10.31.05

Strategic Investment Structure I

Posted in Technology Ventures at 5:09 am by Ray Wu

As I talked about in my last blog, strategic investment has different focus from pure VC investment. As such, strategic investor might ask for a side letter with a few unique items depends on the investment intent. Below are some of the interest items strategic investor might ask for.

  1. Observer board seat. This is a balance act between liability and visibility. Strategic investor wants visibility without liability. This is a quick and easy way to get an insider’s view without too much liability although the situation is changing.
  2. Right of notification, right of first negotiation, right of first refusal etc. These are used to have visibility into a potential transaction by a competitor so that a strategic investor can move in first to protect its investment interest. Ask if you need to know more.
  3. Block list of acquirers. Typically, a strategic investor does not want to help to build a startup, and then allow it to be taken away by its competitor. Whether it is used depends on how strategic an investment is. This should be considered carefully by founders since it reduces the potential exit options and future financial outcome.
  4. Publication right. Some strategic investors might want to protect its strategic intent and not allow the investment to be public. For that reason, a publication right requires the startup to check with the investor before making its any kind of announcement associated with that investor.

Depends on how strategic an investment is, there are various other ways to balance the strategic intent with financial outcome. As a startup, you need to be careful to understand pros and cons of what a strategic investor can bring to the table.

10.26.05

Strategic Investment vs Venrture Investment

Posted in Technology Ventures at 5:10 am by Ray Wu

I have been on several panels now about this topic on what is different between corporate investor and venture capitalist. Even though there are several types of corporate investors out there, majority of them are driven by business rationales than financial returns. Financial return or IRR is very important and normally run through an approval committee to ensure money is properly used, but it is not the main criteria why a corporate invests. Think this way, if I put in $10M in a startup and it becomes pretty successful and return 100% in a year, that would only increase revenue by $10M. But if that $10M creates a new market and brings a unique advantage for corporation like HP, that investment would likely to return hundreds of millions in revenue in business terms. In a way, corporate investment is a leverage to help business to succeed, not vice versa.

Corporate investors look at a variety factors to make investment decisions, here are some examples:

  • Access to proprietary technology or intellectual property such as patents
  • Reach to a new market or a new customer base
  • Talents or know-how that are important to the company in the long run
  • Speed to market for certain offerings
  • Learn about a new market and technology without internal investment
  • Etc

I will address this topic in the next several blogs to bring more light why corporate investor think and structure a deal differently

10.24.05

Location based services

Posted in Technology Ventures at 5:10 am by Ray Wu

Continue on the edge expansion theme, there are more and more location based services (LBS) available in the market place. Since cell phone are more advanced in Europe and Asia, I see more adoption of LBS outside of US. But with the E911 requirement in the states, there is growing interests from VCs to fund LBS companies.

The revenue model comes in from many different sources:

  • location-based ads
  • vehicle telematics
  • subscription mapping services
  • business asset tracking etc

Here are some interesting startups:

  • Telcontar: software and platform for location based services
    ** VCs: Norwest Venture, Cardinal Venture Capital, Ford Motor, Mobius Venture Capital, WI Harper
  • uLocate Communication: location-based services (LBS) focused on the consumer and small-business markets
    ** VCs: GrandBanks Capital, Kodiak Venture Partners
  • Wavemarket: location based blogging and alerts
    ** VCs: DFJ, Nokia/Bluerun, Intel, Telecom Italia
  • InfoMove: safely deliver personalized information to consumers while in the vehicle
    ** VCs: BSquare, Copan, Encompass Europe, Garage.com, Mitsui Comtek, NTT-ME, The Broe Companies

10.20.05

Exit strategy for technology companies

Posted in Technology Ventures at 5:11 am by Ray Wu

I was part of a panel in a NYC event this week. One of the interesting discussion topics is on the exit strategy for technology companies between M&A and IPO. Overall, the general ratio is 20:1, highly tilted towards M&A. Even though IPO has always been a symbol of success for many entrepreneurs, the chance for a startup to go IPO with a bang is definitely harder than a few years ago due to higher revenue requirement and SOX compliance. Take SOX for example, SOX will cost a company somewhere between $1.5M - $2M per year. If a company has a net margin of 15%, that would translate to $10M - $13M per year in additional revenue to support just the basic compliance service. This does not even take additional board/governance/insurance cost and risk into consideration. With rapid consolidation in technology space such as Oracle’s acquisition of Peoplesoft and Siebel, and waves of private equity rollup in technology companies, the IPO breakout for a startup is much harder now.

This raises an interesting question on what makes sense to position a startup. If a company is structured for M&A exit, then it should be positioned correctly up front, be really careful with venture funding intake, stay narrowly on product/service focus and excel, and try to establish a defensible position through patents and customer base. Another approach is to stake in an international market, try to be a leader and then get acquired by US leaders with a premium.

10.12.05

Globalization

Posted in Technology Ventures, Globalization at 5:12 am by Ray Wu

As a native Chinese, I love globalization and impact of that in Asia Pacific. Some of the technology advancements are amazing to look at. For example, South Korea is one of the leaders in broadband usage. In a country of 48 million people, there are 12 million broadband lines that pump data between 20 to 400 times faster than the old trusted 56K dial-up telephone lines. Of the nearly 16 million Korean households, 78 percent now have a broadband connection, which is more than four times the home broadband penetration rate of North America. China also expects 200 million Internet users by 2005, and majority of these people will be on high speed Internet. What this means is that digital entertainment, online gaming, digital TV, voice/video/data integration are all reality in Asia market, but not possible in the US because of current last mile rollout issue. Also, the advancement in wireless technology and functionality of cellphone handset is at least a generation ahead of US.

10.11.05

Vertical Search

Posted in Technology Ventures at 5:13 am by Ray Wu

Vertical search has become a new phenomenon in technology space with many startups created in the last year or so. In essence, vertical search is a fancy word for search aggregation where search targets at a single area of vertical domain, (ie. job or merchandise) and aggregate data from multiple data sources so that consumer can find information from a single place. This is useful only because google can not find relevant data within a defined space without search context. Long term sustainability against google/yahoo of the world is unclear, but consumer benefit is definitely there for this model to make sense.

Some of the top leaders include:

  • Jobs: indeed.com, simplyhired.com, jobster/workzoo
  • Travel: kayak.com, cfares.com
  • Event: fatlens.com
  • Shopping info: become.com
  • Classifieds: oodle.com, kijiji.com
  • Blogs: feedster, topix.net

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