About Us Our Team Our Investments News Investor Info Blog

Archive for the ‘Aquisition’ Category

Enterprise Software Startup Valuation

Sunday, February 10th, 2008

Not a blockbuster headline, but I just noticed that Workplace, Inc. bought Cape Clear. I had never heard of Workplace before, they sell various Enterprise applications using a SaaS model. I had heard of Cape Clear, they are (were?) a pretty welll known Irish startup in the Enterprise Integration\SOA space - providing Enterprise Services Bus middleware.

Most the articles I have seen about the acquisition focus on the aspect of how integration into existing systems is a key capability for SaaS players, and that the Enterprise middleware space is rapidly consolidating. Makes sense, but for me what is more interesting is what this says about enterprise software startups and their valuation. The details of the deal are confidential - but I am guessing that the deal isn’t a blockbuster (given the size of the acquirer), and I’d be surprised if the deal was for more than $50M (maybe much, much less), all stock. Now according to Joe Drumgoole’s blog about $48M has been invested in Cape Clear over the years - so a $50M exit doesn’t leave much for anyone. Here is his list of Cape Clear investments:

  • 2 Million in seed funding from ACT in 2000
  • 16 million in Series A funding from Accel and Greylock in 2001
  • 10 million in Series B funding from Accel and Greylock 2003
  • 5-10 million: A phantom series C round raised as a set of warrants amongst existing investors. It was never press released and their is no mention of it on the net.
  • 15 million in a series D round in the last few weeks (April 2006 - Jacob) with InterWest

Cape Clear seems to have been a “technology” acquisition for Workday - which brings me to my point about Enterprise Software startup valuations. It is very difficult to become a stand alone player in Enterprise software (especially with all of the consolidation going on), and if you aren’t a viable stand alone enterprise software company - well that means you need to plan for the fact you will be acquired - probably for technology. To make sure that a technology acquisition is a viable exit path you need to make sure your valuation isn’t too high in the early stages. Enterprise technology companies seem to sell for $15M-$100M, depending how strategic they are to the acquirer - but require a lot of money in the later sales and marketing phases.

So make sure you don’t over value your company early on, it will come back and bite you later.

Microhoo - My Thoughts on a Microsoft-Yahoo Merger

Sunday, February 3rd, 2008

Well, it is in the news everywhere, the possibility of a $44B Microsoft/Yahoo merger.  Given that I have spent a lot of ink discussing how to manage mergers after they happen - I find it hard to believe that this merger will actually end-up as a net positive for either company over time. The companies are just too different. Yahoo has been spending the last few years making itself into a media company (though lately they have been talking about getting back to their technical roots), and Microsoft is, in the end, a software and engineering company. My guess is that it will be hard for the merged “Microhoo” to be both a media and software company at the same time, which will cause enormous tension w.r.t to management attention and resource allocation. I wouldn’t want to be the one who has to make that merger work…

Another point that has been discussed ad-naseum is whether this will help or hurt the start-up eco-system. I attached a table taken from the Israeli government website about recent acquisitions of Israeli comapnies. Taken in a purely Israeli context it will probably be a net plus. First of all Yahoo has been a complete non-player in Israel, while Microsoft has both a large presence and made three acquisitions lately (see the table below). People are right that Microsoft will be busy for a while digesting the acquisition, which will slow its pace. The good news is that it will probably cause other players to pick up the pace of their acquisitions - AOL (which bought Quigo and Yedda which even aren’t on the list), Ebay which has bought Shopping.com and FraudScience (also not on the list). Maybe even some of the other advertising\internet players - e.g. Google, Amazon, IAC, News Corp. will start acquiring differentiating technology in Israel which would more than make up for any slowdown by Microsoft.

Recent Israeli m&a activity chart

Increasing Your Chances of Success as an Entrepreneur

Tuesday, November 20th, 2007

I am revisiting the topic I mention in my previous entry on “Overconfidence and Entrepreneurial Behavior” because of an interesting post I found on the subject by Bob Warfield. He points at a study from the Harvard School of Business, that essentially comes to same conclusions about experience as the Israeli study in my previous post, but has some interesting insights that are useful to a first time entrepreneur.

