What if You Are a Late Bloomer?

Posted on September 19th, 2017 by Chip Davis

Young software companies seeking growth capital typically look at investor tracksora-capital-approach-advisory-capital-raising-icon record as a variable to consider when determining funding source.  Track record is important, however, it is important for reasons that may not be so obvious.

New fund managers generally aspire to become highly experienced fund managers. To do so, they must perform at levels attractive to their LPs so as to inspire investment in the next fund and the one after that, etc.  LPs are not committed to successive funds and have a wide range of alternatives.

Over the years, we have had deals that required (unexpectedly) multiple rounds of capital (i.e. things were not going according to plan – yes I know, “..you don’t say?”). We have been fortunate enough that many unexpected bets incrementally committed through visceral conviction had positive outcomes allowing us to become “experienced fund managers.”  Sometimes these positive outcomes occurred for reasons we never saw ccompetition-icon-7oming.

When a market suddenly becomes populated with funds promoting the same investment strategy this is when companies seeking funding need to contemplate track record. Why? Because new fund managers want to become experienced fund managers and to do so, they likely have to beat the competition and at significant levels.  So what?

“So what?” needs to be contemplated in the context of the following question…”What if you (i.e. young software company) are a late bloomer?”  This is the question because it impacts how you may be treated by new fund manager hoping to become experienced fund manager.  If you are a late bloomer and other companies in the new fund are not-so-late-bloomers, you have just became a lower priority for incremental capital (which, admittedly, you may or may not need). If you do “need”, you just got squeezed into material financing risk and life just became incredibly complicated. This is so because the inability or unwillingness of your initial capital source to play along significantly is read by potential third-party sources of cash as a sell signal (i.e. they must know something we don’t know). Doesn’t matter what you heard during initial courtship about the long road together, this is the reality of fund management world.

 

 

 

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Tracts – Why We Made This Investment

Posted on September 8th, 2017 by Chip Davis

 

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Buying and Selling Oil & Gas Properties – When oil & gas properties change hands, a buyer wants to know that the seller owns what he is selling. A particular property can have multiple simultaneous “owners” each with a different set of conditions/terms under which they share in the value of underlying hydrocarbons.  Sorting through these variables is complicated and requires a substantial amount of manpower to make final determinations of what is real and what is not (i.e. “ownership”).

Over the past twenty years, the workbench for those calculating title has been the spreadsheet. An examiner gathers all the information relevant to a property and begins a process of understanding how a current owner acquired his interest, what that interest is, and how it relates to everyone else who has an interest and their types of interests. Inside of a spreadsheet, an owner’s position may be represented by something like this:

 (1/7+1/7)-((3/13)*0.5)-(29.4472916/(500))-0.02594875-(16/500)+((0.142857143-((2/13)*0.5))/7)

So imagine a piece of property that has 60 owners and 7 different types of economic rights. The result is a very complex collection of formulas all created for a single purpose by one human.

Are You A Software Developer? – I am sometimes asked to give presentations regarding the energy industry & technology.  On occasion, I like to survey the audience asking, “How many of you are software developers?”  The normal showing of hands might be 10% of the audience.  I then like to ask, “How many of you know how to use spreadsheets?” to which maybe 80% raise their hands.  I then accuse that 80% of actually being software developers. Why?

I like to think of Excel (et al) as a very cleverly packaged software development tool.  It has a database, it has a bunch to canned development objects (i.e. formula functions), and it has a palatable user interface for presenting. The reason we likely don’t think of it as “software development” is that a completed work product has a single purpose and generally only its creator can know how to use it (i.e. you can’t go sell it to a lot of people – IT DOESN’T SCALE).

A Large Scale Software Development Project – An oil & gas acquisition regularly involves a lot of acreage representing thousands of “owners” and complex nesting of varying interest types.  When a buyer determines to move on an acquisition, he engages a team of “examiners” each tasked with determining who owns what. Every parcel of land is examined and the work product is assembled by parcel in a spreadsheet.  This may happen hundreds of times for a single acquisition.  Think of there being 100,000 “lines of code.”  All of this occurs under severe time pressure (say 90 days) and the buyer has little recourse (post acquisition) if the conclusions are incorrect (i.e. the software has “bugs”).

To my knowledge, there are very few successful software companies that are able and willing to produce in 90 days a commercially ready application with 100,000 lines of code. The risk to reputation alone is damaging much less the potential financial liability to a customer depending on that code to perform mission critical processes.   The oil & gas industry is doing this every time it makes an acquisition and court cases reveal that the consequences are not trivial when things go bad.

Why We Invested In TractsTracts obviates the need for humans to create formulas in spreadsheets.  A usertracts-slide-4 simply describes to the system a few variables required to characterize “what, when and who” and the system takes off. As the user adds variables, it determines how each “what, when and who” is connected to all others and it builds the “code.”  Using this system, an oil & gas property buyer gets out of the software development business and stops doing what no commercial software company in its right mind would be willing to do.  Easy to scale and freedom from the consequence of extremely expensive “ownership” bugs.   If am spending $100 million to acquire oil & gas interest, it is appealing to me to cut my “examiner time” by $500k and reduce my error rate by $1 million. This is what we see in Tracts.

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5 Things Young Software Companies Typically Don’t Know

Posted on August 6th, 2017 by Chip Davis

IMG_0007We hear a lot of pitches from young companies with well developed software capable of solving interesting (high dollar) business problems. There is rarely a solution whose value proposition is so self evident and powerful that it can circumvent typical buying patterns. The danger of most elegant software (at initial commercial release) is its hypnotic distraction from what is required to cause a purchase. In this context, we have listed some opinions and questions for young companies to ponder. In no particular order:

  • If you think you just had a “great meeting” with a prospect, you most likely did not. How do you determine the truth?
  • What it is about the particular business problem of interest that is dragging out your sales cycle and how do you reduce drag?
  • When is a trial the right thing to do for the company?
  • Is your sales force doing too much lead generation and why is this bad?
  • What are the first signs that you should not allow a prospect to become your customer?

Consider these points in earnest and founding shareholders of promising software companies will need less money to evolve and own more stock at exit. Make sure your money source has some answers.

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