SOUTHWEST VENTURE

The best IPO quarter since 2000 overall, and a reasonable showing for VC backed IPO’s,  but it is difficult to tell what kind of momentum is being carried into Q2.  There are just two deals on the calendar for this week.  And it’s not just the recent issues in the technology markets causing the near term uncertainty…

From Red Herring March 30^th –

“This brings us to the present. The second-quarter IPO market is barely getting out the door.  Bankers have just one deal on the calendar. No, make it two, if you wish to include last week’s “blank check” carryover. There’s a reason.  For the first time in years, two major religious holidays have converged in the spring to give Wall Street an extended break. They bookend the week. Passover begins at sundown on Monday. The markets are closed for Good Friday.  For all intents and purposes, the IPO production line is open for one day. Whatever deal that goes public will have to be priced Wednesday evening and trade in Thursday’s market.”

It will be interesting to see how the quarter develops.

-John Reed  

• Geographic Arbitrage:  taking advantage of the centrality of Texas to enter markets in the Americas
• Era Arbitrage:  bubble-era companies with management that survived the nuclear winter, rolled out a second-or-third generation product, and are now ramping under radar
• Sector Arbitrage:  companies levering technology developed over time and at great expense for an adjacent market

These classifications are a bit loose.  However, if you have any interest in finding out more about these companies and their teams just send a note to me:  SouthwestVenture at gmail.com, and I will pass your information to the founders.

Geographic Arbitrage:  Interesting tech companies here are post-revenue to cash flow positive in smaller geographic markets.  The play is to leverage the upside of bringing a fully-baked product to the larger US market with an “Americas” team that has enjoyed recent successes in bringing technology to US and international markets.  The world is still not really flat – to quote Tom Peters, “Nothing Happens Unless You’re There”, and he means in person.  This style of deal has lower risk than a startup and most of the upside.  (Three companies)

Era Arbitrage:  (the ‘Survivor’ company):  Reasonable people differ as to whether there could be any upside to bubble-era companies that Missed the Window in 2000.  Jaded venture partners assume that the team was not right, the technology insufficient to the task. 

In many cases they are right, especially where management has built an unscalable services business that makes payroll, but little else, in order to survive.  But in other cases they are very wrong.  ‘Survivor’ companies have the three success factors in spades: (Two companies)

1. Team:  Management that came together in the bubble may indeed be guilty of bad timing.  Those that stayed together, forcing scarce resources into creation of a product suited for today’s market, have shown crazy persistence and creativity combined.
2. Technology:  Technology brought to market in 2000 would now be obsolete without continued investment.  It may also have been brought to the market in sectors way too immature to commercialize.  However, technology that has seen continued reinvestment, and that has been adapted to fit today’s new opportunities, is in position for rapid market wins.
3. Model:  The Survivor companies’ great risk comes from having shifted their model from scalable (licensing) to predictable (services) in order to keep the team together during the bust.  Those that kept their focus on a scalable model in a growth sector are in a strong position today.

Sector Arbitrage:  Several Texas companies have leveraged bubble-era investments by licensing for new uses.  Some advantages of this strategy: (Two Companies)

1. Investment Efficiency - with the right licensing structure, these companies can  leverage other’s investment capital and development time, and focus on productization.
2. Reduced Technology Risk - This strategy allows marketing of technology already developed and tested with other investor’s risk capital
3. Speed to Market - Competition will have to follow longer, traditional development path
4. Focus - Funding can be tightly focused on sales, marketing, and product

It’s a great time to be an investor in this market.

-John Reed