Private Equity Firm vs. Venture Capital -- What it Means to Customers and the Market

Most private equity firms -- especially given today's capital markets situation -- have very different goals than venture capital firms. Venture capital firms typically place their bets across dozens of companies looking for the 5-10% of their investments that will be true home runs -- delivering 20X-50X-100x or even larger returns. 50-70% of their investments will typically fail and will become write-offs or write-downs. And a few will break-even, sold off to larger companies at or just above the original investment (or sometimes below). This approach suggests that venture capital firms embrace risk. In other words, they'd rather see their investments place large amounts of capital in R&D in hopes of creating products and solutions that either breakaway from the market or create new markets in their entirety. They're after the next Google (or Ariba or FreeMarkets for that matter).

But private equity firms typically have different goals. They are more conservative in their investments and in the case of Emptoris, I suspect that MEP either made the investment to flip the company in a couple of years (because they got a great deal on it given the market conditions and they had the cash available) or to use it as a foundation for a roll-up of multiple companies (something Emptoris has claimed is not the case, unless the acquisitions are a strategic fit).

Regardless, I suspect that they will certainly focus on making Emptoris as operationally efficient as possible. But since many development and back office jobs have already been moved to India, there is probably not much more cost to cut here, but I'm sure they'll identify some areas to take unnecessary cost out of the business. Such is the standard modus operandi in private equity (at least effective private equity).

In addition, I suspect that MEP will provide significant oversight in eying and analyzing acquisition targets -- both financial and strategic -- that will seek to complement and grow their investment. Despite what Avner told me a couple of days ago, Emptoris could very well become more of a holding company for multiple procurement, operational and related technologies if MEP decides that's the direction they want to take it.

Emptoris' current cash position does not matter much here in doing deals necessarily. Why? Since MEP owns Emptoris, they can put their own money into acquisitions regardless of whether Emptoris has enough cash on the books as of today. The good news for Emptoris is that it positions them well for both small and large potential buyouts if MEP can back-up their initial investment with further acquisition capital.

But what might those tender acquisitive morsels (or lumps) look like if MEP and Emptoris goes down the acquisition path? Stay tuned. Later this week, I'll offer some thoughts on who would be on my shopping list in this impossibly difficult capital markets environment. Listen close, as you can be sure that Ariba and others are considering the same names. I have no doubt that throughout 2009, there's sure to be some good buy-out pickings thanks to all the investment pain going around.

- Jason Busch