Trident Capital Blog

The Year in Review

With the end of 2009 upon us, I spent the last few days reviewing our activities during the year.  The year started better than we had prepared ourselves for.  January was not as bad as we had anticipated for our portfolio companies.  However, once February rolled in we all knew we were going to have new experiences.  Most of our portfolio companies reached bottom late June early July, since late August they’ve been seeing rays of hope, and most are expecting to have a strong yearend.

In October 2008 I had written about my firm’s thoughts on the economy, and the advice we had provided to our portfolio companies on how to survive during the recession.  We urged cost-cutting, assessing customer quality and risk, reducing debt when possible, and starting new initiatives only after very careful consideration.  The measures our companies took in response to that advice had the intended effect.  Our entire portfolio survived.  Even the weaker companies lived to fight another day, even if they didn’t grow in the way they had anticipated.

Some business models proved particularly strong and enduring during the recession.  For example, I had been reporting throughout the year that, by and large, three categories of companies were beating our expectations: SaaS application companies, branded response e-commerce companies, and performance-based advertising companies.  For a few companies from these categories 2009 was a banner year, since they grew by as much as 100% over the past 12 months.  The recent crisis also allowed us to assess the quality of our management teams.  The more experienced management teams were faster to take the right measures, whereas the less experienced teams required more prodding and handholding.  While many of our portfolio companies had to lay off employees during the 1H09, but they also took advantage of the talent available in the market to upgrade their teams (from the rank and file to the executive ranks).

While all portfolio companies survived, the economic conditions of the last 12 months have significantly set back the business plans of some.  These companies will require more support than we had originally planned (e.g., more investment than initially planned), and may not be able to begin growing again to have a successful exit. As a result, going forward we will need to be assessing how to allocate capital between these companies and the ones that are performing well and can provide strong returns to the fund.

About ten of our portfolio companies had to raise new rounds during 2009.  Consistent with our advice, it took them longer to complete these rounds than it would have taken in “normal” times.  But by appropriately planning for such delays they didn’t have to make drastic changes that could have spooked their customers and prospects.  Most of these companies were financed successfully and, in some cases, they closed up rounds.  We had to do inside rounds for only a couple of the companies which gave us the opportunity to re-assess our conviction for each company.  I should also note that portfolio companies that raised money after June had an “easier” time, since from July on VCs were actively looking for new investment opportunities.  In fact, since October the better-performing portfolio companies have been receiving calls from venture or private equity investors interested in leading pre-emptive financing rounds.

Even during this year we had two strong exits.  We sold Arantech and Datatel for very nice multiples in the process delighting our LPs.  We were one of the very few firms that provided returns during this difficult year, consistent with what we’ve done every year.  Moreover, we view the recent opening of the “IPO window” and the increasing M&A activity benefiting additional portfolio companies.  At present, at least half a dozen portfolio companies are involved in relevant discussions.

On a typical year we make 10-12 new investments.  During 2009 we completed only three new investments, in two internet companies and one cleantech company.  We considered several other opportunities throughout the year.  In most cases we didn’t think that the risk-reward profile of these opportunities warranted an investment.  In addition, during the first part of the year, the economic turmoil made us feel less certain about what terms to offer, particularly to later stage companies.  As I mentioned above, since July we consider that we have entered one of the best investment periods and we are actively looking for new opportunities.

Despite the optimism surrounding the economic recovery, we don't believe that the US economy is out of the woods completely.  We are still in the early stages of the economic recovery.  Even though during 2010 the IT budgets are expected to improve (2-4% growth) and the online advertising budgets will stabilize and may even grow by as much as 5%, we expect that the US may experience a W-shape recovery rather than a U- or V-shape one.  If this proves to be the case, then we wouldn't be surprised to see the IPO window closing again and investments in private companies becoming tough to come by.  For this reason, we continue to advise caution to our portfolio companies and to work closely with them as they navigate these uncertain times.

