Examining the Recent History of Qualifying Investment Worthy Target Ventures in the B2B IT subsectors.
Alan D. Wilensky, Analyst and Industry Relations Advocate
Is the The B2B IT sector a difficult arena to source and place capital or, conversely, to harvest capital out of such deals? According to a diverse pool of analysts, including several specializing in the enterprise software and services sector, the past 15 years of high-profile B2B tech company consolidations driven by certain PE funds, has resulted in a reduction in overall availability of mid stage direct placement capital deals for well-established, maturing ventures poised for growth. This reduction in capital resources, and how it came about, is a troubling tale. The epilogue is even sadder as if that were even possible, describing the pollution that occurred in the aftermath of the B2B consolidations. The selection criteria and commonsense values became out of phase, upside down, leading to long-term damages. These are the wages of fear and doubt that reliably occur when sound targeting attributes are ignored. Applying the corrective selection targeting criteria – no MBA required – when the next phase of capitalization restarts – and we shall see that these mature, well led, clearly innovative B2B ventures come to the surface, with long-established continuities of private ownership; these ventures have been overlooked en mass for the past 15 years in the B2B IT subsectors.
While it seems a bit farfetched to state that, “better companies were deliberately ignored in favor of the now well-known, (even infamous) weeble-companies tagged by PE’s for toxic consolidation). They were all past their prime, overstaffed, overstuffed, having long abandoned their founders drive and vision, and eschewing the technical staff’s architectural and system acumen. The sordid mess. in a nutshell, stank of corruption, but there is still hope….
We all know that no one can stop a true inventor – the Edison’s, the Teslas, the Jobsian leaders….these brilliant, hard-headed, are true to themselves (and to the very word) Innovators – they never go away, they continue to innovate and improve, and gain more ground.
A simple rendering:
A shallow reservoir of early and mid-maturing stage capital vanished after a 15 year period of horrendously structured mega-deal rollups in the B2B sector. These roll ups created ‘zombie-like’ composite corporations that served no one at all well – not the investors, the B2B Tech and Tools and Services industry, and certainly not the customers. These highly inefficient and byzantine experiments in direct capital placement showed with a grim finality that these particular PE‘s at the center of the B2B debacle, were ill-equipped to operate in the sector (a gross understatement) – but mostly it was a massive stumbling by the PE’s in applying well-informed selection targeting criteria, with the result that some of the best researched, ready to scale opportunities in the sector were ignored. More will be said of such mature ventures, all having superior intellectual capital portfolios, and almost all harboring the even more important attributes of: ‘continuity of ownership, a well mastered design process, and fully and truly transmitted, ‘ethos of operations’.
As a result, discretionary R&D was reduced, delayed, and otherwise weighed down as a sense of palpable uncertainty settled over the market. Failed selection modeling caused rippling waves of sector-wide damage, and multi-year acquisition delays of systems and services. The damage has only been partially repaired, and for some it is a process that has not reached its conclusion – but the thaw has commenced one full year past the peak of ‘the great B2B wars of the mid aughts’. Interviews with companies that were directly in the line of fire at the peak of the debacle are coming back to level revenue, which nets out to a loss due to missed growth.
A properly illustrated diorama or tableau would explain – at a glance – the complex investment vs. risk strategy that was applied to gain such a poor result. This realization is just now landing on the shoulders of the culpable Fund’s, as an industry-wide realization that their progeny, the “weeble corps” they have left us all, and their customers are wobbling, yet resisting gravity in not quite falling down. These are some of the best-known enterprise integration resellers and EDI networks – but the best known of all are now serial-tragicomic dramas reading like King Lear, but are neither compelling nor as interesting when stripped of the ‘I told you so’ business lessons that will be covered in the following monograph. Such is the house that a certain type of PE built for the now somewhat stunted B2B Technology sector.
Now, post acquisition, the acquired knowledge of the founding engineering or operations teams, the IP champions, are long gone. The acquired company’s culture of collective knowledge and the skills of experienced engineers and operators, all were obscenely disparaged – – they were often the first slated for post-acquisition termination..
The B2B IT sector is in sore need of exactly the opposite selection model – a new model that is not the least bit mysterious, where a Founder’s clear vision and unquestioned expertise are just two of a multitude of attributes that grow out of the soil of ‘continuity of ownership’.
Have such reliable verities been altogether forgotten?
Fortunately, armed with the proper set of selection attributes, we can apprehend instantly that the sector is home to a good many highly desirable, mature, privately owned, founder / CTO / Engineer run, bastions of pure, ready to scale value.
The remedy is to see that the constellation of ownership attributes or ‘culture of continuity’ is given ultimate deference. The next wave of directly placed capital should target investments by single mindedly focusing on mature B2B ventures – not merely large acquisitions combined with appurtenances of various window dressings,stripped always of the founding technical staff members. This formula always results in roll-ups that are completely devoid of any patina of heritage.
