"Skeptical scrutiny is the means, in both science and religion, by which deep insights can be winnowed from deep nonsense." -Carl Sagan


In Search of the Best Technologies with the Greatest Promise

The world is entering a new era in technology and venture investing, in which rigorous Targeted Research is the prerequisite to high-quality Deal Flow and Participation and partners offering Strategic Value will have the greatest opportunities. Within this environment, Equitek will focus on Growth-Stage Deals, where its skills in Technical and Operational Due Diligence can be most accurately applied to the evaluation of Low-Level Infrastructure and Enabling Technologies, and apply a rigorous Focus on Valuations to identify the best investments. After entering deals, the process continues through Active Ongoing Involvement with these companies to ensure their success and as direct participants in the further evolution of technology.

Targeted Research

Creating a different approach to venture investing requires the construction of a framework of predefined concepts and criteria for understanding the rapid changes taking place. Equitek seeks to identify and understand the most significant sector-based trends within the general technology landscape, and to use this knowledge to serve as a reality-check with which to examine developments as to their relative significance.

Equitek's proactive research approach allows it to target promising sectors and technologies prior to discussions of specific companies. Equitek is then able to identify leading individuals, research teams and new ventures pioneering developments in the areas it has recognized as promising the most significant investment potential due to prospects for high growth.

The pursuit of these world-class opportunities is based on taking a broad view of diverse technology areas and applying a geographically agnostic but intellectually rigorous approach to identifying the greatest opportunities regardless of their location. Equitek's goal is to seek out companies with superior technologies and significant market opportunities and help them move beyond their local markets to exploit those unique advantages on a global scale through its industry experience and worldwide network of contacts and strategic partnerships.

Deal Flow and Participation

Understanding the key influences on technological development and speaking fluently the language of engineers, the Equitek team and its advisors are active participants in technical debates, standards and engineering committee meetings, trade and investor conferences. Through these forums the reputation of the Equitek team and the breadth of its network of contacts and acquaintances expands to provide ongoing access to the leaders pioneering new advances. Recognized by entrepreneurs, CEOs and CTOs as peers and valuable contributors in strategic discussions, debates and decision-making, the Equitek partners can choose among outstanding invitations to carry out company visits and receive ongoing updates.

It is through these relationships that Equitek establishes the basis for deal-flow and investment participation. Often well before a targeted company seeks its first institutional-round funding an Equitek partner has already established a relationship with one of its engineers or executives. Thus, as the company enters a funding cycle the strategic value of Equitek participation is already established. In the simplest terms, Equitek identifies and enters deals through the CTOs and CEOs, rather than by waiting for CFOs to seek funding through road shows. Equitek identifies technical advances through deep understanding, rather than through a sorting business plans based on hype and hope.

Strategic Value

It is Equitek's understanding of its investment companies' technologies and markets and the associated strategic value Equitek can bring to bear on their behalf that allows Equitek to cultivate relationships and influence with its portfolio companies that extend well beyond the significance of Equitek's potential initial financial involvement.

Having developed an understanding of a company, its technological advantage and product potential, Equitek places that information within the context of its understanding of the company's industry sector and market. Through Equitek's partnerships and worldwide contacts, it can readily assist companies in identifying new customers, entering new marketplaces and in establishing valuable distributor, manufacturing, and sourcing alliances on a global basis. The strategic advantage of Equitek's contributions is readily recognized by its portfolio companies; in contrast to some venture capitalists' minimal participation at quarterly board meetings, Equitek typically has regular (weekly or monthly) interactions with its portfolio companies.

Growth-Stage Deals

In the current landscape of private equity, there is a focus on early-stage deals in which board seats are demanded and "incubation" is offered. However, it is expected that almost all of these embryonic companies will fail, with just a few offering spectacular multiples on investment to make up for all the rest.

More recently, there has also been a focus on later-round funding. In this case, the companies in question are already well established; their reputations are growing, and inside investors are driving the process, providing additional funding until the company reaches cash-flow breakeven.

But, in between these two extremes in private venture funding there has been an under-served investment gap or "saddle". Here there are companies just commercializing their technologies. They have come through product development and beta testing and proved the initial team could manage projects and meet deadlines. They are usually expanding their ranks to include experienced executive and management personnel. But, significant questions remain.

The questions investors at this stage must answer are primarily technical, strategic and operational in nature. Not only: "Does the technology or product work as promised?" But "Is there a need for it? Is this company's product merely competitive in an existing but fading market, or is this an essential advance enabling a small new but fast growing market? What is the scope and scale of this new market? Is it large enough to sustain a single company or a whole industry of competitors? What are the barriers to entry or possible alternatives? The product may work in beta, but can it be manufactured in scale?"

Such questions may have been asked by seed round investors as well, but are mitigated by a portfolio approach spreading the risk across many investments, and a valuation-obsessed effort to get the cheapest price at the earliest stage. As these investments are often made before proof-of-concept, they are closer to guesswork and intuition than true evaluations of feasibility.

Technology and operational due diligence performed by traditional VCs when investing in growth-stage rounds has often been outsourced, sometimes to consultants but typically to other co-investment partners. The typical refrain: "Who else is investing?" Even with top-shelf VCs from prior rounds involved, companies in this "saddle" are often at a disadvantage. They can sometimes rely heavily on follow-on investments by existing early-round investors, but commonly find difficulty in identifying a lead investor who can understand their technology, appreciate their potential, and explain the opportunity to other new investors. Equitek is poised to exploit this growth-stage reality.

