cfa research challenge safeguard scientifics (sfe) - sell
TRANSCRIPT
CFA Research Challenge Safeguard Scientifics (SFE) - Sell Equity Research Jan. 19, 2018 Recommendation Company Target Price Current Price Sell Safeguard Scientifics (SFE) $11.05 (9.46%) $12.20 (As of 1/18/18) Exchange Headquarters GICS Sector NYSE Radnor, PA Financials – Venture Capital
Executive Summary
WearerecommendingasellofSafeguardScientificswithafinalpricetargetof$11.05.SFEhasnotpositioneditselfwellenoughtosucceedinanever-changingindustry.WebelievethattheoutlookforSafeguardanditsholdingsisworsethanthemarketperceivesittobe.Whilemanyoftheircompetitorshaveexpandedinternationallyaswellasbroadeningtheirinvestmentopportunities,SFEhasremainedstaticandmanagementhasshownnoindicationsofmakingchangesanytimesoon.Thecombinationofareluctantmanagementteam,regulatorypressuresoftheinvestedindustries,andtheoveralllackoftransparencyhasledustobepessimisticaboutthegrowthprospectsofSFE.Finally,SFEistradingatapremiumcomparedtoitscompetitorsprovidingforahighlikelihoodofameanrevertingdrawbackinthenearfuture.Ultimately,duetotheinherentrisksandminimalaccesstofinancialinformationwebelievethataninvestmentinSFEisnotaresponsiblemove.
Business Description
SafeguardScientificsInc.(SFE)isaventurecapitalandprivateequityfirmthatresidesinsoutheastPennsylvania.Thefirmspecializesinexpansionfinancing,growthcapitalaswellasindustryconsolidationsinthreemainsectorsHealthcare,FinancialServicesandDigitalMedia.Theyinvestinhigh-growthcompaniesthattheybelievetheycanbuild value in. The experiencedmanagement team prides itself on facilitating thegrowth of their partner companies by aiding them with industry and financingknowledge.Toensurethattheinvestedcapitalisbeingusedeffectivelyandthatthepartnercompanies’objectivesareinlinewiththoseofSafeguard,thecompanyplacesone to two of their management team onto the board of the partner company.Typically, SFE initially invests in series A-C rounds and sometimes dips into seedfunding.Thecompanylookstomakeinvestmentsbetween$5millionand$50millioningrowthequityfinancingwithinthreetofiveyears.Thegoalofeachinvestmentistodoubletheinitialinvestmentintheshortestperiodoftime.Currently,thereare26partnercompanies(12Healthcare,9DigitalMediaand6FinancialServices)andfiveseedinvestmentsintheportfolio.Themanagementteamforecastsonetothreeexitsin2018anddonotforeseeandnewinvestmentsonthehorizon. Key Highlights of 2017 SFEsolditsinterestinitspartnercompanyNexxt(formerlyBeyond.com)for$26million,composedof$15.5millionincashanda$10.5millionnote.Thiscashresultedinagainofonly$0.1millionandinterestincomewillbereportedonthenote.SFE'spartnercompany,GoodStartGeneticswasacquiredbyInvitaeCorporation.Againof$4.3millionwasrecognizedonthistransactionintheformof414,237sharesofInvitaecommonstock.Another137,125shares($1.4millionvalueatclosingdate)arebeingheldinescrowuntilAugust2018.SFErecognizedimpairmentchargesof$3.6millionrelatedtoSpongecellbasedonSFE'sexpectationthatthispartnercompanywillraiseitsnextfinancinground.Anaggregateimpairmentchargeof$4.9millionwasrecognizedrelatedtoPneuronduetoitsinabilitytoattractthirdpartyinvestorsoracquirersandadeclineinrevenue.Pneuronhasterminatedbusinessoperations.SFEfundedanaggregateof$13.6millionofconvertiblebridgeloanstoInfoBionic,CaskData,HooplaSoftware,Sonobi,WebLinc,GoodStartGenetics.SFEalsodeployed$2.5millionintomeQuilibrium,$1.8millionintoQuanticMind,$2.1millionintoTriceMedical,$1.5millionintoAktana,$2.0millionintoCloudmine,and$2.4millionintoFullMeasureEducation.A$1.5millionconvertibleloanwasfundedtoNovaSom,alongwitha$0.2millionbridgeloantoLumesis.SFEfundeda$0.3millionofaconvertiblebridgeloantoAventuratofundwind-downactivities.
CFA Research Team This report is published for educational purposes only by students competing in the CFA Institute
Research Challenge.
Figure A: SFE Performance Relative to S&P
Figure B: SFE vs. Tech, Healthcare,
Financials, & PE
Company News SafeguardScientificslaysoff15employeesamid'changesinstrategy'
• HalfofSFE'semployeeswereeliminatedinordertocutcostsbyupto$6million • Newstrategyalsoincludesfundingonlyexistingcompaniesratherthanintonewpartnercompanies
Safeguard Partner Company Putney to be acquired for $200M (3/15) • SFEexpectstorealize$58millioninaggregatecashproceeds(3.9xmultiple)• SFEhasdeployed$14.9millionintoPutneysince2011
Safeguard Partner Good Start Genetics to be acquired by Invitae (7/31) • SFEwaspaidin$3.8millionofInvitaecommonstock,with$1.3millionofcommonstockheldinescrowforayear• StephenT.Zarilliquotedassaying“…thisoutcomerepresentsasignificantshortfallbasedonourreturnexpectations.”
Safeguard Scientifics Enters into New $75 Million Secured Credit Facility (5/12) • Creditfacilityhasamaturityof5/11/2020,andhasafloatinginterestrate• FundsfromthefacilitywillbeusedtorepaypartofSafeguard’sconvertibleseniordebentures• TheHPS-fundedfacilityprovidesSafeguardwiththenecessarystrategic,tacticalandfinancialflexibilitytodriveshareholdervalue”
Industry Overview and Competitive Positioning
SWOT Analysis
Strengths Weaknesses Opportunities Threats -Longtrackrecordofaddingvaluetostartups-Experiencedmanagementteam
-HeadquarteredinPennsylvania-Limitedbynumberofemployees-Limitedaccesstofunding
-IncreaseexposuretoBostonstartupsthatSiliconValleyVC’smaynothaveaccessto-TaxBillallowscorporationstospendmoreonproductivitytechnology-Gainaccesstoadditionalcapital
-Limitedmobilityduetotheexpertiseofthecurrentmanagementteam-Valuationsstayhighmakingitdifficulttofindattractivebuyingopportunities
Porter’s Five Forces
Threat of New Entrants Threat of Substitutes Bargaining Power of
Suppliers Bargaining Power of
Buyers Rivalry Within the
Industry Low:-Highcostofentryandinvestinginstartupsisahighlycapital-intensiveprocess-Therearelimitednumberof“experts”whohavebeensuccessfulintheVCspaceandcanaddvalueasinvestorsfornewentrepreneurs-BothinvestorsandstartupswanttoworkwithVC’swithagoodtrackrecord,thiscannotbebuiltovernight.
High:-Therearemanyalternativesforinvestors,outsideoftheVCspace:hedgefunds,mutualfunds,privateequity,andotherwealthmanagementoptions.-Alternativesoftenprovidemoreconsistentreturnswithcompetitivefees.-Intheassetmanagementspace,thereisageneralracetozerofees,makingothersmoreattractive.
Moderate:-StartupshavetheoptiontochoosebetweenmanyVC’soracombinationofVC’s,butultimatelytheydoneedcapital.-Investmentsinstartupsarenegotiatedtoapriceforaspecifiedshare.-Higherprobabilityofsuccesstypicallymeansgreaterinitialinvestment.
Moderate:-Investorshavesettermsforcapitalinvestedandfeesonthatcapitalaswellasanyreturnsgeneratedinexcess.-Investorsthathaveanenormousamountofcapitaltodeploymaybeablenegotiatealowerfeestructure,however,mostinvestorswithanenormousamountofcapitalwillhavealowerrisktolerance.
