Earlier this week, the technology firm Smarsh acquired the Franklin company Digital Reasoning, which uses artificial intelligence to glean insights from human communication.
Leaders argue the partnership will work because Smarsh focuses on capturing and storing communications like email, text messages and video calls, while Digital Reasoning specializes in making sense of those messages.
Over the last several months, video conferencing software like Zoom and messaging applications like Slack and Microsoft Teams have become essential tools for businesses to communicate. It’s also generating more communication through more channels.
Digital Reasoning founder and CEO Tim Estes said the goal of the partnership is to capitalize on the increase in digital communications, especially in highly regulated industries like banking.
“These tools have allowed us to have some level of business normalcy and that's beautiful, but it's the wild west,” Estes said.
He speculated that even after companies return to the office, many meetings will still have employees who participate remotely, and he doesn’t expect digital messages to slow down after the pandemic subsides.
Financial institutions, as well some companies in other regulated industries, are required to monitor employee communications to root our illegal activities. Those companies don’t get out of that obligation because the technology is changing, Estes said.
Digital Reasoning started out focusing on security and intelligence, but later moved into health care and financial industries. Smarsh has clients in several industries, but specializes in financial institutions. Following the merger, the plan is to zero in on financial institutions because that’s where the biggest opportunity is post-COVID.
Estes said the merger makes it possible to grab a large portion the market share for storing and analyzing communications at financial institutions. Digital Reasoning didn’t have the manpower to do it alone.
“This whole thing is about growth,” Estes said. “The opportunity that has been accelerated by remote work is so large that if we can grab the role of being that trusted provider of processing and monitoring all that stuff … we don't have enough people”
Digital Reasoning has been growing rapidly. Estes said 2019 was the company’s best year ever and it was on track to become profitable soon. However, the coronavirus tamped down that growth.
Estes said Digital Reasoning, which has previously been backed by venture funding, started looking for capital as a buffer against the pandemic earlier this year. The investment bank Barclays, which was helping with that fundraising process, presented the merger with Smarsh as an alternative to venture funding.
Digital Reasoning has over the years secured tens of millions of dollars of investment capital, including from local players Nashville Capital Network and Tennessee Angel Fund (both in 2014) and HCA Healthcare (in 2015).
As it expanded into finance and across the planet, it also drew funding from blue-chip names Barclays, BNP Paribas, Goldman Sachs, Nasdaq, Macquarie Group and Standard Chartered, among others. Early this year, a fund backed by private equity giant Apollo Global Management pumped another $20 million into the venture.
Before the COVID-19 pandemic, Estes said he probably wouldn’t have gone that route. But Estes said teaming up with a much bigger company gave Digital Reasoning the resources to seize the opportunity created by the pandemic.
"When you go through a once in a lifetime craziness like we've been through, you start looking at things differently,” he said.
The companies aren’t disclosing the terms of the deal, but Estes said the merged companies have a combined revenue on par with many large, public companies. Smarsh had 2018 revenues of $112 million and employs more than 600 employees.
However, he said the newly merged company will be focused on proving the worth of its technology to financial institutions rather than organizing a public offering.
“I have a hunch we'll have plenty of options once we've proven that,” he said. “After that, we'll see how this goes.”
If the company can manage to cement itself as the leader in monitoring communications for financial institutions, Estes hopes to convince other big companies that analyzing emails and instant messages is worth the effort, even if it’s not legally required.
He argued that the combination of Smarsh’s storage and Digital Reasoning analysis could help companies rectify customer complaints faster or identify bad behavior like racism and sexual harassment.
Overall, Estes said he’s excited about the opportunity to work with a bigger company and that the organizations mesh well.
“I think in the end, mergers work when the chemistry of the team works, there's good alignment of those teams … and you have very thoughtful and patient execution to get it right," he said. "All those things are happening right now."