Technology Due Diligence for Venture Capital & Private Equity

Venture Capital in China Part I

2010-05-20T21:20:00.006-04:00

Venture Capital Potential in the Middle Kingdom

While the economic possibilities and promises of China often seem limitless according to the media many serious Western investors also share this unbridled optimism. One area in particular, venture capital, has demonstrated a commitment to bringing the potential of China based investments to fruition. This attempt to tap the benefits of bridging the East and West via a digital silk road is more complex than is generally portrayed by the eager media. China still remains a unique and sometimes implacable culture that offers many obstacles to the over-eager Western investor seeking to extract her resources. To understand the reality of the situation an assessment of current VC trends along with the investment trends and opportunities in China must be performed. Then an understanding of the dynamics of foreign investment in China along with the issues of intellectual property must be gained. Finally, there is the exit strategy dilemma from China which poses yet another unique obstacle to the foreign investor. Overall, this will provide a high level understanding of the subject of foreign venture capital in China and the realities involved in this type of investments.
It is generally accepted that 2004 marked the beginning of a new cycle in venture capital investment as investment vehicles from the late 90s wound down and new opportunities surfaced. The primary areas that define this new cycle are summarized as follows:

Restructuring of existing portfolio investments in boom-economy allowed firms to redefine fund focus
Economic recovery allowed for new wave of VC capital calls and fund raising – 2004-2005 yielded over $17B
New opportunities appear in the life science and technology sectors in both emerging and mature markets
Globalization of investment strategies for VC firms and their portfolio companies. In regards to China this meant that there was large funding available focusing on areas that China had demonstrated resources and proficiency in. Also, given the size and classic view as an untapped market, China is an ideal focal point for VC fund managers.

Given the relevance of globalization as a business catalyst, a report from Ernest & Young’s Venture Capital Advisory Group had the following insight:

“As competition grows, regions such as China, India and Eastern Europe are impossible to ignore. The growing consumer markets of the Far East—especially China—present increased opportunities. Indeed, a China strategy has become the top issue for every venture capital firm and corporate investor as the business case for investing in China continues to grow,”

Undoubtedly reports such as this, as well as media-hype, have led to the designation of China as the undiscovered country for new investments.
China truly is a fantastic resource in terms of invention and innovation especially in the area of technology. China is expected to graduate over 250,000 engineering and technology related job candidates in the next year. This greatly justifies China as a source for new investments in 2005 which were largely in the areas of Internet and wireless applications and services which garnered over $205M and IC design with $180M. The high-tech areas are closely followed by Telecommunications which was allocated approximately $190M in invested funds. Traditional services and firms collectively also received almost $200M in investment. In total, foreign capital made up 75% of total venture investing in China in 2005. The majority of these investments occurred in Beijing and Shanghai with additional deals taking place in Shandong, Shenzhen, and Jiangsu.
While the amounts allocated are impressive as are the returns from the more high profile ventures/IPOs such as Baidu and SMIC, the obstacles that are encountered must be recognized. The most basic of the issues encountered are simply a lack of current business law parameters that allow effectively established a venture capital firm type structure. Without the modern VC partnership structure it is difficult and risky to operate an effective venture firm. However, a new regulation was established on March 1, 2003 that replaced preexisting guidelines for establishing foreign-based venture capital funds that eased monetary requirements and allowed for more flexibility in management structure.

(To Be Continued in the Next Posting)

2010-02-05T09:17:00.000-05:00

New Collaborative Technologies Not-All-That-New

The messaging industry is highly fragmented but includes very sizable markets such as Email Security (projected at $6.7Bn by 2013, E-mail Security Market, 2009-2013, The Radicati Group, 2009) & Instant Messaging (forecasted at over $12Bn by 2013,Mobile Messaging Futures 2009-2013, Telecoms Market Research, 2008). A new, possibly disruptive, class of messaging platform is emerging and many are wondering how it might affect the market size from an investment standpoint. These platforms are known as collaborative messaging which are cross-breed of email, IMing and real time interaction with others, the poster-child being Google Wave.

