The Role of Research in Venture Capital Investing

According to the latest research from the National Venture Capital Association (NVCA 2012), venture capital is responsible for roughly 12 million jobs and $3 trillion in revenue in the United States and accounts for 21 percent of its gross domestic product and 11 percent of its private sector employment. In 2010 alone, venture capitalists invested approximately $22 billion into more than 2,700 companies, 1,001 of which received funding for the first time.

For those who know the term “venture capital” but aren’t entirely sure what it entails, venture capital firms (there are about 460 of them in the United States) raise funds from large, institutional-type investors–think pension funds, endowments and the like–and invest that money in new companies or ideas they believe will become commercially successful. The goal is to have the start-up companies either go public (i.e., sell shares of their stock to the public) or be acquired (bought) by another company so that the venture capital (VC) firm can pay back the institutional investors who provided the “seed” money and also make a little profit for themselves.

Given the unpredictability of the business world, it’s no surprise that these investments are essentially high-stakes gambles by VC firms. The NVCA estimates that 40 percent of companies that receive venture capital fail, and a similar share produce only “moderate” returns (NVCA 2012). Only about one in every five investments produces significant profits, and it is these returns that make it possible for the venture capital industry to consistently perform better than the public markets.

While making money is certainly important to venture capitalists, the highest ideal in this particular industry is to drive job creation, economic growth and technological advancement by giving a “leg up” to entrepreneurs and helping them turn their bright ideas into products and services that influence our everyday lives. Since 1970, VC firms have invested more than $450 billion in 27,000-plus start-up companies (NVCA 2011), the most famous of which include Google, Microsoft, FedEx, Apple, eBay, Intel and Facebook.

Researching the Deal

So, where do librarians fit into all of this? Well, given that the average venture capital investment is around $7 or $8 million (though investments of $30 to $50 million are not uncommon), venture capitalists don’t just throw their money at every start-up idea that happens to walk in the door. Vetting, or “due diligence,” is crucial to the success of a VC firm. And while it is best to let those with investing experience pore over the financial statements, the research skills required to sort through the various markets, companies, technologies, regulatory issues and individuals related to a potential deal are perfectly suited to the modern information professional.

I should know–I am a research analyst for a top-ranked VC firm in Texas. I don’t have a business degree, but I do have a library degree, not to mention a passion for competitive intelligence and a time-honed knack for unearthing the kind of deeply buried information–especially information about private companies, which tends to live under the radar if it lives anywhere at all–that is invaluable to a venture capitalist. And although the world of investing was outside my comfort zone coming into this job (my background is in library science and journalism), I’ve also learned more than I ever imagined about the ins and outs of successful companies and investments. These days, I can even look at a balance sheet and make some sense of it.

At my firm, I work with another MLIS-degreed research analyst to provide research support to roughly 25 investment professionals. We also offer services to the companies in our portfolio and to our “CEOs in residence” (my firm partners with proven, entrepreneurial CEOs to pursue value creation opportunities in segments of mutual interest), as well as to entities or individuals closely related to the firm. Essentially, we act as reference librarians to the firm and its extended family, with the key difference being that we tend to simply provide the information they are seeking rather than showing them how to find it themselves. In addition, we perform a good deal of synthesis on the data we dig up, both to help clients make more sense of it and to more quickly point them in the direction of an answer.

Inquiries typically come to us through e-mail, though some are made in person or presented over the phone. The next step is often a reply that can take the form of everything from a brief narrative to relevant data points to a selection of materials related to the query subject. Sometimes the other research analyst and I will have the opportunity to use the reference interview skills we learned in library school.

The inquiries run the gamut, from the typical “tell me how big this market is” and “tell me as much about this company as you can” types of queries to personal background checks, searches for CEO e-mail addresses, competitive landscape overviews, news runs, patent searches, trading comparables, acquisition comparables, demographic information, funding data and growth projections–all of them deadline-driven and highly confidential. It goes without saying that you wear many hats in a job like this, but the underlying goal is the same: to deliver a successful customer service interaction to our particular group of users, the investment professionals.

To facilitate our research, we use a number of proprietary databases, including the following:

  • Financial data and analytics providers like Capital IQ and Thomson One;
  • Equity research portals such as TheMarkets.com (recently acquired by Capital IQ);
  • Independent research providers, including IDC, Frost & Sullivan and eMarketer; and
  • News sources such as The Wall Street Journal, Factiva and the business journals.

