| As a Merger and Acquisition advisor, we | | | | believe that model could also be applied to |
| regularly dialogue with the top executives in | | | | great advantage in the Information Technology |
| the information technology industry. We have | | | | industry. The giant networking company, is a |
| to chuckle when we reach a decision maker | | | | serial acquirer of companies. They do a |
| with a large IT company and he says, "We have | | | | tremendous amount of R&D and organic product |
| a corporate policy that we do not buy | | | | development. They recognize, however, that |
| companies." Does this guy read the industry | | | | they cannot possibly capture all the new |
| publications? Is his company's development | | | | developments in this rapidly changing field |
| group that good? Does he understand the first | | | | through internal development alone.Cisco |
| mover advantage or window of opportunity?We | | | | seeks out investments in promising, small, |
| have gotten past the dizzying array of | | | | technology companies and this approach has |
| Internet product introductions, but the pace | | | | been a key element in their market dominance. |
| of technology introduction has again returned | | | | They bring what we refer to as smart money to |
| to robust levels. Any large company that | | | | the high tech entrepreneur. They purchase a |
| feels it can keep pace with this force | | | | minority stake in the early stage company |
| through internal development efforts alone is | | | | with a call option on acquiring the remainder |
| headed down the path of extinction.Almost | | | | at a later date with an agreed-upon valuation |
| everyone will agree that information | | | | multiple. This structure is a brilliantly |
| technology will be a primary driver of | | | | elegant method to dramatically enhance the |
| controlling costs in U.S. industry. | | | | risk reward profile of new product |
| Technology is our answer to remaining | | | | introduction. Here is why:For the |
| competitive in this world economy. A great | | | | Entrepreneur:1. The involvement of Large IT |
| deal of the technology development is coming | | | | Investor - resources, market presence, brand, |
| from small, entrepreneurial, nimble, low | | | | distribution capability is a self fulfilling |
| overhead companies.There is, however, a huge | | | | prophecy to your product's success. The halo |
| paradox in the market. The institutional | | | | of the big secure company helps you cross the |
| buyers of technology are relatively | | | | chasm to the conservative majority |
| conservative late adapters. This prevents | | | | institutional customer.2. For the same level |
| the expected innovation and commercial | | | | of dilution that an entrepreneur would get |
| success that should naturally follow the | | | | from a venture capital, angel investor or |
| innovation and passion of these small | | | | private equity group, the entrepreneur gets |
| technology innovators.These entrepreneurs | | | | the performance leverage of "smart money." |
| respond to a market need and achieve | | | | See #1.3. The entrepreneur gets to grow his |
| encouraging initial success from the early | | | | business with Large IT Investor's support at |
| adopters. They soon hit the wall and are not | | | | a far more rapid pace than he could alone. He |
| able to "cross the chasm" from a small group | | | | is more likely to establish the critical mass |
| of early adaptors to general market | | | | needed for market leadership within his |
| acceptance from the conservative majority. | | | | industry's brief window of opportunity.4. He |
| There is little economic value created when | | | | gets an exit strategy with an established |
| good technology is in the control or a | | | | valuation metric while the buyer/investor |
| failing company and the technology never | | | | helps him make his exit much more |
| reaches broad acceptance.Most of the | | | | lucrative.5. As an old Wharton professor used |
| blockbuster new products are the result of an | | | | to ask, "What would you rather have, all of a |
| entrepreneurial effort from an early stage | | | | grape or part of a watermelon?" That sums it |
| company bootstrapping its growth in a very | | | | up pretty well. The involvement of Large IT |
| cost conscious lean environment. Think of | | | | Investor gives the product a much better |
| some of the new developments from companies | | | | probability of growing significantly. The |
| like Google. The big companies, with all | | | | entrepreneur will own a meaningful portion of |
| their seeming advantages have a very high | | | | a far bigger asset.For the Large IT |
| internal cost structure for new product | | | | Investor:1. Create access to a large funnel |
| introductions and the losses resulting from | | | | of developing technology and |
| those failures are substantial.Don't get me | | | | products.2. Creates a very nimble, market |
| wrong, there were hundreds of failures from | | | | sensitive, product development or R&D |
| the start-ups as well. However, the failure | | | | arm.3. Minor resource allocation to the |
| for the edgy little start-up resulted in | | | | autonomous operator during his "skunk works" |
| losses in the $1 - $5 million range. The same | | | | market proving development stage.4. Diversify |
| result from an industry giant were often in | | | | their product development portfolio - because |
| the $100 million to $250 million range.For | | | | this approach provides for a relatively small |
| every Yahoo or Ebay there are literally | | | | investment in a greater number of |
| hundreds of companies that either flame out | | | | opportunities fueled by the entrepreneurial |
| or never reach a critical mass beyond a loyal | | | | spirit, they greatly improve the probability |
| early adapter market. It seems like the | | | | of creating a winner.5. By investing early |
| mentality of these smaller business owners | | | | and getting an equity position in a small |
| is, using the example of the popular TV show, | | | | company and favorable valuation metrics on |
| Deal or No Deal, to hold out for the $1 | | | | the call option, they pay a fraction of the |
| million briefcase. What about that logical | | | | market price to what they would have to pay |
| contestant that objectively weighs the facts | | | | if they acquired the company once the product |
| and the odds and cashes out for $280,000?As | | | | had proven successful.Dave Kauppi is a |
| we contemplated the dynamics of this market, | | | | business broker and President of MidMarket |
| we were drawn to a merger and acquisition | | | | Capital. We help business owners with all |
| model that is used in the networking | | | | aspects of Mergers and Acquisitions. |
| technology market by Cisco Systems. We | | | | |