Thinking About Thinking

Succeeding With A Potential Single Point Of Failure

Posted in Technology, Venture Capital by larrycheng on November 21, 2009

I’ve had the opportunity to invest in two companies that I’d describe as having a “potential single point of failure”.  I chose to invest in one – Verid.  And decided, unfortunately, to pass on another – Mint.  Verid was ultimately sold to EMC/RSA less than two years after our investment for several multiples of our capital.  And Mint was recently acquired by Intuit.  I thought it was interesting how they were both sold for similar exit values given that both had the uncommon distinction of having a point of single dependency.  Here are their stories and a couple thoughts:

Verid provides knowledge-based authentication services.  You’ve probably run into the service if you’ve ever tried to open an account online and been prompted to answer questions about yourself to prove that you are who you say you are.  Verid’s potential single point of failure?  Their entire authentication service was built leveraging a single data aggregator on the back-end.  If that data provider decided not to work with them one day, there would be no questions and no answers in this authentication service.  Verid’s entire service depended on a single data contract. 

Mint provides an online financial management service for consumers.  They help you manage and identify ways to save money through one online console that sees across all of your financial accounts.  Mint’s potential single point of failure?  They rely on Yodlee as the account aggregator to bring together all of the data from the different financial accounts for a consumer.  Absent Yodlee, there would be no data in Mint’s service, which means there would be no service at all.  Mint’s entire service depended on a single technology relationship.

While I don’t know Mint’s situation, I suspect both companies mitigated this risk by signing long-term deals with their respective partners.  I imagine both were among the largest customers for their respective partners and felt like they had some leverage in the other direction.  Nonetheless, I suspect both companies wanted to hedge their bets by cultivating other partners, but ultimately were growing too fast to seriously contemplate using another platform.  I also imagine that both sold to their respective acquirers with one eye looking at an attractive valuation and the other eye looking at a substantial unknown after the terminal year of their partner contracts. 

Verid and Mint both deliver superb products and ended up being great investments for their investors.  Both probably could not have been huge companies without mitigating that potential single point of failure.  But, both showed that despite that issue, with astute management, you can still have a very successful outcome. 

Tags: , , ,

2 Responses

Subscribe to comments with RSS.

  1. Joshua Karp said, on November 23, 2009 at 9:15 am

    Yikes… it takes some guts to invest in a company that has any points of catastrophic failure that are outside of its direct control. You’re crossing your fingers… I tell entrepreneurs who ask that they shouldn’t have any dependencies or barriers that they themselves cannot control, fix or mitigate. I can easily see a VC saying, “wow… so you’re telling me everything can go perfectly, but Yodlee’s owner could get a divorce, and half the company could go to his estranged wife, and the judge could order liquidation in 90 days, and you’re out of business?” Over dramatic, but you get my point…

  2. […] Succeeding with a Potential Single Point of Failure […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: