Category Archives: Case Studies

Industries for Private Equity

Note: for information on the Watchtower industry screening tool, please contact me here.

For small private equity firms, choosing attractive industries to focus time and effort is essential to success. Private equity firms don’t just invest in high tech. Industries can range from food services to Recreational Vehicle parks (see Context Capital Partners) and everything in between.

Looking at all the industries in the U.S., we can see how they have been growing over the last few years, and see how many industries are controlled by big business versus those that are fragmented and have small and midsized businesses in the industry:


As you can see, there are quite a few industries out there. Now let’s take a look at just those industries with high profit margins (>20% EBITDA):


As you can see, there are many fewer industries with high profit margins, but there is still a wide spectrum among those that are growing and those that are shrinking, and among those controlled by big business, and those with many small and midsized companies.

For those curious about the shrinking industry with high EBITDA margins – it is the Miscellaneous Publishing Industry (NAICS Code 511199), with $7.5 billion in sales, 1,100 firms, and negative growth of 32% per year.

Is it Tightwad Bank, or Peculiar?

The Washington Post highlights the latest entrant in the financial services industry. Tightwad Bank is a legit FDIC insured operation named after its hometown of Tightwad, MO. Current deposits are in the $1M range, and co-owners Donald Higdon and Jeff McCalmon plan on additional revenue through an internet site, and also selling hats, t-shirts and other memorabilia to curious tourists.

Opportunities about in this area of rural Missouri (just 90 miles from Kansas City) – where nearby towns are named Peculiar, Racket, Blackjack, Wisdom , and Fair Play.

ADVANCE REVIEW: Mastering the Hype Cycle

Title: Mastering the Hype Cycle: How to Choose the Right Innovation at the Right Time
Author: Jackie Fenn and Mark Raskino
Hardcover: 227 pp.
Publisher: Harvard Business Press (October 13, 2008)
Just as individuals are notorious for buying stocks “high” and selling “low,” companies make exactly the same mistake with technology adoption.

A new technology emerges. Experts squeal with delight over the possibilities this technology will allow. Companies rush to adopt…but too soon. There are still kinks to be worked out, bugs and issues not yet discovered. Implementation is behind schedule and over budget. And the first-adopters begin to bail out. The technology, they believe, has failed. But again they are wrong. Even as they throw up their hands in failure, the technology is maturing and evolving. It may not live up to the initial hype that was once described, but it often has a powerful role to play.

Fenn and Raskino, analysts at technology research firm Gartner, have seen companies fall into the same traps time and time again. They describe why this happens, how hype corresponds to actual technology developments, and most importantly, how to use this knowledge. They also introduce frameworks such as radar screens and innovation scorecards used at Gartner and elsewhere to improve the decisionmaking process.

Will this be sufficient? The “hype cycle” provides a clear understanding of why things go wrong, post-facto. “You were too early / you were too late.” But even with the frameworks provided, many will inevitably fall into the same trap of buying “high” and selling “low.”

Bootstrapping your way to Fortune 500

I recently met Mike Mecklenburg of Chicago Micro. They are a year-old startup going head to head against CDW, a behemoth IT hardware vendor with $8B in topline revenue.


  • Negotiating credit lines with manufacturers and wholesalers.
  • Drop-shipping from partners’ warehouses across the country
  • Actively partnering with cutting edge manufacturers
  • Developing and maintaining strong customer relations by offering a dedicated service rep who is truly dedicated – and available by cell phone 24×7!

In the new world of startups, a company can focus on negotiating partnerships and managing service rather than developing in-house brick-and-mortar operations. Now even CDW competitors can be boot-strapped!

The Art of the Presentation

My presentations are bad. Very bad.

And here’s why:

  1. I like to improvise.
  2. I don’t stick to a clear, simple story.
  3. I get bogged down by details. When I know too much about something, it’s hard to stay at the 30,000 foot overview
  4. I’m bad at telling jokes or anecdotes.

Any one of those four flaws could turn a great presentation into a dud. Sadly, all four together becomes the perfect storm of tedium.

