No, the venture capital model is not broken. If the output has been upsetting of late then let’s double check the inputs.
What are some of the ingredients that have caused some to hold their nose? And more importantly, are there components we can control to create a better outcome? Key market inputs that are out of our control include (1) poor macroeconomic growth and demand (2) tight capital/debt markets and (3) withered IPO markets that limit high value exits. Given these are, unfortunately, part of what the model has to process, are there other elements we CAN alter as investors to ensure the “venture model” is still palatable?
When I consider our investment in FieldView Solutions, I’m convinced the answer is yes. FieldView is a software company that provides a solution to data center managers to better handle energy needs, capacity planning and risk mitigation of their critical assets. So what is it about FieldView that addresses these three negative market factors in such a way that makes me believe?
1. Take painkillers: For faltering economic growth, it’s tough to find sectors that haven’t been hurt by the downturn in one way or another. But those that have been more resilient are in markets wrestling with critical problems that require a solution even in downturns. The venture adage of funding painkillers instead of vitamins is doubly true in recessions.
Data centers are dealing with two separate problems that are only becoming more severe. The first is the increasing amount of data that these strategic assets need to process and store. The second is the increasing energy demand necessary to maintain these assets. A recent DOE report highlights both these problems when it indicates that energy use could double to more than 120 billion kWh from 2006 to 2011, equal to annual electricity costs of $7.4B. Neither of these problems is going away any time soon and since FieldView provides managers with transparency into both of these critical needs to enable better decision making, they’ve continued to grow in a “down market” by bringing on some of the largest financial, insurance, co-lo, and pharmaceutical companies as customers. The ROI and need of the product has been compelling, with examples of customers able to avoid unnecessary capex in the tens of millions of dollar range, minimize the amount of data center downtime through better load management, and reduce energy consumption through consolidating assets.
2. Go with capital efficiency: Given tight capital markets, companies with capital efficient business models are better suited. Capital efficiency has been a core investment mantra of SJF’s since the beginning and especially so when we consider our cleantech investments. Limiting the amount of capital ensures that both the entrepreneur and investor are more financially aligned and generate attractive returns even at modest exit valuations, which is a reality especially with IPO markets dried up. FieldView’s business model and design delivers this.
The software architecture and UI is highly flexible, cost efficiently scalable and user friendly, which enable both installations to take days not months and easy customer adoption across a variety of levels without complicated and costly training and support. The offering is configurable across hardware vendors and protocols to adapt easily to different customer needs while not being burdened by complex customization. This low cost to serve and lean business model means that significant additional capital investment will likely only be necessary for strategic reasons rather than as a matter of course.
3. Assume strategic exits: Given atrophied IPO markets, finding companies that have, or provide access to, high value assets that will be sought after by strategic investors paints a more reasonable exit scenario.
FieldView’s product is used by Fortune 1000 companies and resides on their networks and hardware worth tens to hundreds of millions of dollars. The software also connects two groups that have long operated separately – Facilities and IT – both of whom are critical decision making groups in the energy management and data center equation. These customers and the entrée FieldView provides to this valuable asset base and key decision makers can make the company strategically complimentary to a number of potential acquirers.
Obviously having a capital efficient business that solves a key market need in a sector that has acquisitive players isn’t automatically a recipe for success, but it’s certainly some of the right ingredients. Fred Dirla the company’s CEO and other senior members of management have deep expertise in and understanding of market needs. The references from some of the largest companies in their sectors praised Fred and his team’s ability to continuously innovate in anticipation of new market trends.
If a model isn’t giving you the results you expected to see, it’s always good to reflect on what inputs are going in. In an environment with some “down market” drivers to contend with, it’s even more important to be careful what other factors should be mixed in to ensure the right outcome. But if we’re able to do this, I think we’ll come to realize that, depending on the fund strategy, the venture model isn’t broken.
Arrun Kapoor
Read more about SJF Ventures’ investment in FieldView
