Can Dell be Model for Nurturing Innovation?

I read with interest the launch announcement for the Dell Innovators Credit Fund. Dell has set aside $100m in financing to be allocated in $150,000 chunks to qualifying innovation led companies. For more details check it out - http://eir.dell.com/


Some might see this a vendor financing through the back door, and I wonder if the $100m is the street price of the equipment they will be funding or the COG's? It is also worth noting that this is on the back of Dell's continued inability to allocate internally to innovation (stuck at around 1% of turnover).


In any event I wonder what similar initiatives could be created in the UK market to spark much needed innovation.


I quickly figured out the $100m is about 0.5% of Dell's market cap. Given the allocation they are talking about this could potentially expose them to hundreds of new and interesting companies. Many of these companies will not yield any value add to Dell, but I am sure that something of interest will come out of it!


Wouldn't it be great if "UK Tech Ltd" took 0.5% of their value and found creative and sensible ways to foster innovation. Of course each company would have the criteria that might support their wider aims and needs in life.


As a possible suggestion the recently announced StartUp loan scheme could be leveraged by tech companies if they offered to match the government funding if the start-ups met whatever criteria the corporate partner would set (sector, geography, size etc).

As a simple example, wouldn't it be great for the North East if Sage launched such a scheme to support 20 ventures a year matching the government funds by 5x for young entrepreneurs in the region starting a business in the areas of software, IT, SaaS or other relevant spaces. This would be a £250,000 program and everyone would be a winner.

• Sage would encourage innovation in its back yard, which it could exploit as and when they mature. 
• They show that government and business collaborate successfully. 
• Of no less importance Sage would show that in an era of globalisation it still believes in the importance of giving back to the local community and fostering future talent that Sage and others in the region could benefit from.

By way of comparison if Sage spent the same proportion of its market value as Dell it would be allocating £16m (about 10% of its R&D spend) to this type of activity - now that would be radical!!

Innovation and entrepreneurship needs to be fostered, and the established tech companies have a responsibility to take part in that. More than that it is squarely in their interests to do say, as without home grown innovation it will not be possible to stay competitive in a globally demanding and dynamic market place.

Buyout funds are growing their activity in Israel

Here at Goldrock Capital, as a tech-focused growth equity investor, one of our investment theses since 2008 has been the expected emergence of international and local buyout activity to complement the existing strategic M&A activity within the technology markets in Israel.

This activity is a growing reality in Israel and we expect the trend to spread throughout the market. Many institutional shareholders in Israel have been reluctant to embrace this liquidity event, since generally the feeling is that strategic acquirers pay more than private equity buyers. This of course is true. But since many Israeli technology companies are "sub-scale" for large strategic acquirers, often a recapitalization is best for the company to continue strong growth and access opportunities that would otherwise be closed off within their existing capital structure.

We look forward to this continuing trend! Below is a list of funds and their respective buyout / recap transactions (in parenthesis) over the past few years:

JMI Equity (Paradigm Geophysical - 2012)
Apax (Paradigm Geophysical - 2012)
TPG (iMDSoft - 2012)
Summit (Touro - 2008, Answers.com - 2011)
TA (Answers.com - 2012, Alma Lasers - 2007)
Battery Ventures (Direct Insurance - 2010)
Premira (Netafim - 2011)
Citi Ventures (Ness - 2011)
W Capital Partners (Conduit - 2012)
Taldan Capital (Teledata - 2012, Sintec Media - 2011)
Susquehanna (Netformx - 2009, Skybox - 2011)
Great Hill Partners (Plimus - 2012)
Francisco Partners (Attenti - 2009, Ex-Libris - 2008)
Vector Capital (Aladdin - 2009)
The Riverside Company (NovaMed - 2008)

An important common denominator on the above purchases is that there is seldom a venture fund invested prior to the buyout. We believe that will change and more venture-backed companies will partner with buyout funds in the future.

I am sure I may have missed a few. If i did, please add them into the comments.

UK Tech as an Ecosystem

Really liked Ian Spence's thoughtful piece on the dynamics in the London public markets for UK software companies - you can find the full article here - http://tinyurl.com/cfxqj2c. Ian also referred to frustration (via Neil Rimer's blog) that the UK has not spawned signature IPO's matching the fizz of FB, Zynga, Linkedin, Groupon etc

One of the issues has certainly been that the capital released from the many "take privates" over the years has not been recycled by the City institutions into new IPO's and at best has been invested in the ever decreasing number of surviving companies.

Don't know if anyone has researched this yet, but it would be interesting to know what has happened to those PE backed companies within the UK tech sector that have then been re-financed or sold to strategics? What has become of that money and has it, on the whole, generated new wealth.

Bear in mind that there are probably more tech-minded PE firms in the UK than there are out and out VC funds. In the US and in Israel, it is the opposite, and whilst there is growth in the non-venture private tech strategies in both of these markets, they are both still dominated by the supply of venture for new businesses. The is the life-blood of new innovation, and certainly when you want to see ultra-ambitious and "global-domination" ambition.

A second issue has been that historically most of the public "software" companies in the UK are really IT services companies with differing levels of IP. By their nature, they have tended to be domestic and very few real IP-driven global businesses have been created or backed by the City.

The TechMARK itself is a hotch potch of engineering, telco, and IT services companies with a smattering of hardware thrown in. (Very few obvious exceptions like Autonomy (now HP of course), ARM, CSR and maybe Sage, which is global, although not a traditional global software company in the US sense of the word).