The advent of collaborative technologies has given new dimensions to real-time productivity and communications for users worldwide. This segment of technology includes platforms like Etherpad, Shareflow, Microsoft SharePoint & Google Wave which allow multiple levels of interaction on a real-time platform incorporating aspects of email, IM, chat-rooms & document collaboration.

Currently these new technologies all operate on standard packet-based/IP or even SMTP platforms which are compatible with eachother, they would just need specialized APIs to function. These new products are simply repackaging standard data communications in more usable and dynamic platforms.

Messaging Misperception

While evaluating technologies that could impact the overall message management market, a few clarifications need to be made. There is an underlying assumption that new technologies will always supersede existing ones, and therefore, consume their market share. Generally this is correct, but in the messaging space it is critical to note that so far, all existing message platforms are ultimately built on the same IP-based architecture. While they are new products, they are designed with the same technical framework.

Email, SMS, MMS, IM and the variations produced by products like Google Wave are essentially different modes of delivery using the same packet-based communication technology. Most customizable messaging platforms will only need to be customized to fit the format-specific architecture. With this is mind, new products like Google Wave and Etherpad, could, in fact, act as a complimentary market force that will expand the messaging industry

Web 3.0: A VC Primer for the Next Step in the Internet's Evolution

2009-08-11T10:21:00.040-04:00

Looking towards the future is an inevitable aspect of VC technology investing,and while we all dislike catch phrases or "trends-dujour", it is critical to understand the implications of the next looming step in Web evolution (download this primer here).

Problem: The Internet is currently a jumble of data categorized for people BUT searched by computers.

Solution: Create a system that allows computers to understand the meaning of the data the way people understand language like using words to form a sentence.

Web 3.0 is the unification of disparate data systems thru standardization making the Internet intuitive for people and computers alike, hence, the "Semantic Web" which emphasizes the

real meaning of data on the Internet. The goal is to treat data objects like ideas and real

language thereby achieving the real meaning of the "information age".

Here are the highlights of the direction of Web 3.0 and what it will mean to any VC investor looking to capitalize off this evolution:

Personalization: web-experience then focuses on the individual, personalization = iGoogle, Netvibes, customized home pages, aggregators & mash-ups
Intelligent Search: next generation of search will be dynamic, rather than just keywords-based; it uses the data itself to produce results for user by understanding the context of the data and verbiage in order to produce results, ie search for Bali, results in travel arrangements, backpacker blog, maps of recommended sites, restaurant ratings, local events, etc.
Relevance: Contextual Advertising: focused, personalized, meaningful & nonintrusive; such Engagement Ads on Facebook that blend marketing, live polls, & mixed media. Also, social media apps that allow for sharing of ratings of purchases and include targeted advertisements based on preferences.
Unification: vision of the web as joined and empowered by accepted syntax of data taxonomy and standardized programming languages - this allows computers to comprehend the meaning and process it just like people do, hence like real language.

The onus is on VCs to find companies that can create or leverage these new forms of data relation & presentation. Web 3.0 is mainly about convergence and the shifting of websites into web services that provide something tangible out of the garble of the web that users can both use and perhaps pay for.

Examples:

Layar: Mobile augmented reality browser: iPhone App that combines the Internet, cell coverage, GPS, & camera on a smartdevice so you can point your device down a street and see overlays of what shops are where and what you do or buy. http://layar.eu/

PeopleBrowsR: Social Networking Aggregator: Indexes and combines different social profiles into a primary interface to manage and better use them

Facebook Apps - Twangu: Collaborative shopping portal: Create & join teams of buyers for products or services and have vendors bid against each other for your business; review user’s profiles for info on items and share info with them

Download the Web 3.0 Primer here

2009, The Year in VC, so far

2009-07-25T17:19:00.016-04:00

Venture Capital Investment Summary for Q1 + Q2 2009, the stats so far:

2009 funds invested increased overall, but currently at pre-DotCom levels
Total of $7 billion in first half of 2009 in over 1200 deals
Spike in Seed & Early Stage Investments
Highest percentage from Life Science Investment
CleanTech still strong and growing stronger spurred by political and social impetus
International investing on the rise as Globalism lessens geographic disparity

Sources:

PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters

Deloitte: Global Trends in Venture Capital 2009 Global Report

Facebook to Face Facts?: The Monetization of Eyeballs

2009-06-29T13:41:00.028-04:00

Facebook has the greatest blessing and curse of a Web 2.0 company - a skyrocketing and captured community of eyeballs but no strategy to monetize it. While there is no clear answer, I strongly believe there are some critical signposts that might lead us in the right direction to understand how Facebook can monetize its constituency.