Technical and Operational Due Diligence

The Equitek partners are well-qualified to directly address the questions and the requirements of growth-stage due diligence. Ken Ehrhart, as Director of Research for the Gilder Technology Group, was responsible for identifying and quantifying the long-term trends and opportunities transforming the technology marketplace as it moves from the Microcosm to the Telecosm. Paul Grim, working as a consultant to many of Europe's leading telecom companies, has been focused on identifying the greatest potential for next generation products and services and on the due diligence involved in acquiring the companies, talent and technologies, required in a real-world competitive environment. Greg Somer, as head of product development in Cypress Semiconductor's communications chip division, was responsible for coordinating the silicon requirements of customers such as Cisco, AT&T, and IBM as they designed and developed future data networking and telecom equipment, while simultaneously interfacing with the industry and standards bodies defining the functionality and specifications for those products. The kinds of questions that must be answered to successfully invest in growth-stage companies are the kinds of questions the Equitek partners have proven experience in answering.

Low-Level Infrastructure and Enabling Technologies

Equitek's expertise in making technical and operational evaluations is that of hard science, not mere speculation. It can be applied most effectively at the lower levels of fundamental enabling technologies and infrastructure advances. Beginning at the level of materials science and semiconductor design there are clear and objective assessments that can be made regarding the performance gains of technical innovations and the specifications of new product designs. As one rises into the level of components and systems the evaluations become more complex and the opportunities for alternative solutions increase, but technology still dominates.

Equitek's primary focus will rest where its expertise offers its investors a competitive advantage: in identifying the fundamental technical advances which will enable the most lucrative business scenarios.

Focus on Valuations

In identifying the most lucrative business scenarios, the strength of the Equitek team is not limited to the crucial analysis of technology. The partners all have financial as well as technical backgrounds. Equitek utilizes two standard valuation models to assess companies as potential investments and has developed another in-house proprietary model that offers additional input for investment decisions.

The standard comparative approach to valuation is enhanced by Equitek's deep understanding and appreciation for the factors that influence public market acceptance or rejection of the stories of technology companies. But the model has limitations imposed by the difficulty of finding appropriate comparisons in either private or public markets and the necessity to apply discounts in most comparisons.

The standard discounted cash-flow valuation model is enhanced by the partners' experience in actual management and budgeting of real-world engineering projects, experience in due diligence and evaluation of pro-forma projections, and an ability to assess the quality of figures and assumptions being built into company budgets. But typically the input data into these models comes from business plans that emphasize "hockey-stick" growth rates.

Borrowing from options theory and currency trading models, Equitek has also established a valuation model that assigns probabilities to various company milestones related to funding, management, product development, market entry, and liquidity events. These probabilities are then applied to the history and future plans of the company to assess the value of the company within a context that takes into account the achievements to date as well as the upcoming challenges in order to discount optimistic longer-range projections in favor of immediate circumstances.

Even in cases where a company's technologies and business model were judged to be superior, Equitek has frequently passed on investments where it also felt the company's valuation to be out of line with market realities. Indeed, even great companies may lack the upside potential sought by Equitek investors when valuations are inflated. In the end, Equitek ultimately analyzes a company and its technology as an investment first and foremost.

Active Ongoing Involvement

Regardless of the size of the initial investment, Equitek's involvement with its portfolio companies does not end with a closed investment. At any stage in the evolution of the company if Equitek recognizes an opportunity to assist through strategic advice or active participation, then Equitek will pursue actions that benefit our portfolio companies and investments. Equitek partners will be speaking to investor and technology conferences; writing about the latest technologies and portfolio companies' advantages; and making introductions to customers, suppliers, distributors, and alliance partners. These actions will not only directly aid our companies and investment returns, but will also continue to build Equitek's network of contacts and crucial exposure to the new ideas driving technology development. It is this direct, active involvement in the evolution of technology that serves as the basis for Equitek Capital's understanding of the opportunities ahead.

 



INVESTMENT STRATEGY


The Goal

For our investors, the ultimate goal is simple: capital appreciation. We will invest exclusively in pre-IPO companies, with a focus on communications infrastructure builders and enabling technologies.

The Sectors

In the initial stages, we will focus our efforts in the following sectors, although not to the exclusion of any concepts that fit our key criteria of disruptive technologies and concepts that can create sustainable value:

Semiconductor Materials and Packaging

Semiconductor Architecture and Circuit Technology

Semiconductor Manufacturing and Equipment

Adaptive Computing

Pervasive Computing

Fixed and Mobile Broadband Wireless Access Technology

Core Optical Networking Components

Optical Networking Hardware

Network Management, Provisioning and Security

Remote Monitoring, Self-Aware Systems

Human Interface Technologies


INVESTMENT CRITERIA

Early stage funding (chiefly second and third round, with a small focus on seed funding)
Strong senior management capability, with relevant industry experience in either previous successful new ventures or established competitors

Good mix of technical/research and commercial skills
Technology represents either significant breakthrough beyond the status quo or a completely new concept with significant impact

Technology is feasible, commercially viable, and has the potential to become a dominant factor in its sector

Technology has high barriers to entry, possibly in the form of patent protection or unique proprietary elements
Large potential addressable market
Potential to become a publicly listed company in three years or less


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