We also rely on specialized services like Morningstar Document Research and Guidestar, financial- and technology-specific news sources such as TheDeal.com and GigaOM, legal research services like Westlaw and PACER, federal government databases (including American FactFinder and the Bureau of Labor Statistics), and publicly available search engines like Google and Bing. We occasionally reference print publications along the lines of Venture Capital Journal and Private Equity Analyst, but 98 percent or more of our research is conducted on the Internet.

Reverse Engineering

That said, it’s not always simply a matter of fielding an inquiry, performing a search, and then delivering the answer. On a daily basis, we encounter any number of challenges and obstacles that require us to lean on the skills we’ve accumulated during our careers as research professionals. Chief among these is the fact that sometimes the information a person is seeking simply does not exist, at least not in the form he or she desires–or perhaps it does, but only as part of a report that costs somewhere in the five-figure range and isn’t important enough in the grand scheme of things to purchase.

While obstacles like these can be frustrating, they can also inspire the development and implementation of creative search strategies that can sometimes lead us to a piece of proprietary research hidden in the “deep Web” or to an alternative data point that can be manipulated to reveal the answer a user is seeking. The ability to “reverse engineer” is an extremely valuable (if difficult to articulate) skill to have in a job like this one, as is the ability to recognize patterns, especially when we’re trying to piece together the storyline of a particular company or deal.

Reverse engineering, for instance, can come into play if we’re searching for information about a private company and finding little of substance. By examining the company’s business registration or taking a look at the WHOIS record for its URL, we can sometimes identify either the company’s former name or actual name, which often occurs when a firm is using a public-facing moniker named for a flagship product. This approach can also identify principals associated with the company and, in turn, supply us with a bunch of new search keywords. From there, it’s a matter of harvesting information and working back toward the present to provide context around “who” the company is and how and why and with whom it does what it does now.

If we’ve been charged with unearthing the details of the acquisition of a company by either a private equity firm or a corporation, looking for patterns or interesting coincidences can help us find the answer or at least obtain enough information about the transaction to make some solid inferences about it. For example, if the deal is not showing up in the standard financial databases, it’s possible the acquisition was part of a “roll-up,” a practice whereby a private equity firm buys multiple companies in the same industry and “rolls” them up together into a single, larger company. These transactions are sometimes hidden from view, especially when a recently-acquired company makes an acquisition of its own, a transaction that has undoubtedly been funded by its new parent company.

Armed with what we know of other similarly timed acquisitions, we might notice that the LinkedIn profiles of employees of a known-to-be-acquired company show them to be working simultaneously for both that entity and the company whose acquisition details we’re seeking. It’s also possible that we might discover separate news stories about both companies and their plans to relocate their headquarters to the same city. Our research might even lead us to other companies that appear as though they could be involved in the same roll-up, providing us with information that allows us to draw some reasonable conclusions about the acquisition of the company we were researching in the first place.

Of course, there is tedium in this job as well. For example, filling in the cells on a giant spreadsheet to build out a market map or contact matrix is probably not at the top of anyone’s list of good times. Like the more engaging assignments, however, it is something that needs to be done to contribute to the firm’s mission and, hopefully, its continued success.

Looking back on my days as an MLIS student, I can’t say it ever occurred to me to put my new and developing skills to work in the financial industry. Back then, I was on track to be a news librarian, which felt like a sensible path for me given my prior experience as a journalist. A chance meeting opened up a whole new world of possibilities and provided me with a new context in which to apply a set of skills I’d been developing. It’s a venture that has proven successful and reinforced the notion that a background in library and information science can indeed give an individual the professional capital he or she needs to get a “leg up” in the business world.

REFERENCES

National Venture Capital Association. 2012. FAQ: Frequently Asked Questions about Venture Capital. Arlington, Va.: NVCA.

_____. 2011. Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy. Arlington, Va.: NVCA.

This article was originally published in the December 2012 issue of Information Outlook.

 

Twitter Secret S1 Filing

Twitter

Twitter is going to IPO but why can't you find their SEC filing? Where could that pesky S-1 be hiding? Last year my colleague Ryan Field posted about the looming red herring shortage and his prediction has come to fruition. As Ryan reported, the Jumpstart Our Business Startups (JOBS) Act was signed into law in April 2012.  The law is designed to encourage entrepreneurship both by making it easier and safer to go public and by relaxing certain fundraising requirements imposed by the Securities and Exchange Commission (SEC).

Under the JOBS act, Emerging Growth Companies (EGCs are those that posted revenues of under $1 billion during their most recent fiscal year) are able to confidentially file drafts of their registration statement (S-1) for non-public review prior to their actual public filing.  An EGC’s S-1 is only made public 21 days before it conducts a roadshow.