It took Google several years of providing a revolutionary search service and gaining a monumental following before it created AdWords which resulted in $10Bn per year revenue. Facebook has been striving for a similarly suitable model but has been wasting time with traditional banner ads that undermine its next-gen potential, until now. The next evolutionary step of a more dynamic ad-based system known at Engagement Ads (engagement marketing) is a unique convergence of social networking, advertising & market research. The purpose of these ads is to use video, polls and other interactive media to direct visitors to a specific Facebook Page.

The Engagement Ads are successful on a limited scale as they can bring in revenue from the SMB market but have not been able to bring in the large corporate advertisers which are critical.

Another aspect of the Engagement Ad is that it can involve polls used for market research which differ greatly from intrusive phone calls & questionnaires. These polls are:

completely optional
tapped into the social network paradigm
interactive - allowing user to help develop the brand
highly targeted to user demographics
can be completed at user's leisure

And they exist without the awkward phone call! The results gleaned are pure gold for marketing companies who will theoretically pay huge $$$ to Facebook to harvest this crucial data. This is the first significant step towards a monetization strategy and it reflects a forward thinking mindset for Facebook management. This type of media and paradigm convergence (much like Google splicing marketing, data indexing & websurfing into AdWords) is what we need to see happen and Engagement Ads is the first step.

IT Risk Management for Portfolio Companies

2009-06-22T17:01:00.006-04:00

Private equity and venture capital firms often face the threat of risk within their portfolio companies, but are not always certain of their portfolio firm’s competency in this area. Risk Management within Information Technology is especially critical as it affects all operations and the eventual value of a portfolio company. CSC, Inc. specializes in helping investment firms make the best technology decisions for their portfolio company’s technology needs.

This article serves as a primer for PE & VC firms who must ensure that their investments are secure and may need to proactively engage the IT management of their portfolio company. This primer can act as a template for those IT managers that are tasked with developing an IT risk management plan and who need guidelines for the process. It will also provide examples of how to implement each step and a validation structure for the investment firm to follow the process.

The pervasive nature of technology has increasingly made information the most valuable commodity for the majority of modern organizations. It is because of this that information itself has become one of the most prevalent areas of focus regarding the management of risk within any enterprise-level organization. Since risk management is the identification and control of threats that can impact an organization, few things can affect an organization more than a loss of data or communications.

I have handled several projects involving implementing an IT-focused risk management plan and it is critical that a well-conceived and organized approach be taken. This allows a stable flow of operations and a healthier, more profitable company.

Here are the basic steps I would summarize the process into and how it involves managing the data necessary to manage the risk in the IT department:

Preparation - gathering the data to ensure a comprehensive and informed process
Identification - organizing the data and understanding the risks
Assessment & Prioritization - processing the data to establish what happens & when
Planning - applying the data for an effective process
Implementation - leveraging the data to address the risks
Finalization - communicating results from the data to the organization

An effective and robust IT risk management plan allows for more confidence from stakeholders and allows for more resources to be allocated to being successful. I highly recommend a thorough audit and risk management plan to any private equity and venture capital firm that recently acquired a new portfolio company. For the complete article, click here.

SaaS: The Real Scoop on Multiple vs Single Tenancy

2009-04-24T17:32:00.014-04:00

Let's face the obvious. VCs plain love SaaS! What's not to like?