What can be done to improve? Here are some tips I’ve picked up from working with one of the best professional speakers in the country:

    • Practice always. Every conversation – even with a friend or ordering a hamburger – is a presentation. Live the role.
    • Develop a repertoire of anecdotes that can be pulled out as appropriate.
    • Tailor the material to the audience – understand and focus on their interests


      • More often than not, visuals are distracting

      Note the supporting materials for Bill Gates vs. Steve Jobs (courtesy of Presentation Zen). See if you can spot the difference.

      Steve Jobs Presentation

      Steve Jobs

      Bill Gates Presentation

      Bill Gates

      Which audience would you prefer to be in?

      Strategies in Funding Scientific Research

      Scientists believe that 65.5 million years ago, an asteroid triggered the mass extinction of the dinosaurs.

      Some scientists also refer to a second “asteroid strike” – a period in the 1990’s when NIH funding virtually disappeared, triggering the extinction of countless research projects.

      Dr. Steven Wiley, an expert in systems biology, describes this second “extinction” in a recent column in The Scientist. He ascribes his personal survival to two basic strategies:

      Adaptation: Once Wiley determined that the NIH was not funding any projects in his field of research, he looked for other sources of funding (e.g., NSF or DOD) and adapted his research to the sources available.

      Hardiness: Despite the dearth of fundin, Wiley continued his research, using whatever resources he could muster. He volunteered at a company in exchange for access to lab equipment and supplies; and he partnered with other scientists to work on projects that had received funding.

      The story he tells and the techniques he uses are no different than that of countless businesses and entrepreneurs. What is interesting is that these simple strategies apply not just to business but to the scientific community as well.

      Massively Multiplayer Online Game (MMOG) Hosting Market Opportunity Analysis


      The MMOG market is expected to double in the next five years. MMOGs differ from typical computer games because they are perpetual virtual worlds, meaning that users can continue to play forever building on previous play. New players are constantly starting to play these game and continue playing them, creating a snowballing user base.

      Traditional game developers are beginning to discover a new sources of revenue from MMOGs. The developers typically offer a free version or trial period to attract users, and then a subscription-based version (typically $10-$20/month) to keep the on going revenue stream. In the future, MMOGs are likely to generate additional revenue through advertising and non-traditional revenue sources such as virtual sale items.

      Overall, DFC Intelligence estimates the market will double by 2012, reaching $13B worldwide. Half the revenue will come from East Asia, 25% from North America, and the remainder from Europe and Japan.


      The 15 largest MMO Games are as follows:

      MMOG List

      Of these fifteen MMOGs, the fastest growing (based on 2006-2007 subscribers) are:

      • World of Warcraft
      • Second Life
      • Guild Wars
      • Dofus
      • Runescape

      Additionally, the following venture-backed MMOG developers are likely to launch in the next 1-2 years:

      • Real Time Worlds will be launching “APB” in 2008
      • Red 5 Studios is developing an as-yet unnamed MMOG
      • Areae is developing an as-yet unnamed MMOG


      Leading MMOG Hosting companies:

      • AT&T
      • Online Game Services (OGSi)
      • Hypernia
      • Valve Software

      Additional hosting companies used by MMOGs:

      • APIServers (
      • Go Daddy (
      • JHServers (
      • ServePath (

      Most game developers do not have the capabilities to host games themselves. Rather, they rely on outsourced MMOG hosting services. Even the largest MMOG developers such as Blizzard, Activision and Electronic Arts use third party MMOG hosting services.

      Whether an MMOG game developer is hosting a game in-house or outsourcing it to a hosting company, the following three issues are most important in selecting IT vendors:

      1. Price – minimize price of both hardware and bandwidth. A rough estimate for hosting prices for 100k subs requires 30 servers plus bandwidth and costs $50k/month. (Note this includes ammortized hardware costs, bandwidth, and managed services)
      2. System stability and scalability – ensure data isn’t lost or corrupted and system can scale to handle growing subscriber base.
      3. Bandwidth and latency – maximize uptime at all hours of the day, since most MMOGs are highly international and cross all time zones. Provide sufficient bandwidth for peak usage. Minimize latency by using NOCs collocated near major POPs and with localization in areas with large numbers of gamers.