First their definition of success is different than that of the Israeli study - success is effectively defined as an exit (closer to the hearts of most VCs than the definition used by the Israeli study). Here is my summary of their findings:

1. Entrepreneurs who succeeded in a prior venture (i.e., started a company that went public) have a 30% chance of succeeding in their next venture. By contrast, first-time entrepreneurs have only an 18% chance of succeeding and entrepreneurs who previously failed have a 20% chance of succeeding.

To be honest the relations seem about right - though the actual numbers seem a bit high, but maybe it isn’t if you take into account that an exit doesn’t necessarily mean that money was made.

2. Companies that are funded by more experienced (top-tier) venture capital firms are more likely to succeed. This performance increase exists only when venture capital firms invest in companies started by first-time entrepreneurs or those who previously failed. Taken together, these findings also support the view that suppliers of capital are not just efficient risk-bearers, but rather help to put capital in the right hands and ensure that it is used effectively.

This is really important news for entrepreneurs (since you really can’t just increase your own experience) - if you don’t have the experience yourself, you should “buy” it. Choose your investors not just on the basis of money, but on the basis of their experience, and how much of that experience they are willing to put into a company (one day a month just isn’t enough). Or, if you can then you should hire the experience even though it is expensive. If you look at the numbers in the study - by getting the appropriate experience on board - you can increase your chances of success by 7%-12%

3. The average investment multiple (exit valuation divided by pre-money valuation) is higher for companies of previously successful serial entrepreneurs.

in other words - by getting the appropriate experience on board, you can not only increase your chances of success - but leave more money in your pocket when you are successful.

So for me the study proves the model that we are using at eXeedtechnology, while expensive, is the right model for entrepreneurial success (early heavy involvement of experienced industry veterans as an integral part of the startup). While it doesn’t increase your chances of a home run (which seems to be heavily predicated on luck) – it significantly increases your chance of a successful exit.

The Long Road towards Integration – Appendix

Sunday, October 28th, 2007

I was at Journey 2007  (E&Y’s yearly conference for startups and VCs) last week – it was an OK conference, a good way to catch up with people I haven’t seen for a while. I did sit through one interesting panel on Mergers and Acquisitions, and heard some additional insights that I would like to add to my “Long Road to Integration” series. The points reiterate some of the points I have made before, but I thought it was worth posting them anyway – since the whole panel more or less agreed with them.

The first is that there is no such thing as a merger of equals – the larger company ACQUIREs the smaller company – and make sure you understand that before you go into the transaction. Also, the bigger size difference between the company, the greater the chance for a successful outcome.

Even though you may need to let the CEO go, make sure you keep on the 2nd a 3rd level management at the company. They are what keep things ticking.

Finally, since culture issues are a large culprit in the failure of an acquisition the acquiring company should appoint a SPOC.

The Long Road towards Integration – Part 4

Sunday, October 21st, 2007

I am sort of surprised that I am back on this subject again, but when I read that Microsoft’s Ballmer plans to buy 20 smaller companies next year (Ballmer: We Can Compete with Google) it drives home for me the importance of being able to integrate well in the aftermath of M&A. My best guess is that those 20 companies will include 1-2 large companies, the rest being small and midsize companies - companies that are “innovating in the marketplace” (a term we used to use at IBM Research). So Microsoft is effectively outsourcing a good portion of their innovation, and placing a big bet on being able to integrate these acquisitions into the fabric of Microsoft.Thee types of smaller acquisitions seem to be in the cards for IBM and Google - and I think more and more technology companies will be outsourcing their innovation this way - augmenting internal “organic” growth with external  ”inorganic” growth. Oracle seems to have gotten this down to an art (though they tend to swallow whales rather than minnows), and even SAP has jumped on the bandwagon. One issue that will clearly come with these acquisitions is how the acquiring company doesn’t kill the spark of innovation that exists in these smaller companies  (of course that is assuming that they want to keep the innovation alive, and aren’t just buying a specific technology or existing product.I had the opportunity the other day to speak with someone that was on the Corporate side of an acquisition and discussed what was their thought process at the time of the acquisition, and how that differed from how things turned out after the acquisition.One thing that struck me was that both sides were fooled since they were (paraphrasing Bernard Shaw)  ”two companies separated by the same language”. The company being acquired thought they were communicating important information about the acquisition, but it turns out that they were using internal shorthand to describe people and situations, which were interpreted completely differently by the other side. This was probably exacerbated by the fact that one side was Israeli and the other American - but it could have happened with any two companies - especially when there is a high impedance mismatch between the two (or in English - the companies are of very different size). . For example when one company said a manager “kept the trains running on time” - they meant a clerk that could keep to a schedule - while the other side thought  they meant someone could manage a complex system with all its nuances and make sure that it keeps working. Understandably these kinds of miscommunications caused a lot of faulty decisions to made during, and right after the acquisition.In my experience it takes about 9  to 18 months until the sides really start to understand each, how the other side works - and how they need to work together. That is assuming that everything goes smoothly. If you try to speed it up too much - you will end up killing the innovation, and you may end up killing any possibility of a successful acquisition.So what is the bottom line? Assume that you will need to keep the current structure of the acquisition intact for about a year before you can make any drastic structural or strategic changes. See the rest of my recommendations in previous posts - and perhaps hire a consultant that has been there and can help smooth the transition.

