Small software companies find a home with ESW Capital

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ESW, short for enterprise software, is controlled by Texas billionaire Joseph Liemandt. Over the past couple of decades, the firm has bought more than 100 companies in deal sizes ranging from less than a million dollars to at least $460 million. ESW aims for at least 30 more acquisitions next year as the big companies that are its target customers rely ever more heavily on technology to get through the coronavirus pandemic.

Austin, Texas-based ESW has the infrastructure—managers, lawyers, recruiters, developers and sales professionals—that small companies struggle to afford. It also has the cash to allow early investors and founders to move to the next creative challenge.

Source: Court documents

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Source: Court documents

Andrew Einhorn co-founded media-intelligence company Synoptos in 2014 and sold the Virginia-based provider of real-time reputation-management software to ESW last year for an undisclosed sum. Synoptos had been growing steadily but its founders wanted it to expand faster, either by raising venture capital in exchange for partial ownership or by selling the company outright to a large company like ESW, he said.

ESW, Mr. Einhorn said, offered “founder-friendly” terms and, important for him, allowed Synoptos customers to tap into other software products as part of the subscription service. He is now chief executive of LevelFields Inc., a financial-technology startup that hasn’t come to market yet, and says he has no regrets about selling to ESW.

Instead of buying and selling companies the way private-equity firms do, ESW operates the software businesses it buys, increasingly through its Aurea Inc. unit.

Source: Court documents

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Source: Court documents

Technology created by the small businesses ESW has bought is often collected in a library of software tools for sales and marketing, collaboration and integration, and other business essentials. ESW sells access to the collected offerings under a subscription model.

The deal team works with venture capitalists and sometimes directly with founders who have hung on to equity in their software startups through the rounds of early investments, product creation and customer capture, only to stall when it came time to scale the business.

An early technology pioneer, Mr. Liemandt dropped out of Stanford University to co-found Trilogy, which sold software to large companies. Trilogy boomed in the 1990s, retracted when the technology bubble burst in 2001, and is now part of ESW.

Mr. Liemandt couldn’t be reached for comment.

ESW occasionally invests in larger technology companies such as Canada-based Optiva Inc. In other cases, the firm acts as a see-you-in-court patent owner, ready to battle over its rights to valuable technology.

Besides the field of companies backed by venture capitalists looking to cash out, ESW’s hunting grounds also include smaller, ailing software businesses destined for bankruptcy court. Since 2015, ESW has sealed deals for about 10 bankrupt companies, including at least three in 2020, a Wall Street Journal review of court records found.

Because bankruptcy deals are public, they offer a view of privately held ESW’s distinctive buying style.

ESW doesn’t just buy up bankrupt businesses’ assets, software and patents. It acquires the entire company—including the potential for tax breaks. The big losses that pushed the companies into bankruptcy translate into tax-break opportunities once ESW owns the business and starts generating profits.

Losses usually stack up in technology companies’ early years as they plow millions into product creation. Once a startup starts making money, it can use net operating losses recorded earlier to offset income on tax returns. Bankrupt companies are often sold for parts in chapter 11, their tax breaks wasted. ESW’s deals typically are designed to preserve net operating losses, essentially using the previous CEO’s losses to reduce the next CEO’s taxes.

Take ESW’s recent deal for Security First Corp. The California-based cybersecurity software company filed for bankruptcy in August, having burned through at least $140 million in debt and equity financing since its 2002 founding. In the two years before filing for bankruptcy, Security First had recorded just $92,000 in revenue. It had only three employees and no office. But it did have net operating losses that could eventually translate into more than $150 million in tax breaks. ESW has offered at least $6 million for Security First.

Closing the deal will start the clock running on ESW’s ability to use Security First’s potential tax breaks, which expire over time. It will have to take the company from almost no sales to sizable profits, and while it might never generate enough income to use up the entire $150 million in potential tax breaks, it will be able to avoid paying tax on the profits it does make, at least for a while.

One advantage of running a private empire like Mr. Liemandt’s is that if his strategy succeeds, nobody knows but the Internal Revenue Service. The exception would be if Security First landed back in bankruptcy court, opening its books to inspection. That has hardly ever happened to businesses ESW has acquired, according to a person familiar with the company.

Write to Becky Yerak at and Peg Brickley at

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