      The largest IT vendors for the MMOG market are IBM, HP, and Dell.


      A vendor seeking to serve the emerging MMOG market should take the following approaches:

      1) Target both large MMOG developers that do their own hosting and also outsourced MMOG hosting companies. To avoid competing on price, focus on system stability, scalability, and management tools that can support the MMOG environment.

      2) Focus on the development stage. Historically, MMOGs could be hosted on any vendor’s hardware, but as developers seek to increase system stability they are increasingly becoming platform dependent. This means that if an MMOG developer uses a specific vendor’s hardware for development and testing, they are likely to request the same vendor’s hardware for hosting.

      In order to assess exactly how a company can enter this market, it is necessary to understand how the company is currently positioned. The Ansoff matrix provides a basic framework to understand what type of entry is needed – based upon a company’s product portfolio and market space.

      Ansoff Matrix

      A go-to-market strategy required for a Market Development play is quite different from those required for a Product Development play, and different still from Diversification.

      One of the immediate next steps to take will be to benchmark your company’s current status along key dimensions. Using a “Points of Differentiation” graph, it is possible to tailor the go-to-market strategy to take advantage of the company’s strengths.

      Points of Differentiation

      In the example above, a company may be strong in performance, reliability, average in scalability, reputation, service and price, and weak in value-added services. After analyzing other vendors using a similar framework, a company with these particular points of differentiation might choose to focus on midsized MMOGs with 100k-200k subscribers.

      MMOG Data

      DFC Intelligence – Online Game Market Forecast

      IGDA (International Game Developers Association) – Hardware and Hosting

      GigaOM Top 10 Most Popular MMOs

      MMORPG Developer’s Forum


      IDC – ASEAN Online Gaming 2007 – 2011 Forecast and Analysis

      IDC – China Gaming 2007-2011 Forecast and Analysis

      IDC – India Online Gaming 2007–2011 Forecast and Analysis

      Digital Asset Management

      When choosing a company’s DAM solution, there are five key criteria that should be evaluated. The relative importance of any criterion will vary based on the strategic objectives and particular situation of your company and should be adjusted accordingly.

      1. Scalability of platform
      2. Versatility of solution (media files supported, specialized applications)
      3. Accuracy of results
      4. Speed of indexing/retrieval
      5. DAM System Type

      The first four criteria are self-explanatory. However, the fifth require some additional context. Typically, DAM systems were designed to serve one of two purposes:

      • Search Indexing consists of cataloging thumbnails of original media in an indexed database that can be searched using keywords. The source files are left untouched. At present time, most indexing approaches rely on embedded tags manually encoded into files. An accurate and reliable computerized method for visual query of still images and comparison of visual similarity of video shots to “create and embed tags into files” is an open problem with ongoing research
      • Asset repositories store the source files in a secure database. Benefits include security, referential integrity, and centralized data management along with full storage management and disaster recovery. DAM systems based on the asset repository model are most suitable for managing rights and access permissions that include intellectual property rights, and structuring global access by customers. The centralization of assets requires significantly higher performance hardware such as high-end UNIX servers, substantial online storage, and very high-speed networks. Capital investment requirements for catalogs are 10x to 50x the cost of catalogs.

      Based on the five criteria listed above, we have evaluated a number of DAM products to determine their suitability for the multimedia search and content management. We found many jack-of-all-trades asset management solutions. However, these solutions tend to have crude and rudimentary search functionality. For best-in-class multimedia search capabilities, we suggest you look into Virage for still-images and video, and Truveo or Blinkx for video-only search. Additionally, Microsoft is developing next-generation tools that may alter the competitive landscape in 4-7 years. Below are details on each company.