High:-Forstartups,therearemanyVC’sthatbidinordertogettheparticularproject,competitiondrivesvaluationstobepushedhigher,increasingthepricetoinvest.-VC’smusthavestaffthatcanaddvalueforstartupsandinvestatacompetitivevaluation
Venture Capital/Private Equity
PrivateEquityisaformofinvestingfocusedoncompaniesthatarenotpubliclytradedoraformofinvestmentwherepubliclytradedcompaniesaretakenprivate.Thisformofinvestingtookoffinthe80’s,wherefirmswouldpurchaseotherfirmsandstripthemofnon-returningassets,orchangethemoperationallytothensellthemforaprofit.PEfirmsheavilydependonbothcapitalraisedfrominvestorsanddebtinordertobesuccessful.Alargepartofhowtheycanmakeseeminglynon-profitablecompaniesagoodinvestmentisbyfusingdebtintothecapitalstructure,andcuttingoutsignificantcostsfromthebusiness.PEfirmsmostlyinvestinmaturefirmsthatarelosingtheirtouchorcompaniesthathavegrowntoolargeandcarrynon-profitabledivisionsthatcouldbesoldoff.PEfirmstypicallyinvestbypurchasing100%oftheirinvestmentandthenbecomeveryhandsonbystreamliningoperationsandincreasingitsvaluetosellbackintothemarket.PEfirmsalsoconcentratetheirinvestmentstoasmallnumberoffirmsatatime.TypicallythesefirmsexittheirinvestmentsthroughIPO’sorbydirectlysellingtheentirecompanyforastrategicM&Adeal.PEfirmscanwithstandfailures,butusuallyexpectmostoftheirinvestmentstobeprofitable.KeyplayersincludefirmssuchasKKR,Apollo,BlackStone,BainCapital,TPG,andCarlyleGroup,amongothers. VentureCapitalfirmstypicallyinvestinveryearlystagefirms,mostlystartupswithnewideas,thathavethepotentialtochangetheworld.Typically,theyfocusmoresoontheideathatthecompanyhasandhowtheycancreateaproduct,moresothanfocusingonthecompany'sprofitabilityatthemoment.Theylooktomakebetsonwhocancapturethefuture.UnlikePEfirmswhoconcentrateonafewfirmswith100%ownership,VCfirmstypicallydonotconcentrateonahandfulofcompanies,butrathermakesmallinvestmentsbelow50%amongstalargenumberofcompanies.Theyalsohaveamixtureofinvolvement,theycanbeveryhandsonorveryhandsoffdependingonthefirmandtheparticularinvestment.VCfirmscanhelpstartupsfigureouthowtodevelopamanagementstructureormarkettheirproduct.Essentiallytheyhelpturnideasintoabusinessandreachmorepeople,iftheyareinvolvedatall.VCfirmscanexitinwayssimilartoaPEfirm,usingIPO’sandM&Adealstogetoutoftheirinvestments.VCfirmswouldlikeforalloftheirinvestmentstobesuccessful,butexpectaboutoneinteninvestmentstobesuccessful,knowingthatsuccessmeansaverylargereturn.Successfulventurecapitalistfirmsinclude:AndreessenHorowitz,SequoiaCapital,BenchmarkCapital,Accel,UnionSquareCapital,NEA,GreyLockpartners,KhoslaVentures,GoogleVentures,amongothers.ManytechgiantsalsohaveadivisiondedicatedtoVCtypeinvestments.AnotheremergingkeyplayerinVCasofrecentisalargeJapaneseinvestmentfirmknownasSoftBank. Healthcare
Thehealthcarestartupindustryrecognizesthegrowingdemandofcustomerswantingtobeinfullcontroloftheirspecificneeds.Companiesaretryingtogiveallofthepowertotheconsumer.Asconsumersarebecomingmoreconcernedwiththeirhealthcareneeds,theywanttobeincontroleverystepoftheway.Withthissocialclimate,consumersdemandanswersquicklyandaccurately,sothehealthcarestartupindustryisfacedwiththechallengeofsolvingthesedemands.Ontopofthischallenge,thefrugalnatureofindustrybeingdominatedbygovernmentregulationandeverchangingmedicalproceduresmakesthefutureofthestartupindustrydependentontheabilitytostayaheadofthecurve.Thedevelopmentinthetechnologyofthisindustryhascreatedgreaterefficienciesandscalability.Thehealthcareindustryhashighexposuretobothpolicyandregulation.Regulationaffectsthepharmaandbiotechfirmsthemost,especiallywhenitcomestodrugpricing.Policyaffectsmanagedcareandinsurancecompaniesheavily.Theindustryislikelytoseethegovernmenttrytofixtherisingdrugcosts.Wagesarenotexpectedtogrowatthesamerateasthepriceofprescriptiondrugsforcitizensunder65,at2.5%comparedto11.6%.,respectively.Drugcompaniesareabletosettheirpricessincethebargainingpowerofbuyersisverylowsomedicationcostsarebeingraised.Insurancecompaniesarepassingthecostsofthesehigherdrugstotheirpatientsintheformofhigherdeductibles.PresidentTrumpisfortheloweringofdrugprices,butsofartherehasnotbeenachange.ArecentadditiontothetaxreformbillincludedarepealoftheAffordableCareAct’sindividualinsurancemandate.Thisclauserequiredcitizenstopayasteeptaxfineiftheydidnothavehealthinsurance.Withoutthismandate,itisestimatedthat17millionpeoplewillgowithouthealthcareleadingtodecreasedemandforvariousservices.Thevolatilityanduncertaintyoflegislationinthisindustryhasmadeitincreasinglydifficulttomeasuredemandandcreateasolidoutlook.Thisrepealoftheindividualmandate(thatprovidesmostofthefundingtotheAffordableCareAct)signalsconcreteturningpointinhealthcarelegislation.ThereisstillagreatdealofuncertaintyasCongresshasnotseenanymomentuminanybillproposed.Companieswillneedhelpwiththechangingrulesandregulationssothatiswherethestartupcompanieswillcomeintohelpwiththeflowofinformation.Technologyhasbecomeincreasinglyimportantforhealthcarecompanies.ArtificialIntelligence(AI)hasbecomeahugephenomenoninthetechnologyspaceoverthepasttwoyears.AIistransformingthehealthcareindustrybyhelpingwiththeorganizationofhealthcareinformationthatisgrowingatincrediblespeedsandcanassistphysiciansintheirdecisionmaking.BusinessesusespecializedAItocatertoeverycustomer’sneedsinordertoimprovetheirexperience.Inthehealthcarespace,startupsareusingAItoverifyhealthcare,enhanceinteractionsbetweenpatientsanddoctors,andinterpretlabresults.ThereisstillalotthatcanbedevelopedintheAIspacethatwillleadtohugemedicaladvancesinthefuture.
TheapplicationofAIisnowfeasibleduetotheaccessofthelargedatasetsthatBigDataprovides.PatientrecordsthatareavailableduetoBigDataallowdoctorstocomparetheirpatientswithothersaroundtheworldwhohaveexperiencedsimilardiseasesandsymptoms.BigDataalsomakesclinicaltrialsandtestingmoreefficient,whichpresentstheneedfordataanalyticsandprocessingplatforms.Thatneedinthemarketconceivedthecontractresearchorganizationmarket,throughcompaniessuchasIcon.TheadoptionoftheInternetofThings(IoT)inhealthcareisbeingdrivenbywearabledevicesthatareabletocommunicateandexchangedatawithotherdevicesthatareconnectedtotheInternet.IoTimprovesproductivitythroughthiscommunicationamongdevices.Inasurveyofover900executivesinthestartupindustry,oneoftherisingconcernsforthefutureistheincreaseinhealthcarecosts.Thisissuehasgrowninimportanceovertheyearssignalingtheincreasedprobabilityoflaggingnumbersintheinthehealthcarespaceandinitiativestodevelopabusinessinthehealthcarespace.
Financial Technology
Fintechisavaguetermreferringtocombiningfinanceandtechnologywiththegoalsofimprovingefficiencyanddecreasingcosts,andfintechhasverydifferentapplicationsineachsubsectorofthefinancialservicesindustry.Whiletechnologywilltakeeachsubsectorindifferentdirections,fintechcurrentlybenefitstheoperationsofallfinancecompanieswhochoosetoembraceit.TechnologiessuchasAPIs,e-payments,AIandcybersecurityalreadyhavemadeanimpactontheinfrastructuresandbottomlinesoffinancialservicecompaniesandwillcontinuetodosoastechnologyimprovesandcustomersandclientsalikebecomemorecomfortablehandlingfinancialtransactionsdigitally.
Themostcommonlifecycleoffintechcompaniesistobeginasastartuputilizingtechnologytoaddressaspecificneedorissue.Thesecompaniesrarelygopublicastheusualpurposeofthebusinessistohelpalreadyexistingbusinessesusetechnologytoimprovetheiroperationsordatamanagement,ratherthantryingtodirectlychallengetheworld’slargestbanks.Thetwoindustriesareveryco-dependent,asfintechcompaniestypicallyhaveahardtimeattractingclients,andbanksstrugglewithimplementingtechnology.
M&Avolumeisconsiderablydownfromyearspast,howeverthevalueofVCbackedexitshasalreadyexceededFY’15throughthreequartersandalmostsurpassedFY’16.EarlystagefintechVCfundinghasrecentlytrendedinverselytoglobalVCactivity,withanincreaseinmedianvalueofangelandseedfunding.Theindustryhasmatured,andinvestorshaveabetterideaofwhatasuccessfulfintechstartuplookslikeandhavetopayapremiumtoinvestincompanieshopingthattheywillbeoneofthefewtocapitalizeoffofloftyexitmultiples.ThisischallengingfortheportfoliosofVCfirmsbutapositiveforcompaniesreceivingearlyfunding.
