Ending the Paper Chase

Alarm:clock is a daily news site that evaluates privately-held technology startups in the areas of hardware, software, the Internet, and wireless communications. One company profile and one industry overview by alarm:clock’s editors come to Technology Review every Wednesday by special arrangement.

Fios of Portland, OR, helps law firms and legal departments tame the morass of documents generated during corporate litigation.

Company: Fios
HQ: Portland, Oregon
Founded: 1999

Management: Gerald Massey is president and CEO. He previously worked at the private equity firm Clayton, Dubilier & Rice, and before that he spent more than ten years at Electronic Data Systems, the IT consulting and services company founded by Ross Perot.

Investors: In September, the company announced a financing of $6.5 million from 3i, Banyan Capital Partners, Digital Partners, FBR CoMotion, and Fluke Venture Partners.

Business Model: Fios provides electronic “discovery” services to corporate legal departments and law firms. In legal parlance, “discovery” is the fact-finding stage before a trial takes place – it typically involves the exchange of countless documents between the opposing sides. Fios’s products, which include software and services, allow customers to collect, process, and review large numbers of electronic documents in preparation for litigation. The company claims it helps customers reduce litigation costs – and even increase the likelihood of success in front of the judge.

Competitors: InterLegis, Attenex, iLumin

Dirt: Big-time corporate litigation involves reams of documents – literally rooms full of boxes with every manner of records. As recently as 10 years ago, many of these documents would have existed only on paper and would be tracked by using a crude system known as Bates Stamping, where each document is hand-stamped with a number.

Improved document scanning technologies have now eliminated the need for manual stamping of paper documents, and in any case most documents are now created at the outset in a digitized format like Microsoft Word. This shift has opened an opportunity for technology companies like Fios, which says the electronic discovery market exceeded $1.3 billion in 2004 and is growing more than 60 percent annually  (http://biz.yahoo.com/bw/050906/65372.html?.v=1).

This appears to be a decent growth market and it’s clearly the future of document management for litigation…but this still feels like a cottage industry to us. Fios may ultimately be a good acquisition target for a larger company seeking to expand into new vertical markets.

Startup Globalization
M&As are ranging far and wide  – and other alarm:clock news from the land of private venture funding.

Some very big transactions recently served as reminders that tech startups are now a global game. First, there was the sale of privately held, New York-based Linkshare to  Tokyo-based Rakuten for $425 million. Then came the confirmation, on September 12, that San Jose-based eBay would buy Luxembourg-based Skype for up to $2.6 billion (with an additional $1.5 billion potentially to follow, depending on Skype’s performance over the next year).

Not that long ago, mergers and acquisitions among tech startups were predominantly a local affair, for instance, with one company CEO driving Highway 101 between San Jose and San Francisco to meet with another company’s CEO to close a deal. Now deal-makers are assessing acquisition candidates as much for their global coverage as their revenues and technology strengths.

Linkshare is a great example of the new rules whereby big companies are looking outside their home countries to buy growing startups that are strong in new regions. Linkshare runs a performance-based online advertising service: it places clients’ advertising on blogs and other sites and compensates its publisher partners whenever readers click-through and buy goods. For the year 2005, Linkshare claims that it had $32 million in revenues. The company says that about 2% of US retail commerce, or $1.4 billion of trade, passed through its network in 2004. Almost all of Linkshare’s business is in the United States. Rakuten, meanwhile, operates Japan’s largest online shopping site. According to Rakuten’s CEO, Hiroshi Mikitani, Linkshare’s global reach was a primary motivator for the acquisition.

Meanwhile, although Skype is only three years old, it’s been a global company from day one. It has employees in 15 countries, with its chief offices in Luxembourg and Talinn, Estonia, and it claims to have 54 million users in 225 countries, with 150,000 more users joining every day. Nearly half of Skype’s users are in Europe, one quarter in Asia, and one-eight in North America.

In contrast, eBay users are heavily concentrated in North America. Ebay’s acquisition of Skype will give it a longer international reach, and may allow it to give its users an easy and free way to talk by voice with other buyers and sellers. It could also give eBay a way to track users’ phone numbers, in addition to their email addresses – and eventually let eBay charge for calls that lead to sales.

Although venture capital investors are often averse to investing in startups far from their offices, the primary investor in Skype – Draper Fisher Jurvetson – is getting a huge payday from the sale of Skype. Firm founder Tim Draper recently traveled to Eastern Europe to open a fund there. Intel Capital is another venture firm investing globally, recently putting $17 million behind Czech security firm Grisoft. In recent weeks, Intel Capital has also invested in Infinet Wireless in Moscow, OneWave and Verisilicon in Shanghai, and Chipsbrand Microelectronics in Shenzen, China.