      Autonomy, Inc.
      19th Floor
      Spear Tower
      San Francisco, CA 94105
      Tel: (415) 243 9955The Virage video indexing applications offer an array of commercial grade features, plus additional specialized applications (such as surveillance video analysis). The system quickly indexes video and still images, and encodes it for real-time searchability. Virage is a wholly owned subsidiary of Autonomy, Inc, a UK-based company with a $2B market cap.

      Cost of the Virage software is between $200k-$500k if used internally. If the system is “monetized” for use on a website, the company would charge $1M

      truveo.pngTruveo, Inc.
      An AOL Company
      333 Bush Street, 23rd Floor
      San Francisco, CA 94104
      Phone: 415-844-9000Truveo powers many of the main video search sites including AOL, Microsoft,, Excite, and Infospace. In 2006, it released the Truveo Developer site, which provides a variety of APIs for 3rd party sites.

      blinkx.pngblinkx Inc. (London AIM:BLNX.L)
      One Market, 19th Floor, Spear Tower
      San Francisco, CA 94105, USA
      Phone: 415 848 2986

      Blinkx’s accuracy in searching video comes from analyzing the closed captions and using speech recognition (English, German and Spanish) to generate transcripts. Image analysis is also done, though on a lesser scale. Their website boasts of 14 million hours of searchable videos.




      ms.png Microsoft Live LabsSources at the National Security Agency report that Microsoft’s blue-sky research is head and shoulders above other companies. Two products under development illustrate these advances:

      • Photosynth is a tool that takes images of related topics and seamlessly reconstructs them into a navigable universe
      • Seadragon is a technique that removes the computational performance barriers of image search and display

      These technologies do not directly solve the problem of multimedia search – since they require a collection of related photos. However, as these tools are developed, they will be instrumental in changing the way we search.

      dvml.pngDigital Video Multimedia Lab
      Department of Electrical Engineering
      Columbia University
      1312 S.W. Mudd
      500 West 120th Street, New York, NY 10027
      Phone: (212) 854-3105Academic research labs such as that at Columbia are developing new algorithms for content analysis. The Digital Video Multimedia Lab is sponsored by AT&T and the National Security Agency. Research focuses on five areas:

      • Multimedia indexing and management
      • Feature extraction and object/text recognition
      • Pervasive media
      • Authentication and watermarking
      • Multimedia standard, testbed, and evaluation




      ibm.pngIBM Multimedia Analysis and Retrieval System
      Intelligent Information Management Dept.
      IBM T. J. Watson Research Center
      19 Skyline Drive
      Hawthorne, NY 10532 USAIMARS employs a multi-modal machine learning algorithm. In its demonstration form, it supports 10-20 semantic concepts over a mere few hundred hours of broadcast news clips. A fully functioning version requires a semantic ontology of 1,000 concepts – just to cover broadcast news. Although it is still far from commercial viability, the techniques employed appear very promising, given additional development.

      quick-square.pngQuick Square LLC
      3510 Snouffer Road Suite 200
      Columbus, OH 43235
      Phone: 866-849-5844Enterprise-grade multimedia management and repository, with keyword-based search and categorization

      700 King Farm Boulevard, Suite 400
      Rockville, MD 20850
      Phone: 301.548.4000Enterprise-grade multimedia management and repository, with keyword-based search and categorization. Typical license costs $100k – $200k, with customization available.

      APPENDIX: Technical Approaches to Video Indexing

      Recent developments in indexing videos have used optical recognition software to scan video files for closed captioning. Speech recognition software employing neural networks and machine learning using “hidden Markov models” can index video files that do not have closed captioning.

      An accurate and reliable computerized method for visual query of still images and comparison of visual similarity of video shots is an open problem with ongoing research at academic universities and private firms. Video contains an enormous amount of visual information with 25 frames every second, high VGA resolution, and a high color depth. A popular method to simplify the data analyzes key frames as a representative sample of a video scene rather than keeping thousands of frames. When there is motion or large variance in the sequence, key frames may not capture complete visual information.

      Researchers are proposing an algorithm that uses motion estimation to generate a series of key frames based on detection of significant camera motion. Producing even a few key frames of a scene presents a serious indexing problem along with redundancy clutter.

