2005 INVESTMENT OVERVIEW: EARLY-STAGE AND GROWTH-STAGE
Updata Partners assertively executed our investment strategy in 2005 continuing to focus on firms exhibiting strong growth momentum. Our new investments spanned earlier venture stage to later stage growth. For the year, we made seven new investments and executed several follow-on investments.
Early-Stage Financings:
Secure Software — January; McLean, Virginia — Secure helps organizations cost-effectively eliminate and prevent application code vulnerabilities in software applications. The company's CodeAssure product suite automates the discovery and prioritization of code fixes while concurrently improving code quality. The company maintains a leadership position as the premier provider of static testing solutions.
Appfluent — March; Rockville, Maryland — Appfluent develops a suite of products that consolidates data, optimizes business intelligence application performance based on usage, and analyzes applications for both test and production environments. The financing has allowed the company to refine their go-to-market message and gain traction amongst blue-chip customers such as Owens & Minor, Pfizer, The State of New Jersey, and others.
ContextWeb — May; New York, New York — ContextWeb provides high-precision, real-time contextual advertising solutions to maximize the results and impact of online advertising. The investment provided the company with capital to more aggressively build out their sales team and grow their base of advertisers and publishers. ContextWeb enters 2006 with significant momentum in the marketplace and relationships with a strong set of advertisers, agencies and publishers, including TheStreet.com, Meredith Interactive, Trimspa and Agency.com.
Interactions — December; Lawrenceville, New Jersey — Interactions is an exciting provider of next generation IVR and call center services leveraging a proprietary blend of people and technology to deliver a truly unique and interactive experience to clients. The solution is well into production use at some of the world’s leading client-centric organizations that strive for differentiation through superior service.
Growth-Stage Financings:
4GL School Solutions — May; Towson, Maryland — We invested in educational technology provider 4GL School Solutions to facilitate expansion including strategic acquisitions. In August, 4GL acquired Tranquility Solutions, a competitive provider of K-12 special population software which manages over 150 school districts. The acquisition nearly doubled 4GL’s market share and provided a foothold in key states and market segments.
Management Dynamics — October; East Rutherford, New Jersey — Updata’s follow-on investment in Management Dynamics financed the acquisition of NextLinx, a Rockville, Maryland-based provider of international trade compliance technology and content. At the time of the acquisition, NextLinx boasted over 70 customers, including industry leaders such as Boeing, Cisco Systems, Fairchild Semiconductor and FedEx. The new suite of products provides a unified technology platform to automate import, export, and trade agreement processes, optimize global transportation and inventory costs, and ensure cross-border compliance. The company will continue to deliver the combined offering through its On-Demand platform.
Numara Software — December; Tampa, Florida — Updata joined TA Associates in the $200 million spin-out of Intuit’s Blue Ocean Software business unit. Renamed Numara Software post-financing, the company provides IT asset management and help desk management to small and medium-sized businesses (SMB). With over 42,000 installations in the SMB market, Numara is a leading provider of software to the SMB marketplace.
The GETPAID Corporation was acquired by SunGard Data Systems in October. GETPAID is now an integral component of SunGard's AvantGard enterprise treasury solution suite and will be called AvantGard GETPAID. AvantGard GETPAID will help corporations to automate the entire financial value chain from customer order to cash management.
Updata Partners originally invested in GETPAID in August of 2003. Over the last 26 months, Updata, together with investment partner Insight Venture Partners, worked closely with the company to help them drive strategic objectives and create additional value for management and shareholders.
“This was a great example of likeminded investors working closely with an A-plus management team to help realize significant value for all parties throughout the lifetime of the investment,” said Conor Mullett, General Partner at Updata Partners.
AvantGard GETPAID will continue to provide finance and credit professionals with tools to more effectively manage their businesses. With $4 billion in annual revenue, over 25,000 customers including the 50 largest financial services companies, GETPAID will have an opportunity to introduce their solutions to a broader customer base while reinforcing SunGard’s leadership position in the treasury management marketplace.
As stated by Ken Dummit, President of SunGard's AvantGard business unit, “We want to help our customers to more efficiently manage working capital and the entire cash position across the financial supply chain with increased automation, straight-through processing and data integration. AvantGard GETPAID will help us to achieve this goal.”
On-Demand Emerges Into the Mainstream: Since Salesforce.com hit the scene almost seven years ago, the software landscape has been shifting from software installed behind the firewall and maintained by internal resources to software delivered as a hosted service (On-Demand) via the internet. On the heels of Salesforce’s success, Sales Force Automation (SFA) and Customer Relationship Management (CRM) companies have been at the forefront of the On-Demand transformation. Now, however, the On-Demand model is beginning to spread to other areas such as human resources management and e-procurement. Vendors like Kenexa, Workscape and RecruitMax have all shed, at least partially, their traditional software skins and grown their On-Demand models at a significant pace. Another area leveraging the capabilities of the service delivery model is the Web itself. Web analytics companies like Omniture and Webside Story have gained traction in their On-Demand offerings over the last eighteen months.
