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Doll backs Encover with $11M
by Clifford Carlsen, May 13th, 2004

Post-technology-bubble startup Encover Inc. has raised a key second round of venture capital at an increased valuation because of its very post- bubble product and service: technology outsourcing.

The Mountain View, Calif.-based startup pulled in $11 million to support software and outsourcing services that boost technology manufacturers' sales of ongoing service contracts. Menlo Park, Calif.-based DCM-Doll Capital Management was the lead investor in the transaction, which included previous investor Sigma Partners.

Terms of the deal were not disclosed, but Encover CEO Chip Overstreet said the round came at an increased valuation to the company's $6 million first round of July 2002. Overstreet said the company began fundraising in January, looking for a single investor to take the bulk of the round, along with continued investment from Boston- and Menlo Park- based Sigma.

He said the company selected Doll partly based on its experience in business process software and outsourcing. Encover did not use an outside financial adviser in putting the deal together and made contact with Doll through Sigma general partner Wade Woodson.

Encover called on the legal services of Matt Bonner of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP in Menlo Park to close the financing. The investors were represented in the deal by Eric Jensen of Cooley Godward LLP in Palo Alto, Calif.

Doll general partner Tom Blaisdell said the firm was attracted to the investment based on Encover's technology and strategy of providing customers with business process services to boost revenue on existing product lines. Blaisdell said the firm looks for technology and outsourcing services that can perform business processes not only more cheaply, but more efficiently than they can be performed in- house.

"The things I invest in are technology to enable business services and business processes, and services that offer not just wage arbitrage, but domain expertise," Blaisdell said.

Companies purchasing high-technology products generally require service contracts to manage the cost of maintenance and ensure continuous operation. Even though they will usually end up paying more for service than they would shouldering the responsibility in-house, companies sign on to service contracts to keep maintenance costs more predictable.

That tradeoff on the part of buyers makes margins for sellers of service contracts much higher than sales of the equipment itself.

Approaching outsourcing from a strategic, rather than tactical, viewpoint, Blaisdell said Doll is attracted to companies that offer technology and services that enhance business processes by leveraging expertise in a tightly defined area. Blaisdell last year led a Doll investment in Irvine, Calif.-based HireRight Inc., which takes a similar technology and services approach to the area of personnel background checks.

Blaisdell said he has been aware of Encover since 2001, when current chief technology officer Sridhar Krishnan formed the company after leaving Cisco Systems Inc., where he built that company's service contract management software systems. But he said Doll held off investment until Encover demonstrated its ability to attract customers and deliver products.

Encover boasts customers including Rochester, N.Y.-based Eastman Kodak Co., Stamford, Conn.-based Xerox Corp., Sunnyvale, Calif.-based Juniper Networks Inc. and Andover, Mass.-based Enterasys Networks Inc.

Overstreet would not disclose Encover's revenue, but said the company had its first sales at the end of 2002 and will have 300% growth this year over revenue in 2003. He said the company has offered its technology and services on a pilot project basis to customers to demonstrate that it can boost the yield on sales of service contracts on technology sales.

Overstreet said that about 85% of sales of "mission- critical technology" comes with service contracts and that sales service contracts make up about 58% of resellers profits. But he said that the cost of obtaining the sales is high.

Encover's products, he added, are aimed at helping manufacturers strengthen relationships with resellers by providing assistance in selling and managing service contracts.

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