RegulationTechnology,orregtech,istheareawithinfintechwiththemostroomtoexpandinthecomingquarters.AsbanksandotherSiFisgrowtiredofthesignificantcostsassociatedwithcomplyingwithbothU.S.andglobalregulation,therehasbeenatrendofmovingtoregtechinanefforttorelievesomeofthestressesoffollowingtherules.AnotherareatokeepaneyeonistheuseofBigDatawithintheinsurancespace,aswellasthelendingspace.Athemeintheinsuranceindustryhasbeentheneedtoacquiredataonpotentialpolicyholderstoattempttoeliminateorreducetheamountofasymmetricinformationpresent.Thisdataissomethingthatwouldalsobeveryusefultobanksassessingorpricingloansforcustomers.Thispresentsanopportunityfordataanalysisandmanagementstartups,likeSFE’sCask,tomeettheneedsofarapidlychanginginsurancespaceandpotentiallybanksattheregionalandgloballevel. Digital Media
Digitalmediaisdefinedasthedigitaltoolsusedtocommunicatemessages.Itisvastlydifferentfrommostbroadcastmediaoutlets,becauseitallowsfortwo-waycommunication.Anadinanewspaperortelevisionbroadcastcannothaveinstantinteractionfromtheaudience.However,aninternetadonawebsiteorinanappcaninteractwiththecustomerallowingtheaudiencetodirectlymakeapurchaseortakethenextstepsdivingdeeperthanjustthead.Digitalmediacanfollowusersbasedontheircookiesandbeabletoprovidemoredirectedadvertisementsthantraditionalmedia.AccordingtotheIAB,digitaladvertisingcontinuestogrowatanastonishingrate.InternetadvertisingintheUnitedStatesinQ12017alonegenerated$19.6billion,up23%fromthepreviousyear’sfirstquarterandthe7thconsecutivefirstquartertoshowdoubledigitgrowth.PwCexpectsglobalrevenuefortheInternetindustrytoriseto$260.36billionby2020atanexpectedCAGRof11.1%fortheperiod,startingin2016.Infact,in2016adspendononlineadvertisingsurpassedTVadspendingforthefirsttime,andattheexpectedgrowthrate,thegapisexpectedtowidenby2020.
Overthelastfewyears,therehasbeenamajorshiftintheindustrytowardsprogrammaticadvertising(ormarketing).Inthisform,advertisersarenotonlybuyingadspacebasedonthepublisher,buttheyarebuyingitbasedonwhotheexactaudienceis.Withprogrammaticmarketing,thereareexchangesonwhichadvertisersmustalgorithmicallychosewhenandhowmuchadspaceitwantstobuybasedonhowmuchacertainviewerisworthtothematthatspecificmoment.Thinkoftheseexchangeslikethestockmarket,butforveryspecificadspace,bothintimeandplace.Whenawebsiteisbeingloaded,theinformationthathasbeencollectedabouttheuserspaceistakenandfactoredintotheavailableadspacethatisabouttobevisibletothisuser.Thatspaceisthenauctionedofftothehighestbidder,allofthesetransactionshappeninginmilliseconds.Thisallowsadvertiserstolimittheiradexpendituretowhereitwillbethemosteffectivetoreturnsales.TheseexchangesrequireDemandSidePlatforms(DSPs)andSupplySidePlatforms(SSPs)inordertooperateoptimally.Theseareessentiallytheplatformsonwhichthebidding,buying,posting,andsellingcanoccur.SomeofthelargestDSPsincludeFacebookAdsManagerandGoogle’sDoubleClick.ThesearethelargestbecausetheyhaveaccesstothemostInternetadsbeingsoldaswellasbuyersofads.Whilethiskeepsthemsafefornow,animportantfactorforDSPsiswhattheycandowithdata.Forthisreason,thereisstillasignificantriskofanewcompanyproppingupthatisabletousedatamoreefficientlyorallowitsuserstodrawdeeperinsights.Thisforcescompaniestocontinuetoinnovateinordertoremainsuccessful.Inordertomakethebestdecisionsonwhichuserstospendmoneyon,advertisersneedaDataManagementPlatform(DMP)thatwillallowthemtocollect,store,andleveragebothfirst-partyandthird-partydata.Thelargestkeysuccessfactoristheamountofdatathateachofthesecompaniescancapture,manyoftheleadersintheindustryhavebeenabletoclaimtheirspotasaresultofacquisitions,allowingthemtocapturemoredataandthusalargemarketshare.
Dataplaysalargeroleinthedigitalmediaindustry,notonlycollectingitandowningit,butalsoknowinghowtomakethemostofthedatabyfindingopportunitieswithinthatdata.MeaningasweimplementAI,notonlywilldigitalmediacompaniesbeabletopullvaluableinsightsfromthedata,butwillbeabletoactbasedontheinformationthatisalreadyaccessibletous.AIcouldleadtobettersmartcurationforcustomers,allowingforspecificmarketingnotonlybasedonrecentsearches,butalsobasedonpastpurchasesfortheindividual,notjustgeneralpatterns.Currentlymarketerscansuggestproductsbasedonwhatsecondproductsothersboughtwithanotherproduct,however,withAItherewillbemoresuggestionssimilartoNetflix,inwhatyoushouldwatchnext,basedonwhatyouhavewatchedbefore,notbecauseothersaredoingthesame.Thefocuswillbeonindividuals,notgeneralpatternsinlargedatasets.SomeotherAIfunctionalitythatdigitalmediacompanieswillbeabletouseisautomaticadgeneration,whichismorepersonalizedthanprevioustargetedads.Differentindividualsmayseedifferentadsforthesameexactproduct,basedontheirindividualbehaviorandwhatthedatadeterminestobethebestwaytosellaproducttothatperson.Theindustryalsoseeschatbotsplayingintodigitalmediaandmarketing,asthesebotsarealreadyhereandcansavecompaniesvaluabletimeansweringbasicquestionsaboutproductsandordersthatwerepreviouslyansweredbyhumansthatcouldbemorecostly.However,withthelargedevelopmentcostsofAI,itputscompetitorssuchasGoogleandFacebookinamuchbetterpositiontotakeadvantageofthebenefitofAIthansmallercompetitorsinthedigitalmediaspace.
Partner Companies
RevenuegenerationdeterminesthestagethatSFE'spartnercompaniesfallinto.TheDevelopmentStagecompaniesarepre-revenuebusinesses;theInitialRevenueStageconsistsofbusinesseswithrevenuesof$5millionorless;theExpansionStageismadeupofbusinesseswithrevenueof$5millionto$20million;andtheHighTractionStagecompanieshaveover$20millioninrevenue.(SeeAppendixforfurtherreference) Competitive Positioning
RivalFirms IndustryMarket
Capitalization(B)
CompetitivePositioning
Blackstone(BX)
PrivateEquity $38.5
Blackstoneisoneoftheworld’sleadinginvestmentfirmswith$347billionAUM.Thevehiclesutilizedincludeprivateequity,realestate,hedgefundsolutions,non-investmentgradeandsecondaryfunds.TheycurrenthaveastrongholdintheEuropeanrealestatemarket.TheyhavesomefocusonInformationtechnologyandIndustrials.
KKR&Co.(KKR)
PrivateEquity $10.5
KKR&Co.has$153billionAUMacrossvariousalternativeassetclassesincludingprivateequity,energy,infrastructure,realestate,creditandhedgefundstrategies.Itisatrulyglobalinvestmentfirmhavingoperationsinover5continents.
ApolloGlobalManagement
(APO)
PrivateEquity $14.1
ApolloGlobalManagementhasover$230billionAUMandmainlyinvestsforpensions,endowments,andsovereignwealthfunds.ThemajorityoftheirrevenueisgeneratedfromCorporateprivateequity,Credit-OrientedCapitalMarkets,andRealEstatefunds.ThecompanyspecializesinChemicals,Commodities,andConsumerRetail.
CarlyleGroup(CG)
PrivateEquity $8.44
TheCarlyleGroupisaglobalalternativeassetmanager$174billionthatismanagedacrossover300vehicles.Thecompanyhas30officesinsixcontinentsandtheyserviceover1,700investorstoensuretheyachievepremiumreturn.TheirfourmainbusinesssegmentsincludeCorporatePrivateEquity,Realassets,GlobalMarketStrategiesandInvestmentSolution.
KleinerPerkinsCaufield&Byers
VentureCapital N/A
KleinerPerkinsCaufield&ByersisanAmericanventurecapitalfirmlocatedinSiliconValley.Thecompanyspecializesininvestmentsintheincubation,earlyandgrowthstages.Manyoftheglobalinvestmentsarefocusedinthetechnologyandlifescienceindustries.KPCBisknownasthe“largestandmostestablished”venturecapitalistfirm.
