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NEWS ANALYSIS

How one family built an US$8b software startup

San Francisco

THE tech industry's newest billionaires are a pair of brothers who started a software company in their parents' basement in Utah. Now Ryan and Jared Smith are selling Qualtrics International Inc to European giant SAP SE for US$8 billion - and they'll get to keep running the business.

Ryan, 40, is the chief executive and public face of a startup that - unusually - resisted taking venture money for over a decade before finally agreeing to deals with Accel and Sequoia Capital. Last valued at US$2.5 billion, Qualtrics makes customer-survey software used by the likes of Microsoft Corp to General Electric Co, helping boost its revenue more than eight-fold over the past seven years.

Ryan, who reportedly once turned down a US$500 million offer for his company, his family members and other major shareholders are now poised to get about US$3 billion for their shares. Not bad for a CEO who got paid US$100,000 in salary last year. "You do not forget your first meeting with Ryan Smith," Sequoia Capital partner Bryan Schreier wrote in a blog post. "A go-to-market savant, Ryan complements his brother's understated-engineer mindset. But they, their father Scott, and their co-founder Stuart, clearly have a shared set of values."

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Qualtrics had filed for an initial public offering in the US and was planning to raise about US$500 million. SAP CEO Bill McDermott preempted the IPO with an all-cash offer that was more than 75 per cent higher than the company's projected valuation. Mr McDermott said in a conference call that SAP had to pay up because the Qualtrics roadshow was going well. But the company's shares slumped more than 5 per cent on Monday as analysts questioned the price tag.

Ryan is known as the more gregarious and outgoing in a family of brainiacs - both his parents held doctorates and his father lectured about market research at the University of Oregon. The Smiths moved to Utah around the time Ryan's father opted to work at Brigham Young University, and in 2002, the pair started Qualtrics, originally targeting academics that needed to conduct field research.

As the company grew, Ryan eventually convinced his brother to quit a product director's job at Google and run the technical side of things. Jared, now 43, is the company's president. The Smith patriarch came up with the idea to serve his fellow academics, while Jared wrote the code and Ryan sold it to customers. "We just said, hey, there's no rules. There's no playbook," Ryan said in an interview conducted for an Accel series profiling entrepreneurs. Qualtrics' approach is based on what it calls "experience management" or XM, according to Sequoia's Mr Schreier. That involves analysing every aspect of the customer experience to drive loyalty and referrals, which it deems crucial at a time when social media gives individuals more power than ever to speak out.

That approach worked. Qualtrics expects 2018 revenue in excess of US$400 million and forecast a forward growth rate of more than 40 per cent. Ryan and his family hold shares in Qualtrics through a holding company managed by the two siblings and father Scott. That's worth roughly more than US$3 billion based on SAP's purchase price - though it's possible other family members own shares as well.

Ryan will continue to run the company as an entity within SAP's larger cloud business group, maintaining headquarters in Utah's Provo as well as Seattle. That allows the Smith family to retain a formula that's served it well. Sequoia singled out the company for running on its own money at the start, eschewing the cash-burning common to Silicon Valley's hottest outfits.

After college, Ryan said he wanted adventure and went to South Korea to teach English. One of his early lessons in entrepreneurship came there. While most foreign tutors were scraping by on next to nothing, he decided to try private tutoring by putting flyers offering his teaching services in mail boxes. "I put those in, like, 5,000 apartments within a couple week period. I ended up making a lot of money," he said in the video. "That was one of my early, better actions. Hey wait, there's another way of doing this and it worked." BLOOMBERG