Since 2009 and the subprime crisis, the interest for venture capital and private equity investments is gaining in traction. Investing into the private equity (PE) brings an additional value to the investor as compared to hedge funds: it creates a physical link between the investor and the economy. It has the power to entertain the investor by connecting him to the world of business. According to Mc Kinsey 2017 report, the PE is the largest asset class.
The PE differs from the Venture Capital (VC) as its capital is brought to companies who have already succeeded on the market. The risk is much lower. The purpose of the investment is to shape the company in such a way as to optimize its activity and its value, in order to bring it to a successful exit.
The PE investment limits the availability of liquidity as it’s typical investments period is a minimum of 3 years, generally up to 10 years, with a 2 to 5x return to be expected. Cambridge analytics has conducted a study on the US market, which reveals a typical 10.64% return over a 10 year investment. So that figure is closer to a 2x return.
Besides the common rules of conducting a thorough and comprehensive due diligence, the investor in technology must be aware of a set of risks which are different from other sectors.
Rule #1: On top of the regular due diligence, which covers the finance and legal section of the company, there must be a real technological due diligence. Make sure to refer to the 5 tips described in the article https://www.linkedin.com/pulse/technology-investments-beware-snags-olivier-desjeux/ with a special emphasis must be brought to the management team. A very special care must be brought to this technological due diligence as it’s really the essence of the company, where its whole potential is lying.
Rule #2: Conduct an assessment of the technology in regard to its intrinsic life cycle. This is especially true for new technologies who are moving very fast. A good hint is to plot it on Gartner’s hype graph to figure out where it stands. The next exercise is to watch from where the disruption will come. It can be either from the standardization process or from non-competing technologies. Making sure the technology is in the mainstream of the standardization is a sign of a healthy future, provided it is the proper standard. Regarding competition coming from nowhere, take the example of the indoor localization feature. Companies from the wireless sector may soon be disrupted by low cost video+AI technologies, depending on the application purpose.
Rule #3: Getting an understanding of how the market is evolving is perhaps the most difficult assessment to do. Remember, the PE investment comes after the VC has successfully launched the basis of the company. True. But in the meantime the market is changing, and in some areas it can be radically different with the inception of complementary technologies. So the company who has been successful during its first 5-8 years of initial development must demonstrate that it understands how the market is evolving and the measures taken to anticipate the evolution in order to prevent the fatal disruption. Cloud computing was emerging 15 years ago, Blockchain started to stumble on our radar a bit more than 10 years ago with the Bitcoin, artificial intelligence was still un-affordable to many 5 years ago, and so on. A company might have settled its operations 10 years ago without any concern about data fusion.
New technologies are feeding everyday’s lives, bringing value to the most common operations in everyday’s life. Just by optimizing and streamlining processes, the technology has the power to play a major role to reducing the impact of our daily lives. So it’s certainly a good idea to invest into technology, provided it is done with all the care required to be sustainable and profitable on the long run.
Make sure to leave your comments, I’d love to hear about any contradiction or added suggestion.