Twitter is one of those EGCs so we know their revenue is under $1billion. Luckily, Twitter is expected to release the filing any day (maybe this week). Each S-1 filing contains unique information about each company but you can usually expect to see five years of financials, breakdown of revenues by type,  and other market research on the industry as a whole. Based on the Facebook S-1 we will probably see a lot of Twitter usage information too.

Watch your Twitter feed for exciting SEC news coming soon!

E-commerce Landscape and Trends

Today in my Internet travels, I came across a great presentation from Josh Yang, a student at Harvard B-school. It's about a year old but still great information on the e-commerce landscape. You can check it out below:

Form D Free For All

FormDs Logo

Do business research for any length of time and you'll likely be called upon to locate Form Ds. And as we bizologists like to say, why not find them for free? First of all, what is a Form D? Our friends at Investopedia define it as "a filing with the Securities and Exchange Commission (SEC) required for companies that are selling securities in reliance on a Regulation D exemption or Section 4(6) exemption provisions." But for our purposes, let's use a simpler definition. Start-up companies file Form Ds when they raise money. And while there are a couple of paid subscription databases you can use to track down Form Ds, you can also find them on FormDs.com.

FormDs.com, founded by  former private equity firm investor Robert Hunt, offers a couple of paid services like monitoring or custom projects, but you can also get quite a bit of great information for free.

My favorite feature is their "Local FormDs" showing investments in a particular city. I simply click on my city of choice and I see a list of recently funded companies in my area which shows me the date and the amount of funding. Even better, once I click on a particular company, I can see their address, company directors and executives, a link to the actual Form D and, better still, a link to other companies in the same industry.

Speaking of industries, I can also filter by industry, location, amount and dates. And then display these results as a list or as a map. Below you'll see I've created a filter showing all the biotechnology companies recently funded in Texas.

FormDs.com definitely earns a spot on our Favorite Resources page.

Free Email Address Verification

Quick Email Address Verification: The other day, I found myself in an interesting situation.  I wanted to get in touch with the VP of marketing of a local company and all I knew was that their company email addresses ended with @companyX.com.   I had a hunch that this person’s email address adhered to one or four common email-address conventions, but couldn’t be sure.  My experience has been that most company email addresses are built accordingly:

firstname.lastname@companyX.com

lastname.firstname@companyX.com

firstinitialLastname@companyX.com

firstnamelastname@companyX.com

To verify that I was correct, and to ensure that I wasn’t targeting the wrong person or sending my message blindly into the ether, I set out to find a good, free email verification tool.  There are actually several sites out there that allow users to validate emails for free.  Here is a breakdown of the free tools that have risen to the top of the search heap:

http://www.verifyemailaddress.org/

http://verify-email.org

http://my-addr.com

http://www.email-unlimited.com/tools/verify-email.aspx

The tests I ran on all of these programs yielded the same results.  However, there were some features that distinguished the good from the bad—namely the number of addresses you can validate in one sitting.

Of these programs, I liked www.verifyemailaddress.org the best.  These folks pay at least some attention to usability, allow you to verify lots of addresses (some sites only allow 5/hour), and don’t bombard users with ads.  All and all, not bad.  If you’re working in a company and want to scrub the email addresses in your database, this site also offers a bulk verification tool (not free).  Here is a screen shot to demonstrate the look and feel of the site:

 

Tools like these are incredibly useful for librarians, CI analysts, sales people, or anyone else who wants to reach out to an expert, potential client, or anyone with whom they are not immediately connected.  I suggest keeping verifyemailaddress.org in your back pocket, should the need to figure out someone’s email address ever arise. 

5 Free Resources for Venture Capital & Private Equity Research

There are any number of subscription databases for researching venture capital and private equity, but as you know, our goal at bizologie is to help you find free information. To that end, we've compiled a list of 5 of our favorite free resources that provide great information for venture capital and private equity. 1. PricewaterhouseCoopers MoneyTree Report--Here you'll find investments by region, industry and deal stage as well as historical trend data and definitions. They've also got a great report called "Roadmap for an IPO: A guide to going public".

2. Prequin--Here you'll find information on fundraising and deals. They also publish The Preqin Quarterly which "outlines the latest developments in the Private Equity,Real Estate and Infrastructure industries over the most recent quarter-year period."

3. National Venture Capital Association--NVCA has a great "Stats & Research" page where you'll find fund raising, performance and exit data. Near the bottom of the page you'll see recent studies which includes the "NVCA Yearbook." Their yearbook "details the state of the venture capital industry and detailed industry statistics for the past twenty years, including commitments, disbursements, IPOs, acquisitions and performance (most recent data is full year 2010)." At a whopping 122 pages, you won't find a better free resource for all things venture capital.