The Big Picture: Investment Trends and Themes

Last Wednesday I presented at an event organized by Janney Montgomery Scott, an investment bank, about the investment trends we are following and investing on.  l spoke about three large trends:

1.       The shift from offline to online in advertising and commerce

2.       The shift from on-premise to on-demand, or cloud-based, software

3.       The desire of corporations to utilize the data they generate or must access to.  This is big data

Oftentimes these areas intermix.  For example, some of the better campaign management applications used by online marketers are SaaS.  Online businesses are some of the largest data generators.

Within Internet we have been focusing on 2 areas: e-commerce and performance-based advertising.  The current economic environment favors the further growth of e-commerce globally.  We have continued to make investments in an area we call branded response that combines the sophisticated use of analytics to achieve low-cost customer acquisition and high per customer retention and Lifetime Value.  Thus far we have invested in 5 such companies in the US and China (Syndero, AccountNow, Zeo, Profex and Advanced Payment Solutions).  Even during the difficult past 12 months these companies have exceeded their financial targets and have grown by over 100% YOY.  For this reason we continue to look for companies that offer data, products or services that facilitate e-commerce. 

We perceive a huge demand for increasing the effectiveness of online marketing and advertising.  Online advertising is global, targeted, personalized and measured in ways that no other form of advertising can. Portfolio companies such as HomeAway, Turn and Sojern here in the US, as well as Elucido in India have been growing quickly because they provide differentiated and technologically advanced platforms.  We plan to continue investing in this sector looking for solutions that allow corporations to optimize their online advertising decisions and address post-sales customer engagement.

Cloud computing in all its incarnations (SaaS, PaaS and IaaS) and virtualization (of various layers in the IT stack) represent fundamental enterprise IT platform shifts and are attracting significant attention from corporations and investors.  SaaS applications, in particular, are being adopted by smaller and large enterprises because they provide superior TCO, faster deployment, and better overall value than their corresponding on-premise counterparts.  We have invested behind horizontal SaaS applications, for example business intelligence applications, and IaaS solutions such as Qualys.  More recently we started shifting our investment strategy towards vertical applications, particularly those offered by later stage companies.  For example, working with our healthcare IT team we have been looking for SaaS applications that allow payers to reduce costs, allow providers to enhance their revenue, and applications aimed at consumers.  Other verticals of interest include: energy, particularly applications that utilize the data generated by smart grids, logistics, and financial services and insurance.

Because the large IT vendors (Microsoft, IBM, SAP, EMC, etc.) are making significant investments  in cloud computing, we hesitate to aggressively invest in companies whose products will compete directly with those of the large vendors.  Private companies that develop cloud management solutions are of interest but today we see the space as being overfunded.  As it happened with other IT platform shifts, we anticipate that it will take a few years for cloud computing platforms to become established enough that will necessitate the appropriate management tools.

We monitor the adoption of server virtualization technology with great interest though we see few opportunities for new investments.  Despite the broad adoption of netbooks (particularly during 2009) we are skeptical about investments in client-side virtualization.  We believe that database and application virtualization may provide only selective investment opportunities.  However, we invested in Hytrust, a company that is developing security solutions for virtualized environments, because it combines security where we have been investing for several years and where we continue to see interesting opportunities with virtualization.

Data is becoming strategically important to enterprises as they become performance-driven.  It is also being generated in unprecedented volumes, particularly by internet portals, ad networks social networks, like Facebook, and e-commerce companies.  As a result, we are interested both in companies that can address the management and analysis of big data, as well as data companies that use technology to allow their clients to make better business decisions particularly in the areas of online marketing and advertising.

We have built broad experience (executive, client and partner networks, business models, technology models, etc.) in all these areas.  We will continue leveraging this experience in new investments we will be making in order to build them into successful and enduring companies.