In the following pages, the author shall enumerate the quality traits of investment worthy companies that are ready for growth, who have established organizational cultures, and highly trained and competent human capital with tenure, long-term client relations, and real vision expressed within a credible architectural portfolio. More and greater details of these marker traits will be discussed next.
The above Abstract will be followed by a private release of the Full TOC and subsequent chapters. Drop the author a note if you would like to be included in the release.
The Abbreviated Review of Past Errors
The following question needs to be aired or at minimum answered in a condensed manner:
1. The selection criteria of B2B IT ventures (over the past decade plus) had become misguided. This resulted in errors that damaged sole-owner, expert led ventures that were mature and profitable.
2. These errors ended up throwing the sector’s direct funding sources off-balance – which stunted the entire B2B sector, up until the present day. This was particularly harmful to the maturing close held corps with visionary hands on founders – the oft touted by your author Engineer / Scientist owners who are not only true innovators, but who are also the most dynamic thinkers in their respective industry sectors.
So, how did competence, longevity, and professional acumen come to be undervalued? How and why were the opposite criteria used to fund and prop up the merely large, composite roll ups of just dead B2B companies – some having the lowest satisfaction scores and flatline customer sentiment survey results?
How did the exact opposite traits and selection criteria become so encompassing in a peak of manifest gross error especially in the past 10 years?
The point of this most condensed perspective on a decade plus of errors is being released in a report scheduled for publication this month, February 2015. I have been asked by my colleagues, analysts at investment banks, independent bureaus, and private industry research sources – to write-up the bottom line result of the collective research emerging from this consortium, and to release my ‘wrap up narrative’ summarizing the results, opinions, and what has always seemed to me to be obvious, common-sense.
Who needs a voluminous report when the truth has been so obvious from the beginning. Therefore in summary:
The past 15 years of pre-planned consolidation by aggressive PE Funds destabilized the B2B tech sector, with the result of chasing off Specialized VC and the very, very few direct funding investors who specialized in the B2B sub sector of Enterprise IT.
Billions in private and sovereign wealth was deployed to roll up the B2B transaction networks and dozens of enterprise software companies, with the combined power of their global user constituencies – the resulting conglomerate-monopoly toxified the sector.
The model deployed in the most visible of B2B sector rollups was all too typical – buy large, smash the properties together, excise the creativity of the tenured visionary leadership, while cutting services to the leanest bones; this was accomplished while the fund-installed drones in the C-Suite chanted, extolled, and praised, ‘innovation’ and ‘visionary leadership’, while the flesh and blood corporate culture of the newly rolled up synth corps became ever more dysfunctional, utterly failing to serve their clients.
Now the charge is to reform the investment targeting regime to focus on the mature, vision-driven closely held B2B ventures, forces the conclusion that institutional analysts have missed opportunities by failing to recognize hallmarks of investment-worthy, techno-scientific ventures led by genuine visionaries.
These founders who are thought leaders in their respective sectors evoke highly positive sentiment among their end-users and professional peers alike. They are meta-market evangelists, instantly recognizable for their pro market, pro competition drum beat.
The selection of proper qualitative targeting criteria for B2B IT has remained unexamined for decades, and should be re examined for codifying direct placements in the sector.
Such characteristic markers are used to make a first cut of target investments. The ventures thus surfaced present unexploited , under-the-radar opportunities for applying resources at the point of maximum growth delta in the ventures maturity curve.
The criteria in brief, sans commentary:
- Founder / Owner – Closely held corp. Founder is often Engineer / Scientist with a product or service driven vision.
- Mostly a population of exemplary bootstrappers, they sometimes are known for shunning outside capital (in many cases), although they might be persuaded on occasion to dilute the sole ownership when the venture’s critical time-to-scale is at stake.
- A decade plus into a maturity curve of providing services, delivering products, and generating solid net revenues,
- Has reliably make payroll for years.
- Has built a handpicked team, not merely as hires, but in each case in a mentor / coaching model.
- Has enjoyed long-employee staff tenures, often exceeding 3/4 the company’s total age.
- Their Corporate and personal reputation is where these prototypical thought-leaders and inherent innovators really own the sphere.
- They are all, in my experience without a single exception, considered the last word of authoritative advice and opinion in their various highly technical and scientific sectors.
A workable checklists for selection of investment targets within the software sector (especially B2B IT / Enterprise sub sector) should be generalized for directly placed capital. Using the precise corporate behavioral and leadership character markers will make the first cut selections much more trustworthy and save heartburn for investors and Partners alike.
The ventures that are selected and vetted in the process present the most fecund and unexploited opportunities for applying capital resources at the point of maximum potential growth delta; they are truly ready to absorb capital resources and scale fast, as opposed to the old model or complex deal structures that took dead and wobbling B2B companies stripped of their founding and technical leaderships, throwing fresh capital at a C-Suite often comprised of empty suits .