In fact, most of the information services deal flow I see these days falls into this category. Often small-ish ($10-25m), often run by their founding management team, often undercapitalized, and often lacking clear/coherent strategy, these firms have wasted a great opportunity.
Sometimes they can be fixed. But they're mostly not worth the time it would require to do so.
Some of the most common problems I see:
- Faulty pricing (often hard to fix). When executed properly, pricing in information services businesses is a very sophisticated undertaking, rooted primarily in a clear assessment of the value delivered to the buyer. But all too often, mediocre information businesses have set their pricing far below the real value to the customer. And when that disparity is too large, it's very hard to fix.
For example, I looked last year at a potentially interesting healthcare informatics business. It ticked all the boxes for me - proprietary data, embedded in a business process, and delivered through software. By my calculus, the value - in terms of revenue generation and cost avoidance - was measured in thousands of dollars of month. But the firm had priced their offering at hundreds of dollars a month - and I could see no way to make a 10x price increase stick.
- Wrong allocation of resources (quite fixable). Great information businesses are zero marginal cost businesses - once the product is produced, there should be little to no cost involved in delivery. That, in turn, implies an appropriate allocation of resources - specifically, relatively small expenditures in creation of the product and relatively large expenditures in distribution. Note that I didn't say that it must be inexpensive to produce the product - rather, that the cost to do so should be a fraction of the money spent on distributing it.
- Lack of embeddedness (nearly impossible to fix). Lots of information products are really nice-to-have. But nice-to-have doesn't cut it when the economy takes a downturn - and it conveys little or no pricing power to the business. In other words, it's a product that will produce only modest, cyclical returns. Again, not worth the time invested.
For example, I once was part of an information business that was intensely nice-to-have. But it wasn't need-to-have, because it wasn't embedded within a customer's business process. The result? A 40% drop in revenue during the next recession.
There are many more problems of course - but these are the most common ones I see. How do these observations compare with your own?