SaaS (Software as a Service) architecture has gained tremendous momentum in the software world as it is the evolution of the ASP model allowing a software delivery without the need for any local data or software installation. Any browser with a robust Internet connection is able to access the software and the clients are billed via a subscription model, hence the service part. No ownership, no installation, no maintenance.

I recently vetted a SaaS company for a VC client of mine and the SaaS model & revenue model made an extremely compelling business case. For VCs looking to invest in companies with a scalable business model this is an ideal revenue structure as it generally involves a fixed cost of initial development and infrastructure then they can scale up for countless clients who subscribe to their software.

This is great but there is more to it as the architecture for SaaS comes in two basic flavors. The question was posed by several members of the VC deal time about what type of SaaS is best, so here are some details I provided to clarify the issue:

Single Tenant: Each instance of the software provided is unique to the client and database is isolated without any chance of co-mingling with other data; additionally, the application instance can be customized as needed and maintenance / administration can be decided by client

Multi-tenant: A single instance of a hosted software solution is distributed to multiple clients

with co-hosted databases that are accessed as needed by the application layer; all clients run same version of software with centrally managed maintenance which improves standardization and offers more efficient and effective cost structure for all parties.

The following chart provides a conceptual diagram of the Multi Vs Single Tenant application architecture:

Many technology pundits argue that Single Tenancy is not a "pure SaaS" model but it is really not that simple. Each architecture has valuable qualities that lends itself to different industries. For instance, Single Tenancy is more suited for regulatory controlled industries such as trading platforms or government clientele that prefer NOT to have their data co-mingled with others on a shared database platform.

More generic software services such SalesForce are really perfect for Multi-Tenancy as this allows them to have a centralized control of software versioning & customization, thereby saving infrastructure costs and passing the efficiency/savings on to their clients.

For the VC, understanding what platform to use is all about understanding how it aligns with the company's business strategy. Do they profit by virtue of what benefits their SaaS model provides? Would they be more successful operational or via marketing if they shifted to another model? That's really the bottom line in terms of what type of SaaS to use.

Video Games ARE the Video Games of the Future!

2009-04-08T21:30:00.001-04:00

No doubt, it is a hot, hot market and apparently somewhat recession proof. Video Games and, by extension, Virtual Entertainment(basically a game but based on a paradigm of experience rather than score/achievement) are a huge market with a worldwide projected value of $47Bn by 2010 under a CAGR of 14%(PwC, 2008). Great potential and a huge area for VCs to invest in.

In 2008, funding alone for games & virtual worlds reached almost $1Bn from Venture & Angel sources which went into a approximately 110 firms(VentureBeat, April 26th 2009).

With that in mind, it is a good market for any VC to be aware of so here are some thoughts about innovations that might make for good investments:

Mobile Gaming / Wireless - not wireless game controllers, but actual wireless/mobile game versions that can be ported over to PDA/Cell device so that people can continue to play while on the subway or training to work or breaking for lunch. Packet or "chapter" technology that can allow for people to download a discrete module to play, then synch back when ready to continue on their computer or console. Everything is moving to our mobile devices and full video gaming will be expected to follow.

The Marriage of Video Games & Social Networking - currently the social web is just "dating" the video game industry in the form of virtual world platforms such as Second Life. They are converging and turning the online interaction with other people in other environments into an actual dynamic experience for everyone - not just tech heads in their basement. The next innovations will start when Facebook buys a video game company that allows its members to participate in next-gen interactions and real-time gaming scenarios. Who cares about Facebook's "What Rock Star are You?" Quiz when you could hook up with your friends in Sweden, Micronesia & Pensacola, Florida and play Guitar Hero - live and online? Or settle grudges with groups of other friends by playing a medieval war game in which you storm their castle - online and live?

Basically, VCs should be on the look out for gaming startups that firmly have a social networking platform in their sites or via an API that allows this to happen. This is the next step after the flirtations going on between these two industries and some great things will happen when they tie the knot.

Pre-paid Access - this is more of a complementary service but adds to the overall video game market. Many MMOGs are subscription based but in Asia pre-paid cards are also an option allowing for innovations in pricing and supply sources. Considering the way pre-paid cellular usage has made a dent into standard cell phone plan revenues, this could be the next step for the US gaming market. Intermediary firms enabling this type of alternate revenue model could be an interesting step for any VC in that sector.

