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3 of 4 - The Most Important Thing You Don’t Know About Market Due Diligence Continued:

Posted by Jon Klein of The Topline Strategy Group on Thursday, June 17, 2010 @ 10:00AM

Blog Series 3 of 4

Pipeline Interviews: The Missing Piece


At this point, you may be thinking, "The analysis addressed the overall market size, the potential penetration of the market, and the company's likely share. Shouldn't that be enough?" Actually, it isn't. The typical due diligence process is based on the critical assumption that the accounts that have purchased a solution from the company or its competitors are fundamentally the same as accounts that have not yet purchased. Given enough time, the non-buyers will eventually buy a solution if it has a strong value proposition.

But what if that assumption is wrong? What if the accounts who haven't bought are somehow fundamentally different than the ones that already have purchased in a way that isn't obvious from segmentation factors like size or industry? If that is the case, then ‘I haven't purchased yet' becomes ‘I'm never going to purchase' and the market is far smaller than calculated. And, if the market is smaller than you calculated, the company may never reach its revenue projections.


Pipeline Interviews: Interviews with Accounts that Fell Out of the Pipeline without Making any Purchase



So how do you sort out whether or not you have an ‘I'm never going to purchase' problem? The answer is through Pipeline Interviews. Only prospects that have had sales interaction with the company but decided not to purchase anything can answer this question. They know whether their decision not to buy is primarily a timing issue or is due to something more fundamental.

Continuing with the CRM for Law Firms example, it turns out that approximately 30% of law firms with over 100 people have a fundamentally different selling model than one that is supported by a CRM. Examples include firms who primarily serve consumers and those that focus on a very narrow subspecialty and act as a subcontractor to general practices. These types of firms will never buy a CRM system since it doesn't fit their business.

In this case, the market turns out to be about 70% as large as calculated using traditional methods.   We have conducted numerous due diligence projects over the years where the market turned out to be a fraction of the size originally believed, including:

  • A company providing translation management software where the real market turned out to be only 10% of the original target: $1B+ companies with 25% or more of their sales overseas. Many industries, such as aviation, do business solely in English everywhere, regardless of local language and do not need translation. Others, such as packaged goods companies, develop custom materials in each market and do not need translation either.
  • A company providing software simulations for training repair technicians on maintaining products found that the real market was only 25% of the original target: $500M+ companies that provide low and medium tech equipment such as lawn mowers, pumps, and oil field equipment. Because the process of repairing each product is unique, a separate simulation is required for each product. For the cost of a simulation to outweigh its benefits, the product either has to have very large sales (over $100M/year) or a very long lifecycle (10+ years). The Pipeline Interviews revealed that most companies did not have a single product with sufficient sales (they had a wide range of smaller products) or a long enough lifecycle to make a simulation economical.


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: due diligence, technology diligence, technology, diligence, market diligence, Pipeline Interviews

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.


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 (, 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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