Microsoft’s Office Live, which launches in beta early this year, will consist of 22 applications offered in an On-Demand model targeting small business customers. Given the track record of profitability the traditional Office suite has delivered, the revision to that model is a clear sign that On-Demand is a trend to take seriously in the broader software industry. While On-Demand delivery has significant benefits for both customers and vendors, the most significant implications of this new approach may be the spread of enterprise-grade applications into the small business environment. In addition to saving costs by amortization of large upfront license fees and limiting the need for IT resources, On-Demand will deliver smaller business the kind of productivity gains previously only available to large enterprises. While great news for the little guys, this change is likely to lead to an acceleration of competitive and disruptive business models that will make it harder for market leaders to sit on the laurels of previous products or successes.
Think Small, Medium and Vertical: 2006 continues the trend of slowing software sales growth within the large enterprise and increasing growth in the Small and Medium Business (SMB) market. According to Gartner, sales to companies with revenue between $50 million and $999 million are expected to grow by about ten percent compared to only six percent for companies with sales above $1 billion. Enterprise software vendors which have traditionally focused on the large customers are well aware of this trend. For SAP, SMB already accounts for 30 percent of new-license revenue. By 2010, the company expects that number to be 45 percent. Original SMB bellwether Intuit’s 24 percent revenue growth in the most recent quarter is further evidence that software for the small guys is big business.
The emergence of Software-as-a-Service (On-Demand) into the mainstream, and its appeal to smaller, resource-constrained organizations, is also a strong signal that 2006 will reward companies who are thinking small and medium. In order to keep up, many of the large enterprise software vendors will continue to retrofit their offerings for a smaller audience and try to gain a slice of the SMB pie. However, given the elusive nature of the SMB customer and the slowing growth in traditional enterprise markets, we will likely see another year of frenzied M&A activity to boost top lines and build out vertical specialization.
UPDATA CONTINUES FOCUSED INVESTMENT STRATEGY FOR 2006
After a busy 2005, Updata Partners enters 2006 with a strong appetite for new investments. As always, we are interested in talking to entrepreneurs and CEOs about potential investment opportunities. Our focus remains on early growth through later growth-stage technology companies within the software and information services marketplaces. Many of the opportunities we review have annual revenues in the range of $2 million to $25 million. However, we also evaluate growth and momentum opportunities including spin-offs and recapitalizations.
Our most important deal screening filters include differentiated intellectual property, large potential market opportunity, experienced and coachable management teams and evidence of strong business momentum. We are particularly interested in companies with products in the following sectors: security, storage, financial technologies, Internet-based software, analytics, healthcare IT, retail IT, process outsourcing and subscription-based information services.
Updata targets $2 million to $10 million in an initial investment and up to $20 million in the lifecycle of the portfolio company. For opportunities with larger capital commitments, we are able to work with value-added firms with whom we have long-standing relationships. In all situations, we remain committed to providing access not only to capital but also to our strong network developed through our extensive operating and industry experience.
Our affiliate, Updata Capital, had a very busy year that included twelve transactions in the last half of the year. Clients executed strategic acquisitions to achieve vertical depth, end-to-end solutions, compliance and competitive differentiation.
Vertical Depth – Critical Path’s hosted messaging assets were acquired by Tucows to diversify their hosted e-mail offerings to Internet service providers. Trilogy acquired Versata, adding customers in the financial services and government markets.
End-to-End Solutions – Internosis was acquired by EMC, extending EMC's capabilities to deliver tightly integrated application infrastructure solutions and further balancing their enterprise license revenues with services.
Compliance – iLumin, an e-mail message management and archiving provider was acquired by Computer Associates to extend records retention capabilities for discovery, compliance and supervision.
Competitive Differentiation – VA Software’s Animation Factory was acquired by Jupitermedia, expanding Jupiterimages' range of image offerings. Aluria Software was acquired by Earthlink to enhance its suite of protection applications.
In the midst of some of the highest private equity valuations in recent years, Updata Capital also advised on several transactions with private equity buyers and/or private equity-backed strategic acquirers. CA sold Multigen-Paradigm, a leading provider of 3-D simulation applications used for both civilian and government purposes, to Parallax Capital Partners. Tesseract, provider of a web-enabled HR solution, was acquired by Halo Holdings.
For a complete list of 2005 transactions, please visit the Transactions Section of Updata Capital’s Website. If you are interested in talking to someone about a specific M&A opportunity, please email Lisa Lombarde at llombarde@updata.com.
The GETPAID Corporation was acquired by SunGard Data Systems in October. GETPAID is now an integral component of SunGard's AvantGard enterprise treasury solution suite and will be called AvantGard GETPAID. AvantGard GETPAID will help corporations to automate the entire financial value chain from customer order to cash management.
