Kofax buys Ephesoft: The Prodigal Son Returns.

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ephesoft kofax

Kofax buys Ephesoft: The Prodigal Son Returns.

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With the explosion of new vendors and investment coming into IDP, we think the market will hardly notice the merger. There is so much new business now that IDP has become intelligent. The best is still ahead. 

Kofax’s consolidation of the legacy capture market continues with today’s announcement that it acquired Ephesoft, a well-known provider of IDP software for payments, mortgage, healthcare, and other industries. The terms of the deal were not disclosed. We estimate Ephesoft’s revenue between $20 and $30 million. The company also raised an investment of around $20 million, most notably from the CIA-affiliated In-Q-Tel. Kofax is a well-run company with a very healthy EBITDA and a large software maintenance revenue stream that generates impressive cashflows. At this time, there is no information about whether Kofax paid for Ephesoft from cash reserves or with help from its private equity owners. 

That’s the business news. But as the late Paul Harvey would say, now for the rest of the story. As keen Kofax and Ephesoft observers for many years (indeed, one of us worked with Ike at Kofax and also was an OEM customer of Ephesoft), we learned a lot about both companies and their unique approach to success. 

Ike Kavas, founder of Ephesoft and one of the nicest people in the IDP world, left Kofax around 2010 to start Ephesoft a few miles up the road in Orange County California. Soon after, Kofax veterans Don Field and David Talarico joined Ike and began marketing the new platform around the industry. The original vision was to create a very easy-to-use, cloud-native IDP product that was also open source and inexpensive. It was a good strategy because it directly aimed at some Kofax customer complaints at the time: too complex, no cloud option, and too expensive. It was a classic David vs Goliath story. Kofax was the undisputed king of the capture world and a sharp-elbowed competitor with impressive resources unafraid to crush another competitor. It would be an understatement to say Ike’s move did not go over well within Kofax. 

But Ephesoft had a good, timely product idea, and the market discovered it was a good alternative to the legacy, massive client-server stacks like Kofax and OpenText. Ike and the team steadily built the business up through innovation, persistence, fair play, and a culture of humanity and kindness. Ephesoft was also among the first IDP companies to set a vision far beyond document scanning and capture. We recall when they introduced their business intelligence roadmap with designs to take on the enormous unstructured data management challenge. 

Once the darling startup of the IDP world with all the cool ideas, Ephesoft matured into a solid, reliable vendor known for its happy customers. New startups such as HyperScience and Rossum came along on the deep learning wave and raised hundreds of millions of dollars for R&D and marketing investments. We think this created an existential crisis for “Capture 2.0” vendors like Ephesoft, who would have to raise a lot to compete. Raging inflation and the end of the Fed’s quantitative easing (or “easy money for investing”) have made that prospect practically unreachable for mid-life software companies. 

To survive, let alone thrive, Ephesoft likely faced two choices: go for a private equity buyer or an acquisition by another software company. With Kofax, they get both now. 

So the prodigal son has returned to the fold. Will there be a feast with dancing and singing tonight to welcome him home? (Firmly tongue in cheek, with apologies to Ike and Reynolds Bish, Kofax CEO, as the metaphor stretches only so far!)

What does this deal mean to the IDP market? Kofax continues to pursue a determined consolidation strategy, buying up other mature competitors with a large and loyal customer base with a recurring revenue stream but lacking the exciting AI story and ARR hockey stick growth to raise $50 to 100 million. Once in the fold, Kofax provides access to the most extensive installed IDP base, a well-run global operation, and some seriously fun sales parties in Las Vegas. Kofax’s strategy reminds us of how OpenText consolidated the ECM and DM markets, removing competition for their products while accreting the valued renewal streams. 

We wish Ike and his team all the best returns and hope Kofax nurtures that special culture. 

With the explosion of new vendors and investment coming into IDP, we think the market will hardly notice the merger. There is so much new business now that IDP has become intelligent. The best is still ahead.  (Dan Lucarini, former Kofax and IBML exec, contributed personal insight to our analysis)

f you are a buyer or user of IDP or capture technology and wondering how to navigate these difficult times, we have a free – yup, free – confidential advisory service for you. A service that means all you have to do is find a time on our calendar.

Suppose you are a seller of IDP technology; then, like many others. In that case, you may be reassessing your current business, pricing, or go-to-market strategies to adapt to these turbulent times. Again feel free to reach out and chat with us as we may be able to help by providing some critical but constructive advice and support.

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