In December 2004, Updata Partners formally announced the close of Updata Partners III L. P. with total commitments of $154.5 million. Investor interest was strong, with demand for subscriptions significantly exceeding available capital.
New limited partners include top tier endowments, state pensions and fund of funds including the Virginia Retirement System, the University of California , FLAG Capital Management and the University of Pittsburgh. These limited partners join Grove Street Advisors for the California Public Employees' Retirement System and other existing investors. With the close of this fund, Updata Partners now manages in excess of $250 million in assets.
Updata III will continue the focus on investment opportunities rich in intellectual property across a variety of information technology segments such as security, storage, systems management, retail, healthcare and financial services. Investments will range in size from $2 million to $10 million, primarily targeting firms that have reached an inflection point in their growth curve where Updata can play an active role helping the business move to the next level.
This new fund follows Updata II, a vintage 2000 fund with $66 million in capital commitments. The increased average investment size of Updata III provides for more significant investment levels and the ability to finance acquisitions and other strategic initiatives after the initial investment.
NEW PARTNER TO SUPPORT SOFTWARE AND IT INVESTMENTS
At the close of 2004, Rich Erickson joined Updata Partners as a Venture Partner in the New Jersey office. Erickson brings over 20 years of executive experience in the IT industry as the founder of a successful startup and CEO of a public company. At Updata, Rich is active in identifying and leading new investments as well as working with existing portfolio companies.
We are very pleased to welcome Rich to the Updata team. He is an excellent addition given his operating experience and prior success as an entrepreneur. Rich further extends our role as an operationally-focused value-added partner to help our portfolio companies succeed. He is already actively engaged as a board member of Acclaris, a current portfolio company.
Before joining Updata Partners, Erickson was the President and Chief Executive Officer of AlphaNet Solutions Inc., a publicly held information technology outsourcing company and former Updata portfolio company. In less than two years as CEO, Erickson drove the turn around of AlphaNet and positioned the business for its ultimate sale to Ciber (CBR-NYSE).
Prior to AlphaNet, Erickson was Senior Vice President of U.S. Operations for iXL, an Internet application consulting firm with over 2000 employees. While at iXL, he championed the firm's restructuring and was an instrumental part of their merger with Scient.
Erickson started his career at Excelan, one of the TCP/IP Internet network pioneers. While at Excelan, he participated in the company's growth and Initial Public Offering before its ultimate sale to Novell. Previously, Erickson was a principal at Digital Network Associates (DNA), a private network and systems integrator. Under his guidance, DNA grew from a start-up to almost $20 million in revenues before being sold to United States Office Products (USOP) in 1997. At USOP he helped acquire, divest and integrate numerous technology service businesses.
Erickson holds a Bachelor of Mechanical Engineering degree from Villanova University.
Updata Partners made four new investments and three follow-ons in 2004. Our most recent investment, Management Dynamics Inc. (MDI) marked the first investment of our third fund, Updata Partners III, L.P. Acclaris, Softek and CoreStreet, our other new investments in 2004, were originated from Updata II. Follow-on activity included investments in Netkey, eSecurity and ObjectVideo.
Our investment strategy includes looking for opportunities where capital can help companies realize the next phase of their growth plan. The December 30th investment in MDI realized this strategy by supporting the company's acquisition of BridgePoint, a visibility management vendor that allows for real-time tracking of goods in transit. In addition to selling BridgePoint as a stand-alone solution, the company will use data generated from the visibility product to roll out an ocean-based transportation management system in late 2005. For more information on MDI, see our new investment profile below.
In July of 2004 Updata invested in Acclaris, a Tampa, Florida-based company focused on human resources and finance business process outsourcing. The capital was designated to help the company augment their sales and marketing infrastructure. Since the investment, Acclaris has made several strategic hires in the sales and finance departments. Additionally, the company has closed several key customer accounts and continues to build their backlog of transaction-based recurring revenue.