4. Wall Street Journal's Venture Capital Dispatch--"Produced by the editors of Dow Jones VentureWire, Venture Capital Dispatch tracks the fast-moving developments at the intersection of high-tech innovation and venture capital finance. Featuring the VentureWire reporting team in the Silicon Valley, New York, Boston and Shanghai tech centers, Venture Capital Dispatch provides insight into the newest start-ups and latest trends in venture capital investing."  This is a cool, one-stop place for daily VC happenings.

5. New York Times DealBook--"DealBook is a financial news service reporting on mergers, acquisitions, venture capital and hedge funds and is produced by The New York Times."

You'll find links to these on our Favorite Resources page. Have a business research topic you'd like us to cover? Let us know on Twitter @bizologie or on our Facebook page.

Introducing Our First Infographic: Researching Private Companies

Since the world has become obsessed with infographics, we decided to try building one ourselves. There are several different services you can use and after reading about them here, we decided to give Piktochart a try. Take a look and let us know what you think. Have you built an infographic yourself? We'd love to hear about your experience. Tweet us @bizologie or join us on Facebook.

How To Do Research On A Private Company

private logo

We've talked before about how finding information on a private company is much more difficult than researching public companies. So today we thought we'd take an example and walk through some different ways you can track down information. I'm intrigued by the idea of Getaround, a peer-to-peer car sharing company, so we'll use them as our example private company today. If you're not familiar with Getaround, you can check out their video below. It's a pretty fascinating idea. So, let's get started. Though, it probably seems obvious, the first thing I do when researching a private company is check out their webpage. In this case, Getaround's webpage is really helpful right from the get-go, linking me to several articles from The New York Times, TechCrunch and a couple of others. This gives me a great start. Just from these couple of articles, I can already see a few of their competitors and an estimate for the number of people using the service. And that's all from the front page. If I click on "Press" at the bottom of the screen, I'm taken to even more articles. Of course, if I'm Getaround, I'm only going to link to articles that reflect a positive opinion, so you'll definitely want to do an independent news search, but I've still got a great start.

If the company I'm researching has a technology slant (Getaround uses iPhone apps, etc.), I'll see if they're in Crunchbase (You can see our previous post about Crunchbase here.) Luckily for this post, Getaround is in Crunchbase and I can find out all kinds of things here.  I can see how much, when and from whom they got their funding, where they're located and who the important people at the company are. Crunchbase also shows me recent news articles, competitors and screenshots. For a free resource, you really can't beat it which is why they've earned a place on our Favorite Resources page.

Another of our favorite resources for private company research is BizJournals. You'll see a search box up at the top right corner; just plug in your company name and snap! Eleven articles about Getaround which include funding information, quotes from the founders and a bit of company history.

Lastly, it's sometimes helpful to run a Google search on the company you're looking for and limit your results to PDFs. In this case my search looks like this "getaround cars filetype:pdf".  These types of searches will take you to things like press releases, market research reports or contracts. You can do the same thing by limiting your search to PPT or XLS to find presentations and spreadsheets. You'll be surprised at all the things you can find if you're a savvy searcher.

All this for the low, low price of free.

Valuethiswebsite.com

Website_Valuation

As the title implies ValueThisWebsite.com is one of the multitude of valuation tools for ballparking the worth of a url.  Of course the creators, for whom English is apparently a second language, do not disclose their secret recipe for how they are calculating said value.  (Read: take the number with a block of salt.)  If you go to another valuation site, you'll see different figures.  Nevertheless it aggregates a handful of nifty informative tidbits, including the IP address plotted on a google map, the Alexa ranking, visitation charts, and the reason why I like it for private company research- estimates of daily ad revenues. If you believe its valuation system, then it's useful for comparing public and private companies, e.g. Petsmart.com (public) vs. Petco.com (private).  Looking up URLs could give you an idea of the relative size and/or market share of Petco when it isn't spilling its guts to the SEC like the competiton.

One more thing: you might see the 'Websites with Similar Value' tab on the search results page, but it's really not worth your time.  It only returns sites with adjacent traffic rankings, not categorical competitors like the aforementioned pet supply stores.