The Death of Enterprise Software Startups?

Tuesday, October 2nd, 2007

In Israel, it has become close to impossible to get an investment for an Enterprise Software startup, even worse than in the US. One of the main reasons is that enterprise software sales are hard, and expensive ( a lot of high cost man power, and long sale cycles) - which is true. Everyone is looking at models to get around those issues (e.g. open source, SaaS), but fundamentally it remains an issue.
Not that there aren’t problems or opportunities in enterprise software (see The Trouble With Enterprise Software for a nice overview of some of the issues), there are huge issues with enterprise software, and SOA (Services Oriented Architectures) are no panacea. So opportunities for technical innovation abound, it is just that most VCs don’t believe that it is a good investment of time or capital. Since VCs are awfully busy, and have more on their plate than they can handle, once this is a “rule-of-thumb” it is hard to get their ear.
I think this will have grave implications for Enterprise IT shops (and vendors). In last few years most large IT vendors have gotten into the habit of “outsourcing” their technical innovation - they buy companies rather than develop the technology in-house. If the VCs stop investing - then in a few years, innovation in the enterprise software market will dry up. Given the current state of enterprise software, that can’t be a good thing….
I think that things will change - since there is still a lot of money in enterprise software and large vendors need technology, someone will have to provide them with it. Enterprise software companies probably will have smaller chance at IPO - but given the relative lack of competition they should have a better shot at M&A. The trick is to have unique, innovative technology that solves a problem for enterprise IT departments – or even better, for the business. I also think the pendulum has swung too far, and will swing back in a couple of years - making any investment done now, much more valuable in the future

HBR Article on Acquisition and Integration

Wednesday, September 12th, 2007

Haven’t posted lately. Not sure why (the kid’s summer vacation didn’t help much), but just couldn’t find the time. I read a good article on Acquisition and Integration in the September edition of Harvard Business Review (Rules to Acquire By - Bruce Nolop) which gives insight into how Pitney Bowes does acquisitions.  I especially liked the differentiation between “bolt-on” and “platform” acquisitions.

 However, even though all the points were right on, but I thought it was interesting that for the most part focused on things that need to get done before an acquisition takes place (probably makes sense given his CFO perspective).  I would like to see a similar article on “post-acquisition” since I have found that even if an acquision is made for all the right reasons - unless great care is taken for the first 12-24 months of the acquision to the integration process - the acquision will fail to live up to its promise (or just fail…)

Israel Chief Scientist Grants - Should Startups Use Them?

Thursday, July 26th, 2007

I was just looking at the new version of Israel’s “Chief Scientist’s Law” (the new version - updated June 2005) Encouragement of Industrial Research and Development Law 5744-1984. For those of you unfamiliar with this government program - it is essentailly a loan program to startups (and other manufacturing\technology companies) that is repayable as royalties or as a settlement on sale of the company. Companies submit proposals to the Office of the Chief Scientist, which decides on the merits whether to provide funding. The law itself is relevant for both manufacturing and IP based companies - but for most start-ups, the rules regarding IP are the the more interesting.

So is it worth it? Seems like easy money - right? Fill in a few forms, talk to a few people and get some serious funding. So whats the catch?

