Tech Banker

It's all About Perspective

It's funny how certain things stick with you.  Growing up my parents had a small framed quotation, cited to be made by the Chinese philosopher Confucius.  It hung on some random, out of the way wall in our home.  Although we always had a variety of interesting framed art hanging on the walls, I'm pretty sure this was the only quote featured in our house.  The quote was:

"A sage seeks opportunity in difficulties.  A fool sees difficulties in opportunities."

Over the years, this bit of advice has come to mind thousands of times.  I'm not really one that holds on to these types of phrases but this one stuck for some reason.  Somehow it infiltrated my mind, became a part of my own idealized personal identity and has given me perspective and motivation throughout my life.

These days with the economic dark clouds over our head I've found the advice come to mind many times.  In my professional world, M&A activity and equity financings have certainly been impacted by the uncertainty of whats next for the economy.  Uncertainly equals very slow moving and cautious or outright frozen buyers and investors.  Encouragingly, In spite of the general mindset that prevails today, I do often hear a variation of Confucius' quote by executives, board members and investors.  It's more words than action at this point but it's a first step.

 

A Breach of Faith

Guest posting by Ralph G. Risley

I was initially going to write a white paper on the HP leaks and the issues that it raises. However, on analysis this event is so core to Board behavior and effectiveness that I have elected to post a series of comments/observations in hopes of getting a dialog going via comment postings which I can incorporate in my future postings on the subject.  My objective is to construct a fair, balanced, impartial display and analysis of he events and their short term consequences and long term collateral damage. This process will be significantly enhanced by future postings from others.

Recent disclosures relating to the activities of certain HP Directors highlight broader and deeper elements of both Board responsibilities and obligations. HP documents their rules of engagement in their own Policies, Procedures and Practices and separately in their position paper on " Standards of Business Conduct". Leaks, whether at the operating management or Board level, compromise both business and investor interests and possibly more significantly those of suppliers, creditors and lenders. Leaks are not the way to force attention to a specific issues or apply pressure to further a specific agenda. The Board process is one of; vetting, consensus, probative dialog and evaluation. This must be accomplished in confidence as a closed group until this process is accomplished. Leaks of any type risk compromising the integrity and long term viability of not only the process but also its participants.  HP provides in its " Corporate Governance Guidelines" a clear statement of intent. Under section 11 there is only a single sentence dealing with " Authority to Retain Advisors " under which guidelines the leak investigators would fit.  Any rules of engagement and oversight criteria not included here or under other sections of the Corporate Governance Guidelines are chronicled under HP's Standards of Business Conduct. Given the sophisticated nature of public company directors there appears to be sufficient policy guidance in place to insure Board behavior to both letter and intent standards.

Private Company Best Practices

Blogs and podcasts (and likely soon video blogs) are being used by an increasing number of venture capitalists as their mouthpiece to their constituencies.  Brad Feld is certainly one of the pioneers and he has begun to organize a blog network of venture capitalists via Feedburner.

One incredibly useful form of post is under the theme of best practices.  Brad Feld has his Term Sheet Series of posts and now Pascal Levensohn and his partners at Levensohn Venture Partners has begun a series entitled VC Inside Out.  I'm sure there are other examples as well, but the point is that the amount of sharing of insight and perspective gained from experience is unprecedented.

Thanks for all who believe sharing is better than hoarding knowledge.

The New Breed: Collaborative Applications

In the spirit of community and collaboration, I'm passing on a terrific presentation that Tom Coates presented at The Future of Web Apps Conference held recently in San Francisco.  Thank you Brad Feld for passing this on.

Technology IPO Market Resurrection?

This past week has been what may be a breakout week for technology IPO.  Three IPO's in particular received an enthusiastic welcome by Wall Street.

CommVault --  CommVault has distinguished itself as a truly viable competitor in the data storage management sector competing head-to-head with giants such as CA, EMC and Symantec's Veritas line of products.  Revenues over the past 12 months were $120.8mm and growth from fiscal year 2005 to 2006 (March year end) was 32%.  CommVault's competitive momentum, emerging scale and growth rate make for an impressive offering.  CommVault has been incredibly patient with its IPO, actually starting the process three years ago and biding their time as their business grew and the technology IPO market began to regain its footing. 

Of particular note in this deal were two rather unusual structural elements; (1) roughly 45% of the shares sold were selling shareholders and (2) a large portion of the proceeds raised by CommVault will be paid to certain preferred stock holders. 

