The latest trend in venture capitalism is the merger of portfolio companies with other VCs' investments, a visiting American says.
Philadelphia-based Snider Capital founder Jay Snider says this is shaping up as the most common form of strategy for VCs, surpassing the pre-dotcom crash favourite method of share floats - IPOs - and trade sales.
While vast sums of money continue to be raised to add to venture capitalists’ funds, the recent slow-down in investment can be attributed to the VC’s keeping their current portfolio afloat – and concentrating on consolidation.
“We are in work-it-out mode,” Snider says of the industry. “The liquidity has been drained out – the investors are using their dollars to keep their portfolio companies afloat and holding back from new companies.”
Merging portfolio companies with other companies at a similar stage of development – that is, with those that have already received funding and have a strong business plan – avoids duplication in the market and increases revenues faster.
While Snider says local venture capitalists should follow this trend, he also says the time is right to start buying again.
In New Zealand, listed venture capitalists IT Capital and Strathmore Group have played it quiet over the past nine months, and while other private VCs made investments, the flurry of pre-crash activity has noticeably slowed.
Snider, whose company owns around 8% of IT Capital and who also sits on IT Capital’s board, says this proved the right strategy. IT Capital made millions out of the $A30 million trade sale of exo-net to Solution 6 and turned a profit.
But he says he will advise IT Capital at its next board meeting that “it should be very active right now”.
“Right now is a great time to be investing, while valuations are down,” Snider says.
Snider Capital specialises in technology companies in education, sports and cable broadcasting. It is about to make its first investments since the crash.
Snider sees the hot sectors as new media, or products that converge telecommunications with media, and “old fashioned software”.
Media companies were particularly hard hit by the market downturn because "there was a lot of really bad ideas that were funded that had no content", Snider says.
But he believes an area about to take off is new media based on sport and recreation. Snider Capital owns a large shareholding in Virtual Spectator and recently finalised a third round of investment, bringing its total investment to $3.5 million. The latest $1 million injection is for further development for other sports contracts and comes as former ESPN Asia head Alexander Brown is appointed operating officer.
The massive networking infrastructure that accompanied the first wave of e-commerce has also made old-fashioned software companies and their products smarter, Snider says. Software companies such as multi-use electronic card businesses are back in favour with VCs because they have a real customer base as well as revenues from software upgrades, licences and annual maintenance fees for service.
While VC investments in hardware are not high profile as the major hardware vendors face downhill sales, Snider says this is happening. He points to IT Capital's investment in LCD monitor technology Deep Video Imaging.
“Early stage VC’s these days have to have a three- to five-year horizon. The job of the VC is to see beyond the current public stock market."