In 2007, Houston, TX-based Seismic Micro-Technology (SMT) was a family-owned provider of geoscience software, a vital tool used by small oil and gas (O&G) operators to evaluate potential reservoirs and plan field development projects. Four years later, the company was valued at $500 million in the largest-ever software acquisition at the time by global information powerhouse IHS. In between, TCV acquired the company, helped it navigate a sharp drop in oil prices worldwide in 2008, and built on SMT’s outstanding technology and fervent customer base to seize market leadership.
Finding a Diamond in the Oil Patch
Interpretation software like SMT analyzes seismic data gathered from underground to enable exploration companies to pinpoint high probability areas of oil and gas deposits before making expensive, high-risk commitments to drilling. At the turn of the century, companies had started to implement new geoscience software, driven by improved computing capabilities and increasing well complexity that required more precision and insight. The increased use of software dovetailed with two other trends: advances in geological research that yielded richer raw data, and the emergence of a new, younger generation of scientists and engineers accustomed to utilizing software for modeling, problem-solving, automating processes and making real-time decisions.
“SMT stood out by offering a powerful yet easy-to-use software platform, called KINGDOM, that was substantially less expensive and easy to implement and maintain compared to UNIX workstation-based solutions. It was also more flexible, interoperable with other systems, and ran on desktops and laptops,” recalls Jake Reynolds, General Partner at TCV. Compared to legacy systems, SMT’s software solutions provided full functionality at 20% of the cost, and thanks to strong word-of-mouth recommendations, SMT had grown steadily and become profitable. When the company’s founder, Tom Smith, wanted to take the company to the next level, he was looking for like-minded growth experts who would build on SMT’s strengths to make it a global player and leader in energy software.
TCV had domain expertise and experience in the energy industry, having invested in Houston-based Solarc, a leading provider of supply chain solutions for global energy companies. As a growth investor, TCV makes both minority and majority investments in companies addressing massive markets with a strong product offering. Customers loved SMT’s products and services, which gave the company an enduring competitive advantage, and it still had many untapped sales opportunities among larger energy companies, particularly overseas. To scale rapidly and shift its focus from smaller O&G companies to industry leaders and oil companies owned by national governments, SMT needed targeted investments in R&D, sales and marketing, and the addition of new tools and technologies for its business processes – all core strengths of TCV.
To execute on this opportunity, TCV took a majority position alongside SMT co-founder Tom Smith and recruited Symantec veteran Arshad Matin as CEO.
SMT was a gutsy investment for a Silicon Valley VC firm, but TCV’s investment thesis was both strong and foresighted. SMT’s founders had built a fantastic business with loyal customers. My priority as CEO was simply, don’t break anything.
– Arshad Matin, CEO of SMT
Matin, Smith, and TCV worked closely together to build out the board of directors and recruit a new management team, including CFO Jake Pyles, CMO Indy Chakrabarti, and VP of Sales Bill Stephenson. TCV General Partners Jake Reynolds and David Yuan joined the board of directors, supported by Kapil Venkatachalam. TCV helped deploy additional resources in finance, sales, and marketing and advised on SMT’s pricing strategy and international expansion.
Flying Through Headwinds
Meanwhile, Matin made careful adjustments to SMT’s culture and business processes. “We didn’t come in like the big suits from Silicon Valley who know everything,” Matin explains. “Our mission was to make a good company even better, from the inside out.” For example, he involved SMT’s software developers and geoscientists more fully in strategy and product development. With the opportunity to share ideas across teams, their creativity blossomed.
This was vital at a time when the oil industry was undergoing a sea change. “The global recession had already started when oil prices plunged, and that combination impacted profits for big energy companies,” Jake Reynolds explains.
“A year into the deal, oil plummeted from just under $140 to $40 barrel — a tough backdrop for a levered investment,” says David Yuan. “Yet, at the same time, new extraction techniques such as horizontal drilling offered breakthrough opportunities for SMT. We thought we could emerge from the downturn in a really strong position if we invested in product development when others didn’t.”
Source: Capital IQ
Scaling to Greater Success
Despite a challenging market environment, the management team and board worked together to extend SMT’s product lead. “We continued our strategy of building the best product out there and kept R&D levels at over 25% — well above industry levels,” says Kapil Venkatachalam. “When the recession receded and oil prices stabilized, SMT had an expanded product portfolio, customers in more than 100 countries around the world, and its market penetration had nearly doubled.”
SMT had effectively become the most widely used platform in high-growth unconventional/shale formations in the U.S.
As SMT gained market share and grew its customer base, it became attractive to potential acquirers. Among the companies that approached SMT was IHS (now IHS Markit). SMT would allow IHS to provide a more robust, valuable, and integrated solution set of information, software, and insight to support energy customers worldwide and give them even more options to support their business needs, including collaborative decision-making. TCV supported SMT on the journey towards a successful exit in 2011 with foundational work pre-process, and with help in negotiating and executing the acquisition.
TCV found a diamond in the rough and made it a huge success. They went into the deal with an investment thesis strong enough to blow right through the market headwinds, and we were able to execute.
– Arshad Matin, CEO of SMT
That thesis is still strong today. SMT is now part of IHS, and the combined company continues to help the energy sector improve its performance in finding and delivering oil and gas to the global economy.