With regard to selling shareholders, it certainly makes a stronger statement (and deal) when existing shareholders are NOT sellers in an IPO.  Given the choppy nature of the IPO market in general, it is a bit surprising that the Company and underwriters were comfortable with such an aggressive structure.  I posit that the answer lies in the fact that the vast majority of selling shareholders were affiliates of CSFB, one of the two book managing underwriters.  Clearly the market looked through this "interesting" set of facts and focused on CommVault's business and prospects.  Generally, underwriters and corporate issues strive to eliminate these types of distractions as they increase the risk of execution.

Another quite unusual "distraction" in this situation was the large cash payment ($101.8mm) being made by CommVault to satisfy obligations under the first five rounds of private financing.  Typically preferred stock issued in private financings converts to common stock upon an IPO.  In this case, in addition to conversion into common stock, the holders of Series A-E preferred stock (again CSFB affiliates) were also due a preferred return and accrued dividends.  This is an extremely unusual occurrence in an IPO.

So, does any of this matter to the new investors purchasing the IPO?  Only if you believe that the selling shareholders see this as an opportunity to liquefy as they have a tempered view of CommVault's prospects.  In this case, the CSFB affiliates have been in this investment for up to 10 years (a VERY long time) and are continuing to hold a substantial equity position in the Company.  Also, very importantly, management is only selling a modest amount, signaling confidence.

Two other IPO's which priced this past week were DivX and Riverbed Technologies.  Both were well received and traded up nicely in the aftermarket.

These transactions are encouraging and suggest that we may be seeing a more receptive marketplace for emerging vendors.  Investment banker IPO activity levels are also reasonably high these days suggesting that with an open market, the technology IPO pipeline may begin to build.  We'll be watching.

THE STRATEGIC GUIDE TO SELLING YOUR SOFTWARE COMPANY

Brad Feld alerted me recently to a newly published book by William H. Venema, entitled Top Secret:  The Strategic Guide to Selling Your Software Company, Essential Advise from a Veteran Deal Warrior.  Mr. Venema is an attorney who has represented a number of software company executives with the sale of their businesses.

I applaud Mr. Venema for the effort and feel the book gives a good overview of the types of processes and issues that executives and boards need to navigate when selling a business.  What this book fails to do, and to be fair, no book would accomplish, is to equip the constituents involved with a sale of a company with the depth of knowledge and judgment that only comes with years or decades of transaction experience.  Mr. Venema, does make this point but it’s worth reiterating; sellers should surround themselves with deeply experience advisors including accountants, lawyers and in many cases investment bankers.

While its detailed military analogies fail to deliver better understanding and are a distraction, I recommend this book to any technology entrepreneur who is seeking a sense of the M&A process.  The issues around intellectual property and where value lies (or not) are just as relevant to any technology company not just software vendors.

Corporate Governance

My father, Ralph Risley, was an executive at General Electric in the 1960's and 1970's then was recruited to several successful start up (in one case going public) enterprises in the energy industry during and following the first "energy crisis" in the mid-late 1970's.  Over the past couple of years he has become engaged with the topic of corporate governance.  He provides the following thoughts:

The business models of start up companies focus on product, markets, distribution, financing and technology development. Insufficient attention is placed on those governance and ethical oversight issues which will become critical as a company grows, especially when a public offering is considered.

Early stage Boards of Directors have a much narrower interest spectrum than those of public companies where the shareholder base is more diverse, less knowledgeable of industry specifics and expectant of candid disclosure.

When early stage investors and venture capitalists use the term "Adult Supervision" I doubt that they are referring to governance at the Board level but rather they are injecting the lixor of experience and insight on operational and budgeting elements.

Regardless of the success of the business, initial investors will eventually seek liquidity. Without strong independent Board oversight an undesirable company culture can root itself so deeply that removal may be next to impossible.

IBM / FileNet Update

John Newton has some insight into the consolidation within the content management sector.  A bit of wild speculation by Seth Gotlieb, a content managment consultant and another take on the deal and the sector by IT Analysis.

Actions Speak Louder Than Words

Fred Wilson, of Union Square Ventures and A VC fame, posted a good reminder for all today.  Watch how a person acts, not what they say for true insight.  Fred, thanks for refreshing us on that valuable lesson.

Larry Ellison

It's always entertaining when Larry Ellison speaks.  Here is Larry's latest riff courtesy of Forbes.