Mar 24, 2004

Investing in Underserved Markets

Cultivating the gems that lie outside the Silicon Valley.

If you are going to launch a new venture outside the technology hotbeds of Silicon Valley or Boston, you have to be an overacheiver...or at least, believe you are capable of beating the odds. What do you have against you? Well, all the things that the Valley has in its favor in multiples: a large and extremely educated and experienced workforce, a deep capital base, experienced service providers (attorneys, accountants, bankers, PR firms, and so on), a history of innovation and success (local heroes like Cisco, Sun, Seibel, Oracle, Google, Yahoo, and others), and the passion to create.

Sorry to reflect upon what is lacking in the rest of the world, but it's only proper to first size up your competition before you embark on the challenge of calling the competition out!

Wasatch Venture Fund invests in underserved markets. Why? Because we believe that innovation can and does happen all over the world and that success can be bred in lesser-known regions. That, coupled with the fact that as investors, we have a first look at local deal flow, less competition for deals, and a lower cost requirement to launch a new venture, makes investing in the regions we touch all the more interesting to us and our limited partners.

We started Wasatch in 1994 in Salt Lake City. At that time, you could argue that 2 of the 10 most important technology companies in the world, Novell and Corel (WordPerfect), were sitting in our backyard. What does a region like Utah need to breed future success? Well, you need all the things I listed above that are found in the Valley and equally important, you need a local hero. Novell and Corel, and to some extent, Iomega were all local heroes. These companies showed that a world-renowned success story could emerge in the Mountain West.

Although our local heroes have withered (albeit Novell is making a nice comeback), the people of Utah got a taste of what it takes to build a world-leading company in the region. New leaders are emerging, such as MyFamily.com, the world's leading genealogy service on the Web.

Wasatch was the first institutional investor in MyFamily.com, which has gone on to raise in excess of $90 million. MyFamily.com has thrived despite the economic downturn, with revenue growth of over 1,027% over the last five years. Among the leaders in the online subscription business, with its flagship Ancestry.com family history service, the MyFamily.com suite of premium content sites has over 1.5 million paid subscriptions and more than 10 million people using its Web resources every month.

MyFamily.com emerged from a core regional strength found in Utah: a passion for genealogical research. We recognize the strengths, interests, and historical precedence in each of the regions in which we invest. With offices in Salt Lake, Phoenix, and Albuquerque, we cover a broad arena with an even wider depth of technology assets. We field investments from across the technology spectrum. Whether it's Utah software, networking, and life sciences companies; Idaho or Arizona semiconductor companies; or biotech startups from New Mexico, we take a long, hard look at all the Intermountain West has to offer.

Note, however, that we do not limit our investing to areas where we have offices. For example, Wasatch has an investment in a Midwest company called Feed Management Systems (FMS). FMS is the world's leading provider of feed management software and services for the livestock industry. Nearly 4,000 feed industry users—70 percent of the North American market, 90 percent of the South American market, and 60 percent of the total worldwide market—rely on the company's products.

FMS's products have enabled ingredient manufacturers, feed mills, brokers, and producers (farms) to formulate, balance, allocate, order, and create sophisticated nutritional feed products for today's technology-driven agricultural market. With the recent Mad Cow scare, the ability to track and manage what an animal has eaten over its lifetime is all the more important. FMS, headquartered in Minnesota, is in a prime location to service the needs of some of the largest feed companies in the world, and it boasts as customers both Land O'Lakes and Archer Daniels Midland.

Building a regional success into an international leader is not easy. I have shared a few of our recent emerging success stories. What I have not shared are the many challenges each of these companies have faced and overcome to get where they are today. If you have created, been a part of, or seen a regional success develop in your own underserved region, please share that story by replying to this blog. How have you raised the capital necessary? What has been your growth strategy? What are your plans/options for a successful exit?

We at Wasatch have been investing and building companies in underserved markets for 10 years now. If you are looking for an institutional investor that will venture out to lesser-known regions, you likely will ask the following question: What can Wasatch do for your company beyond providing capital? To answer, we believe that what sets us apart as investors and partners is our vast network of industry contacts. We put our collective network to work for your company.

With a close affiliation with Bay Area firm Draper Fisher Jurvetson and advisors such as Shane Robison, CTO of HP; Rob Clyde, CTO of Symantec; Chris Stone, EVP of Novell; Ray Bingham, CEO of Cadence; and John Clark of GM Investment Management—to name a just a few—we are only a couple of degrees of separation from almost any player in the technology industry. A VC investing in an underserved market needs to be able to provide assistance in raising capital, recruiting management, and opening doors. We have made a point of delivering these things for our regionally based companies.

Nick Efstratis is a partner with Wasatch Venture Fund.