Finally, It is completely unrealistic to build an expectation that London can compete fairly with the US when you look at the make-up, size and global reach of the companies on both sides of the pond (Apple, Microsoft, Oracle, Cisco, EMC etc vs Sage, Logica, Misys etc is just not a fair fight!), and hence why Ian's piece was thoughtful. It takes into account the risk appetite of the UK ecosystem and its long term affect on the type of companies that have and will be built and funded all the way through to being public.

Without a see-change (business culture, incentives, passion, risk appetite etc) this is the way it will continue to be, and in a macro environment that places a premium on cash-flow and visibility and a discount on future growth it will be even more sharply felt.

In Israel (where I am based) there is a much more mature strategic M&A market for tech companies and whilst some of this money recycles back out of Israel to the foreign VC's and institutions that have given their previous backing, much of the money is recycled into creating the next generation of start-ups.

The big question for the UK is whether they have the critical mass across the value chain to create this type of self-supporting ecosystem, and if not, what intervention is required to assist this in happening! (Your thoughts on a post card!)

What next for Dr Lynch?

It is no surprise that Mike Lynch and HP are parting company.


Hard to see how working for a US mega-corp was going to work for the founder of Autonomy having walked away with such an enormous cheque etc.


The big question is what's next for the UK's most successful technology entrepreneur? 


I don't know or have ever met Dr Lynch, so this is really just in the realm of speculation, but I would be surprised if he disappeared into the sunset following the exit from HP.


So what then are the options. In no particular order:

• Lead a new start up from scratch
• Use his wealth to invest in a series of tech companies, in the UK, or globally
• Acquire minority or controlling stakes in existing companies that he believes he can transform
• Join an existing VC or PE fund
• Philanthropy and public service, either to advance the cause of technology, education or other
• Some or all of the above!

There are not many truly global tech companies in the UK, and very few that have reached critical mass. In Mike Lynch the UK has someone who has seen this from "soup to nuts" and it would be great if he used this talent and experience to help others do the same.


As a direct consequence of the previous paragraph there is also a shortage of talented and experienced execs in the tech arena in the UK, which is part of the chicken and egg situation. 


Perhaps this is an area that Dr Lynch can apply his time and money to help nurture and promote the importance of growing the talent pool and its importance to the UK economy in the 21st century.

In any event I would want to wish him the best of luck in the rest of his life, having dedicated the last 15 years building the most successful British software company of its generation.

Sage R&D - bang for its buck (or pound)?

Sage announced their interim's this week, to the slight disappointment of the market. There is growing concern that as organic growth continues to trend in the mid-single digits, and acquisitions are hard to come by, the company will start to approach ex-growth with a knock-on effect to valuation etc.


George O (Panmure) picked up on the fact that Sage supports 270 different products on 70 different platforms.


He also made a headline comparison between R&D spend at Sage and some of its obviously comparable companies. Sage spends 11% of revenue on R&D, in contrast to 12.5% at Microsoft and 21% at Intuit. He adds that if anything there should be a higher spend on R&D than at present. (Note 5-year comparative share performance).


Whilst I accept this point, there is a more stark comment to be made. 


With 11% (or in absolute terms 160m GBP) invested annually in 270 different products on so many different platforms, the only real progress they can make is small incremental steps to maintain and evolve the products, at best, rather than push a more innovative product offering.


Within the other companies he mentioned (and true of most of the global software players) there is a global approach to product development and thus the effectiveness of the spend is magnified greatly.


Unless Sage allocates investment to blue sky thinking and more creative approaches to partnering/investing/acquiring tech rather than market share, they will continue to struggle in their efforts to generate real growth. Unfortunately attempts to generate these ideas internally have not yet been successful enough. One just has to look at the several years and attempts made by the company to launch a joined-up SaaS strategy, never mind product, to understand the difficulty it is in.


Given the amazing position that the company has, very large, global and loyal customer base, and a highly visible and reliable P&L, it could afford to be a little more expansive in its approach to creating long term growth engines for the business.


Part of the solution will be to realise that (at least for the time being) the era of growth via acquiring market share has passed. This will force the company into looking more organically for that growth.


I have always been of the view that there is sufficient talent within the company to rediscover the growth, it does however need to show confidence and leadership to make this happen. 

Professor Elmo explains the National debt in 1 graph

Its incomes that matter. Its incomes that pay the mortgages and supports small businesses. Not GDP. Government expenditure, however it is misspent, is incorporated into the GDP. But have the US citizens been helped? No. Increasing the national debt by 54% in the last 42 months has not had any affect whatsoever on income per capita. And thats in nominal terms. Add in inflation, and they're actually worse off than they were in 2006. To the tune of about 12%. 

Elmo cant make it any more obvious!

Falling unemployment - everything's fixed now? Part 2!!!

This is a follow-up to my previous posting found here: http://goldrockthoughts.blogspot.com/2012/03/falling-unemployment-everythings-fixed.html


Since my posting of earlier today, I have since been on the St. Louis Federal Reserve (FRED) website. I came across several fascinating graphs; which to me imply anything but a stellar recovery in the jobs market that the headlines are screaming out at you from every direction.


Consider that since the year 2000, the workforce has increased by some 33 million people:

wheras the number of total jobs, including full time jobs, part time jobs, temporary jobs, increased by a mere 4 million:

Of these 4 million new jobs, exactly ZERO of them, are full time jobs.

The number of new part time jobs? An additional 28 million jobs. And dont forget the part time jobs can just as easily be 20 hours a week, or an hour a week. Real earnings are falling and the number of jobs you can actually live on remains stuck at 115 million--all the "added jobs" are marginal: marginal hours worked, marginal security (temp), marginal pay (part-time=low pay and no benefits). Hardly the recipe for a roaring labor market.