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SOMETHING VENTURED: Scouting Out The Hidden Jewels By DANIEL
ROSENBERG Of DOW JONES NEWSWIRES
Find the right company with the right product and the right management team - and get the right deal. "That's high-level apple pie and American flag," said Marty Mannion, managing director of Summit Partners, a venture capital company that manages over $5 billion and invests in a variety of industries. But there's more to it than that, Mannion and others in the industry say. Sometimes finding the right company means digging a little deeper and isolating characteristics that make one firm stand out from a crowd of competitors. For Mannion, the make-or-break factor can be a company's balance sheet. "A company that has a good balance sheet typically is better than you think, and one without a good balance sheet is usually worse," Mannion said. In the go-go 1990s, investors were less likely to closely examine the nitty-gritty financial details. But in today's more conservative environment, such focus can pay off. When surveying a possible investment, Mannion said, he looks at the company's days-receivable record. If a company can't get the money it's owed within 45 days, that raises a red flag. Maybe it's offering its product on some sort of trial basis and customers don't feel the need to pay back right away, or ever. Or perhaps the company just isn't paying enough attention to detail. When
"Lincare had an incredible system allowing it to collect in just 45 days," Mannion said. "Everyone else (in the industry) was at 80. It was an incredibly well-run business by every metric. They turned over their inventory 14 times a year and everyone else was six. They had a high cash flow. It allowed them to buy competitors that were less well-run." A
few years ago, venture firms looked first at a company's product, hoping it
could make a big splash in an e "There's
so much investor money out there going after the 'hot spaces' that it's easy
to fall into a herd mentality," said DCM isn't the only firm taking the "out of the box" approach. When Focus Ventures, a Palo Alto, Calif., firm that manages just under
$600 million, was looking for a new software and services company to invest
in, it eventually put money into Wily Technology, a company that makes Java
application management software. "It's a new playing field
without a lot of close competitors," said George Bischof, another general partner at Focus, noted that Wily has demonstrated
the ability to sell to over 100 different customers, which speaks to its
ability to successfully execute on sales. "Some of Wily's products have
helped save companies $1 million," Bischof
said. At
Itochu Technology Corp., the business development and venture arm of Japanese
conglomerate ITOCHU Corp., venture capitalists seek Itochu
is eyeing a small northern "The
product isn't quite right, but they're very in tune with adjusting for the
Japanese market," said When Thibodeau learned the venture business, a mentor told him a company's management and its market were the top two priorities, he said. That hasn't changed. "You have to have someone to sell to and have an advantage over competitors," Thibodeau said. "Product is probably less important than before, because the belief is that a great team with a great market will eventually find the right product." Almost everyone these days talks about capital efficiency. If a company doesn't have a realistic plan to get to a break-even cash flow within two financing rounds, Gonzales of DCM usually isn't interested. "You don't want to have to raise large amounts of money down the road in this environment," Gonzales said. Successful venture firms also scout a market carefully before choosing a company. Mannion, of Summit Partners, says his firm spends a lot of time "cold calling" companies to ask about their history, current market environment and competitors. "You'd be surprised," he said. "Most will tell you a lot on the phone. When you talk to each company, they'll name three or four competitors, and dominating players get mentioned often. You can say, 'Ahh, that's the top player.' You want to invest in the top company." (Daniel Rosenberg, one of several writers of the Something Ventured columns, covers the medical products and devices industry for Dow Jones Newswires.) -By Daniel Rosenberg, Dow Jones Newswires; 312-750-4118; daniel.rosenberg@dowjones.com
Updated
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2003 Dow Jones & Company, Inc. All Rights Reserved |