Like the recent demise of go.com, many of the dotcoms are going, going, gone.com. As the body count increases, it’s clear there’s no guarantee that an underwriter will not be forced to become the undertaker. Many high profile dotcoms have lost a staggering amount of their venture capital contributions before slinking off to bankruptcy court.
Birthing a BPO supplier may be a safer bet. Web-enabled applications have made the BPO offering irresistible. Outsourcing typical BPO functions like finance and accounting or human resources continues to gain popularity because outsourcing helps companies reduce their risk. The outsourcing vendor is an expert in the field, so it can do a better job than the in-house folks who aren’t as up-to-date on the latest.
In addition, buyers don’t want to focus on the new technology associated with these outsourced processes. Suppliers, however, are eagerly investing in this technology.
Buyers are also tired of trying to attract and retain back office employees in full employment areas like Silicon Valley. BPO providers have a much easier time finding talent.
Thoma Cressey Equity Partners in Chicago, Illinois, is a venture capital firm that focuses on funding service-oriented business like outsourcing firms, according to associate David Schuppan. To date, Thoma Cressey has invested $450 million in its sixth fund. The majority of the 15 companies in the fund are outsourcing suppliers.
Finding Management Teams ‘At the Top of Their Games’
Schuppan says the first thing his firm scrutinizes is the management for the new company. “We try to identify the handful of management teams at the top of their game in their respective industries,” says the investment banker. The venture capitalists want to determine if these executives can open doors to generate sales and bring in new business.
In free-ranging discussions with the team leaders, Schuppan will ask, “If you could start your own company, what would you do differently?” The goal is to form a new company with a new vision.
For example, Thoma Cressey noticed an opportunity in the trade show exhibition arena. The largest company in this fragmented world “was a behemoth that had lost the ability to provide good customer service,” he reports.
So the venture capital firm began looking for a management team that could not only build exhibits but also provide the logistical support needed to deliver the exhibits to shows anywhere in the world. “We wanted to provide a total turnkey solution,” he says.
Thoma Cressey identified Sean Mahoney, who had attended the Harvard Business School with a Thoma Cressey partner. Schuppan calls Mahoney, who had experience in the exhibit world, “a serial entrepreneur.”
Mahoney had pulled together a strong exhibit business by purchasing five different businesses in five different cities. Mahoney had a track record, always a prerequisite for the venture capitalists. Mahoney had also recently hired the behemoth’s head of sales.
Moreover, he had successfully built and sold a video rental business primarily through acquisitions. The money people had proof he knew how to weave companies together.
Thoma Cressey approached Mahoney and the two realized they shared a mutual vision of the industry’s future. The result became Folio. “We provided the equity to make this vision grow,” says Schuppan.
Thoma Cressey funded Folio in August 1999. Since then, the company has been growing organically and looking for strategic acquisitions to fill out its service offering and geographic coverage.
No Day-to-Day Involvement
Firms like Thoma Cressey manage their venture capital investments like outsourcing relationships: each party focuses on its core competency. Schuppan says his firm prefers to act as the financial partner. Although firm members have board positions and work closely with the executives in making strategic decisions, they rarely get involved in day-to-day operations. “We back people we know can run their own business,” says the executive.
Thoma Cressey has also funded two spin-outs: LECG, a specialty litigation consulting firm carved from Navigint, and American Amicable, a life insurance company it bought out of bankruptcy court. In this case, Thoma Cressey had worked with Chuck Cooper, its executive, before. “We had strong confidence in Chuck’s ability to build the company,” Schuppan says. “We saw an undervalued asset that we could make money at with the right management team.” Schuppan adds Thoma Cressey only purchased a part of the life insurance company. “The piece we knew,” he explains.
When searching for a spin-out that will prosper, Thoma Cressy looks for a division that has “orphan status.” The parent company has underutilitized its resources, which leaves it plenty of upside potential. “We believe if you pay attention to the division, things will get better,” Schuppan explains.
In these cases, the management challenge is to reestablish the business so it can operate on its own. Restructuring usually brings the business back to a healthy, performing status.
The bankers have not yet funded an internal group that wants to go it alone. “There are easier battles to be won,” he explains. Divisions that have had one captive customer — the parent — rarely know how to sell their services to the rest of the world. However, Thoma Cressey studies all transactions on a case-by-case basis and would fund an internal spin-out if the right constellation of factors lined up.
Lessons from the Outsourcing Primer:
- Management is the starting point for venture capitalists seeking a new business opportunity.
- The management team should have experience in growing companies through acquisitions.
- Venture capitalists do not get involved in day-to-day operations.
- Orphan divisions that have been ignored by their parent corporations make good candidates for venture backed spinouts.