In the second quarter, Updata invested in the spin out of storage-management vendor Softek from Fujitsu. As a result of the transaction, Softek became one of the largest independent storage management software vendors in the market and is well positioned to continue driving growth of their multi-platform storage management product set.
CoreStreet, a provider of validation products for identity management and access control, marked Updata's first investment of the year in February. Updata led CoreStreet's $8.5 million B round to help the company further fortify their sales and product development efforts. Post-investment, the company had a very successful 2004 that included completing a co-sales partnership with Assa Abloy, the world's largest manufacturer and seller of lock and access systems. The Assa Abloy partnership gives the company tremendous market reach and validates its innovative approach to the convergence of digital and physical access management solutions.
In addition to our new investment activity, Updata led follow-on investments in Netkey, eSecurity and ObjectVideo. Each of these investments further positioned the companies to continue their strong growth in the retail, security event management and intelligent video surveillance markets. For more information and the latest news from any of our portfolio companies, please visit the portfolio company news section of our website.
Updata closed out 2004 and kicked off Updata III with a Series B investment in Management Dynamics Inc (MDI), an East-Rutherford, NJ-based provider of software and services to the international logistics industry. MDI's product, Rate Explorer, is a contract management solution for ocean-based carriers, third party logistics providers and shippers that uses information technology to manage the historically paper-intensive world of freight transportation contracts.
As part of the Series B financing, MDI acquired BridgePoint, a subsidiary of CSX that delivers a supply chain visibility solution to the ocean and land-based transportation market. Updata believes that their visibility solution has tremendous potential as both a stand-alone product and as a complement to Rate Explorer. BridgePoint's client list includes marquee names such as Apple, Levis and Procter and Gamble. In addition to focusing on their newly acquired clients, MDI also has plans to integrate visibility data into Rate Explorer to provide a full Ocean Transportation Management System (TMS) in late 2005.
We are also excited about MDI's on-demand deployment and revenue model. A significant part of MDI's success to date has been the ease with which their system can be implemented and managed, driven in large part by their deployment model.
Jim Preuninger, MDI's CEO, believes the efficient management of global supply chains depends upon complete, accurate, and timely information that integrates suppliers, service providers, and internal operations. With the BridgePoint acquisition, MDI is poised to continue growing their core products while also working to develop a comprehensive TMS offering. Updata is excited about the prospects on the company's horizon and pleased to have them as the newest member of our portfolio.
If you are interested in learning more about MDI, please visit www.mgmtdynamics.com/
UPDATA CONTINUES FOCUSED INVESTMENT STRATEGY FOR 2005
With the close of Updata III in late 2004, Updata enters 2005 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-stage companies within the software and information services marketplaces. Many of the opportunities we look at have annual revenues in the range of $2 million to $20 million. However, we are also interested in reviewing earlier stage opportunities as well as later stage spin-offs and recapitalizations.
Our most important deal screening filters relate to unique and 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, analytics, healthcare IT, retail IT, process outsourcing and subscription-based information services.
Updata targets $2 million to $10 million in an initial investment. We remain committed to providing access not only to capital but also to our extensive network developed over 100-plus years of cumulative industry and operating experience.
In addition to the healthy diet of acquisitions across all sectors, 2004 was marked by big software mergers on an unprecedented scale. While significant in their own right, these acquisitions may also signal a fundamental shift in the landscape and nature of the software industry. The Oracle/PeopleSoft deal was clearly the most visible example of large-cap consolidation. While there may be a good strategic and product rationale for the deal, the most compelling driver may be something that industry professionals like to discuss least: commoditization.
With the days of comfortable million dollar licenses on the wane, Oracle's takeout effort may be necessary to defend margins in the application software business. There is no question in our mind that the consolidation trend will continue as vendors look to protect existing pricing models in an increasingly competitive marketplace. Despite this trend, we believe there is still tremendous opportunity for innovative software companies to grow and flourish. Adoption of a Software as Service (SAS) delivery model can play a significant role in that success.
