December 3rd, 2009
Ken Fox comments on the state of the market, trends in the industry, notes on Stripes portfolio companies and more in Morgan Joseph & Co. Monthly Technology Investment Banking Newsletter.
Morgan Joseph Technology Newsletter Q&A
What do you see as the catalyst for future revenue and earnings growth?
Innovation… At Stripes Group, we are “bottom-up micro investors.” We look for profitable growing companies that have a unique value proposition and defensible competitive positioning - attributes typically evident in companies with a propensity for innovation in the technologies and/or business models they employ.
For example, we recently invested in MyWebGrocer, a software-as-a-service (”SaaS”) company that provides a comprehensive e-commerce enablement platform for traditional grocers and a high-ROI proprietary online advertising network for large consumer products (”CPG”) companies. The Company has devised a unique business model whereby it can easily allow traditional grocers to offer a full e-commerce experience to customers in a turn-key fashion, and then further leverage its e-commerce buying data coupled with loyalty card information to provide CPG advertisers with a holistic picture of the efficacy of their advertising spend. Through its technology leadership and innovative business model, MyWebGrocer is able to offer unmatched services and value to its clients at a reasonable cost while generating significant growth and meaningful profitability.
In short, we believe that in an uncertain economy, the best way to drive profitable growth is through innovation of technologies and business models. Innovative companies will continue to have strong revenue growth and, over time, be able to maintain and often increase profit margins.
What set of guidelines or target profile/criteria are you seeking from private, Growth Companies (technology) in today’s environment to consider an investment opportunity?
Within the technology-enabled space, we tend to focus on B2B / B2C internet and SaaS companies. Specifically, sectors we focus on include IT business services, digital media, e-commerce, consumer Internet, enterprise software and IT services.
The companies we partner with achieve greater than 20% annual revenue growth, have proven business models, are profitable and have trailing twelve month revenues above $10M.
We have deep respect for bootstrapped businesses in which the management teams are significant equity shareholders, as we find we share their discipline around expense structures and how to most productively invest behind growth.
What does it take for a technology company to go public in this market and what do they need to do to differentiate themselves?
It’s encouraging to see the IPO window “open” in recent months. In order to advocate taking one of our portfolio companies public, we need to have a high level of conviction that, at the time of the IPO, the company would be valued at $500M+, and that within two years of going public, the company would be able to achieve financial metrics that would support a $1B market capitalization. The magic of reaching these milestones lies in the company’s ability to become a relevant and necessary shareholding to a broad investor base so that it can not only successfully access the capital markets to derive an operating edge, but also provide liquidity for large private shareholders such as Stripes Group.
What Technology Sectors do you consider to be ‘hot’ for the remainder of 2009 and will be even ‘hotter’ in 2010?
Generally, we continue to be excited about SaaS businesses and companies that are tool providers in the cloud. Also, we are excited about online retailers with innovative direct-to-consumer strategies, including unique sales models, exclusive inventory access, user content/communities and subscription services, since we believe these types of companies have the crucial ability to engage consumers beyond a simple online transaction or purchase.
Other sectors we think are interesting are data providers that are leveraging technology to allow their clients to make better business decisions. We believe these types of companies are emerging in a variety of segments, including online marketing, ad optimization and healthcare, to name a few.
What private technology companies do you believe are best positioned to be tomorrow’s ‘Category Gorilla’ or ‘Market Leader’ and why?
We are excited about the companies in our portfolio as some of them have emerged as category leaders and others are profitably growing into category leaders.
NetQuote is the Category Gorilla in providing comparison shopping for all types of insurance for consumers and small businesses. NetQuote’s value proposition combined with strong management execution has produced great financial results, and we believe NetQuote is still early in capturing the potential for the business as it is the market leader in a very large market, insurance.
Folica is a great example of a compelling company well positioned to be a category leader in the online sale of hair and beauty products and information. Folica develops innovative products, has a large vibrant community and sells third-party branded products all focused on hair and beauty. The business has strong financial results and is emerging as the category leader with a strong value proposition that is taking share from other market participants
Epic Advertising: With greater than $200 million in annual revenues, expanding margins and solid growth, Epic has emerged as the Category Gorilla in performance-based online advertising. Epic is a good example of a business that has innovated through technology and business processes to grow profitably and quickly through the downturn at a time when other online advertising businesses have not grown.
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