This is an ongoing topic that I will need to revisit again. New innovations and booming numbers in the industry make it a very active area to keep an eye on.

Thoughts on the Facebook Interface

2009-04-06T11:51:00.002-04:00

I was discussing the uses of social media for businesses recently with a VC contact of mine in NYC. A by-product from the disconnect that exists between social and business media, I feel there is a missing piece of the puzzle here that Facebook could crack and establish a more direct stream of revenue.

Facebook is a person-centric platform in which a user's profile or "Face" is the brand which is the whole point of social networking.

This differs from the MySpace strategy which simply allows homepages to be built around a business presence and allows almost complete customization. Facebook limits the changes but benefits from the user-defined & private network experience while still allowing a person to become a fan. What Facebook does not allow is the creation of actual facebook profile or homepages for a business (eg a company does not have a "face"). To this end, Facebook allows Pages or News Feeds or Events to be created as secondary tiers for a person's profile but this, by design, prevents people from becoming "friends", instead they are "fans".

This is an intended by arbitrary aspect of Facebook in that it seeks to maintain the focus on people connecting and it prevents dodgy businesses from harassing users by blasting friend requests & posting updates purely for commercial reasons.

But it seems to me that Facebook is missing out on a potentially huge market for small businesses who can capitalize off of microcontent and organic networking. For example, Creating an option for a "Presence" account for a subscription fee to all businesses that want to appear that can also be monitored (therefore, not exploited). This would allow Facebook to expand to users' business entities so that people can receive fully status updates on newest products or services, deals, and complementary offers. Businesses that need a social, personalized presence or those that can benefit from organic communications platform would value this.

Assessing Management: How techie are the techs?

2009-03-16T16:02:00.000-04:00

It is a common and fairly dependable maxim within the VC industry to rate the probable success of a new tech firm (or any firm) by the quality of the management in place. This also extends to the quality, experience and knowledge of the technical leads at any firm whose competitive advantage relies on their in-house technology.

It is rarely an issue of how many types of code does the lead developer know or how many SDLC (Software Development Life Cycle) models does the team use. Rather, it is more of a measurement of the entire team in terms of a number of factors.

These factors include relevant experience, experience within the specific industry & experience within the company itself (familiarity with the product in question). These three axes are a decent, back-of-the-envelope rating system to get a firm grip on how a companies technical leads can be assessed. Included is a very simple chart I included for a VC client of mine who wanted a general, objective summary of the technology leads (in relation to the other management) that I performed for a technology due diligence review.

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The key personnel were rated in terms of their relevant experience in their roles within NewTechCo and are a mean of three axes including High-Tech Industry, Career Overall, and time at NewTechCo Overall experience.

Summary of the personnel, title held and ratings are provided in the following chart:

These interviews served to emphasize the perception that the key strength of the company lies within their technical prowess but they are lacking in operational and business development resources, relatively speaking. As illustrated above, the COO and the Director of Sales are lacking in experience either in the technology sector or within the NewTechCo firm itself. These findings are not meant to be reviews of their ability but rather a quantitative rating within their peer group.

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Mobile Web: The Holy Grail of Technology

2009-02-02T12:37:00.000-05:00

Yes, the Templar's treasure of the technology age: A Mobile Web that works!

This is legendary myth spoken about by Ad-Venture Capitalists hoping to discover the proprietary mobile software platform that can provide this.

This the perpetual underlying goal that all the big smartphone/PDAs such at the iPhone, the Blackberry Storm, the G1 Android, etc are trying to give their users. If you build it, they will come - come and sign up for mandatory 3-year contracts, no less.

