There was a nice plot line in an episode of television show Silicon Valley where the new CEO of promising startup Pied Piper wants to bring in early revenue by selling its product as a box in a data centre, while its founder wants to aim higher and develop it as a service for consumers.
The VCs then have to decide to kick out the CEO, primarily because they suddenly have a sense of what that bigger vision might be worth when a rival buys a peer to Pied Piper for a nine-figure sum.
The plot came back to me when reading about rating service Morningstar’s forthcoming acquisition of data provider Pitchbook for an enterprise value (EV) of $225m.
Morningstar will pay about $180m for the remaining shares in Pitchbook, as it owned about 20% through corporate venturing deals to back its $1.2m series A and $10m B round.
Not a bad valuation for a company with $31.1m in annualised revenues to end-June but probably a fair reflection of its potential and strategic synergy for Morningstar, whose incoming CEO has been on Pitchbook’s board.
The reminder about the TV show was less its location – Pitchbook is based up in Seattle – than in the sense that it sometimes takes the crystallising moment of an acquisition to show what a segment might be worth.
Effectively, Thomson Reuters, which just lost the contract to provide data to US trade body National Venture Capital Association to Pitchbook, and Dow Jones (disclosure: both former employers of mine) had a lock on private capital markets data.
However over the years, through underinvestment and lack of focus, it was given up to a host of startup peers, such as Pitchbook, CB Insights, Preqin, PEI Media, Mergermarket (through its Unquote acquisition) and others.
(Second disclosure: Global Corporate Venturing partners with Pitchbook and some of those other firms, and its GCV Analytics data product complements firms providing VC and private equity information by looking at non-traditional providers, such as corporations, governments and universities.)
If Thomson Reuters and Dow Jones had regarded the space as worth even a fraction of the $225m paid by Morningstar they would presumably have invested more in the team collecting and analysing the data, and in distributing it through its media channels, and tried harder to avoid losing market share.
Instead, and perhaps understandably, the VC data segment arguably became orphan to bigger strategic concerns.
That Pitchbook, led by former Dow Jones staffer John Gabbert, recognised the opportunity, reached out to Morningstar – a corporate venturer that could help – and executed to build a team with more than 1,800 clients is testament to the power of entrepreneurialism and innovation capital.
The only surprise now will be whether Dow Jones and Thomson Reuters realise their errors of underinvestment and try and claw back their status through acquisitions themselves, or if other rivals to Morningstar, such as Standard & Poor’s or Fitch, try and follow suit with purchases themselves to build up their own platforms.
However, given how increasingly strategic, and larger. corporate venturing has become over the past few years, these rivals will be doing so without the backdrop of learning and expertise Morningstar gained from investing in Pitchbook or the offsetting saving on that high EV it got by already owning 20%.