Minority stake offers benefits for both sides

There are several levels to Fujitsu’s recent investment in capture ISV Ephesoft. From the Fujitsu side, it helps the primarily hardware manufacturer diversify further into a dynamic software market. It also provides Fujitsu’s wholly owned subsidiary KnowledgeLake with a closer tie to a partner whose IDR (intelligent document recognition) software it is licensing through an OEM deal.

For Ephesoft, it provides some funding to help the rapidly growing company, which was founded in 2010, continue to ramp up. It also provides Ephesoft with the backing of a $56 billion entity as it attempts to move upmarket and compete more evenly with established capture leaders.

“Fujitsu has made a minority and strategic investment,” said Don Field, CEO of Ephesoft. “They don’t have a board member. As far as our direction goes, we have plans for the future that we will share with them, but there is no veto power. Basically, they have invested in a good technology in a growth market.”

Originally launched as an open source capture alternative [see DIR 10/22/10], Ephesoft has evolved into a purely browser-based, lower priced option than most leading capture products. Sold almost entirely through a reseller channel, Ephesoft has about 250 customers. “We have grown more than 100% in each of the last four years,” Field said. “The investment from Fujitsu is a security blanket. It has given us the confidence to hire people sooner than we would have otherwise. We’ve already hired four people in the past month and have plans to bring on two more.”

Fujitsu, which is based in Japan, made the investment in Ephesoft through KnowledgeLake, a St. Louis-based document imaging ISV that was acquired by Fujitsu subsidiary PFU Ltd. in multiple stages over the past several years. “We started talking with KnowledgeLake last fall,” Field told DIR. “They were interested in expanding their Capture suite. Our OEM agreement was signed in January with an eye toward the equity investment, which was finalized in June.”

Ephesoft is now the technology under the covers of KnowledgeLake Advanced Capture. “We have our own technology that can drive a scanner and do batch capture,” said Ron Cameron, co-founder and CEO of KnowledgeLake. “Ephesoft’s technology sits in the middle and offers classification, extraction, and validation.”

KnowledgeLake was founded in 2000 and in 2003 became a pioneer in adding document imaging capabilities to SharePoint. “Because of our focus on SharePoint, all our technology is browser based,” said Cameron. “Ephesoft’s technology couldn’t fit any better if we had developed it ourselves.”

As recently as last summer, KnowledgeLake was named Partner of the Year by ReadSoft, U.S., which it had previously partnered with for advanced capture. While Cameron said the companies remain on good terms, KnowledgeLake felt it was time to move on. “Our relationship really came to an end when it became clear ReadSoft was going to be acquired by Perceptive (a KnowledgeLake competitor),” he said.

ReadSoft is primarily known for invoice capture, which will now be addressed by the Ephesoft technology. “Forty percent of our business is in accounts payable automation,” said Cameron. “Invoice capture is a big component for us. But, we feel the Ephesoft product is well positioned to do a lot more involving semi-structured and unstructured documents, which is really where the sweet spot is for capture. It’s a very innovative product that really shines when it comes to auto-classification (which has led to success for Ephesoft in the mortgage capture market).”

Cameron discussed the strategy behind taking a minority stake. “It’s better than an outright acquisition, because it guarantees you won’t kill off the innovation,” he said. “In many cases, when you buy a smaller ISV, it motivates the innovators to leave. Our strategy is to invest in and grow a whole family of smaller companies and that can work and grow together.

“Fujitsu started with a small stake in KnowledgeLake and provided us with the help and insights of executives who had run very large companies. Since 2007 [when Fujitsu purchased 20%], we have grown 600%, with a 41% CAGR over the past seven years. Part of the reason for the Ephesoft investment is that KnowledgeLake is still in an expansion mode.
“It also creates a tight bond with our OEM partner. While we don’t have any control, it should allow us a little input on their direction. In my estimation, our OEM relationship is going to double Ephesoft’s revenue—so just from purely a financial relationship we should have their attention.”

Both Cameron and Field indicated that the relationship was off to a strong start. “With the aggressive pricing model that Ephesoft brings, we expect to include their technology in about half our sales going forward,” said Cameron.

To date, Ephesoft has funded its growth entirely through profits. “We have always been self sustaining through the capital we’ve generated,” Field said. “Now, having the Fujitsu name behind us will give us additional credibility in the market. It gives us an extra card to play and helps people understand that we will be here for the long term.”

KnowledgeLake is Ephesoft’s second major OEM partner, and one of its new hires is a director of OEM sales. “OEM partnerships require a high level of personalization and touchpoints,” said Field. “We are talking with several other potential partners. We think it is a great way to complement our VAR channel without competing with it. But it’s also important for us to maintain our brand. In both our current OEM deals we maintain the ‘powered by Ephesoft’ branding.”

For more information:
http://ephesoft.com/strategic-investment-in-ephesoft-announced;

http://bit.ly/KLakeAdvancedCapturePR