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