Trident Capital Blog

Trident Capital Internet Portfolio Company Summit

On Friday my partners and I hosted in our office in Palo Alto a meeting with the executives of our online advertising and ecommerce companies.  Executives from Syndero, HomeAway, Zeo, AccountNow, Advanced Payment Solutions, Turn, Sojern and Tellapal participated in the meeting.  The purpose of the daylong meeting was to enable the participants to exchange information and best practices for customer acquisition and improving lifetime value (LTV).  Below are some of the major points that were made during the day:

1. Being best in class on customer acquisition implies combining the right people, an efficient process, and best in class tools.  The process typically being used involves: creating a control group, hypothesizing a particular behavior of this group that will be capitalized during the marketing campaign, testing the hypothesis on the desired customer touch points (email, search, display, affiliates, etc.), analyzing the test results, learning from the analysis and optimizing, forming a new hypothesis, repeating.  As one of the participating CEOs mentioned “every minute, some aspect of a customer acquisition campaign is being optimized.”
2. Social media is becoming an increasingly important channel for generating interest in a category but once a company starts promoting their particular brand through the social channel, user engagement appears to drop.  Word of mouth is important but it has not yet been integrated effectively with social media.  This is an area that holds great promise and where the participating companies will be investing over the next 12 months.
3. Test and measure every parameter that goes into customer acquisition.  Best in class companies can manage very complex test matrices.  It is important to be able to quickly hypothesize and test offers, creative, etc.
4. The right analytics around the data being collected define best in class companies with the lowest customer acquisition and retention numbers.  Our portfolio companies, by constantly sharing best practices, have moved beyond measuring the effectiveness of customer acquisition campaigns in terms of clicks, and impressions, i.e., website analytics.  Instead they are now measuring the impact of each customer interaction on a particular outcome. 
5. While companies are investing heavily on improving the quality and the uses of the data they capture through their customer interactions, they were less definitive about the impact of data they purchase from data exchanges.
6. A good off-the-shelf software platform for direct response/branded response doesn’t exist (investment opportunity?).  The portfolio companies have created such platforms by manually integrating stand-alone applications.  As a result, the operational complexity of working with multiple applications rather than a single platform presents a big challenge for marketers.  Good direct response software platforms can be used not only to improve the effectiveness of customer acquisition and customer retention of existing products, but they can also be used to effectively test the likely success of new products before introducing them to the market. 
7. Success with online channels is leading our ecommerce companies to start experimenting with offline channels such as Direct Response TV.  Every test associated with an online customer acquisition campaign can become a leading indicating for the effectiveness of a corresponding offline campaign.
8. The companies are being proactive about data privacy issues.  They are using services, including legal services, on how to best safeguard and use the data they collect and what to include in the creative they test for customer acquisition.
9. Metrics on how to calculate lifetime value per customer are still evolving.

Not only were the executives able to share best practices and share ideas about how to improve the operations of their respective companies, but after the meeting ended several stayed behind working on business deals between their companies.  A great way to end the week!

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.

Trident Branded Response Companies Show Significant Growth in 2009

While the overall consumer economy continues to struggle, we have found resilient performance in branded response marketing. Revenues for Syndero , AccountNow , Advanced Payment Solutions and Zeo , four branded response Trident portfolio companies, are in aggregate up almost 60% year over year for the first half of 2009 and are expected to continue their aggressive growth in the second half.

Branded response (for some additional discussion see here) is an evolution in the concept of direct response marketing . Similar to direct response, branded response focuses on marketing efforts that drive specific, and quantifiable actions from the target customer.  In this way the marketer is able to evaluate the effectiveness of the marketing dollars spent. In addition, through branded response the marketer can simultaneously formulate and execute a brand strategy. If executed well, a branded response campaign can quickly create a large, loyal base of customers that generate recurring revenues and brand equity. 

AccountNow, a Trident portfolio company since 2007, has successfully built its business leveraging branded response. The Company offers consumers a prepaid debit card that effectively acts as a virtual bank account, allowing consumers to deposit checks and get access to cash without using expensive check cashing services. While the company builds its customer base primarily through online channels, it is important that it is viewed as a strong financial institution that its members can trust. This trust is centered around the AccountNow brand.  The customer’s positive association with this brand increases usage of the product, which, in turn, drives revenues and profitability.

Branded response marketing ensures that marketing dollars are spent efficiently and generate long term profitability. Advertisers who are evaluating how to allocate their dollars are increasingly turning to online advertising because of the ability to continually assess the ROI of their spend. This drive towards accountability has only been sharpened by the economic downturn. Corporations want to evaluate revenues generated from their marketing campaigns and optimize their marketing spend by marketing initiative and by media channel. While this level of detailed tracking is still in its infancy in much of the online advertising market, it is at the core of branded response.

Branded response represents a very attractive and unique investment opportunity.  It enables a company to quickly make significant sales with a relatively limited capital outlay and a moderate level of risk. Executing on this model, however, is not as simple as it sounds. According to Brad Klaus, the former CEO and cofounder of Trident portfolio company Syndero, “Branded response marketing requires a unique skill set – the ability to combine knowledge of online marketing, analytics, online commerce and consumer products.” These skill sets must be applied to the reams of data that drive the business model – and in order to do that, management teams must have best in class data collection and analysis tools. “Having the right tools to help in the decision making process is critical” says Tim Coltrell, CEO of AccountNow. “Trident has been invaluable in helping us deploy best in class tools to improve our sell through and customer retention rates as well as manage costs.”

Brad recently joined Trident as an entrepreneur in residence after helping to grow Syndero at a CAGR of over 200% during the first four years. He will be working with the Trident team to help discover and develop additional opportunities in the space. Brad’s expertise as a successful entrepreneur as well as his industry contacts as a board member of the Electronic Retailing Association will be invaluable in helping Trident continue its successful track record in the sector.

Branded response and, more generically the increased use of data analytics in online marketing will also drive opportunities in the ecosystem of online marketing and e-commerce. Trident’s online commerce companies such as Homeaway , Kayak , and HipDigital are adopting many of the same strategies for online customer acquisition that companies like Syndero and AccountNow utilize. Other Trident portfolio companies like Turn, Sojern and Merchant e-Solutions provide tools to online retailers to help them improve their customer acquisitions and online commerce.

Trident is leveraging its acquired expertise in this sector to help its relevant portfolio companies adopt and apply best practices and them to success faster.