ETFPrivateEquity(PSP)
PrivateEquity N/A
TrackstheinvestmentresultsoftheRedRocksGlobalListedPrivateEquityIndex.Atleast90%ofitstotalassetsareinvestedinsecuritiesincludingADRsandGDRs.Theunderlyingindexiscomposedof40-70privateequitycompanies(includingbusinessdevelopment,andmasterlimitedPartnerships)
Duetothedecisiontooperateasapubliclytradedventurecapitalfirm,SFEfindsthemselvesinauniquelychallengingpositioninthe
worldofprivateinvestments.Despitehavingasimilarcompensationstyletoprivateequityfirms,VCfirms’investmentshaveafarhigherfailrate.AnywherefromseventytoeightypercentofinvestmentsdonotreachtheirexpectedROI,andthreeoutoffourcompanieswithVCfundingareexpectedtofail.Privateequityfirmsalsotypicallyhavetheadvantageofbeingabletoraisecapitalthrougha limitedpartnerstructure,allowingthemtoinvestwithafargreaterpoolofdeployablecapitalbehindthem.SFEontheotherhandmustinvestwithcapitalraisedfromtheirbalancesheet,andsincetheyareasmallercompany,theyhavesignificantlyrestrainedaccesstofundsrelativetothepublicprivateequityfirmsandmanyofthelargeplayersintheVCspace.WithatypicalVCinvestmentstrategybeingtomakeasmanysmallerinvestmentsaspossibleandhopingforthesuccessfulinvestmentstobeprofitableenoughtooffsetthelossesfromthenon-successfulones,alongwithSFE'slimitedaccesstocapital,theyarenotabletomakeasmanyinvestments.Theyalsomustbefarmoreselectivewithwheretheyputtheirmoney,whichplacesthematadisadvantagerelativetomanyotherfirmsintheprivateinvestmentsspace. OntopofSFE’sbalancesheetwoes,thedecisiontooperateoutofWayne,Pennsylvaniahindersthefirmfromaccessingmanypotentialinvestment opportunities.Within Silicon Valley,where startups and external economies of scale are present to harbor business ideas andinvestors,theVCspaceisbothincrediblycompetitiveandlargelyunsuccessfulwhereSFEisoperating.WebelievethatbychoosingnottooperateoutofSiliconValley,SFEislimitingthepotentialopportunitiesfortheirbusinessaswellastheirshareholders.WhileitcouldbeconstruedasapositivethatSFEistryingtofadethecrowdandcanvasBostonandtherestofthecountryforattractivestartupideas,weareconfidentthattheylackthefundingorthepersonneltosuccessfullyexecutethisstrategy.GoodpracticeintheVCindustryistobewithinatwo-hourflightfromyourinvestment,andbeingheadquarteredinPennsylvanialimitsboththenumberofinvestmentopportunitiesSFEsees,andtheamountofcoachingandoversightthattheycanprovideinvestmentsthatlieoutsideofthisrange. Investment Summary
WearerecommendingasellofSafeguardScientificswithafinalpricetargetof$11.05.SFEhasnotpositioneditselfwellenoughtosucceedinanever-changingindustry.WebelievethattheoutlookforSafeguardanditsholdingsisworsethanthemarketperceivesittobe.Whilemanyoftheircompetitorshaveexpandedinternationallyaswellasbroadeningtheirinvestmentopportunities,SFEhasremainedstaticandmanagementhasshownnoindicationsofmakingchangesanytimesoon.Thecombinationofareluctantmanagementteam,regulatorypressuresoftheinvestedindustries,andtheoveralllackoftransparencyhasledustobepessimisticaboutthegrowthprospectsofSFE.Finally,SFEistradingatapremiumcomparedtoitscompetitorsprovidingforahighlikelihoodofameanrevertingdrawbackinthenearfuture.Ultimately,duetotheinherentrisksandminimalaccesstofinancialinformationwebelievethataninvestmentinSFEisnotaresponsiblemove.
Valuation Price Target: $11.05 Recommendation: Sell DuetotheuniquenatureofSFE,therewasoneprimaryunorthodoxvaluationmethodologysupplementedwithtwocustomarymethodologiesthatwasusedtodeterminethetargetpriceofSFE.ThisincludedaprojectionofexitsofcurrentPartnerCompanies,andrelativevaluationusingmultiplesandpeers. Exit Model Price Target: $11.64 Recommendation: Sell Inmanyscenariosofvaluation,theDiscountedCashModelisthemostreliableandrecognizablemethodologyintheindustry.InthecaseofSFE,creatingadependableDCFwas impossibledue to the companies’ negativeearnings. Themodel utilizedlookedtoprojecttheexitsofthecurrentpartnercompaniesinSFE’sportfolio.Themain variables examined include the number of exits per industry, the initialinvestmentmultiple,andthevaluationofconsistentpartnercompanies.AllofthesevariableswereextrapolatedbasedontheactivityofSFE’shistoricaldeals. Number of Exits per Industry OneofthemajordeterminantsofasuccessfulexitisthelengthoftimethatapartnercompanyisundercontrolbySFE.ThisisverylogicalasthelongerthecompanyhasaSFEmemberontheirboard,thebetterchanceSFEcanincreasethevalueofthebusiness.Managementhasstatedthattheaveragetimeperasuccessfulexitvariesbetweenthethreeindustriesandwasbetweenthreetofouryears.Thisnumberwasconfirmedbyexaminingalloftheexitsandwriteoffsfromthepastfifteenyears.FourandahalfyearswassetasthebasecaseandanyPartnerCompaniesthatwereundercontrolovertheaveragewereexpectedtoexit.Inthebullcase,thenumberloweredasinsomeextremecasesacompanyexitsafterbeingundercontrolforashortperiodoftime.Inthebearcase,theaverageyear(4.5)isusedfordeterminingexitsandanycompaniesintheirfirstorsecondyearandintheinitialrevenuestagewerewrittenoff.ThisearlyperiodisverydangerousforVCfirmsastheydetermineifthereisvalueinthebusinessandsometimesmakethetoughandstrategicdecisiontowriteofftheinvestmentatbelowcost. Initial Investment Multiple Todeterminetheexpectedvalueofaninvestment,managementusesamultipleontheinitialcapitalinvested.ThemainobjectiveofSFEistoreceivetwotimestheamounttheyinitiallyinvestedandtheystatedthatonaveragetheyaresuccessfulinthatobjective.Byexaminingthepastdata,therewerevariationstotheaveragemultiplebasedontheindustryinwhichthepartnercompanyresided.Inthebasecase,themultipleusedwastheaveragereturnforallpastdealsinthatspecificindustry.Thebullandbearcaseswerecalculatedusingthestandarddeviationofthepastmultiplesandisstatedastheaveragemultipleplus/minusonestandarddeviation.Itisbelievedthatthisgapwillaccuratelydisplaythevariationsinabullandbearcase. Valuation of Consistent Partner Companies AveryimportantpiecetothevaluationofSFEisthepartnercompaniesthatarenotbeingwrittenofforexiting.Itisexpectedthatthevalueoftheconsistentpartnercompaniesdoesnotchange,andSFEwouldbeableretainthetotalinvestmentdeployed.Inthebullcase,thevaluationincreases(1.03x)duetomarketfluctuationsandincreasedinvestorsentiment.Thesepartnercompaniesincreaseinvaluewithouthavingtoexitduetoincreasinginvestordemand.Theoppositeimpactistrueinthebearcase.Thevaluationdecreases(.90x)asinvestordemandsdecreaseandarenotwillingtodeploycapitalattheperceivedmarketvaluation.
FigureX:BullCase
FigureX:BaseCase
FigureX:BearCase
FigureX:TargetPriceExitModel
IndustryStatistics
Historical Partner Company Distribution
Relative Valuation Peer Comparison Valuation Price Target: $10.10 Recommendation: Sell
SFEisinaveryuniquesectorasmanyVCfirmsareprivatelyheldanddonotendurethestressesofthepublicmarket.Withthatbeingsaid,itisverydifficulttofindatruecompetitor,soitwasnecessarytolookoutsidethedirectrealmofventurecapital.ThereareanumberofprivateequitycompaniesandanETFthathavethesamebusinessstructureasSFE.SinceSFEdoesnotreportanysalesandhasnegativeearnings,theonlyratioutilizedwithconfidenceisPricetoBook.Thelasttwelvemonthsandthenexttwelvemonths(estimates)forthepeergroupwereexaminedtodeterminethevaluationofSFE.TheoutlookforSFEisverybleakasitisprojectedtobeveryexpensiveascomparedtoitscompetitors.
$0.00$2.00$4.00$6.00$8.00
$10.00$12.00$14.00$16.00$18.00$20.00$22.00$24.00$26.00$28.00$30.00
LTMP/B NTMP/B 52-WeekStockPrice
Historical Multiple Valuation Price Target: $9.67 Recommendation: Sell
Again,theonlyratioutilizedasadeterminantwasPricetoBookduetothestatedreasonsabove.TherewasananalysisofthehistoricalP/BofSFEforthepastelevenyears.Asatotal,therewerethreesharepricescalculatedusingavariationofmultiplesandBVPS.ThefirstsharepricewascalculatedusingthehistoricalaverageP/Bandthisresultedinaseverediscounttothecurrenttradingprice.ThisdemonstratesthatSFEisovervaluedatitscurrentpriceascomparedtoitspast.ThenextsharepricewascalculatedusingtheconsensusP/Bforthenexttwelvemonths.Thisresultedinapremiumofthecurrentsharepriceasthevaluationisestimatedtodouble.ThefinalsharepricewascalculatedwiththeuseofanestimatedratiothatmirrorstheeconomicconditionsforSFEinthepast.Itwasfoundthat2007wastheyearthatmirroredthecurrentstateforSFEwith14PartnerCompanies.SFEcurrentlyhasdoubletheamountofPartnerCompanies,sotheratiowasdoubledtotakethatinaccount.Evenwiththisaggressivemultiple,thecalculatedsharepricewasatadiscounttothecurrentprice.Overall,theconsensustargetpriceisbelowthecurrenttradingpriceandindicatesthatSFEisovervaluedascomparedtoitshistoricalrecord. Conclusion
Afterfurtheranalysis,wefoundthattherewasavariationbetweenourthreevaluationmethodologies.Eachoneofourmethodscarriesadegreeofconfidencematchedwithavaryingdegreeofflaws.Duetothelackoffinancialinformation,wewerenotabletocompleteeachmethodfully.Weweightedeachmethodologybasedonourconfidenceaswellasthedegreeofassumptionsincludedtoarriveatthepricetarget.Ultimately,weweightedourExitModel65%,ourpeercomparison20%,andourhistoricalmultiple15%,thusarrivingatanimpliedsharepriceof$11.05.
