Written by Katharina Dalka, CEO StellarOne
Investment in technology firms is not always straightforward, especially for those investors who keep a more generic investment approach to their portfolio. I recently spoke to an PrivateEquity director and she openly admitted that her team would shy away from certain tech investments out of lack of knowledge regarding the industry.
Of course there is always a human factor to any investment, which I will address in a later post. Beyond the aforementioned however there are technical – and with “technical” I mean investment-related – criteria to be taken into account to evaluate a potential opportunity.
Market relevance
As for any product or service, there should be a market. In technology this might be a mature market, i.e. outsourcing, or a new market. I.e. artificial intelligence. Now one is not necessarily better or worse than the other, however the potential investee should show a clear path in this market and how they will outperform the market. A mature market can be a great field of investment as long as the competitive edge is clear – which brings me to my next point…..
Competitive edge
…… is not necessarily something fancy. I have encountered mature IT companies in mature markets. They were one out of 1000. But they had the little add-on, the free customer service, the high end implementation consulting service, the vertical knowledge that made the difference. They knew their competitors and knew where they struggled – and stepped into the breach. And last but not least, of course….
Quality of Revenue Streams
Depending on the maturity of the company, revenue streams will differ of course. The most important thing to look at though: is the product/service scalable, expandable, viable in the long run. Any company that seeks for sustainable growth will have to look at the right melange between on-off high risk-and high-margin revenue and low-risk recurring revenue (which is not necessarily low-margin).
These above-mentioned items are of course not exclusive, but allow a fair evaluation of the viability of the opportunity before entering more complex and time consuming discussions with potential targets.
This is an overview, please get in touch with us if you wish to discuss further.
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