Four Case Studies – Why Market and Capability Awareness Matters More Than Exit Strategy

Wow. My post from yesterday generated a lot of comments, which is great. But in hindsight, I might have been clearer about the message: the message is not don’t worry about the exit strategy ever, the message is focus on building a business first, and the exit will take care of itself when you have built that business and decided to exit.

Exits happen. They happen even when you don’t plan them (Peoplesoft). Sometimes they don’t happen when you do plan them (Infowave). The best exits are when a company gets BOUGHT, not when it gets SOLD. The best way to get bought is to create business momentum, and the best way to create business momentum is to focus on building a business. But more on that on another day.

(disclaimer: while I may not have captured the nuance of every situation below perfectly – I wasn’t at each company for the entire process, I am less than 100 years old – they are generally correct, and that doesn’t matter anyway. What matters is paying attention to the thinking process that happened every time. )

The first case study is ALI Technologies where I was Director, Finance. It started life as a company trying to invent new ways of doing cancer detection. It exited as a provider of radiology imaging systems (known as PACS) with a half billion dollar acquisition by McKesson, a leading provider of healthcare IT.

The second company is Pivotal Corporation, where I was CFO and eventually became President and CEO. It started life as PenMagic, a company focused on pen-based computing. It exited as a leading mid-market customer relationship software vendor through a NASDAQ IPO in 2000 and eventually went on the have the highest market cap of any Canadian software company.

The third company is San Francisco based Taleo Corporation. The founders were originally looking to create a job board to rival the large ones, but then realized that there was a much better opportunity in providing recruitment software to Fortune 500 corporations. As EVP and CFO, I had the privilege of leading this company to the second largest software IPO on NASDAQ in 2005 (the real NASDAQ, not the bulletin board!)

The fourth company is Chalk Media where I was a director. Chalk started life creating program content for the Internet and specialty channels showcasing technology for consumers (Chalk TV). It eventually created learning/multimedia software for Blackberry devices and was sold to Research in Motion at a premium north of100% late last year in one of the toughest M&A markets in the history of mankind.

How did they do it?

At ALI, in the course of building the cancer detection technology, they built a software system to manage the hundreds of images that were being generated in their testing. By being aware of the market, they realized that there was a growing demand for this type of technology, and a realization that they were developing strong capabilities in this area. In the end, they realized that this was a much better bet for the company than cancer detection.

At Pivotal, when the market for pen-based computers didn’t take off, they looked around and saw a strong demand for sales force automation software, then driven by a small and aggressive Siebel Systems. Very quickly, the management team discovered that they had developed a lot of domain expertise around the way sales forces operated, and leapt upon the opportunity.

At Taleo, the management team discovered that the market for job boards was already becoming very crowded. Using their supply chain background (they had previously sold a supply chain company to Baan), they realized that there was an opportunity to turn job board software into recruiting software to let a company power its own job board (i.e. career site), and layer in tools to make the recruiting process more efficient (a la supply chain). Incidentally, since job boards are hosted, Taleo become one of the earliest and largest software-as-a-service companies that you have never heard of, leveraging another nascent trend in 2000.

At Chalk, management realized that the content business was not particularly profitable or scalable. But they realized that the had expertise around content creation. This expertise led to content creation for learning systems. That led to the creation of learning systems. That led to software to deliver the same learning content over Blackberries. That led to the acquisition by RIMM.

In every case, awareness of internal capabilities, awareness of the market and foresight around the emerging opportunities led these companies to success. In no case could this have been possible if they had stuck to an original plan because they had tied an exit strategy to it.