Article by Ralph Gammon, published in Document Imaging Report (Vol. 27, No. 13)
When Don Field, CEO of Ephesoft, was looking for an equity investor, early on in the process, he received what he considered to be a valuable piece of advice. “Somebody told me that everybody’s money is green, so I’d better look for more than just that,” Field told DIR.
Field’s search ended with Ephesoft accepting $15 million from Mercato Partners in a Series A financing round that was announced last week. Based in Salt Lake City, UT, Mercato invests in “growing companies in technology, digital media, and branded consumer markets.” “A lot of people offer introductions and help with hiring executives,” said Field, who talked with more than 70 potential investors. “What Mercato has that I didn’t see anywhere else was a team of experts that actually comes in and works with their portfolio companies in areas like sales and marketing, human capital, and branding and communication. It’s similar to hiring an outside consulting firm to advise you. We have been really impressed with the background of their team and the advice they have given us. They’ve meshed well with our team, and we are all working together toward our common goal of explosive growth.”
According to Field, Ephesoft was a perfect fit for Mercato’s portfolio. “They specialize in taking companies with revenue in the low eight figures [over $10 million] and growing them to the nine-figure level,” he said. “That’s exactly where we are hoping to go. We fit every checkbox they had on their list. There are not too many companies like us—that make it to eight figures in annual sales without outside money and are profitable.”
Ephesoft had previously taken on smaller strategic investments from Fujitsu (through KnowledgeLake) and In-Q-Tel, which works to introduce federal government agencies to new and relevant technologies. “Ephesoft was founded seven years ago with investments from friends and family, and I call that Ephesoft 1.0,” said Field. “After that, we spent four years growing slowly and diligently. Then came the investment from KnowledgeLake three years ago, and we became Ephesoft 2.0.
“At that stage, we added a lot of people and grew to a significant size. Now we’ve reached the point where we see so many opportunities, and the market dynamics have reached such a significant point, that we felt it was the right time to take on additional investment to really help us get to a new performance level.”
With the Series A financing, Mercato principal Joe Kaiser joins the Ephesoft board. “There are now four people on the board, with one spot open,” said Field. “We also have three non-voting advisors; one is from Mercato and one from KnowledgeLake.”
Field noted that the Mercato investment is the first time that the ISV has issued preferred stock. “Basically, this means Mercato has some extra voting rights that don’t come with common stock,” he explained.
Ephesoft plans to invest the capital in a number of areas, including a recently announced hosted offering, continued development of its Insight software, potential acquisitions, and increasing its overall visibility. “To date, Don has led the company with a very conservative approach,” noted Tim Dubes, VP of marketing. “We have been savvy and sensitive to the bottom line. We’ve been profitable and growing, but, now it’s time to put some rocket fuel in the engine and see what we can do.”
Capture as a service
One of Ephesoft’s first moves related to the investment was to launch a SaaS version of its Transact capture software. It is being hosted on Azure and was announced at last week’s Microsoft Inspire partner event held in Washington, D.C. There are four tiers of service being offered– Entry, Standard, Professional, and Premium.
“We are making a big effort to really do cloud hosting properly,” said Field, who previously had told us that Ephesoft had not seen much demand for cloud capture. “When we first built our product seven years ago, it was designed to run on the cloud. We are now starting to more frequently engage with businesses looking for cloud-based intelligent capture.”
Dubes noted that a lot of this demand is coming from the financial services industry. “We are getting a lot of feedback from organizations that are moving their primary line-of-business applications to the cloud,” he said. “As a result, they don’t feel it makes sense for them to run front-end capture on premises and then move documents and data to the cloud. Our APIs really allow us to integrate with customer environments, as well as call our capabilities as needed.”
The different tiers of Ephesoft’s cloud service are primarily based on volumes and bandwidth levels. “The pricing depends on document volumes and the velocity with which a customer needs to execute its processes,” said Dubes. “The Entry and Standard levels can process complex documents but are designed more for entry level users. There is a basic set up fee in addition to the subscription fee.”
Dubes expects higher volume Professional- and Premium-level users will require additional professional services and tighter API integration, but still expects the offerings to be very competitively priced. “Some advanced capture products can require as much as 4x professional services compared to licensing fees,” he said. “That’s not the case with our on-premises software and will not be the case with our cloud offering.”
Ephesoft Transact on Azure is available worldwide. “With the recent ownership changes at some of the leading players in the capture market, the dynamics have changed a lot in the last few years,” said Field. “With our cloud strategy, we think we have the opportunity to emerge as the leader in the next wave of capture.”
Ephesoft first showed Insight at its inaugural conference in the spring of 2015, where it was called Universe. Since then, the software has been rebranded and gradually brought to market. In-Q-Tel’s investment was based on the Insight technology and its efforts have helped Ephesoft make some forays into the federal government space. Now, the ISV is looking at other markets.
“I’d have to say that Insight is still mostly a well-kept secret,” said Field. “To date, we’ve had very little sales effort focused on it. Our plan now is to go wide with a combination of engineering and sales additions and a marketing rollout.”
Added Dubes, “One reason we need the investment is that our demand generation has bottlenecked. We need a bigger team to follow-up on leads with prospects like large banks and government agencies. Sales cycles for these types of engagements tend to be strategic and long.”
Ephesoft would like to capitalize on Insight while it occupies a unique place in an emerging market. “We have not found anything that competes directly with it,” said Field. “It’s for mining documents and discovering dark data—a solution a lot of large organizations are currently looking for, as demands for compliance with regulations like GDPR [the EU General Data Protection Regulation] start to emerge.”
Capture for the future
According to Dubes, not just Insight, but Ephesoft in general, could benefit from increased visibility. “If you look at where we are seeing traction right now, when we talk to customers, the channel, and analyst firms, it’s because Ephesoft is viewed as having a modern platform compared to some of the legacy capture vendors,” he said. “We really need to turn up the amplifier on that, especially with some of the recent ownership changes that have taken place at some of the market leaders. While we are focused on creating cool technology, they seem to be more focused on improving operational efficiencies and squeezing out profits.”
Helping drive Ephesoft’s innovation is its focus on the utilization of machine learning throughout its products. “Machine learning is core to what we do,” said Dubes. “It’s at the heart of our engineering effort, and tools based on our patent [U.S. number 9,384,264, issued on July 5, 2016] are used in all our products. Basically, our entire business is about capture, classifying, and extracting. In Transact and Mobile, this is typically to enable a business process; in Insight, it’s done for the purpose of data analytics. Machine learning enables both applications. Machine learning is the reason it doesn’t take us more than a few samples to set up our software, which differentiates us from the competition.”
In addition to continuing to develop its own technology, Ephesoft is looking to expand through potential acquisitions. “We are focused on the higher-end of the market, so it probably won’t be anybody developing batch capture controls or anything,” Field said. “We are looking at a couple areas that are peripheral to what we are currently doing.”