Saturday, August 02, 2008

Exit Strategies for Sustainability Reporting companies?

Over the past few months I have had discussions with a number of sustainability technology firm execs, as well as with other tech execs that follow this field.

One particular question keeps coming up: what is the growth and exit strategy for these companies? Many have started with compliance (such EMS or EHS) as the building blocks, while others are new and have built the applications for customizable reporting for the myriad of NGO protocols out there.

While sustainability reporting is just taking hold here in the states, in Europe it has been adopted at a higher rate. Those companies providing such reporting technologies are now faced with the issue of building off this installed base, or seeking additional customers. Up - selling to the base may include providing additional functionality (i.e. I talked to one firm that is building a 'fraud control' set of features, for managing social impacts associated with fund disbursements in sustainability programs). Obtaining additonal customers can be acheived by acquisitions; which also allows for building a broader solution. One trend seen: EMS and sustainability reporting firms acquiring emerging GHG inventory application companies. Perhaps here in the US we will follow this trend of market evolution and consolidation in the next 12- 24 months.

But at the end of the day, it would seem that these firms should be part of a broader set of solutions, or embedded in a enterprise level platform, in order to meet the demands of clients. While reporting is important, I think the real value is in developing and implementing the workflow necessary to manage and improve sustainability processes, which means the reporting tool must be integrated into supply chain, product management, CRM, financials, and other ERP modules.

So, shall we see M&A activity in this sector in the next year? Consolidation of sustainability application companies (such as that of IHS's strategy)? Larger compliance / GRC platform companies such as BWave, Agentis, and SAP make key acquisitions in the GHG management space?

There are questions as to the viability of these growth strategies; a peer of mine on Sand Hill Rd. thought that 'we could develop a Linux platform and open it to developers, which could drive a lot of the sustainability tech firms out of business' (or general words to that effect).

That is certainly possible, although I think a more likely outcome will be that the lagging economy will reduce the overall urgency for sustainability reporting, with tech firms struggling to find paying customers and gaining leadership or market share. The near term result will be a lot fewer of these firms in the next 12 months, with a potential follow - on phase of acquisitions by larger platform companies.

Just a thought....

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