A new SPAC offers a way to bet on the company that powers many of the apps in your phone

April 10, 2021, 4:00 PM UTC

A little-known, 11-year-old software provider in Tel Aviv named IronSource is the trailblazer and global leader in an explosive new category: helping fledgling app developers turn such creations as Join Clash and Stacky Dash into megahits. “It used to be that mainly the gaming giants like Activision commercialized mobile games, and we work with all of them,” cofounder and CEO Tomer Bar-Zeev told Fortune. “But the beauty today is that small indie developers that fashion great content can load on our platform and compete with the big guys.” IronSource reaches 2.3 billion monthly users via its platform connecting developers with advertisers. It’s those developers’ apps that you download to solve puzzles, order dinner, and stream news on your iPhone and Galaxy.

Now, IronSource has merged into a SPAC sponsored by Thoma Bravo, the Silicon Valley private equity titan that manages $80 billion in software holdings, tops in the PE industry. The deal values IronSource at $11.1 billion. “We have 55 people worldwide scouting software companies, and we know most of the ones out there,” says Orlando Bravo, Thoma Bravo’s billionaire cofounder and managing partner. “We’re looking for the best software companies we can find, and this is one of very best best in the world.” The SPAC, called Thomas Bravo Advantage trades under the ticker TBA.

A chart in IronSource’s investor presentation illustrates why Bravo ranks it at the top of the heap. The graphic presents an upside-down triangle that starts at the top slice with the universe of 3,600-plus global tech companies, narrows to the 255 at over $300 million in sales, shrinks in the next layer to the 32 boasting 80% gross margins—among them Autodesk and HubSpot—narrows to the 13 that also register 30% Ebitda margins, a class including Intuit, then skinnies to the single enterprise that checks all those boxes and also achieves revenue growth of over 50%. Standing solo in the bottom wedge is IronSource.

Bravo notes that the IronSource deal marks a milestone in Thoma Bravo’s history. As a buyout firm, it specializes in taking companies private. Its PE funds typically hold 100% or controlling stakes in the more than 40 software players in its portfolio. But Bravo reckoned that IronSource has the first-mover edge and exclusive technology to keep capturing a huge share of arguably the fastest-growing sector of software. The best way to exploit that potential is raising lots of cash and gaining access to public markets—a strategy that provides the firepower to expand through acquisitions. To achieve those goals, Thoma Bravo for the first time deployed a SPAC. “It’s a vehicle that allows us to partner and invest in companies that want to go public today,” says Bravo.

When the offering is completed, Thoma Bravo’s principals and its affiliated funds will own around 5% of IronSource, and a group of investors it recruited, including Fidelity, Morgan Stanley, and Tiger Capital, will hold another 17%. The vast majority of shares will remain in the hands of its eight founders and 800 employees.

Last year, IronSource’s sales jumped 83% to $332 million, and it expects that figure to almost double to $622 million by 2022. Its Ebitda in 2020 reached $104 million, or an impressive one dollar in free cash flow for every three in revenues; Bar-Zeev’s long-term goal is an even higher Ebitda-to-sales of 40%. IronSource’s “dollar expansion rate” with existing customers is 150%, meaning that its average client pays it 50% more each year than the year before—a $1 million customer in 2020 will typically purchase $1.5 million for its IronSource services in 2021. Once developers hop on the IronSource platform, they stick: Last year, it retained 97% of its customer list from 2019.

Bravo relishes the model because it provides extremely high returns on capital. “It’s the opposite of the templates of the past, where to grow earnings 20%, you need to grow assets 20%,” he says. “Warren Buffett would love this company.” Adds Bar-Zeev, “We can grow the top line fast without injecting outside capital. “

So far, the dollops of new investment yielding gobs of free cash approach is working. But bear in mind that growth through acquisitions is central to the IronSource strategy. This year it purchased two companies, including Luna Labs, a startup that enables developers to create and manage video and playable ads. The danger is that in its rush to expand, IronSource overpays for acquisitions. That’s been a major problem in the software industry. Young companies that achieve huge returns on capital in their early years often stumble by paying inflated prices for hotshots that can deliver only by adding lots of growth, and fail to do so. That pounds share prices by severely diluting existing shareholders. (Bravo notes that so far, IronSource has been careful in not paying excessively for acquisitions, and that it can grow well without relying on M&A.)

