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1 of 4 - The Most Important Thing You Don't Know About Market Due Diligence

Posted by Jon Klein of The Topline Strategy Group on Wednesday, June 2, 2010 @ 9:00AM 

Blog Series: 1 of 4

When it comes to venture capital and growth equity investments, the bottom line is the top line. If a company can grow its revenue, then odds are it will generate a strong return for its investors. Market due diligence is a key component of determining the growth prospects, and therefore the return prospects, of an investment. However, the tried and true methods of market due diligence typically leave out one of the most important elements of measuring the opportunity - Pipeline Interviews.

In our experience, Pipeline Interviews - interviews with accounts that fell out of the pipeline without making a purchase - are rarely conducted during a market due diligence effort.  However, they provide vital insight into the true market potential of the company, a perspective that cannot be gained elsewhere. To understand why, we have created a series of blogs to explore the subject.  Next time we will  by looking at what is typically included in a market due diligence effort.

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This article was contributed by Jon Klein. Jon is the founder and general partner of The Topline Strategy Group, a strategy consulting and market research firm specializing in emerging technologies. Jon brings a unique blend of strategy consulting and hands on operating experience to The Topline Strategy Group and works closely with Semaphore on a variety of engagements.

To read the full White Paper, please go to Semaphore News and click on the May 3, 2010 link titled - White Paper - Market Due Diligence

Topics: Venture Capital, due diligence, diligence, market diligence, growth equity investments, Pipeline Interviews

Morning Person Lament: The Upside of the New Down

Posted by Mark DiSalvo on Tue, Nov 10, 2009 @ 12:41 PM 

I'm a morning person.  No, not the kind you are thinking.  The type that goes to bed at 2:30 or 3:00 AM.  You won't find me at a power breakfast at a fancy hotel at 6:30 AM as I'll be making breakfast for my 12 yr old daughter Celia and then jumping, OK, reluctantly climbing onto the treadmill.

My colleagues at Semaphore know that I will handle any evening event or red-eye required travel with abandon but asking me to be presentably lucid in the morning is an effort.  Nonetheless, I accepted an invitation to speak at a recent T-Cubed seminar to discuss VC consolidation.  Wheeling slowly down Rt. 93 and 95 (the roads are a lot emptier in the evening) grinding to the Foley Hoag Emerging Enterprise Center, I reflected on the VC industry.  All too often we at Semaphore in our funds-under- management practice see the worst - disengaged, incompetent sometimes outright criminal General Partners as we take over trouble Venture and Private Equity funds. On the other hand, it is pretty small proportion and many outstanding GPs work assiduously, engaging Semaphore for diligence on people, process, markets, strategy and technology to help make the right decisions.  

At 7:15 AM a room alive with beaming chattering entrepreneurs and PE professionals greeted me at the event cosponsored by RSM McGladrey, Silicon Valley Bank and Foley Hoag.

70+ of my newest bright eyed and ebullient morning friends quickly gathered, coffee cups in hand and half eaten bagels aside and got down to a "down" discussion. There's not much fun in talking about Venture Capital industry consolidation.  I'll leave my fellow panelists to speak for themselves except to say that Michael Greeley of Flybridge and Alain Hanover of Navigator are decidedly morning people in the more traditional sense, being more awake than this correspondent, as they capably presented chilling facts about the steep drop off in fund commitment (both in numbers of General Partnerships funded and the aggregate amount of dollars committed) and cogently offered the gathered entrepreneurs personal experience and simply great advice on how to deal with the adverse conditions of the moment.

I stated that we should welcome the consolidation of the industry.  All too long I have seen General Partners who should not have been funded get funds. Companies that should not have been started were flooded with millions of dollars.  Fund and effort that was unsurprisingly unproductive and portfolios that offered no return to the well meaning but under-skilled entrepreneur, venture fund partners or Limited Partners providing the investment capital.  In embracing the situation it seemed to me, to surprisingly frequent nods from the audience attending, that we should celebrate the upside of the new down circumstance. 

It should never be encouraging to an entrepreneur that they have been turned down by, say 12 VC's but then had another 40 identified in which to speak and appeal for funds.  That is unhealthy and unproductive for all parties all around.  I argue that it is a better and ultimately more profitable circumstance that fewer funds with fewer partners and analysts (but more senior partners) talking with a smaller but more talented pool of entrepreneurs seeking funds is a better situation all around.

VC funding is not for everyone and once or twice a cycle it seems like everyone can get it. It's like when your brother-in-law the car mechanic starts dabbling in spec home construction or "flip" real estate you know the housing market will crash.  The discipline of fewer funds will improve the market for every one as the funded entrepreneurs will receive money from the most appropriate VC and receive the most attention possible from them to leverage each party's cash, sweat equity and intellectual contribution.

Oscar Jazdowski capably played ring leader at our forum and he ably challenged panelist and questioners alike. What I found is that early morning people really do get the worm - and the best advice.  Those 70 early risers walked away with, at least, some level of intellectual stimulation, a contact or two, lots of metrics and particular insight on how to be prepared for the best possible funding opportunity that they may deserve. 

Some learned, disappointingly, that VC funding was not for them or that they were wholly undeserving to receive funds. No one had ever told them that before.  While perhaps stung for a moment, they got to spend the rest of a sunny bright day reflecting and acting on how and what they should do to move forward  rather than waste precious time chasing VC dollars and delaying dreams that were unattainable.  They got liberation instead of money - and that may have been worth more that any millions of dollars they hoped to have received.  At least until the cycle turns again and the VC investing in this current economic trough provide great returns resulting in allocation increases by LPs.  Then we'll get back to the point where I'll have to get up again in a future decade and give the same talk.  I can handle it once every ten years or so.  Now if only we could have a forum that started at 10 PM?  I'll buy the last round.

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (http://www.sema4usa.com/), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners around the world. Semaphore's corporate offices are in Boston with principal offices in New York and London.

 

Topics: Venture Capital, private equity funds, funds under management, general partners, limited partners, technology diligence, diligence, VC, market diligence

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