Friday Rant: The Venture Investment Cycle Returns to Procurement — In Part, But Not Entirely

I've had conversations in the past two months with half a dozen different investment firms -- more of them better categorized as private equity and later stage venture firms rather than angel/early-stage investors -- who wanted to trade thoughts on the opportunity to return to the procurement and supply chain sector. From a combination of the business headlines around supply chain risk to the success in the capital markets of Ariba and SciQuest, there's venture investment interest again the sector. No doubt, this is a good thing, especially for companies that have gotten to a certain point to justify a moderate to large capital infusion. But I fear what's really lacking is the interest in digging trenches alongside early stage start-ups and entrepreneurs to create entirely new products in the area. Except for the funding of Taulia, a dynamic discounting vendor, there's not been much in the area of early stage capital invested in the area in recent quarters.

Perhaps part of the challenge is where the ideas are coming from at the moment. There are certainly those with new and bold concepts out there. But some of them are within large vendors like SAP and other providers I spoke with that will go unnamed for now. SAP recently incubated the Supplier InfoNet (see posts Part 1, Part 2, and Part 3) offering internally, hiring from the outside. But being SAP, they did not require outside capital and the entrepreneurial counsel and advisory that comes from a good venture outfit. Rather, they brought in an experienced and passionate GM to run the business unit, an entrepreneur in his own right, who brought the experience and rolodex -- in addition to the roll-up the sleeves know how -- of an executive in the venture community.

In addition to the fact that a number of the good ideas are coming from within larger organizations today -- in one case, even the procurement department of a company I've been in touch with, which then worked with R&D and commercial teams to bring a new solution set to market out of their core business -- another major challenge I see is that in the venture community, there are very few firm partners and seed-stage investors with a background in procurement or supply chain, either from a start-up or practitioner perspective. It's been my experience that investors tend to feel more comfortable with solution areas and ideas where they've had some exposure to in the past, or can at least draw parallels to commercial needs, wants and requirements.

Still, based on the flurry of interest in the sector, I do predict we'll see a new level of venture interest in procurement and supply chain. Here are five predictions for 2012:

  • At least one venture firm names an EIR (entrepreneur in residence) with a background in procurement, supplier management and related areas
  • 2-3 new Series A investments (at least) are made in true start-ups in the area
  • Larger vendors/service providers and even practitioner organizations inside companies continue to incubate and launch new ventures on their own
  • A number of new ventures focused on the supplier management market continue to surface and larger providers in this market (or tangential markets) accelerate their efforts aggressively through both organic growth and M&A activity
  • Private equity firms make at least one significant new investment in the market; others make associated tuck-in acquisitions to expand the market opportunity for existing portfolio companies

Jason Busch

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