The 2010 Trident Capital Investment Strategy Session

couple of weeks ago, our partnership met to discuss our investment strategy for the next 12 months. We hold this session every year. But this year’s meeting was particularly important because we discussed the overall investment strategy for our new fund (Fund 7). We also reviewed the market conditions in the sectors where we invest, the investment themes we want to pursue in each sector and the continuing evolution of the venture industry. This is a particularly interesting time to be investing in IT and internet. IT is undergoing a platform shift to cloud computing. There is a continuing shift from offline to online impacting consumer and corporate internet. Governments and companies are using IT to tackle healthcare costs and quality of service. Aiming to capitalize on these trends, entrepreneurs are creating new companies at a rapid pace. Technology and business model innovations are resulting in capital efficiencies that benefit investors and management teams.

As I posted before, last May we announced the first closing of our seventh fund. Thus far we have closed $350M out of a $400M target. We have come to realize that in this environment, only top performing venture firms, like Trident, are able to raise new funds. With the amount we have already raised, we are able to fully execute on our investment strategy. Trident has always been a multi-stage venture investor. For each of our previous funds we created balanced portfolios investing equally (by dollars invested) in early-, expansion- and lat- stage companies. We define “early-stage” as companies with up to $5M in annual revenue (including pre-revenue) at the time we invest. “Expansion-stage” refers to companies with less than $15M in annual revenues and are unprofitable. Finally, “late-stage” stage companies are those that have at least $15M in annual revenues and are at least breakeven.

In the fall of 2008 we had advised our companies to prepare for adverse financial conditions that could last until June 2010. During that period we did few new investments. Today while the economy is exiting the Great Recession we remain cautious about the economic environment and will remain so for the next 12-18 months. As a result, we expect to take a slower than normal investment pace (investing in 8-10 companies per year, rather than what had been our normal pace of 10-12 investments per year) and hold in reserve more capital for each investment than we used to.

We also expect that Fund 7’s portfolio will be weighed a little more towards expansion- and late-stage companies. Moreover, for early stage software and internet investments we will be looking for companies with at least $2-3M in annual revenues at the time we invest and less at pre-revenue companies. Our approach towards early stage-companies will necessitate that we collaborate closely with venture firms that fund very early and seed stage companies, as well as with super angel funds in order to have access to the right high quality deals.

During our strategy session we decided to leverage our sector expertise across all the stages we invest. Over the years our firm has developed deep expertise in:

Security, where our sector knowledge helped us invest early in companies that provided solutions to emerging security threats such as the security of virtualized environments;
SaaS¸ where our investment experience dating to 2000 helped us develop a set of corporate performance metrics and KPIs that today drive our SaaS portfolio companies;
Business analytics and data warehousing, where we have been early investors of cloud-based BI and analytics solution companies;
Healthcare IT, where we’ve been investing for the past 15 years;
Online advertising, where we invested early in companies now driving the automation of display advertising;
Ecommere, where we have successfully invested in direct response ecommerce companies;
IT outsourcing and business process outsourcing.

For the most part, we had successfully used this expertise to proactively identify early stage investment opportunities, including pre-revenue companies. Earlier this year I had written about the software and internet technology areas that are of investment interest to Trident. We had been more opportunistic in identifying late stage investment opportunities. For such investments we relied mostly on intermediaries, e.g., investment bankers. As more funds begin to focus on later stage investment opportunities, we expect that the competition for the right late-stage company and the appropriate deal structure will become even more heated. Under these conditions, we believe that by using our deep sector expertise across investment stage we will be able to find more investment opportunities that will be proprietary, better differentiate our firm from our competition and craft more advantageous deal structures.

Our approach towards entrepreneurs and management teams remains unchanged. We will continue seeking to work with the best entrepreneurs and management teams. Moreover, once we back them we will work tirelessly to bring the full capabilities of our firm (networks, business model know-how, and sector expertise) to enable them to reach the full potential of their ventures.

We look forward to creating a portfolio of great companies for Fund 7. We consider this a fertile period for new investments. The pace of technology innovation is at an all-time high, new and experienced entrepreneurs are capitalizing on this innovation pace and are starting companies, and, like with every past recession, the Great Recession has led to the emergence of private companies with enduring models and value that represent wonderful late stage investment opportunities for Trident Capital.