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Will Smartling's $24 Million Disrupt the Translation Software Market?
Posted by Donald A. DePalma on October 21, 2013  in the following blogs: Technology, Market Data, Translation and Localization, Web Globalization
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Earlier this month Smartling announced that it had raised US$24 million in its third round of funding, adding to the US$14 million it received in its Series A and B rounds. We caught up with CEO Jack Welde to find out what this infusion of funds means to this translation software supplier, the market, and Smartling's competitors. 
  • The funding? This round was led by Tenaya Capital, which has also invested in HubSpot, New Relic, and Zuora. Welde noted that all previous investors had contributed to this Series C funding. He also pointed to the cloud-based and software-as-a service portfolios of his investors, contending that their participation positions Smartling well in this fast-growing market segment.
  • Financial performance? Privately held companies typically refuse to reveal revenue figures, and Smartling is no exception. However, Welde did say that the company tripled its revenue over the last 12 months. He also said that the projected customer lifetime values are very high due to its monthly subscription cost. It's these same monthly fees, as little as US$5,000 to quickly get up and running, that distinguishes Smartling's product from the longer implementation cycles and fifty-thousand to quarter-million dollar price points of its heftier, traditional translation management brethren such as Across Language Server, SDL TMS and WorldServer, and TransPerfect GlobalLink.   
  • Control? Did Smartling sell a majority stake to its investors? Not surprisingly, Welde refused to answer that question but did say that, "We are smart entrepreneurs, we have smart investors, and this was a very competitive round" of fund raising. In other words, Welde said that Smartling didn't have to pledge its firstborn to the venture capitalists. However, the question of what percentage of the company its investors own probably won't be answered until Smartling is sold or goes public.  
  • Exit strategy? "You can't raise US$38 million on the assumption that SDL will buy you," Welde said, rejecting the path taken by Idiom, Language Weaver, and Trados. Rather, he sees a public offering is in the company's future. However, he did acknowledge the possibility that a cloud-focused company such as Adobe, Amazon, or Salesforce might buy Smartling to make it the localization-enabling component of the enterprise technology stack. Welde told us that Smartling has already received and turned down several legitimate acquisition offers.
  • Smartling's plans for the money? Welde ruled out using the money for acquisitions, preferring to rely on the company's agile development to roll out as many as 20 code refreshes - from bug fixes to major features - per day. Instead, he will use the money to improve technology execution even more but most importantly, "We will accelerate sales and marketing to capture more of the market as quickly as possible." 
Which market? Common Sense Advisory calculates that the market for outsourced language services in 2013 will be US$34.778 billion (see "The Language Services Market: 2013," May13). Welde also cited Mary Meeker's figures on the rapid growth of mobile as a percentage of global internet traffic, targeting prospects selling to global mobile users and the rapidly growing middle class in the developing world. High on Welde's to-do list is opening a marketing and sales office in Europe where he sees "incredible demand" for the product.

Welde kept returning to what he called Smartling's "unfair advantage" in the marketplace - that is, a US$5,000 per month investment in his software can provide a powerful global presence. But Smartling isn't the only supplier selling proxy server technology for globalizing websites or enterprise translation management systems (TMS), so how will this investment change the market?
  • It will energize the website globalization market. There's a huge pool of companies that are unable or unwilling to deal with translation and the software it requires. Rivals such as MotionPoint and TransPerfect OneLink offer a one-point-of-contact model that includes both the proxy servers and managed translation aimed at prospects who just want to pay someone to make them global. Smartling targets tech-savvy buyers who want to integrate its server with their websites. Smartling will spend heavily on marketing, not just to buyers but also to the language service providers (LSPs) they need to serve those less technical customers. Who benefits? Its marketing could raise general awareness and expand that market. MotionPoint and TransPerfect will find their sales cycles lengthening and will have to up their marketing and sales game in response.  
  • It could tempt Smartling into chasing the wrong kind of deals. Earlier this year Smartling ventured out of its cozy niche with new translation management features that put it up against TMSes from Across, Elanex, MultiCorpora, Sajan, SDL, and TransPerfect for traditional enterprise business. While these deals might look appealing with their big dollar volumes, they will divert Smartling's attention from what it does best. Even if it had all the technology it needs to compete with these enterprise-class TMSes (which it doesn't), Smartling would find itself mired in long, drawn-out sales cycles for complex embedded global content workflows. The bottom line: Smartling won't replace many incumbent translation management suppliers in heavy-duty Fortune 500 accounts or score well in RFPs or tenders for enterprise TMS. Our advice to Smartling: Steer clear of this market a while longer, but keep building for when the market moves towards cloud-based solutions. Our advice to the incumbents: Watch your flanks while Smartling takes the website, marketing, and customer engagement applications from your accounts, setting up a potential prime-time take-over in the future. 
  • Smartling still has to figure out how to work with LSPs. Language service providers are critical to Smartling's success outside the niche of its current Web 2.0 customers. Along with having to get LSPs on board with its solution, Smartling will be hard-pressed to decide which of the more than 28,000 LSPs in Common Sense Advisory's directory to partner with, when, and under which conditions. This is a tough problem - and the same one that the previous "Switzerland" of the translation automation industry, Idiom, had with its partner program. Smartling can't partner with everyone, so some LSPs will become preferred collaborators - but most will remain on the outside looking in. That's not the only problem. Smartling has also signed up LSP partners that resell its software, thus creating another tier of favored partners. Finally, Smartling risks falling victim to the curse of the translation software business - that pure-technology companies often become hybrids, finding that they must offer both technology and translation services. The horror of horrors? Smartling could find itself buying a translation services company, thus alienating all of its LSP partners. 
In summary, Smartling has a lot of money in its bank account, but several tough choices ahead of it. Miscalculations will derail it and cause the company to lose focus. Meanwhile, its competitors won't stand still and wait for Smartling to poach its customers and employees. 

That said, Smartling's latest round underscores the market potential for translation automation technology. Entrepreneurs at innovative software developers such as Kilgray, MemSource, and XTM International must be poring over their own business plans as they craft investor pitches for private equity and venture capital suitors. 

Larger, more established companies such as Lionbridge, SDL, and STAR will have to overcome their inertia and respond much more quickly than they typically do - both in sales opportunities and in product roadmap responses to market changes. Finally, they must avoid the easy temptation to dismiss Smartling on the basis of its current shortcomings before they find themselves marginalized in the long term. 

 

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