Financial Analysis
Equity Income: SFEusestheequitymethodasitsaccountingsystem,whichshowstheprofitsandlossesofitspartnercompaniesintheirownfinancialstatements.SFEtypicallyholdsa20-50%stakeineachpartnercompany,soitreportstheirprofitsandlossesinproportiontoitsequityinterestsinthem.ThisaggregateamountisreportedasSFE’srevenuefigureastheequityincomeline.WhenSFEdeploysitsinitialcapitalinacompany,itexercisessignificantinfluenceoverafirmbygivingindustryadviceandplacingamemberontheirboard.Afirmthathassignificantcontroloveranotherfirmiscontributingtoitsincomeandmustthereforeusetheequitymethodofaccounting.FortheninemonthsendedSeptember30,2017,SFE'sequitylossdecreased$71.3million.ThelossonimpairmentofSpongecellandPneuronoutweighedanygainsonsaleorgainsonproceedsreceivedfromescrow.Lastyear,SFE'spartnercompaniesproduceda$186millionnetloss. Interest Income: Interestincomeremainedsteadyin2016comparedtothepreviousyears’numberswithaslightdecrease.Thefirstthreequartersof2017sawanincreaseof$0.5million,attributabletohighernotesreceivablefromSFE’spartnercompanies. General and Admin: Attheendoflastyear,generalandadministrativeexpensesincreased$1.1millionmainlyduetoanincreaseinstock-basedcompensationofperformance-basedawardsandemployeecosts.Alargeportionofthegeneralandadministrativeexpensesisthestock-basedcompensationtoexecutivesofSFE. Negative Cash Flow YoY: SFEhasseenanegativenetchangeincashintwelveofthelastsixteenyearsandhasoperatedwithanegativefreecashflowforfifteenofthelastsixteenyears.Eveninyearsofpositivesales,SFEhasnotbeenabletogenerateenoughcashtoproduceapositivefreecashflow.Amajorityofthechangesofcashflowhavebeendrivenbyboththepurchaseandsaleofinvestments,withatrendofgreatercashoutflowinpurchasesofinvestmentsthancashinflowfromthesaleofinvestments.CashseemstoleaveSafeguardmuchmorequicklythanitcanbeproduced.Inthefewyearsthatpurchasingdidnotoutpacethesalesofinvestments,positivechangeinnetcashwasnotguaranteed.In2012,forexample,SFEsold$23.92millionmoreininvestmentsincomparisontopurchasesofnewinvestments,butcouldstillnotcreateapositivechangeincashflowthatyear.Inthatsameyear,theyalsohadlargeoperatingexpensesandchosetoreducealargeportionoftheirlong-termdebt,showingthatevenwhencompaniesaresoldoff,itisoftennotenoughtopushthecompanyintoamuchstrongerfinancialposition.Inthepastfiveyears,Safeguardhashadabouttwentymilliondollarsincashoutflowfromoperatingactivities.Muchofthisisduetothefactthattheydonothaveanypositivecashflowgeneratingactivitiesthatcompetitorshavedeveloped,whilestillmaintainingagenerousamountofoperatingexpensesstartingwithanegativenetincomeandchangesinnetworkingcapitalthatcontinueinanegativedirection. Eroding Assets: Safeguardhasseensevereerosionofcurrentassetsontheirbalancesheetyearoveryearascashhasbeendeployedandshort-terminvestmentshavebeendwindleddown.Inyear-end2014,SFEshowed$137.16millionincashandcashequivalents,byQ32017,theyweredownto$43.47million.Totalassetshavealsodecreasedasthevalueinlongterminvestmentshavesignificantlydecreased.Althoughcashhasconsistentlyleftthebalancesheet,thevalueininvestmentshasdecreasedby$52millioninthepastyearalone. Debt: Sinceyearend2014,shorttermliabilitieshaveincreasedbycloseto800%asSFEhastakenon$42millioninshorttermdebtinadditiontoaccruedpayrollsthattheyhavetypicallyheldyearoveryear.Longtermdebthasbeenfairlystablearound$50millionforthepast7years,beforewhichdebtwasmuchhigher.Totalliabilitieshavebeenfairlystableuptothisyear,wherethelargeincreaseinshorttermdebtalsosignificantlyincreasedtotalliabilities.Overthepast5yearswehaveseenadouble-digitpercentagedeclineinequityasretainedearningscontinuetodeclineandtreasurystockhasalsobeendecreased.Safeguardhascontinuedtodecreaseinperformanceandthebalancesheethassufferedasaresult. Investment Risks
Risk Tolerance/Success Rate
VentureCapitalfirmshaveafarhigherrisktolerancethanPEfirms.VCfirmsmakeanumberofsmall,minorityinvestmentsin
companiesandexpectmostofthemtofail,withthehopethatahandfulwillbemassivelysuccessfulandoffsetthemultiplesmalllossessufferedfromthefailedinvestments.Ontheotherhand,PEfirmshavealowrisktoleranceduetothesizeoftheinvestmentstheymakeaswellasthesystemunderwhichtheyarecompensated.UnlikeVCfirms,PEshopstakemajoritystakesinmuchlargercompanies.PEmanagersarealsocompensatedwithcarriedinterestassumingthatthefundtheymanagehitsaminimum“hurdlerate”.Onemassivefailureonalargescaleinvestmentcouldsinkthefundandleaveitsmanageroutinthecold.PEfirmsmakelarger,moreconfidentbetsincompanies,whileVCfirmsplantseedsinasmanycompaniesaspossible,hopingthatoneortwowillbloom.
FCC Significantly Changes the Internet Inthefallof2017,theFCCchosetoremovenetneutrality,meaningthatinternetserviceproviders(ISPs)cannowchosetochargeusersforaccesstocertainwebsitesandpartsoftheInternet.Forexample,Facebookmaybefree,butyourISPcanchargeyouafeetoaccessFacebook.ThesameappliestoYouTube,NetFlix,oranyotherwebsite.ThiscouldpotentiallydecimatethebusinessofmanyofSFE'sDigitalMediaholdings.Thesecompaniesspecializeinconnectingadvertiserswithadvertisingspaceontheweb,andmanyofthetransactionshappenwithinsecondsaspagesareloading.However,ifusershavetobeginpayingforaccesstocertainwebsites,byeconomiclogicthiswilldecreasethetotalnumberofusersonmanyhightrafficwebsites.Thiswillalsodecreasethevalueofadvertisingaswellasthetotalamountofadvertisingspace,duetofewerpeopleareloadingthepages,feweradvertisingspacewillbeavailable.Unliketraditionaladvertisinglikeabillboard,eachuserseessomethingdifferent,withfewerusersandlessspace,therewillbefewertransactions.Ultimately,thiswilldecreasetherevenueoftheseDigitalMediacompanies.
Corporate Governance
Key Members of Management Team:
Stephen T. Zarrilli has been the President and CEO of SFE since January 2013. He has experience in theentrepreneurialspace,ashewasinvolvedinlaunchingtwobusinessespriortohisroleatSFE.HehasalsobeentheCEOandCFOofmultipleventurecapitalistfirmsinboththeprivateandpublicspace.Overall,hehas30yearsofexperience, giving him the ability to provide valuable financial and industry knowledge to other companies. HecurrentlysitsontheboardofpartnercompaniesApprendaandPneuron. GaryKurtzmanisaSeniorVicePresidentandManagingDirectoratSFEandhasbeenwiththecompanysince2006.Hehasyearsofexperienceinthehealthcareindustryandhasaprofoundunderstandingofthemedicalworld.AtSFE,heisresponsibleforidentifyingandaddingvaluetoemerginghealthcarecompaniesthroughdeployingcapitalandsupportingthem.HeiscurrentlyaboardmemberofAktana,MedCrypt,meQuilibrium,MoxeHealth,OncoraMedical,Prognos,PropellerHealth,Syapse,TriceMeical,andZipnosis.HisskillandexperienceinboththehealthcareandentrepreneurialspacescanbeseeninhisaccomplishmentsofmanyIPOs,M&Aandturnaroundtransactions.HewasaccountableforthesuccessfulexitsofAdvancedBioHealing,AlverixInc.,AvidRadiopharmaceuticals,CrescendoBioscienceInc.andSoteraWireless. BrianSiskoistheCOO,ExecutiveVicePresident,andManagingDirectorofSFEandhasbeenwiththecompanysince2007.Hehasyearsofexperienceinmergersandacquisitions,strategicpartnerships,andbusinessdevelopmentandfinancingtransactions.HisrolewascrucialinthesaleofTraffic.comtoNAVTEQCorporation.HeiscurrentlyaboardmemberofAdvantEdgeHealthcareSolutions,CaskData,Lumesis,andNovaSom,andAppFirst.HealsoactsasanobserverforInfoBionic,Inc.ErikB.RasmussenisaSeniorVicePresidentandManagingDirectoratSFEandhasbeenwiththecompanysince2006.Hesupports,advises,andidentifiescompaniesintheInternet/NewMedia,SoftwareandTechnology-EnabledServicescompanies.HewasresponsibleforthesuccessfulexitsofKado,Swap.comandThingWorx.HecurrentlyisaboardmemberofBrickwork,ClutchHoldings,FullMeasureEducation,MediaMath,Spongecell,andWebLinc.
