Tougher Times for Cash Hungry Content Processing Vendors?

April 18, 2013

I read the troubling write up “Q1 Venture Capital Spending And Number Of Deals Down, M&A Activity Drops 44 Percent And Pre-Money Valuations Plummet”. Try as I might, I could not see much good news in the data presented.

The main point of the write up was in my opinion:

Deals in Information Technology (IT), Healthcare, Energy and Utilities, and Industrial Goods all declined, and deals in Business and Financial Services, Consumer Goods, and Consumer Services investment increased from the previous quarter.

For companies in the search, content processing, and analytics sector with a consumer angle, the good news is that money may continue to flow and may, in some cases, spike.

For other types of outfits, money may become more difficult to get. If a funding source is available, my hunch is that investors may be taking increasingly critical looks at the companies ingesting money. How does one age a Type A 35 year old senior manager? My thought is, “Ask for actions that deliver revenue, not marketing puffery.” I am probably off base, but the Techcrunch story suggests that a downward trend may be upon us.

One cannot forget that the investors’ expectation is a return. For companies in the old “search” space, revenues are going to be needed to avoid one of those legendary investor actions: Top management replacement, fire sale, forced merger, intellectual property auction, shut down, or some similar step.

Going forward, search, content processing, and analytics vendors are going to have to generate more revenue. In short, the squeezable days of the last three years may be going away.

Can the search, content processing, and analytics vendors which have taken sums ranging from a few million (BA Insight, Digital Reasoning) to tens of millions (Attivio, Coveo) to hundreds of millions (Palantir) deliver significant top line growth and demonstrate a here-and-now value proposition? One or more of these companies will definitely perform. The ones which do not? Well, that’s what makes search and content processing so darned interesting.

One of my financial clients has asked me to poke around with some numbers and market appetite. No results in hand yet. The project is interesting.

Stephen E Arnold, April 18, 2013

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