The next Autonomy - looking for game-changing companies

Over the last few weeks I have made several references to Dr Mike Lynch, the CEO and founder of Autonomy (LON:AU.) . Founded in 1996, Autonomy is a remarkable example of what can be achieved with a UK based technology business. Last week it received a recommended offer worth £7 billion from Hewlett Packard, representing a 64% premium to the closing valuation on the day prior to the announcement. With the news of the bid coming in a week when the market was plummeting, the timing was poignant! It is only by fostering the development of numerous Autonomy emulators (harnessing a range of technologies) that the UK will emerge from the current economic turmoil stronger rather than weaker. We have the creative brains to develop the technologies and applications to form such business platforms and the management talent required to help unlock the commercial potential but the patient early stage capital to finance the cost of unlocking that potential is very limited. One of the challenges for early investors in such businesses is that in order for the businesses to be successful, they will almost certainly have to develop a game changing business model within a selected supply chain which results in an improved outcome for the end customer. In many instances this will involve reducing, in some cases eliminating, the role of existing parties within the selected supply chain where they are charging prices which have ceased to represent good value (i.e. disintermediation).

As an investor in early stage game changing companies, I have learned that there is relatively little conventional due diligence which can be done. By dint of the company setting out to be being game changing, many of the established parties within the supply chain (including end customers) will not have considered the game changing opportunity and are therefore not in a position to express a view (although, if asked for one, they may well do so!). Accordingly the investor is restricted to judging:

• Whether the technology works, or is likely to work
• If the selected business model stands to provide both an attractive value proposition to the end customer and also attractive profit margins for the supplier
• the input they are able to get from early adopters (which by definition will be a small percentage of customers)
• the quality of the management team

My experience is that in some areas one needs to act on hunch and that it is necessary to plan to invest in stages in line with the company's funding requirement. This allows due diligence to be carried out over time following the first investment based on information emerging as the company develops its market position.

Lesmoir-Gordon, Boyle & Co. (the owner of the LCFR website) is involved directly and indirectly with a number of companies at various stages of development falling within the above profile. A number of these are expected to be fundraising over the next year, including in some instances utilising AIM and/or Sharemark as part of the fundraising process. LCFR is curently undergoing development to make it easy for readers wishing to consider participating in such fundraisings to do so.