From the technologist perspective their are several hurdles that need to be overcome or addressed in order to make this a reality and give freedom to the Internet Kingdom. I have done some significant technology due diligence in this sector from research to direct company vetting. In order for a firm to be a good VC investment it should include or address some of the following issues:

Mobile Web Highlights for VC Investment:

Standardization: W3C Web Initiative is wrestling with this but a unification of mobi platforms is critical. A common attempt to relieve this issue is the creation of "light" languages such as WML, XHTML & the old timer - WAP. Now we are even seeing the Flash-Light allowing for video ala YouTube. The goal here is to render web pages on the mobile device as you would a computer, a firm getting this done is worth its weight in gold.
Development: Google introduced Android on the development end as a possible answer, anyone who can take the next step to allow everyone to create apps and use the mobile web together will be praised throughout the kingdoms.
Domain aggregation: the mobile web has the .mobi extension which separates it from the basic .com/.net which means there are incompatibilities if I try to open a forwarded URI link from one to the other. This needs to be addressed - we cannot continue to divide the land, one king must unite the kingdom once and for all.

People of the Web, I am out of medieval metaphors so all I can prophesize is that the VC who funds the company that can solve these problems will essentially be pulling the fabled sword from out the stone.

The 3-Tiered Architecture and What it Means to VCs

2009-01-25T09:57:00.005-05:00

I have been asked by multiple VC clients of mine to explain the 3-Tier architecture as it pertains to vetting a software company. Since many SaaS, ASP & web-enabled software companies use an interation of this architecture it helps to have a breakdown of it.

Understanding the workings of the standard 3-Tier web architecture greatly improves the VCs understanding of a web-enabled software's inner workings thus allowing for a better investment decision.

The following describes the each of the layers and a standard diagram is provided to represent each conceptual tier:

Presentation tier – web application layer consisting of web site code hosted on a Internet facing server (Apache or IIS). Interactions with this layer initiate data transaction calls to communicate with a runtime engine or similar in the COM layer.
Logic tier – Often called the COM layer, it consists of a runtime engine or other processing central code. This layer accepts transaction calls from the presentation layer and calls the information from the database, processes them and completes the transaction with the web application in the presentation layers.
Data tier – the database is where all client information resides which accepts the transactions requests. The database looks up the necessary information to fulfill the query then passes it back to the logic tier for process and delivery.

How a company implements its architecture greatly defines how efficient its software delivery is and, therefore, how successful it will be as a business. Additionally, making sure they have chosen all the right parts will provide insight on how coherent and stable their technological competitive advantage is which ultimately decides whether or not they are a good addition to a VCs portfolio.

To SWOT or Not?! Answer = Technical SWOT

2008-11-10T16:20:00.002-05:00

No one who has ever worked in a corporate environment, much less been to business school, has ever avoided dealing with the infamous SWOT Analysis. SWOTs are meant to summarize the strategic positioning of a company and explain where they are and what steps they should take to be more effectual.

In actuality, they are a very effective high-level tool for examining any company. I incorporated the SWOT technique into my own surveys of companies and created the T-SWOT or Technical SWOT analysis.

The idea here is to easily and effectively explain to my VC clients what are the Technology-based positioning a company has. Each SWOT axis can be converted to technology standards and examines the tech functions of a company in a granular fashion.

SWOT in an IT Context:

Strengths - technical strengths in platform, infrastructure and management

Weaknesses - who a firms software design and platform may weaken them and what they should do

Opportunities - in the technology field, opportunities are often defined by how agile a company can be to adapt so here I examine how the firm can shift into a position and exploit them.

Threats - technology threats are what i am there to mitigate so I explain what issues in technology they need to overcome internally as well as what they need to be aware of from the industry itself.

Included is a sample I created for a firm I completed a Strategic Technology Review (technical due diligence) on:

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Open Source or Standardized? Assessing .NET for start-ups

2008-10-28T14:54:00.001-04:00

Just like Coke vs Pepsi or Mac vs PC, an information-age old question is what type of source code is best for developing new software. As a technology consultant for venture capitalists, this question arises fairly often. Since my VC clients often have to review business plans for tech start-ups, gambling their competitive advantage on the programming language they use can be risky.

A VC friend of mine who has a minimal technology background asked my opinion regarding an SaaS (software as a service) start-up that came his way. The firm's software product was built on Microsoft's .Net Framework and was designed with VB Net.

