Walnut Venture Associates is a small group of angel investors with backgrounds in the software industry. RBS is a small software company that makes billing and enterprise management software specifically targeted at other software companies. RBS and Walnut are deciding whether Walnut should invest in RBS, and then if they are willing, whether RBS finds the terms of the deal satisfactory. This case memo illustrates that the venture capitalists are looking for good managers in a particular industry, while entrepreneurs typically think funding is dependent on having a good idea. It also discusses why or why not RBS and Walnut might be a good fit for each other.
What Venture Firms Want
Industries not Companies
Venture firms are focused on particular industries, not just great companies. Software itself (i.e. the stuff RBS’ customers sell) is also in the high growth portion of their S-curve, growing 5 times faster than the rest of the economy. Software of RBS’ type (“vertical solutions”) is replacing in-house solutions.
According to the case, the software industry is the fastest growing segment of the US economy (1997). This fits with where the venture firms would like to be. The industry is at the right timeframe in terms of its maturity. Further, the timing of the deal was right because of the current high availability of capital as well as the explosive growth of the network, which has added value to all aspects of software. One risk in this is that there are no direct competitors offering nearly exactly what RBS is. Thus if they do not move quickly, and other companies can offer what they do, someone else may survive an industry shakeout.
The Right People
As stated in both the article on business plans and the article on how venture capital works, having the right personnel in place is critical for venture funding. Evidence of this can be seen in the Walnut-RBS case by the very early and prominent listing of résumés for O’Connor,