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April 04, 2004

Orbiting towards profitability on Sarbanes-Oxley booster

A meeting with Vani Kola, Founder & CEO, Nth Orbit

By Arun Natarajan

"Study finds women lagging in venture capital race" reads the headline of a March 26 Mercury News report. The study, sponsored by the Kauffman Foundation, aims to find out why women-led businesses (which constituted 28% percent of US businesses in 2002) received only 4-9% of the available venture capital.

No one seems to have told Vani Kola, Founder, President & CEO of San Jose, CA-based Nth Orbit, about the huge disadvantages women entrepreneurs face in raising VC funding. At a select press meet (on March 29) held at Nth Orbit's new R&D center in Chennai, India, she disclosed that her company had completed raising a $11 million second round of VC funding earlier in the month. Nth Orbit, Kola's second start-up, categorizes itself a provider of "enterprise risk management" software. Its "Certus" software enables publicly listed companies in the US--especially, large ones with global operations--to comply with corporate governance rules and reporting requirements under the Sarbanes-Oxley Act. Nth Orbit counts PepsiCo, Great-West Life & Annuity, Polaroid and Conexant among its customers.

The latest round of funding, led by Ignition Partners with participation from existing investors Sequoia Capital and JumpStartUp and new investor Evercore, takes the total investment raised by Nth Orbit since its founding in 2001 to $25 million. Kola was earlier the Founder, President & CEO of e-procurement software firm RightWorks, which was acquired by ICG for $1.2 billion in 2000. RightWorks had raised funds from Sequoia Capital, Lehman Brothers, i2 Technologies, and angel investors.

Prashanth Viswanath Boccasam founded Approva Corp., another provider of compliance management software, has also just raised a second round (of $8.05 million) taking the company's total funding to about $15 million. It certainly doesn't seem as if Kola is disadvantaged in anyway even when compared to male peers within Nth Orbit's industry niche.

Kola does not expect Nth Orbit to need another round of funding any time soon. She says she has commited to her VC investors that she would take the company to profitability by 2005 (at which point Nth Orbit's revenues would be in the $15-20 million range).

Kola agrees that the success of her first start-up has made raising capital easier for Nth Orbit. She says Sequoia, which had also invested in RightWorks, was an automatic first choice as investor. One of the partners at Ignition Partners, which is founded by a group of ex-Microsoft executives, sought her out. And she was introduced to Kiran Nadkarni of Jumpstartup, an specialist India-US cross-border fund, by Stanford University professor Rajeev Motwani. The latest investor, Evercore, which runs a large private equity fund, brings to the table its wide contacts among CFOs.

"The social and professional networks critical for opening the doors to venture funding are all but absent for female entrepreneurs," according to Nancy Carter, one of the authors of the Kauffman Foundation study. "Women tend to know more women, so they are more likely to know each other in a first-degree relationship," Myra Hart, a Harvard University professor and a co-author of the study, told Mercury News. At Nth Orbit, Kola is the only woman on the company's board. (The other members being Doug Leone of Sequoia, Jon Anderson of Ignition and Sangam Pant of Evercore) Even the company's nine-strong advisory board has just one woman representative.

What about the "compliance management" software space itself? Sarbanes-Oxley does provide a huge headache to companies and something that they have to spend money on (like it or not). But aren't too many companies going after the same pie? In fact, some of them drastically morphing their business plans to do so--in a way that is reminiscent of the Y2K and "Home Security" related technology rush?

For instance, Zaplet, which was founded in 1999 as an email-based collaboration software company and raised about $100 million from a host of blue-chip investors including Kleiner Perkins Caufield & Byers, Accenture Technology Ventures, Cisco, Novell and Oracle, decided to target this space. On March 31, Zaplet merged with Ramana Mulpury co-founded MetricStream, a Redwood Shores, CA-based provider of software for--you guessed it--compliance management. Incidentally, Nth Orbit itself was originally focused on providing software for managing manufacturing supply chains.

Kola agrees that a shakeout is bound to happen. One that would leave behind a handful of players each focused on a different segment of the market. She believes Nth Orbit's focus on the specific needs of large, global enterprises will enable it to emerge among the winners. Kola sees an opportunity, down the line, in catering to suppliers and other partners of MNCs--for instance, manufacturing companies based in China--who would need to make their systems "Sarbanes-Oxley ready" in order to do business with US-listed companies. She believes the market is big enough--$5 billion according to AMR Research (including for both products and services). Nth Orbit itself is committed to being a pure products company and would have a small professional services team to work with external services companies--including Indian vendors--to implement its software.

What does Kola see as the most likely exit route for Nth Orbit's investors? Would the large ERP companies (like SAP) find it attractive to gobble up the compliance management start-ups that emerge from the pack? Prefixing it with the "venture capitally" correct disclaimer about exit being "only an event that happens along the way for a certain class of investors", Kola says that vendors of Business Intelligence and Business Process of enterprise would also be interested in adding such a capability to their software.

In the long term, Kola sees Nth Orbit's software helping customers address other compliance management requirements as well. Interestingly, that's also the thinking of Vinod Khosla, General Partner at Kleiner Perkins and a Zaplet board member. "I find the opportunity to create a single application that addresses all compliance issues within an enterprise to be very compelling", he says about the recent MetricStream-Zaplet merger.

The game--the so-called disadvantages facing women entrepreneurs notwithstanding--has just gotten very, very interesting.

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Arun Natarajan is Editor of TSJ Media. He can be reached at arun(at)tsjmedia.com
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