Posts Tagged ‘industry’

Portfolio Management – A Case Study

by Sanjai Marimadaiah on January 12, 2010

Portfolio management is a critical activity for any business leader, be it a General Manager or a Venture Capitalist.  This article offers a case study on portfolio management with a focus on value-net1 and the economic value of portfolio companies. The intent is to provide an analysis of the portfolio that can serve as the basis for growth strategy.

The Value-Net1:

The success of any business initiative depends on the value delivered to its customers. While immediate customers are important for near-term growth, the long-term viability of a company hinges on the value delivered to eventual customers, i.e. customer’s customer.  Hence a view of how you serve your eventual customers is important in portfolio management. Several business entities, called value-net1 partners, are involved in the process of delivering value to end customers.

The Portfolio:

Rajesh Setty is a successful CEO and now a venture capitalist with a growing portfolio of companies.

Following is a brief description of 3 of his portfolio companies:

An innovative approach to solving the content marketing challenges. Content such as white paper and ebooks are better managed to ensure that it is efficiently delivered to the target audience. Since the company is still in a stealth mode, a fictitious name, ContentKing, is used.

Jiffle brings efficiency and intelligence to event marketing activities.  It offers a simple and intuitive web portal for event managers to schedule and manage client engagements at events.  In addition, customers can generate various reports on the efficacy of their participation at various events by product line, region, etc.

iCharts business service allows one to easily build sophisticated, searchable online charts. iCharts makes it easy for customers, journalists and others to find, reuse and republish your data — helping proliferation of your data across the web.

Analysis of the above portfolio companies highlighted a common theme in their value proposition. There were opportunities for collaboration among portfolio companies and also opportunities to expand the value range of services.

A common theme among the 3 portfolio companies is that their immediate customers are demand generation teams.  Hence these 3 portfolio companies influence the adoption of product/service by the eventual customers. However they are at different stages of the AIDA – Marketing model5.

AIDA – Model 5:

There are 4 stages in the AIDA model – Awareness, Interest, Desire and Action.  A customer first has to be aware of the existence of the product then be interested in learning more about the product, then have the desire/need to buy the product and eventually be convinced that it is the right product in order to buy it. Support is added as the last stage by some marketing professionals. Different tools, tactics and activities are required to be effective at each of the stages.

The dynamics of each of the stages in the AIDA model are different. As you progress from Awareness to Action, the number leads decreases while the cost per lead increases. The following is an illustration of this dynamics. The numbers in figure 1 and 2 illustrate the relative scales. The actual value varies by product and industry.

Figure 1

Mapping the Portfolio on the AIDA Model:

The 3 portfolio companies are mapped on the AIDA model in figure 2. The immediate target customers are listed below the portfolio company. Finally, the Assets/Capabilities of the VC, Rajesh Setty, is also mapped to highlight the investor’s affinity to their domain expertise.

iCharts4 is at the cusp between Awareness and Interest. The interactive charts not only build awareness to a company’s offering but also generate interest in the offering by providing interactive charts that offer more details. ContentKing2 deals with whitepapers and eBooks, hence heavily in the interest phase. Jiffle3 is placed in the Decision stage but can play well into the action phase. The meetings at conferences and tradeshows influence the decision and at time deals are closed at these meetings.

Figure 2

The Conclusion:

The mapping in Figure 2 provides a bird’s eye view of the strategic position of the portfolio companies in the AIDA model. This can serve as the foundation to develop strategic growth initiatives for the individual companies as well as help VCs manage their portfolio companies.

Considering the price per lead at each stage of the AIDA model, one can get a sense of the valuation as well as revenue potential of the portfolio companies. The portfolio manger can evaluate collaboration opportunities among the portfolio companies and also opportunities to invest in new companies.

The individual portfolio companies can brainstorm whether it makes strategic sense to expand along the AIDA model. It also forces the portfolio companies to think beyond their immediate customers by engaging in initiatives and partnerships to help product/services companies in their pursuit to close sales.

Note:

  1. Value Net:
  2. ContentKing: http://www.rajeshsetty.com (watch the URL for announcements)
  3. Jiffle: http://www.jifflenow.com
  4. iCharts: http://www.ichartsbusiness.com
  5. AIDA Model:  http://en.wikipedia.org/wiki/AIDA_(marketing)

strageic acquisition just askIn a recent post, we discussed the significant difference between the financial acquisition value and the strategic acquisition value of a privately held company.  Obviously, before you can convert your company into an attractive strategic acquisition candidate, you have to learn just what that means in your industry.  But, how can you do that?  You certainly can’t just walk up to a key acquisition executive and ask, can you?

Actually, with a few important modifications, that’s precisely what you can, and should, do!  Well, not you personally, because it will be important to keep your company unidentified.  Just have a trusted advisor conduct these interviews on your behalf.

Once you and your team have developed a list of likely buyers, design a questionnaire that will take no more than 15 minutes to complete on the telephone.  The questions you ask will largely depend on your industry and the data you want to gather on where these executives think the industry is headed.  However, two questions will be common to all questionnaires, irrespective of the size of your company or its industry.

  1. If you were to acquire a company in this industry today, which strategic assets would be most valuable to you?
  2. How are these preferences like to change over the next few years?

If your interviewer talks to enough acquisition executives (15-25 should do it) and compiles the responses, s/he will have put together the profile of the attractive strategic acquisition candidate from the perspective of the marketplace.  Next, conduct a “gap analysis” that compares this profile with the strategic profile of your company.  In other words, how does your company stack up on each strategic asset regarded by a number of interviewees as important?  In most cases, your individual strategic asset ratings will fall roughly into three categories.

  1. We are in very good shape, and need only fine tuning.
  2. We have made significant strides, but we have a long way to go.
  3. We are pretty close to the starting blocks.

Once you have made these judgments, you can decide which strategic assets to acquire and/or enhance in order to move your company’s strategic profile closer to what the marketplace has specified.  Consider these possible scenarios.

  1. Many interviewees indicate that they would be very interested in acquiring a leading regional company in your industry, but not a local one.  This would suggest that acquiring one or more companies in your industry or, perhaps, merging with a larger competitor elsewhere in your region, would make the equity in your company much more valuable.
  1. A number of executives indicate that some important product development opportunities are stalled because the components currently available in the market are technically inadequate.  One or more of these components is within your company’s technical expertise.  This information could affect your strategic product development effort in a very positive and targeted way.
  1. You have been planning to expand into a new market niche, and have narrowed the choices to three that appear to be roughly equally promising.  The interviews yield the information that one of these three would be considered very valuable to many prospective buyers.  Case closed.

Once you have made these decisions, you need only incorporate them into an effective strategic plan, complete with areas of individual responsibility, deadlines and standards of performance.  Good luck!

PhotoPopell This article has been contributed by Steven D. Popell. Steve has been a general management consultant since 1970. Steve is a Certified Management Consultant, business valuation expert, and inventor of ExiTrak®– a process designed to assist the privately-held company owner/manager to build an attractive strategic acquisition candidate