There’s a growing class of “developer-focused” software infrastructure platforms. It all started with Amazon AWS but since then many companies have taken a similar approach to other areas of software. Other examples included Twilio (TWLO), Stripe (Private), Atlassian (TEAM), MuleSoft (MULE), and GitHub (Private).

What distinguishes this type of company? Here’s our list:

1. They can “call or be called” via APIs. Developers can integrate the service directly into their code.
2. They run predominantly in the cloud although some support “hybrid” cloud.
3. Initial customer onboarding is self-service with low initial pricing that scales up with use.
4. There’s an emphasis on performance, efficiency and the latest technology versus ease-of-use.
5. Pre-built libraries and integrations for popular development “frameworks” are available.

SendGrid has grown up providing an email service that started out to allow “transactional” emails to be sent as in “your package has been shipped.” Then SendGrid started offering the ability to send more “marketing” oriented emails like “we haven’t seen you in months, here’s a coupon for your next visit.”

This is very different from the more mass-marketing services like MailChimp and Constant Contact (CTCT – acquired by Endurance (NASDAQ: EIGI) for $1B.) MailChimp was the king of sending out newsletters and other mass-marketing emails for years. Since then the space has become more crowded and there are many new options.

The lines have blurred too – SendGrid introduced their own marketing email service and many marketing email services have added 1-to-1 and transactional email capabilities. Online content and marketing platforms often include some level of basic email sending as well. Even hosting providers have added email to their suite of services. (In 2014 GoDaddy (NYSE: GDDY) acquired Mad Mimi for $45M to fold the service into their hosted offerings.)

SendGrid has a key advantage in their positioning with developers and with their proprietary mail transfer agent which they refer to as their “special sauce.” Email sending and delivery is not just complicated, it requires large volumes to be sent over time which builds a bit of an extra moat around the business. We’ve included a slide from the roadshow below which paints a picture of the complexity.

It’s fair to say that right now SendGrid is recognized as the most reliable, developer-friendly email platform out there. But the market is evolving.

SendGrid, The Market & Competition

SendGrid figures their market opportunity is $11B. They use a simple and but naïve formula which just takes the number of companies with more than 5 employees that have an online presence and multiply that by their ASP. It’s not completely invalid but it’s rather broad and by assuming their ARPU level probably understates the opportunity.

There are industry analysis reports that have better estimates but the research costs money. You’d think SendGrid or their bankers might have sprung for them. One industry analysis firm puts the current size of the industry at $4.5B and expects it to grow to $22B by 2025. We haven’t seen the math so the $22B number is suspect but the $4.5B is realistic.

Most estimates of market size seem to rely more on the total number of companies in the US and then apply whatever entry-level ASP is for the company they are evaluating. Another way to look at is by emails sent – that comes to around 200B per day. Using the “Pro” level for SendGrid which is $80 for 100,000 emails that would but the absolute total market size as: 200B * 30 days / 100,000 * $80 month * 12 months = $57.6B.

Of course, that’s not a real number either. A huge portion of these are sent for “free” either from personal emails systems or services like Amazon which offer free tiers of service that allow for as many as 62,000 sends per month at no charge. Using my own inbox as a sample at least 50% of the emails are sent by service providers. Let’s say ½ of those are sent for “free” and the rest are via paid services. Some are cheaper than SendGrid while others are more expensive. That implies a current market of about $10B. The truth is probably somewhere between $5B and $10B per year and it’s growing with volume.

At $112M in revenue, the total market opportunity is not a problem SendGrid investors should worry about. Competition and how they react to it is more important.

Very direct competition in the form of “developer-focused, programmatic email services” is very limited. There are a few other providers but most pale in comparison to SendGrid. There is one newer service called SendinBlue which is going after SendGrid (and other email providers) with a full suite of transactional email tools. They are competing on both price and breadth of service. In particular, they already integrate SMS for marketing and transactional messaging.

It’s worth mentioning Amazon SES or (Simple Email Service) which is very cheap but horrible to use with very few features in terms of analytics and reporting. Even developers don’t want to send a lot of time and energy trying to figure out email and SES is a bear. Most people would rather spend a few dollars to be able to make simple SendGrid API calls and move on to solving other problems.

SendinBlue is a little less programmatic and a little more user friendly with pre-built integrations. So developers may still slightly prefer SendGrid. SendinBlue offers a free tier while SendGrid offers a free trial of their paid service. This is a small difference but having a free tier helps to get early adoption with newer, less-proven customers. SendinBlue is based in Paris France with US marketing operations in Seattle and engineering and design in India. This might make it harder for SendGrid to expand internationally than they expect.

Besides SMS there is “creep” surrounding transactional and marketing services that are incorporated directly into applications. Mobile has paved the way for this. For example although password resets still largely come via email, many others like delivery updates are coming via SMS or integrated by developers using platforms like Twilio (NYSE: TWLO).

The consensus is that there is no “one size fits all” email solution out there. But if SendGrid is to stay ahead of the pack with developers they will need to add more SMS and notification style updates.

Business Model, Valuation & Conclusion

SendGrid is a classic SaaS company. Some highlights plucked from the IPO roadshow transcript:

• Sales and marketing expense is only 27% of revenue.
• Only $80M in VC and half of it is still in the bank.
• No single customer accounts for more than 2% of revenue.
• Revenue is driven primarily by growth in email volume.
• Gross dollar churn was 10% for the last 9 months and the dollar retention rate was 116%.
• Despite minimal efforts outside the US 37% of revenues are from international.

We ran two separate IV scenarios in the model on page one with slightly different growth rates and terminal operating margins. Both suggest upside from the $15 mid-point of the proposed price range but the more conservative case of $22/share might not offer enough upside.

Another valuation point to consider is that both TWLO and NEWR are at 10x sales. TEAM recently surged to nearly 20x sales. If we use a 10x as a “comparable relative valuation” that would be SEND at $27.

SEND will be on the IPO Candy Watch List but it’s not clear yet that it will make it into the portfolio. Under $20 this is probably a good add. Also in six months after the company has had some time to execute as a public company and the share lock-up comes off we will take another look.