Securing Investors and Structuring the Deal 303$2.2 million in nine separate deals with Software Artistry over a period of five years.
More important, CID encouraged the company to concentrate its efforts into develop-
ing Expert Advisor, a program that centralizes information from a business’s internal ex-
perts at a central help desk. This unique and successful software has enabled entities like
Sony Electronics, General Mills, and the U.S. Senate to reduce the number of employ-
ees handling customer inquiries, cut phone time, and slash the number of transferred
calls within the organization. CID also recruited a new CEO for Software Artistry
before the company went public. During the initial public offering, CID sold enough of
its Software Artistry shares to recoup its cash investment, but retained shares that still
gave them a $40 million interest in the venture.^8
Not all investments have happy endings for the founding entrepreneur and the new
venture. Street Story 8.1 is a cautionary tale of investor involvement in the company.
The Ideal Entrepreneur
Investors also have their “dream” investment. It poses little risk, produces a big payoff,
and takes place overnight. More realistic investment opportunities require careful study
and evaluation. The five most important investment criteria are:^9
- Market attractiveness includes four major elements: size of market, growth rate of
market, access to market, and need for the product. All enable a firm to build vol-
ume while sustaining selling margins. - Product differentiationinvolves aspects such as uniqueness and patentability. These
make the product hard to copy and are bases of sustainable competitive advantage,
resulting in higher profit margins. Value added through the employment of techni-
cal skills is another aspect and is part of the human and technical resource base of
the venture. - Management capabilities,the skill levels and implementation abilities of manage-
ment, are also key components. The development of organizational resources
requires management capabilities, and the employment of such inert resources as
financial and physical assets is enhanced by management and organization.^10 - Environmental threats matter because research indicates that investors do not sepa-
rate the industry environment from the macroenvironment, as we did in Chapter
3. The major safeguards that investors look for are protection from competitive
entry, resistance to economic cycles (economics), protection from obsolescence
(technology), and protection from downside risk. - Cash-out potential is reportedly the least important factor among all the evaluation
criteria, not because money is not important, but because profitability and wealth
are the result of all the other factors falling into place. Nevertheless, investors are
interested in the potential for merger with another firm and other opportunities for
exit. These factors are summarized in Figure 8.1.
Jack Gill of Vanguard Ventures (http://www.vanguardventures.com/team/jg.html)
looks for a driven management team, a better solution (where is the pain? will this prod-
uct/service ease it?), and a unique product. But he cautions against the BFC proposal
in which the entrepreneur is offering “Better, Faster, Cheaper.” While the product might
be BFC in the short term, Gill urges investors to investigate whether a new generation