Board of Directors: Theboardofdirectorsconsistsofsevenmembers.Ofthose,fourareindependentdirectorsandtwoareinsiders.OneoftheinsidersisStephenZarrilliwhoistheChiefExecutiveOfficerandPresident,andtheotherisMaureenF.Morrison,whowaselectedinOctober2017.Mr.Zarrillihasbeenamemberoftheboardsince2012.TheChairmanoftheBoard,StephenFisher,waselectedin2007andisalsoanindependentdirector.Threeofthefiveindependentdirectorshavebeenontheboardsince2003.Oneindependentboardmemberbeganhistenurein2015.Theboardiscomposedofmemberswhohavebeenontheboardformanyyearsalongwithnewermembers.Itisessentialthatthemajorityoftheboardisindependent,soshareholdersareassuredthattheirbestinterestsarebeingprotected.ItisalsoagoodsignthattheboardtenureisvariedsinceitreaffirmsthatSFEhasnewfaceskeepingmanagementtothehighestintegrity. Executive Compensation: Thekeyexecutivesofthecompany include;StephenZarrilli (ChiefExecutiveOfficerandPresident), JeffreyB.McGroarty(SeniorVPandCFO),BrianJ.Sisko(ExecutiveVPandCOO),aswellasJohnE.ShaveIII(SeniorVP,InvestorRelationsandCorporateCommunications).Executivecompensation ismadeupofbothcashand stockbasedcompensation.Executives canalsoearn service-basedcompensation and in some years, performance-based compensation. A large amount of stock based compensation ensures that the keyexecutivesareactingwiththebestinterestsofitscompany’sshareholdersinmind.
Appendix: Partner Companies Healthcare
HighTraction SFEOwnership:40%
AdvantEdgeprovidesmedicalbillingsolutionsforhealthcareprovidersandfocusesonspeedinguppaymentcycleandmaintainingconsistentcashflows.Thecompanytailorsitsservicetothespecificneedsofeachpracticeorhospitalthattheyworkfor,recognizingtheuniquenessofeachsituation.Throughrevenuecyclemanagement,coding,pricing,compliance,consulting,andpracticemanagement,AdvantEdgeisabletoprovidebusinesssolutionstosmallercompaniesthatotherwisewouldnothaveaccesstothistechnology.SFEacquiredAdvantEdgeinNovember2006andhasdeployed$16.3millioninthecompany.
InitialRevenue SFEOwnership:25%
Aktanaassistspharmaceuticalcompanies’salesandmarketingteamsintheirtransformationofbrandstrategy.Theyuseathree-stepprocessofConfigure,Empower,andImprovetobetterperformance.TheirConfigurestepconsistsofcreatingagameplanforanexistingstrategybyanalyzingmarketdataandinterviewingtop-performingreps.Theydelivertheirsuggestionsandinsightstotherep’scustomerrelationshipmanager(CRM)duringtheEmpowerstep.Finally,duringtheImprovestep,Aktanaenablesorganizationstoconnecttheiractionswithresultsandfocusesongeneratingimprovedresults.SFEenteredthispartnershipinJune2016andhasdeployed$9.7millionofcapitalsofar.
InitialRevenue SFEOwnership:47%
CloudMineworkswithhealthcareorganizationstohelpthembuilddigitalhealthapplications.TheyareaHIPAA-compliant,cloud-basedplatformthatpartnerswithhugecustomerssuchastheAmericanHeartAssociationtoassistthemwiththechallengestheyfaceinthedigitaltransformationoftheirhealthcaredata.DatasecurityisveryimportanttoCloudMinesowhencompaniesusetheirplatform,theyareautomaticallyHIPAA,HITECH,ISO,andHITRUSTcompliant.TheyalsorecognizetheimportanceoftheInternetofThings(IoT)throughtheuseofwearabledevicesandsmartsensorstorecordandrelaypatientdatatotheapplication.CloudminebecameaSFEpartnercompanyinFebruary2015andhasdeployed$7.5millionofcapitalsofar.
InitialRevenue SFEOwnership:40%
InfoBionicshortensthedistancebetweenphysiciansandpatientsthroughmonitoringsolutionsforchronicdiseasemanagement.
TheirMoMeKardiadevicedetectscardiacarrhythmiathroughanytimeaccessto24-hourECGdata.Thisdataisrelayeddirectlybacktothecloud-basedsystemsothatphysicianscanreviewthedata.Theprocesscutsdownontimebecausephysicianscanviewthisinformationfromanywhere.SFEandInfoBionicbegantheirpartnershipinMarch2014andhasdeployed$18.5millioninthecompany.ItislikelythatSFEwillcontinuefundingthecompanybeforesellingtheir40%stakeinthecompany.
InitialRevenue SFEOwnership:37%
MeQuilibriumisasoftware-as-a-service(SaaS)platformthatisusedbylargecompanieswhowanttoimprovetheiremployeesstresslevelstodecreaseabsenteeismandforindividualswhowanttoimprovetheirlifestyles.Thecompanyconsiderstheirproducttoalsobearesiliencesolutionthattransformsindividualsandorganizationsthroughengagementandempowerment.Theyfocusonemotionalcontrol,reducingstress,andimprovingoverallwellbeing.SFEbegantheirpartnershipwithmeQuilibriuminApril2015andhasdeployed$10.5millioninthecompany.
InitialRevenue
SFEOwnership:32%
MoxeHealthenablesdataexchangeofclinicalinformationinordertoimprovepatientcareandensureproperreimbursement.Theirkeyproduct,Substrate,linksitspayerstotheprovidernetworks.TherehasbeenadisconnectbetweenhealthcareprovidersandinsurerssoMoxeHealthworkstowardstighteningthisgapthroughimprovingpatientcare,ensuringproperreimbursementandenhancingcompliance.TheirpartnershipwithSFEbeganinSeptember2016andtheirtotalcapitaldeploymentis$4.5million.
HighTraction SFEOwnership:32%
NovaSomisaleaderintheObstructiveSleepApnea(OSA)hometesting.Thiscompanywasfoundedin2002inGlenBurnie,MDand
aimedtoaidtheover35millionsufferersthathavenotbeendiagnosed.WhendiagnosingOSA,patientswereforcedtogotohospitalsorothersleepcentersandmanypeoplefoundthisveryuncomfortableandundesirable.NovaSomdevelopedtheonlycomprehensivelysupportedhomesleeptestthatprovidescontinuouspatientsupportandnextdayresults.ThehopeisthatthistechnologywillallowpatientstobecomfortableandbeginaddressingtheissueofOSA.SFEdeployedcapitaltoNovaSominJune2011withatotalof$23.1millioncapitaldeployed.
Expansion SFEOwnership:35%
PrognosisaninnovativehealthcareAIcompanythatlookstoimprovethehealthcarefieldbytrackingandpredictingdiseaseearlier
byconnectingLifeSciencebrands,payers,andclinicaldiagnosticsorganization.ThissystemenhancesthevalueofresultsanddiagnosticsdatathroughanalyticsandaSFEdeployedcapitaltoPrognosinNovember2011withatotalof$11.6milliondeployed.SFEhasseriesAandseriesBstagefundinginthebusiness.BasedoffhistoricaltransactionswewouldexpecttoseePrognostohaveanexitrelativelysoon.Managementhasmadestatementsthattheyexpectatleastoneexitin2018so,Prognoscouldpotentiallybeoneofthoseexits.
InitialRevenue SFEOwnership:24%Propellerisaleadingdigitalplatformforrespiratoryhealthmanagement.Themainproductofferedisasensorthatisattachableto
almostallinhalersandspirometers.Thesensorgivestheuserinsightsonwhatmaybecausingthesymptomsanditreducesthehassleofmonitoringtheuser'scondition.Thistechnologyhasledtoupto50%moredosestakenonascheduleandupto79%fewerasthmaattacks.Thisisanenormousmarketastheseconditionscostpatients$100billionannually.PropellerHealthlookstofindasimplesolutiontoamajorproblemthatwillsaytheusersasignificantamountofmoney.SFEdeployedcapitaltoPropellerinAugust2014withatotalof$14.0milliondeployed.SFEhasseriesBandseriesCstagefundinginPropeller.Wedon’texpecttheretobeanexitofPropellerinthenearfuture.
InitialRevenue SFEOwnership:26%
Syapselookstohelpcancerpatientsreceiveaccesstothebestprecisioncarethatcanimprovetheirqualityofliferegardlessoftheirsocioeconomicstatus.Thesoftwareofferedintegratesanddeliversclinical,treatment,andhealthoutcomedatatophysiciansatthepointofcaresotheyhavethemostinformation.Previously,allofthisdatawasfragmented,sotheworkthatSyapsehasdoneiscriticalforoncology.Anotheruseofthetechnologyistoenablecustomerstosharede-identifiedpatientdatawitheachotherandlearnfromrealworldtreatmentcustomers.Ultimately,Syapseisgatheringallhealthcareandpatientdataintoonecentrallocationsophysicianscanhaveasmanyresourcesaspossibleinordertogivethemosteffectivetreatmentpossible.SFEdeployedcapitaltoSyapseinJune2014withanaggregateof$13.3millioncapitaldeployed.SynapseisinseriesBandseriesCSFEfundingstagesandweexpectthatSynapsewillcontinuetobeapartnercompanyforatleastthreeyears.
