficiaries of the Buy American Act which, in my view, unfairly puts trade barriers in the way for UK companies that wish to sell to public sector agencies across the US,” he adds.

The act, introduced in 1933, requires the US government to prioritise the purchasing of US-made products and services during public sector procurement exercises.

Pelz-Sharpe also fears the fallout from Huddle’s financial difficulties could effect how successful other startups are when it comes to securing funding from UK and US investors.

“In retrospect, it may well be that Huddle were too successful too fast, they raised too much money, and their ambitions got the better of them,” he says.

“This [Turn/River] deal won’t help matters with US tech investors, though there is no suggestion of anything untoward at Huddle, nor will it help home investors in the UK as it has been hard for UK startups to raise funding and much of Huddle’s money came from UK-based firms, including Zouk Capital and Eden Ventures.”

Computer Weekly contacted Huddle for a response to this story, but was told the company has no plans to comment at this time.

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