His question: what did these technical terms really mean to him as a possible VC backer? Once again, another strong case for performing technology due diligence on a potential target tech firm.

My answer: while it is difficult and dangerous to rate the market validity & viability of a software package via its language, there are some very important things to keep in mind when a tech start-up uses a generic, industry standard like .Net. Here is an excerpt from a technical due diligence assessment I performed recently that covers the main issues to be aware of:

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Issues of Risk

· Product Platform code:

1. Software product based on Microsoft .Net platform which is inherently restrictive due to proprietary ownership by Microsoft.

2. Lack of open source-code limits customization of product development; with so many options for open-source available it is a warning sign if the developers have not explored more scalable / extensible options

3. Generic, standardized platforms such as .NET are classified as JIT (Just-In-Time compilation) languages which are non-algorithmic and, therefore, leave software more easily open to reverse engineering.

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Mitigating the Technology Risk of New Ventures

2008-10-20T13:12:00.000-04:00

Tech Venture Capital firms are tasked with sourcing the best companies with the most competitive technologies; however, they face the challenge of confirming the viability of their technology investment. VCs need to focus on verification of the target company’s proprietary platform as well as its infrastructure to ensure success.

A good overview for understanding the technical due diligence needs is covering both Software / Hardware appraisal of all proprietary technologies is provided:

Software code and language review including Web 2.0 platforms
Scalability & compatibility assessment
Competitive landscaping in direct sector
Identification of risks and potential costs within target firm to reduce post-closing surprise expenses
Existing technology infrastructure and operations evaluation to determine “IT health” of business-technology alignment

Overall, it is critical to remember that the underlying infrastructure a firm uses to implement its key strategy will define how successful it will be as a business.

Where to go with Web 2.0

2008-07-13T11:38:00.000-04:00

What's the Scoop:

Venture Capital firms are continuing to review and invest in web 2.0 firms but the initial honeymoon is over. According to the PriceWaterhouseCoopers MoneyTree report and VentureSource summaries, VC investments in Web 2.0 fell almost 50% in Q3 of 2008.

While investments were still made it is important to keep in mind some fundamentals that social and collaborative technologies need to evince to be considered mature products.

What to Look For:

Here is a quick and dirty list of qualities a VC should look for in a Web 2.o company while performing technology due diligence and assessment:

Sustainable Technological Advantage - the idea (like sharing RSS feeds) has to be great but the IT implementation has to one that cannot be easily replicated. This is what happened to MySpace, someone came right in and made a good idea great and now has all the marketshare. New innovations will take Web 2.0 to the next level, ideas such as unifying all internet message boards via a universal Unique ID ala Klostu.
Convergence - varying sectors of technology are overlapping in new ways and Web 2.0 is truly positioned to benefit. Here is a sector that already has a market share captured (hello Facebook, LinkedIn) now if that can create a hybrid with say, video games, they will have people playing online games - live with all their friends! Another possibility is the HR software market where firms are starting to have Social Networking recruitment extranets - if they plugged into LinkedIn they could have a pre-qualified & dynamic recruiting platform ready to go. Basically Web 2.0 is pregnant with possibilities, 1+1=3
Mobi - what can I say that everyone is not already aware of? bring the web 2.0 to the Mobile Web ala twitter is a huge win for a potential company. That is the future of the web so any "2.0" needs to look to the mobile web and focus on robust architecture as well as compatibility with disparate device platforms.

As the Web 2.0 summit closed last year these are the some of the technical edges that should be revealed in a technology-focused due diligence review on any firm worth investing in. Otherwise, they are already dated and will not yield a successful investment.

Understanding the Tech behind the CleanTech

2008-04-09T18:50:00.002-04:00

CleanTech has been the hot venue for new venture capital investments for a couple years now as it offers great potential returns, revolutions in innovation and immense social benefits. Energy & Fuel is the by far the largest sector and it incorporates a significant amount of technology behind it so today I am looking at it from the VC review process. How big is the industry?