Presentation at Fordham University for IBM’s Launch of Business Analytics Curriculum

Last Wednesday I presented at an event organized by IBM and FordhamUniversity ’s business school, around the launch of a new business analytics curriculum sponsored by IBM.  Earlier in the fall, IBM announced the establishment of a NY-based analytics center with 400 consultants.  Through its collaboration with Fordham’s business school, as well as through a similar collaboration with North Carolina State University ’s computer science department, IBM is hoping to gain access to qualified and well-educated candidates to staff its analytics services organization that will grow to 4000 consultants. 

Through surveys that were recently completed by business and IT leaders around the world, IBM has determined that the corporate interest in business analytics and information-based (rather than gut-based) decisions is increasing, while the number of qualified candidates who can help such organizations remains small.  Similar conclusions have been reached by researchers at Villanova University's School of Business in a study found here.  The Fordham program will educate individuals on how to blend business with quantitative analysis skills.  Today universities graduate “pure quants” that find their way to many corporations from Wall Street investment banks, to internet social networks like Facebook.  Pure quants have obviously strong quantitative analysis skills but relatively weak business skills.

I was asked to talk about the drivers for business analytics and their impact on investments in new analytics companies.  For several years Trident realized the importance of analytics in business decisions and has invested in several software companies that either develop applications and platforms to support the creation of business intelligence and analytics or their business is mainly driven by analytics.  Today almost 20% of our active portfolio companies belong to these two categories.  Moreover, we continue to look for additional investment opportunities in these areas here and abroad.

I see three drivers for today’s growing investor and corporate interest around business analytics:

1. Big data.  Data is becoming strategically important to enterprises of any size and type.  It is also being generated in unprecedented volumes. This is particularly the case with Internet companies.  Yahoo, Fox, AOL and some of the larger ad networks routinely generate upwards of 100 TB of data per year each.  Facebook is generating an order of magnitude more data than that.  Once prepared for analysis, the size of each such data set can triple in size.  By comparison, in the 90s, when I was running IBM’s BI Solutions organization and later when I was the CEO of Customer Analytics, we were dealing with data warehouses that contained, at most, a few terabytes of data and most frequently only a several hundreds of gigabytes.  To analyze big data in an impactful and timely manner, we need new data management paradigms (e.g., we are starting to see the broad use of column-based databases, and the emerging use of Hadoop by a variety of organizations across several industries) and new analysis paradigms that efficiently combine solid analytic techniques with business/industry knowledge, practices, etc.
2. The quest for performance-driven decisions.  Corporations are moving from report-driven decisions (where business intelligence was used only to passively present historical data so that a business executive can make decisions) to performance-driven decisions where analytics are used to, oftentimes automatically make decisions that impact corporate performance.  For example, ad networks combine sophisticated analytics with novel data management to determine within a few milliseconds which ad to show an Internet user.  Sophisticated optimization techniques are used by ecommerce companies to determine the price of keywords used in search advertising or the price they will pay for a new customer lead.
3. The need for broadening the corporate use of analytics.  In their quest to achieve analytics-driven decision-making, corporations are accelerating the use SaaS BI and cloud-based analytic solutions because of their lower total cost of ownership, speedier implementation compared to their on-premise equivalent solutions, and support of community-based and collaborative problem-solving.

Realizing the impact of analytics-driven decision-making, corporations are now thinking about analytics while designing new business processes and the associated applications, rather than after the fact, as was happening to date.  By comparison, we used to build data warehouses and BI applications by extracting and reporting on data from systems that had been around and were never designed for analytics-driven decision-making, e.g., ERP systems, or supply chain management systems.  Today, most state of the art applications are designed with an analytics component instead of being fitted with one. 

Over the next couple of years we will be able to assess whether Fordham’s business analytics curriculum will have the desired impact and provide IBM with a rich pipeline of analysts that combine the right mix of the business and quantitative skills needed to satisfy the corporate demand for analytics-driven decision-making.