InitialRevenue SFEOwnership:25%
TriceMedicalisahealthcarecompanythat’smainobjectiveistoimproveorthopedicdiagnostics.Theyhavedevelopedafullyintegratedcameraenabledtechnologythatprovidesaclinicalsolution.Thecompanylookstoprovidefasterandaccuratepatientcarebyeliminatingfalseread.SFEdeployedcapitalinJuly2014withatotalof$10.2milliondeployed.TriceMedicaliscurrentlyinseriesBandSeriesCfundingstagesandbasedoffthehistoricalaverageoffiveyearsforasuccessfultransactiontooccurTriceMedicalcouldbeapartnercompanyforanothertwoyears.
Expansion SFEOwnership:38%
Zipnosisprovidessolutionsthatallowleadinghealthcaresystemsbridgethegapbetweentraditionaltelemedicineandvirtualcare.
Theplatformgivesclientsasimplewaytoprovidepersonalizedonlinecaretoadiverseclientbase.Thiscompanyismostnotablyknownforthelivevideoandphoneconsultationsthatallowpeopletohavedirectaccesstoatrainedmedicalprofessionalwithouthavingtoleavetheirresidence.Along,withthatuniquefeatureZipnosisoffersonlineadaptiveinterviews,smartpatienttriageandaclinicalnetwork.Theserviceistargetingconsumersthatareonaverybusyscheduleanddonothavethetimetovisitadoctor.TheyarecapitalizingonthemovingtrendsofquicknessanddigitalservicesandhealthcaresystemscanutilizeZipnosistoattractthenewconsumersthatvalueefficiencyandspeed.SFEdeployedcapitalinDecember2015havedeployedatotalof$7.0million.SinceitisstillinaseriesAstageoffundingwedonotexpectZipnosistoberelinquishedrelativelysoon.
FinancialTechnology
Expansion SFEOwnership:29%
ApprendaisaleadingprovideroftheKubernetes(K8s)platform.K8shastheabilitytobuildwebbasedapplicationsinanylanguageandstoretheminwhatarecalledcontainers.Thisopen-sourceplatformmakesbuilding,monitoringandmanagingapplicationsfarmoreefficientasitrunsthesameacrossanyoperatingsystemastheOSisnotbuiltintotheapp.Apprendaaddsvalueintakingthisplatformandmakingitopen-sourcebetweenvariousunitsofabusinessonaprivate-cloud.Apprendaisaleaderinprivate-cloudenabledapplicationplatforms(CEAP)whichisanemergingindustryexpectedtogrowto$4billionannualmarket.Asconsumersdemandmoreandmoresoftwarefrombusinesses,theamountofcodeandsoftwarethatbusinessesarebuildingisgrowingexponentially.ApprendahasanumberoflargecustomersincludingWalmart,JPMorganChase,GoldmanSachs,Bloomberg,NewYorkTimes,Comcast,Ticketmaster,SoundcloudandPokemonGo.TheirpartnershipwithSFEbeganin2013andthetotalcapitaldeployedis$22.1million.
InitialRevenue SFEOwnership:31%
CaskDatausestheopen-sourceplatformHadooptohelpcompaniesquicklybuildcontainer-basedapplicationsandthencollect,
monitor,andanalyzethedatageneratedfromtheapplications.Hadoopwasfoundedin2011andisbasedoffofresearchpaperspublishedbyGooglethreeyearsearlier.Cask’sCDAP(CaskDataApplicationPlatform)addsvaluetowebdevelopersaswellasdatascientistsandbusinessanalysts.Ithaseasy-to-useAPIsallowingdevstogetapplicationsrunningquickly,storemetadatafromtheapplicationsandallowdatascientistsandanalyststomanipulatethedatacomingfromapps.CDAPhasanapplicationmarketontheplatformmuchliketheAppStoreoniOStoallowdeveloperstocustomizetheirplatformtotheirneeds.Ithasacode-lessinterfacetoallowbusinessanalyststoeasilymanipulateandinterpretdatasetsgeneratedfromapplications,andanadministrativepagewheremanagerscanclearlysetrulesfordatausesandapplicationsettings.Hadoopisforecastedtobeanearly$10billionannualmarketbytheendof2017,anda$50billionmarketby2020.SFEandCaskbegantheirpartnershipin2015andSFEhasdeployed$12.6million.
InitialRevenue SFEOwnership:44%
Lumesisfocusesonstreamliningtheoperationsandcomplianceoftheirclientswhoparticipateinthemunicipalbondmarket.Themunicipalbondmarketisonethathasbeentraditionallyoverlookedbytechnologyproviders,andLumesis’DIVERplatformseekstogiveclientsdataandtechnologytomeettheircredit,compliance,andriskneeds.Dodd-Frankhasmadethecostofcomplianceratherhighformanyfinancialservicefirms,andLumesis’compliancebusinesshelpsmunimanagers,issuersandunderwritersstaycompliantwithDodd-FrankStandardofCreditWorthinessregulations.SFEenteredintothispartnershipinFebruary2012andhasdeployedatotalof$6.3million.
InitialRevenue SFEOwnership:24%
T-Rexwasfoundedtoaddressthelackoftransparencyandliquidityinnon-commoditizedassetclasses.TheseesotericmarketsincludePACE(PropertyAssessedCleanEnergy),solarenergy,andothermarkets.TheT-Rexplatformnotonlyprovidesanelectronicmarketplacetofacilitatedeals,itoffersvaluationtoolsincludingIRR,DCFandscenario-analysis,andallowsclientstostructuredealswiththeircurrentportfolioorinisolation.Thoughtheysaytheyaddress“othermarkets,”thiscompanyismainlytailoredtoaddressbonds/loansbackedbysolarorothercleanenergyassetsandsimplyincludeothermarketsinhopesthatthissoftwarecanbeusedelsewhere.Ascompaniesshiftmoretowardscleanandalternativeenergy,thehopeisthatT-Rexwillbeattheforefrontoffinancingdealstomovetheworldawayfromgasandcoalenergy.T-RexisaddressingaverynichemarketandisafarlessexcitingcompanythantheothersinSFE’sfintechportfolio.T-RexbecameapartnercompanyinNovember2016andSFEhasdeployed$6.0millionincapital.
Expansion SFEOwnership:24%
TransactisisbyfarthemostmatureofanyofSFE’sfintechcompanies,currentlyintheirsixteenthyearofdoingbusiness.Transactis
wascreatedtodealwithasimpleyetglobalbusinessproblem–paperbilling.Transactisestimatesthatfewerthan25%ofbillsarepaidelectronicallyintheU.S.andavastmajorityofthetechnologyintheindustryistwodecadestooold.Transactis’mainproductisaSaaScalledBillerIQ.Transactishelpsbusinessessendbillssecurelytoclientsviatheinternet,andcollectsasmallfeeforeachtransactionthattheysendbacktothebusiness.Inaddition,TransactisoffersDocumentIQwhichallowsenterprisestoreducepaper,reduceadministrativecostsandsharedocumentsP2P.ThesetwoservicesfitunderTransactis’maingoalofhelpingimprovethebottomlineofbusinessesandreducingpaperuseacrosstheworld.Transactiscanbescaledtoacompanywith50billsallthewayuptotheworld’slargestbusinesses.TheElectronicBilling&PaymentProcessingindustryhasbeenforecastedtobegrowingata13%CAGRsince2013.TransactisbecameapartnercompanyinAugust2014andSFEhasdeployed$14.5millionincapital.
DigitalMedia
InitialRevenue SFEOwnership:20%
Brickworkisasoftwareasaservice(SaaS)platformthatenablesretailerstobringbrickandmortarstoresonline.WithBrickwork,retailerscanmonetizemoreoftheirwebandmobiletrafficthatdoesnotconvertonlinebydeliveringthesecustomersintostores.Brickworkpowerstheworld'smostadvancedsearch-optimizedstorelocator,appointmentmanagementsolution,andlocalevent/promotionmanagementsolutionforretailers.ByusingBrickwork,retailerscanexpandtheirfootprintonlineandusecustomerdatatohelpcreateamoreuniqueexperienceinstoretohelpincreasesales.Thecompanyhelpsretailersensurethatcustomersalsoknowabouteventsandexperiencescomingupatlocationstoincreaseinterest.TheircurrentportfolioofclientsincludesbignamessuchasUrbanOutfitters,J.Crew,Bonobos,Chanel,MichaelKors,Nike,andotherluxurybrandsandretailers.ThecompanybeganitspartnershipwithSFEinOctober2016andSFEhasdeployedanaggregateof$4.2million.
Expansion SFEOwnership:43%
ClutchHoldingsdevelopsamarketingplatformthatintegratescustomerdataacrosspointofsale,e-commerce,mobile,andsocialchannelstopersonalizeengagementandincreasethevalueofeachcustomer.Theyofferchannelsynthesis,robustsegmentation,customerscoring,loyaltysolutions,referralprograms,instorepromotions,emailcampaigns,directmail,customeranalysis,marketingdesignandopportunitydiscoverysolutions.TheadvancedmarketingplatformClutchhascreatedactsasacustomerhub,deliveringdeepintelligencederivedfromrealtimebehaviorsallowingClutchclient’stotrulyunderstandcustomersandbeabletoadaptanddeliverrelevant,timelyengagementtomaintainbrands.TheedgeClutchhasisthattheyhavealreadypartneredwithmanypopularexistingmobile,POS,andmailplatformsandcanintegratewhatbusinessalreadyhavedeeperknowledge,ratherthanstartwithallnewsystems.Byusingtheirservice,theirclientscanconvertmoreoftheircustomersengagementsintosales.TheyalreadyhavepartneredwithfamiliarbrandssuchasLacoste,NewBalance,Godiva,Pandora,TheBodyShop,Samsonite,andothers.SFEandClutchHoldingsbegantheirpartnershipinFebruary2013andSFEhasdeployed$16.3million.
InitialRevenue SFEOwnership:42%
FullMeasureeducationcreatesaplatformthattargetsjuniorcollegesandcommunitycollegestohelpandsupporttheenrollent,retention,andsuccessoftheirstudents.Theyusetheirtechnologytohelpstudentscreatetheirindividualplanforsuccessandthenstayonitbyallowingfacultyandstaffseeaviewofeachstudentandhowtheyaredoinginordertoensurethateachstudentisreceivingtheattentionandcaretheyneedtofinishtheireducation.FullMeasureallowsschoolstodeliveranindividualizedexperienceforeachstudentwithoutthecostofindividualattention,theydothisbyanalyzingstudentbehavioranddeliveringinformationinthebestwaypossibleforeachstudent.FullMeasureprovidesintegratedplanningandadvisingservicesdesignedtoimprovestudentservicesforeachorganizationandallowstudentstobebetterinformedwhenmakingdecisionsabouttheireducationprocess.FullMeasureEducationtargetscommunityandjuniorcollegesstudentservicesexpenditurewhichtotalstoabout$2.5billionayear.Thisnumberisderivedfrom1,132juniorandcommunitycollegestotalinginabout$56millioninaveragerevenuewithatotalmarketofabout$60billionandstudentservicesspendingof$2.5billion.SFEdeployedinitialcapitalinJanuary2015withatotalof$11.0milliondeployed.
InitialRevenue SFEOwnership:26%
Hooplaisasoftwareasaservice(SaaS)platformcompanythatenablesitsclientstogetthemostoutofitsworkforce.Theyaredesignedtohelpsalesteamswithincompaniesbecomeevenmoreeffectivebygathering,analyzing,anddistributingteamandcompanyperformancedatatotheteams.Hooplausesgamemechanics,employeerecognition,motivationalcommunicationtools,dataanalytics,andhigh-qualityvideobroadcastingtoimprovetheperformanceasasalesteam.Thecompany'ssoftwareallowsclientstoshootoutinformationtotheirsalesteaminordertomotivateteamstowardsachievinggreatersuccess,Hoopla’ssoftwarecanhelpfosterfriendlycompetitionwithinfirmsaswellashelpsupportcelebratingfirmwidesuccess.Theirsoftwareplatformtrulyallowscompaniestobringdatatolifeandusegamificationinordertohelpinducepositivepsychologyandacultureoffunandcompetitiontoacommongoalofincreasedsales.HooplaalsoworksgreatwithothersalesteammanagementsoftwarethatmayalreadybeinplaysuchasSalesforceaswellasotherappssuchasSlackandGoogle’sGSuite.Hooplaoperatesintheperformancemanagementindustry,companiesintheUSspend$5billionayearonsoftwareforperformancemanagementand$38billionayearonemployeeincentives.SFEdeployedinitialcapitalinDecember2011withatotalof$5.1milliondeployed.
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HighTraction SFEOwnership:20.4%
MediaMathisatechnologydrivenmarketingplatformthatallowsagenciesandbrandstoexpandtheirreachtomorecustomersbyusingthisplatform.Thecompanywasfoundedin2007andwasthefirstproviderofaDemandSidePlatformorDSPcalledtheTerminalOneMarketingOperatingSystem.ADSPisasystemthatallowsbuyersofdigitaladvertisinginventorytomanagemultipleadexchangeanddataexchangeaccountsacrossmanychannels,butthroughoneinterface.Notonlyweretheythefirsttoprovidethisservice,butarestillrankedasthebestproviderofDSPsystemsamongstallcompetitionintheDSPmarketbyForrester.MediaMathalsohasproductsinDMP,DataManagementPlatformthatisalsorankedasoneofthetopleadersinitsindustrybyForrester.ADMPallowsitsuserstocreatetargetaudiencesbasedonprimaryandthird-partydatainordertoensuregreateraccuracyandsuccessforadcampaigns.MediaMathhasalsorecentlyteamedupwithGrapeshotallowingcustomerstoensurethattheywillonlybeadvertisinginbrandsafeenvironmentstominimizetheriskofbrandadsbeingplacedonoffensiveorinappropriatecontentonline.MediaMathisoneofSFE’soldestholdingsandtheclosesttoanexitpointasnotedfromaconferencecallwiththeCFOJeffreyMcGroarty.SFEdeployedinitialcapitalinJuly2009withatotalof$25.5milliondeployed.
InitialRevenue SFEOwnership:25%
QuanticMindprovidesasoftwareasaservice(SaaS)platformthatenablesitscustomerstotapintopredictivecapabilitiesforadvertisementsinsearch,social,andmobilearenas.Theirbusinessprovidesthreemajorcapabilitiesthatallowsittobethemostimpactfulforitsclients.Thedecisionenginehelpspredictthebestadvertisinginvestmentthroughsophisticatedbuyingsignals,data,andlightningfastbiddingoptions.Theyhavesophisticatedandcustomizableanalyticsthatcanhelpvisualizethedataandcreatecustomdashboardsaswellasdeveloppersonalizedreportsandsuperiorforecasting.QuanticMindisalsodesignedtointegrateintosystemsthatcompanyalreadyoftenhasinplaceandworksseamlesslywithamultitudeofformats.TheircustomersincludeHomeAdvisor,AdvancedAutoParts,andHorizonMediaamongstothers.SFEandQuanticMindbegantheirpartnershipinJune2015andhavedeployed$11.5million.
Expansion SFEOwnership:22%
Sonobiisatechnologydeveloperthatcreatessolutionsformediapublishers,brandadvertisers,mediaagencies,DSP’s,andmediatechnologyproviders.Theirproductsallowclientstoconnectwithbuyers.Sonobihelpsmediaproviderstoworkwithbrandsanddevelopaplanformediacampaignsthroughitsfourpillarsofpeoplebasedmediastrategy.ThefirstbeingUpfrontAudiencePlanning,whereSonobiwillsupportinpredictingandplanningthelocationandavailabilityofthetargetconsumers.TheirnextpillarisNegotiatewhereSonobihelpsincreasetransparencyinpricingfordatadriventransactions,allowingcustomersandproviderstoreachequilibriumontheexactscaleandpriorityofdeliveringtheirmessage.ThethirdpillarisReserve,whichiswhereSonobihelpsensurethatnegotiatedanddefinedconsumerscanbedeliveredtoaspreviouslynegotiated.ThefinalpillarisDeliver,whereSonobi'senterprisegradeandreal-timeinfrastructureensuresthattheplanisdeliveredacrosschannelsandisscalabletoincreaseordecreasetheamountofadvertisingdone.Sonobi’sclientsincludelargemediacompanies,mediatechnologyproviders,andlargepublicationsincludingVarickMedia,MediaMath,andtheGuardian.SFEdeployedinitialcapitalinMay2015withatotalof$8.4milliondeployed.
Expansion SFEOwnership:23%
Spongecellisatechnologycompanythathelpsmediacreatorsandbrandsachievegreaterspeedwhenmarketing.Oneofthewaystheysupporttheirclientsisbytakingdigitalmediacreatedbyadagencies,andreshapingandreformattingthatcontentintoamultitudeofshapesandsizes,sothatitcanfitinvariousdigitaladspaceswhereveravailable.TheCEOclaimsthattheyaresolelyfocusedonprogrammaticcreative.Thismeansthattheircompanynotonlyreshapesandresizesads,butalsominesthedatathatcompaniesarepayingmillionsforandthenusesthatverydatatomakeadsappearforconsumerswhentheyaremostrelevant.Thishelpsmakeadsmorerelevanttoaudiencesandadcampaignsmoresuccessful.Spongecell’salgorithmshelptheentireadvertisingprocessbecomemorepersonalforitsaudienceswhilemaintainingthedesignthatmediadevelopershaveworkedon.SFEdeployedinitialcapitalinJanuary2012withatotalof$18.0milliondeployed.
Expansion SFEOwnership:38%
Weblincisanecommerceplatformthatretailersandwholesalerscanemploytobetterselltheirproductsbyhelpingthemcreatethe
onlineshoppingexperiencetheywanttheircustomerstohave.Weblinc’sbusinessbreaksintotwocategories,WorkArea,whichisacommerceplatform,andOrderBot,whichsupportsoperationsmanagement.WorkAreaisasoftwareasaserviceproductthatallowscustomerstomanagetheircommerceandseeinsightsfromsellingdataallinoneplace.Theyallowcustomerstocreatethepagesthattheycanthenselltheircontentonandhelpretailerscreatetheircommerceplatformstoworkwellbothondesktopandmobilesites.OrderBotisanoperationsmanagementsystemthatnotonlyallowsforinventorymanagement,butalsointegratesintoecommerceplatformsandallowsitsuserstomanageallincomingandoutgoingorders.SFEdeployedinitialcapitalinAugust2014withatotalof$14.0milliondeployed.
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Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with the University of Delaware, CFA Society Philadelphia, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
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