"Biofuels (global production and wholesale pricing of ethanol and biodiesel)

reached $25.4 billion in 2007 and are projected to grow to $81.1 billion by

2017."

Clean Energy Trends 2008

Clean Edge Inc. 2008

After all, CleanTech, just like any other industry for investment needs to undergo comprehensive due diligence to vet the deal. Here is an overview of CleanTech with an eye towards the tech behind the energy and what to look for:

Energy is a focal point as it addresses alternative fuels as well as storage (batteries, etc) and it is a potential world changer. We wary of any technology that maintains an established economic paradigm, eg any fuel that seeks to become the next oil as it will also face the same threat of obscelence.
Intellectual Property is a critical aspect to investigate as many fuels involve processes and formula that are hard to patent. Remember, in scientific IP one company can copycat the overall outcome or effect of another simply by altering the process or formula that defines the original. A formal patent search by a reputable and knowledgeable firm is crucial here (http://www.paulreinitzlaw.com/)
Ideally, convergent alternative fuel technologies are very attractive. This means a process or product with multiple wins such as using corn for biofuel then using the by-product for compost / fertilizer for a secondary revenue stream.

Basically, innovative ideas that can be owned and defended are what a due diligence assessment needs to reveal. CleanTech is big and it is the future but it needs to be vetted like any other investment deal.

Technology Transfer University offices as VC tech partners

2008-01-06T15:04:00.001-05:00

The never-ending battle:

An eternal part of the venture capital process is sourcing new deals. No competitive VC outfit merely sits around while anonymous business plans filter through their info@bigmoneyvc.com address on their website. In fact, many have proprietary channels they have forged to maintain a competitive edge and ensure the "first-look" luxury whenever possible.

Increasingly, VCs are turning back to university research for new breakthroughs and these often come in the form Technology Transfer offices which exist to commercialize and develop new ideas which are the property of the university.

I wrote an paper on the VC landscape while at Columbia Business School so please excuse me while I quote myself:

"Where will the new deals come from?

Sourcing is often a critical differentiating factor for VC firms. Bringing untouched, solid deals to the table is as important as appropriately evaluating them. Traditionally, many firms referred to their pipeline as a proprietary deal flow which often comprised of industry contacts, alumni relations and personal references. However, it has become necessary to broaden this scope of their deal nets. Ramana Jampala, partner at NYC-based SAS Investors, identified direct contacts with corporate entities regarding internal spinouts thereby providing a source of new deals within already functioning management. In addition to this, contacts with academic entities also yield active deal potential from their technology transfer units. Mr. Jampala cited the Columbia Science & Technology Ventures division as an active partner which they maintain contact with regarding new ventures."

Dan Davis

Evolution of the Venture Capital Landscape, 2007

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What tech firms do VCs choose to invest in?

2007-12-06T21:25:00.000-05:00

Interview with Ramana Jampala at SAS Investors, 2006, Columbia Business School

Who will VCs choose to work with?

Good Teams

Assessing the team is often more important than the business thesis itself. It is standard for investors to place heavy merit on the value of the management team they are reviewing. Relevant industry experience is critical but some investors feel that they are not truly comfortable with the team unless they have specific experience successfully running a similar early-staged company in the same sector, even going to far as to seek out entrepreneurs with established track records looking for a 2nd home run.

Good Technologies

It is interesting also to note how important qualitative factors have become in screening management teams. Mr. Jampala also noted that people seeking funding for their business should appear dedicated and “hungry” to succeed. This is what compels investors to put their money and faith in potential management team. While this may not be a radical change in the industry it seems that investors are openly acknowledging the need to palpably feel the want to succeed from entrepreneurs. These factors equate a longer and more thorough due diligence cycle including background checks, in-depth industry analyses, and

also technical diligence involving IT auditors (once again, a case for Tech Due Diligence) to evaluate the efficacy of products/technologies. This is even more the case with an experienced VC firm that learned from past mistakes and seeks to eliminate those pitfalls in any future deals they are involved in. The proper understanding of underlying technologies and their competitive advantage are a critical edge for any VC looking beyond the market size.