In general the law tries to be fair - if there is a sale of the company the government gets a percentage of the sale value relative to the amount invested, plus interest. More or less like any VC - except the calculation seems to be as if the investment is the relative part of 100% of the company ((government_grants/all_investments_in_company)*sales_price) - so what about the founders and employees? Is that supposed to be only out of the other investors share? Well, for that there is clause 19B.j.1 “The Ministers may affixx rules for calculating the Sale Price in a manner that will take account of the shares that have been issued to entrepreneurs and employees otherwise than for cash ” - besides the weird english (well, it isn’t an official translation) - it seems to say that the government doesn’t have to actually leave anything for the founders and employees from thier part of the proceeds, but they may decide to…

However, the biggest problem is with uncertainty that the law creates with the transfer of IP outside of Israel in the event of an acquisition. They allow for the transfer based on the decision of a committee (described in text of the law) - which according to the wording doesn’t have to allow the transfer of IP (though in most cases it probably will). Not being able to transfer IP abroad could kill an acquisition - or make it less valuable to the acquirng company. Many international corporations (e.g. IBM) require that all of their IP belong to corporate - so if the IP can’t be transferred, the IP remaining in Israel could be an issue - and will at least be a price negotiation point.

So if you are facing a choice between closing the company (or not getting off the ground) and taking Chief Scientist money - take the money - but make sure you know what you are getting into. Like with any transaction - caveat emptor…

Related reading: Export of Technology Developed With Chief Scientist

Patents and Israeli Startups

Friday, July 20th, 2007

Patents aren’t cheap, but they are important. Besides the time and effort, it will cost you somewhere between $5K-$15K per patent. As a startup you ‘ll need to worry about a patent portfolio that provides you with real value besides the obvious one - responding to a VC’s query about the IP protection you have, barriers to entry etc. So how do you go about creating a patent portfolio? Here are some of the considerations you should take into account when deciding what to patent:

  • Freedom of action - what is key to making sure that you can build the products you need to be successful, without anyone being able to stop you.

  • Leverage for partnering - allows you to provide unqiue partnership value that (hoepfully) people are willing to pay for. And it is cool to say “patent pending technology”.

  • Block competition - keep others from doing the same thing. But don’t really count on this, since this is usually relatively hard. Given that there is usually more than one way to do things - how do you tell if a competitor is actually using your IP without a costly trial.

  • Due diligence and M&A - worst comes to worst, you can sell your IP portfolio. However, this is really a last resort since patents without skills are usually not considered all that valuable as an acquisition. However some key patents can  increase your value in an acquisition.
  • Generate revenue (and especially profit) - this actually a possible, but very difficult, business model to implement (e.g. Qualcomm as an example). Be honest with yourself - what are the chances that someone will pay big bucks for access to your patent portfolio….

The basic steps in creating your patent are:

  • Invention - Discovering something that is unique and valuable and then deciding which parts are worthy of the time and effort of a patent.

  • Competitive Analysis - Should be done by the inventor, rather than attorney, since the inventors understand the domain better than anyone. You can find helpful resources at http://www.uspto.gov/ and http://www.google.com/patents.

  • Provisional Patent -doesn’t really provide protection, buty does allow you to set a date of inventtion. For the few hundred bucks it costs, it is usually worth it. In your provisional patent you should document as much as you can about the invention. Don’t forget you only have a year to submit the actual patent - don’t wait until the last minute.

  • Write patent  - Expect to spend significant time writing, explaining and reviewing.

  • Submit and wait - and decide where you would like to submit.

  • Modifications - the patent office will probably come back with questions and issues (though not quickily, it can take a couple of years for a patent to be reviewed)..

 

The Long Road towards Integration – Part 3

Thursday, July 19th, 2007

Well, I guess you learn something new every day.  

A super critical requirement is a headquarters SPOC (Single Point of Contact) for any decision concerning the remote location - for any decision that comes out of HQ that is not day-to-day business as usual. Someone who cares about the over health and well-being of the lab, even for things that don’t directly effect them, or their department. This is especially true if the remote location consists of a conglomeration of smallish groups reporting to different HQ functions. Otherwise, the different HQ departments will try to optimize things for their own group - but these local optimizations can a have a huge impact on the overall health of the lab - which won’t be noticed until it is too late (unless their is a SPOC).

For example, two HQ departments  could decide to streamline their organizations and remove some positions - for example each decides to remove one person in the remote location.  Even though each decision on its own makes sense - taken together it could have a very negative effect on the remote location - lowering moral and motivation. Cleaning up the fallout could take months….

So make sure you have a SPOC. Live long and prosper!