Editor's Note: Executive Viewpoints, presented by RFID Weblog and MoreRFID, is a series of interviews with business executives in the RFID industry. For our inaugural interview, we welcome Jeffrey Nolan, a VC with SAP Ventures. He gives valuable insights into his views as a venture capitalist about the RFID industry.

Question: Jeff, perhaps you could introduce yourself. Give us the elevator speech about yourself.

Nolan: I am someone really interested in the intersection of technology and business, technology and society. I love mechanical things and I look at technology as something that I can take apart and put back together in lots of different ways to solve new problems and create new opportunities. When I look at my 16-month old son I am envious of the advantages he will enjoy in his lifetime because of the work that is being done today, work that builds on the advances of yesterday.

I started out as a developer (Cobol, can you believe it!) and worked through a number of roles in marketing and sales, so that range of experience has given me a pretty good toolbox to work with for what I do now, private equity investing.

Question: What's a typical day like for you?

Nolan: Being that I work for SAP I am fortunate to be located in our Palo Alto campus up in the Stanford Research Park (actually, right up the street from Xerox PARC... speaking of building on the work of those who preceded us). It's a really casual environment, which is interesting because Hasso Plattner (the founder of SAP) and Shai Agassi (Executive Board Member) both have their offices here, so despite the fact that this location is somewhat of a center of gravity insofar as SAP is concerned, it's remarkably casual.

My only regret is that I don't get in the office all that much when taking into account my travel schedule and the portfolio business I have "around town." Actually I don't even know how many people we have here, but it has to be around 1,400 in Palo Alto, but my team is only 5 and we are spread out to Palo Alto, Boulder, Boston, and Germany. I usually start my days pretty early, around 6:30, and take a short break at 8 at which time I get out and to the office or whatever meetings I have scheduled.

All in all, the life of a VC is pretty much a balance between how much time people want versus how much you have. A mentor once told me that it's important to schedule time for "unencumbered thought" and to this day I spend up to 90 minutes a day reading and typically I just build that time into my schedule in the morning. These days I'm getting almost all of my reading material from blogs.

Question: Tell us the hottest areas for investment in RFID companies today, and why.

Nolan: Analytics and network management are the 2 areas that I like the most. So much has been written about this technology that you don't need me to recap it, but the really important factor that a lot of the analysts didn't figure into the equation was what companies were going to do with the infrastructure to leverage value from it.

I mean everyone knows that Wal-Mart told their suppliers (first 8, then 137) to do it, but what they didn't say was how it was going to get paid for.

This is why the analytics is important, and I'm not talking about better charts and graphs, I'm talking about applications built on top of analytics platforms that enable companies to do things like analyze out-of-stock conditions, counterfeiting, recalls, chargebacks, and so on. These are functional problems and they are big problems. These solutions analyze, present, AND action both retail and supply chain data so that customers not only develop an insight on what happens from supplier to store shelf, but enable them to actually do something productive with that information.

I also like software and hardware technology that manages the data acquisition grids (most likely readers, but I think there will be a wide array of devices that capture RFID data eventually). This is hard to do because not only does it manage actual devices but also network capacity, quality of service, bandwidth and frequency, and much more. It's a challenging set of problems that enterprises are discovering as they deploy large scale RFID networks.

Question: What kinds of RFID companies go begging and find it hard to get investors?

Nolan: Middleware -- it's a commodity at this point.

Also tough to raise money for is anything targeting asset tracking because there are well-established competitors in the warehouse and logistics spaces that are adding RFID functions to their existing products.

Also not interesting, right now, is stuff focusing on the pharma industry, often referred to as e-pedigree. It's not that this is an invalid market, but it's split pretty predictably between drug manufacturers, distributors, and retail, and everyone is looking at someone else to pay for it. Also, there is no consensus on utilizing serialization for drug tagging, so this limits the amount of value that applications can drive. Basically, you can do a lot with barcodes in pharma today and achieve the same benefits that RFID will bring without the added cost.

Question: Please give us some insight into how you look at companies to invest in. When you evaluate companies, what do you think is most important?

Nolan: Every VC says the team is most important and, surprise, the team actually is the most important component.

I also look at market dynamics with the benefit of having the resources of SAP behind me, which as you can imagine offers a lot of insight into what is going on in vertical markets and with customers. We do look for opportunities to leverage SAP, but the truth is that we are a financial investor first and foremost so I don't expect there to be a tie-in to SAP before or after we make an investment. Our approach, I believe, takes the best of corporate and traditional private equity investing and mashes them together.

Question: Help us put the market in perspective. Where are we in the life cycle of RFID investing and development?

Nolan: It's still mid-to-early for RFID. There is a tremendous amount of customer action but not a lot of budget devoted exclusively to RFID technology or applications build on top of the data streams.

The Wal-Mart experience is still early insofar as production systems are concerned, and outside of retail and CPG you can't find vertical opportunities that have critical mass. DoD and DLA (DoD logistics) have spent a lot but I think this is a difficult market for startups to pursue. I wish I could tell you when it reaches peak, but I think over the next 18 months we're going to develop a lot of experience in the market that will be necessary to get to the next level, so maybe next year we'll see activity start to spike up again.

Surprisingly, valuations of RFID companies have held up pretty well through the "trough of disillusionment" of the Gartner Hype Cycle, but I also think that is a function of there being a small group of investors that have specialized in this area (not exclusively but as a core area) and see the progress that is being made. There was an overinflated set of expectations attached to RFID a year ago, but the hype was not without substance so fast forward to today and we see large companies actually doing productive things with the technology and remaining committed to it.

Question: How do you see the RFID market shaking out over the next few years? How big is the market opportunity?

Nolan: Big market, lots of players leading to considerable consolidation. I really don't know how to predict what the market is going to look like after it expands and then consolidates, at least with regard to what companies will still be around. It seems reasonable to conclude that middleware offerings will get displaced or commoditized and that existing warehouse, logistics, ERP/MES, and retail POS software packages will layer on RFID functionality or build RFID data feeds into their existing function sets.

Question: What single piece of advice would you give an entrepreneur in the RFID space who is looking for investment?

Nolan: When you are talking about what you are doing, relate it in terms of what actual customers are doing and how they are benefiting.

The second, and perhaps more significant comment is that you shouldn't look at RFID as something that just does what we were doing before better... in other words, if barcodes offer an 80% solution, forget about developing RFID because you'll never overcome the cost disadvantages that RFID begins with. Look for opportunities to create entirely new application categories and new business processes that are fundamentally dependent on RFID as the enabler.

As newer high ROI solutions built on RFID data feeds proliferate, we can then go back and displace barcode and legacy tracking applications, but even then the unit economics are not compelling on an individual basis.

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You can find more insights by Jeffrey Nolan at his blog, Venture Chronicles by Jeff Nolan.

About SAP Venture Fund: The purpose of the SAP Venture Fund is to provide funding to companies with promising technologies that are expected to further the state of the art for enterprise computing. The funding is by definition a venture investment and does not represent a commitment of further business development initiatives by SAP.

About SAP: SAP, the world's largest enterprise software company, provides companies of all sizes with business solutions that deliver A Better Return on Information(SM). The SAP World Wide Web site can be found at http://www.sap.com.