      The standard approaches are the “query by example” and “query by keyword” models. Research is now exploring “probabilistic semantic indexing” to accommodate concepts in addition to key words.

      Trends in Digital Entertainment

      The Digital Entertainment Industry can be broken down into a value chain with four main components:

      Digital Entertainment Value Chain

      Content creation: this includes writers, artists, filmmakers, and investors in these endeavors (such as producers). The value of the content depends primarily on quality and reputation of the creator

      Content Distribution: this includes portals such as Yahoo or Myspace, television networks, radio stations. The value comes from a combination of quantity, quality and accessibility

      Content Communication: This is the value of the “pipe.” There is value in bandwidth as well as geographic spread. In particular, this is the “last mile” problem – the astronomical cost of building a network capable of reaching many individuals’ homes. Currently, the two types of companies with their own last-mile solution are telecom companies (Local Exchange Carriers) and cable companies (MSOs). Satellite companies generally don’t have uplink ability. Next-generation technologies such as WiMAX may avoid the cost of laying wire, but have yet to emerge as a dominant force.

      Content Display: the consumer devices required to decode and display the content. This includes ipods, televisions, DVRs, and radios. Value comes from form, functionality, and integration with other devices and services.

      Based on the above value chain, one can see how a few of the current trends will continue to play out over the next few years:

      1) The “long tail” of content creation: user-generated content is essentially the lengthening of the tail within content creation. As more independent artists/authors are able to distribute their work, we will see demand for the top performers weakening. As competition within the Content Creation category increases, the next leg of the chain – Distribution – will have increasing influence and be able to capture more value (and revenue).

      2) There are two countervailing trends in the Communication sector: first, alternative “last-mile” access are becoming available. For home use this includes, triple-play products from cable-cos and telcos, and next-generation fixed wireless solutions. For mobile communications wifi will continue to evolve, and compete against EVDO/WCDMA 3G networks, and WiMax 4G networks. The second trend is in the increasing need for speed. People will pay more for faster, better, more ubiquitous. DSL isn’t fast enough – so upgrade to HDSL. EVDO isn’t fast enough – so upgrade to WiMax.

      3) The age of the standalone gadget is over. As hardware capabilities become increasingly commoditized, the value will shift to integration with content distribution services.

      The largest opportunities in the next 3-7 years are among services that seamlessly connect the elements of the value chain: content creation with communication; content distribution with device. The incumbent distribution networks aren’t equipped to manage user-generated content; nor are the communication companies capable of integrating hardware display with distribution services. Third parties will emerge to perform these enabling roles.

      Current trends on Security Software M&A Activity

      I was recently asked to comment on the state of the Security Software industry. Here is how I responded:

      Companies such as Symantec and McAfee are experiencing increased pressure from Microsoft, which has beefed up the built-in security capabilities in Vista. In an effort to counter this competition, the larger firms have made numerous acquisitions that will help differentiate their product portfolio and maintain product superiority. Acquisitions typically focus on two areas:

      1. Acquisitions with next-generation feature/functionality that can be incorporated into the core product suite
      2. Acquisitions that target a niche or highly specialized market that will remain impervious to any mass-market product that Microsoft introduces

      As Symantec and McAfee reevaluate their portfolios over the next year, they are likely to continue acquisitions at a slower rate, as management fills gaps in the portfolio and focuses on integrating previously made acquisitions.

      Whether consolidation in the industry is good or bad depends on who you are.

      • Consolidation reflects a defensive posture against Microsoft; however, it will not alter Microsoft’s slow entry into the market (nor will it alter Microsoft’s ineptness at developing secure products)
      • Symantec and McAfee will become larger and more stable, in a better position to hold off Microsoft
      • VC-backed startups will find it more difficult to scale organically to the size needed to generate 10x returns for their investors
      • Bootstrapped startups will continue to be able to find niche segments that are under the radar of the incumbents (even during and after this period of consolidation)
      • Customers will see fewer, more stable products and services with consistent levels of quality…for a price