SAS or on-demand business models are differentiated from traditional software models in three primary ways. The first, and most appealing from an investor's perspective, is the recurring revenue model based on monthly subscription fees that SASs generate. Investors, whether public equity- or venture-focused, love the predictability that subscription models generate, and are willing to pay a premium for that predictability. Second, and most important to the customer, is the reduction in installation and ongoing administration effort that SAS models enable. This can be particularly appealing to small businesses or businesses that have not historically been big IT buyers. The final driver for adoption of a SAS model is the flexibility it provides customers to add licenses on the fly. Such flexibility allows customers to meet the variable demand of their business without suffering through capacity planning exercises that can lead to under utilized IT assets.
Despite the merit of these differentiators, the majority of software is still delivered through on-site client installations and perpetual licenses. The tide, however, may be beginning to turn. On the back of Salesforce.com's IPO, 2004 was unquestionably the most significant year for on-demand. And while Salesforce makes an attractive poster child for the new trend in selling and delivering software, it may be the Merrill Lynch On-Demand Index (MLODI) that promotes broader Wall Street demand for ASPs in the years to come.
MLODI has tracked almost 80 individual software companies across the application, infrastructure and infrastructure management sectors since its inception in April 2004. For each company in the index, the MLODI looks at two primary metrics: the percentage of sales generated from on-demand revenue, in which customers pay for the software in a monthly subscription fee; and the percentage of revenue generated through on-demand deployments where implementations are managed through the Web and do not involve the customer's IT staff.
As an example, Computer Associates (CA) now generates 100% of revenue via an on-demand subscription model as a result of their 2003 revenue reorganization. However, CA does not generate a single dollar from on-demand deployment. While this approach, which is also used by software notables Red Hat and Verity, allows for flexibility in utilization, it does not fully realize the SAS benefits discussed above. We believe companies that are able to deliver an on-demand model from both a deployment and revenue perspective will be best positioned to win and keep customers in tomorrow's software environment.
Today, only 6% of revenue for companies in the MLODI is derived from on-demand deployments. We expect this percentage to increase significantly over the next five years as vendors learn to accommodate customer's needs.
While there is still a long way to go, big software vendors do seem to be catching on. Despite the fact that Oracle generated only 7% of their revenue through on-demand deployments in 2003, the release of the E-Business Suite On-demand in 2003 signals a commitment to the new paradigm. According to the company itself, customers who use the E-Business Suite On-Demand can save 50% in IT administration costs, achieve 56% better product support and increase employee productivity by 35%. While these numbers may be overly optimistic, there is no question that the benefits of an on-demand model are very real. With greater emphasis on this industry shift, Oracle and its big software brethren may be able to spend 2005 and beyond worrying less about which competitor to buy and more about keeping customers happy-a formula that would bode very well for the software industry as a whole.
With advisory work on some of 2004's most significant mid-market transactions, Updata Capital continues to provide M&A leadership and guidance within the software sector. Updata Capital's representation of Novadigm in the $98 million sale to Hewlett Packard in February maintained our prominent role in the infrastructure management sector. April was also an active month with professional services automation vendor Changepoint's sale to Compuware and search engine optimization provider FirstPlace's sale to NetIQ. As always, Updata Capital also had an active 2004 in the security sector, advising anti-spyware vendor Pest Patrol in their sale to Computer Associates. While security continues to be an area of expertise, Incurrent's sale to Online Services Corp in October further solidified Updata's position as an active advisor in the financial technology sector. For a more detailed perspective on the financial technology space, read the Fall Financial Technology Monitor by Joel Kallett. Additional reports on the software and IT services industry can be found in the research report section of Updata Capital's Website, including the Oracle/Peoplesoft report that puts the blockbuster takeover into perspective. If you are interested in talking to someone at Updata Capital about advisory services, please email Lisa Lombarde at llombarde@updata.com.
At the close of 2004, Rich Erickson joined Updata Partners as a Venture Partner in the New Jersey office. Erickson brings over 20 years of executive experience in the IT industry as the founder of a successful startup and CEO of a public company. At Updata, Rich is active in identifying and leading new investments as well as working with existing portfolio companies.