A Gift Horse From Inc.com

Inc_Profitability_Banner

Because private company financial data is so tricky to uncover we’re always really excited, time and again, to mention any tool that helps us accomplish that task.  So what to do when you’re investigating how well a private company should be performing in a particular industry, but they’re not being forthcoming with figures? The good news: 1) You can check out this free toy from Inc.com: its Profitability Report.  For this content Inc.com sourced from Sageworks, which aggregates private companies’ financial data in order to “enable you to benchmark a company's performance to its peer group.” 2) Choose a category from the list and see a neatly laid out chart that includes several important numbers such as: Sample Size, EBITDA Margin, Sales per Employee, Current Ratio etc. 3) And if you’re a bit rusty on your accounting vocabulary, it provides simple explanations below each term.

Now the bad news: 1)  Inc.com loudly touts a calculator feature, but unless I’m sorely mistaken, this calculator does not in fact exist as of this writing.  Hopefully it will be available in the future. 2)  Another important caveat is that the industries covered are very broad.  If you’re trying to open a new theater chain, pretty much the only relevant category is “Arts, Entertainment, and Recreation,” rather than “Theaters.”  Hence the validity of this data could be questionable depending on the type of research you're doing. 3)  I visited the Sageworks mothership directly to see if they had a better version of this tool.  They didn’t, and instead they asked me to sign up for a single sample report.  Meh.

Social Media for Business Research

SocialMediaBizResearch

As more and more companies are using social media to connect with their customers and spread the word about their products, it makes sense  that as business researchers we need to keep these social sites on our radar. We wouldn't dream of not scouring the company website for insight, and now we should feel the same way about the company presence on LinkedIn, Twitter, Facebook, and YouTube. Social Media is extremely important for researching smaller private companies and start-ups because you won't find reports or news on them elsewhere. LinkedIn - Search for the company and link to the "Insightful Statistics about Employees" section to see which employees are on LinkedIn, where they have worked before and where they went after they departed. Look to see what Groups the company belongs to.

Facebook - Look for who the company "Likes" to see find vendors, partners, suppliers, and enthusiasts. Keep an eye on the timeline for product announcements and progress reports.

YouTube - Search for the company channel to see videos. You can see who works there and sometimes their customers. A video can tell you a lot about corporate culture.

Twitter - Consumers are using Twitter as a complaint line, so watch how the company handles those issues and interacts with the customer. You can use HootSuite or TweetDeck to follow multiple companies and/or keywords of interest.

Pinterest - The fastest growing social media site right now! Search for company name under the people search or just Google company name and Pinterest. Companies can show you in images what represents their values and culture.

The Offical Board - Organizational charts of the world's 30,000 largest corporations. Find contacts at companies and see the reporting lines.

CrunchBase - Free database of technology companies, people, and investors. You can find funding information here that you won't see anywhere else.

We Owe Forbes a Cocktail

Forbes_Private_Companies

Business researchers are asked all the time to provide financial data on private companies, and as you can see here and here, we love any resource that helps us pin down those numbers.   Today we’re looking at one more resource from none other than Forbes, the reporting powerhouse that puts forth juicy lists on all sorts of stuff including rich people, good colleges, and small companies. The good people at Forbes have, for the past several years, been making a list of America’s Largest Private Companies, and even better, they’ve freely posted it online for our benefit.  Here's the complete 2011 list.  Besides an estimated revenue, (for which Forbes details their methodology) this ranking also includes industry and employee count criteria, both of which are sort-able features.  Below is an excerpt from the list- the top chemical companies.

Thanks, Forbes!  You kick @$$, and we at bizologie love you dearly for it.

The Business Journals for Private Company Research

bizjournal logo

If you spend any time conducting business research, then you know that finding private company research can be really difficult. Especially if the company is new or small. Private companies are not required to release information about themselves to the SEC,  so tracking down things like sales figures, revenues, private equity funding, company history or future company plans can be trying at best. One of our favorite resources for private company information is "The American City Business Journals" or, more commonly, BizJournal. BizJournal comes out every week and covers 62 markets nationwide. Some of their information is subscription-based but a fair amount of it is available freely on their websites. While it's possible to search their main site for companies, I typically go straight to my local BizJournal, Austin in this case, and start my local company search there. Austin is a town of startups, including Whaleshark Media, MapMyFitness, UShip, BuildASign and countless others. I've had great luck finding in depth articles about most of them in our local BizJournal. As an example, this article on Whaleshark Media, tells me when the company started, how many employees they have and how much money they've raised and who the investors are. Not bad for free, easy-to-find information.

Another helpful thing to do is follow the national BizJournals and your local BizJournal on Twitter. The local one is especially helpful for keeping up with not only local businesses, but also events going on around town. You can follow  the national account @bizjournals.