Sunday, May 31, 2009

Microeconomics, Synergies and Operational Portfolio

A case discussion link below would give you background perspective on this post { Private Equity Case: Dialogic Carve Out from Intel}:

I checked with a technology industry focused private equity investor on whether his investment committee considers synergies across its operational portfolio in its investment decision making. After all, technology is a pretty broad term- do they see an advantage in narrowing their focus?

His rejection of the idea was couched in an excellent example. The investment team would not buy competitors. This was a pretty straight forward discounting of the potential of merger efficiencies, and we can list numerous reasons for it- from strategic ones like the hypercompetitive nature of the technology industry, to investment ones like the heightened risk of a larger company’s underperformance weighing down upon the rest of the portfolio.

However, this should remind you, as it reminded me, of microeconomics. Does rejecting competitors also mean you would reject complements? Strictly as an investment strategy, wouldn’t investing in complements also increase the correlation across investments?

Investment examples in the technology industry would be:
1. Investing in Facebook and Fun Wall, or investing in Twitter and Twitterdeck.
2. Investing in the Transmeta Crusoe process and a windows power management utility for that processor

Would this mean that the investing team needs to have processes in place to monitor revenue correlations across portfolio companies?

The Venture Capital Context
Lets look at this in the venture capital context, discussed in my post here: {Venture Capital: “If it ain’t broke…” Does the VC Model Need Fixing?}

Investing in startups, especially the very early stage ones, needs to account for some strategy shift. However, sometimes even late stage startups may need to adjust their strategy to account for monetization opportunities in tough economic times.

How would the venture capital firm react if this strategy shift made this investment a complement of anther portfolio investment?

What do you think?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.

No comments: