What exactly does Cisco Investments do to evaluate its investments? I can give a personal perspective as an associate on the team who led the Phunware investment:
Phunware was one of the first companies my team and I evaluated for an investment opportunity within our Connected Mobility investment theme. Our team researched Phunware, met with their executive team, introduced the company to our Cisco business units, worked on the investment process and finally received approval to invest. For an associate, it is an exciting experience that involves taking ownership of the investment process on an end to end basis, while working together with other internal teams, including business units, Finance and Legal.
Step 1: Investment Rationale
The investment rationale focuses on the strategic evaluation of a company. We look at how a potential investment is either relevant to one of our investment themes or to one of our business units.
For Phunware, my Director and I were very interested in finding companies that complement our Connected Mobility theme. After studying the space, looking at potential companies, and figuring out a strategy, we landed on Phunware, a company that provides Mobile Backend as a Service (MBaaS). We felt that an investment in this company would be very strategic to our Connected Mobility team. We looked at Phunware’s current size and how large an opportunity it could be if connected with Cisco’s future efforts in this area. Ultimately, our team determined that an investment in Phunware would give us visibility into mobile adoption across the industry, align us with leading mobile application developers and complement our Connected Mobility strategy.
Step 2: Market Analysis
The Market Analysis has many parts including looking at the market size, landscape and other companies in the space. We look at sectors that are relevant to Cloud / Data Center / Virtualization / Digital Media / IOT / Mobility / Big Data / SaaS / Services and Security. Phunware fell under our team’s focus on Connected Mobility, which you can read more about in our other blogs here.
For this part, I had to do some digging and research to figure out the size of the MBaaS market using a number of resources. According to IDC, 1.24Bn units of smartphones and tablets were shipped in 2013 and this is projected to grow to 2.14Bn in 2017(1). The proliferation of these smart connected devices has given rise to a new phenomenon: apps. It is estimated that there are more than one million apps in the Apple App Store, one million apps in the Android Google Play Store, 200,000 apps in the Windows Phone Store and 100,000 apps in the Blackberry Store. Creating a mobile app is one thing, but launching, managing and servicing an app during its lifetime is something that takes substantial time and effort. MBaaS is a platform that helps app developers manage a variety of backend services, allowing them to actually focus on the main product, rather than spending time, resources and funds on setting up a backend app infrastructure. Phunware is an impressive company in the MBaaS market that is making a big splash across this industry.
Step 3: Product
For the product piece, we generally look for technologies that are disrupting the market or products that strategically fit with Cisco.
Phunware is a company that intersects Cloud, Multiscreen and SaaS and considers itself ‘The Software of Things.’ Learn more about some of the backend features that Phunware offers here. Phunware is a company that can really add value to app developers and save them from the headache of managing all these backend services. At Cisco, we generally find that the best way to understand the product is via a company demo. Alan Knitowski, the CEO of Phunware, came to our offices and showed us their product and my jaw dropped; their technology was on another level! Some examples of Phunware’s application engine include: NASCAR’s Sprint Cup (Mobile) app and CW Network’s multi-platform and device capabilities.
Step 4: Team
At Cisco, it is very important for us to make sure the team is rooted in values and ethics, and has a solid vision and leadership team. Numbers, slide decks, or financial models cannot give you this information. Here is where we loop in senior members of Cisco’s leadership to help us with assessment. These senior members bring with them years of hard work and experience, which gives them the ability to read people well and really understand the company.
As an associate I had the opportunity to meet the company’s management team in person. I was able to sit across from the CEO and actually take part in the discussions pertaining to the investment. I personally met Alan and had a chance to ask him questions about his company. Learn more about Alan and the Phunware leadership team here.
Step 5: Financial Model
The financial modeling is something all associates focus on. Building the model requires speaking with the company’s management team. The process of building these financial models really helps us fully understand the business and helps quantify an investment. In particular, models help us understand what is driving the company’s revenue, what the cost structure is, where resources are being allocated and what the future looks like (among many other things).
Building the financial model for the Phunware process was what I enjoyed the most. As an associate I spoke directly with the CEO and CFO to understand all aspects of their business. From here, I built a new financial model from scratch using our favorite program and best friend, Excel. The model includes projecting out the company’s income statement, balance sheet, cash flow statement, understanding the cap table, and deriving a valuation using all sorts of fun stuff, such as the discounted cash flow, public company comparables, and precedent transactions, to finally come up with a returns analysis.
Step 6: Conclusion
Here is where team work comes into play, another value that is very strong within the Cisco Corporate Development Team. We work across all teams including Finance, Legal, and our own Corporate Development Technology Group to complete the investment process. There are a lot of moving parts when it comes to an investment but by working together with all the teams at Cisco, the investment for Phunware came together pretty quickly and was a fun process!
There are many other pieces that go into an investment consideration, but this is just meant to serve as an illustrative example. The Cisco Investments team really looks to invest in great companies, people and products. If you think your start-up company has these characteristics we encourage you to reach out, and have FUN while doing it! Additionally, if you are interested in Corporate Development associate opportunities at Cisco, we are always looking for great candidates to add to the team.
Soures:
(1) “Tablet Shipments Forecast to Top Total PC Shipments in the Fourth Quarter of 2013 and Annually by 2015” IDC