Roadblocks for app developers

Bar-Zeev and his seven cofounders started IronSource to overcome the roadblock they themselves encountered as app developers. As a computer scientist, Bar-Zeev launched several failed ventures in his twenties, and at age 32 decided to give entrepreneurship a last go. “It was one more startup, and if that flops, work for a big company,” he recalls. “My wife just had our second daughter, and I was broke. So we moved into the second floor of my parents’ house in Tel Mond.”

Prior to starting IronSource in 2010, Bar-Zeev specialized in hatching consumer web apps. Customers liked them, but his tiny shops lacked the cash and expertise to bring his handiwork to a wide audience. “I saw firsthand how hard it was to succeed in the app business,” he says. “It was much easier to create a product than build a business.” He says that virtually every app developer was struggling because they lacked automated tools to do things on a huge scale and couldn’t afford to assemble them in-house.

The narrative replayed when he and his partners started IronSource. The group developed appealing consumer apps for PCs; the mobile app economy was still in its infancy then. “It wasn’t enough to create great content,” says Bar-Zeev. “We needed to build the technology ourselves to grow.” Getting there would forge something similar to the cloud-storage revolution, he predicted. “With the cloud, you didn’t need on-premises for storage. Instead of hiring IT people, you could use Amazon’s AWS—just press a button to add computing power. That made it so much easier to start companies.”

Sundry startups benefited from outsourcing storage to Amazon and husbanding resources for their strengths. Bar-Zeev aimed to do the same thing for the mobile app economy. He and his partners saw that the best business for IronSource wasn’t creating content but building a platform for scaling great apps.

IronSource has two main types of customers. The first and largest group are game developers. “We provide the infrastructure to scale the app,” says Bar-Zeev. “We have a platform that can get a client’s app out to millions of users. We take care of monetization, analytics, and growing the customer base, so that the developers don’t have to do it themselves. We cover all their commercial operations except for developing apps, and things like accounting and HR.”

IronSource has a particularly strong mobile advertising platform. It helps developers attract users by finding the best way to advertise their apps, and guides them to making money by running campaigns for other developers’ games on their own apps. It also provides the technology enabling clients to build highly creative “playable” ads that attracts users inviting them sample interactive demo versions of their games.

IronSource handles 87 of the top 100 games downloaded in February. Among those it supports for large developers are Subway Surfers from Sybo and Homescapes from Playrix. The roster of hit apps from independents on its platform run the gamut from FreePlay’s Join Clash 3D, where players compete to gather the largest crowds, to Born2Play’s Stacky Dash, where folks navigate a maze to win by stacking towers of digital tiles.

The second major business is helping telco operators, an industry struggling with shrinking margins and sluggish growth. The data they provide is increasingly commoditized. Hence, they’re looking to create an enjoyable experience, and make their customers’ lives easier, by providing the best apps. To that end IronSource works with the likes of Orange, Boost, and Samsung as well.

One major challenge ahead? Today, mobile app platforms are free to track users who see ads for their clients’ games on another developer’s app. Hence, they can tell if the ads entice customers to purchase their clients’ games. But Apple is raising a potential roadblock to platforms such as IronSource. It will soon require that they get permission from the apps running the ads to follow their customers, a policy called “App Tracking Transparency.” That could make it much more difficult to discern what apps the new users for their clients’ games are coming from, and what ads attracted them. IronSource and the platforms may need to find new ways of tracking, so the impact on their growth remains uncertain.

It was fulfilling a crucial void in software that made IronSource successful. Now it’s bringing apps to millions that without the company might never have left a zany developer’s garage.

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