In the startup world, when companies mature, they go to the public markets to fund growth and allow investors and employees to reap the...
In the startup world, when companies mature, they go to the public markets to fund growth and allow investors and employees to reap the financial rewards of their work.
WhitePages.com took a different route recently to reach the same goals.
The Seattle company, which provides residential phone listings online, had been profitable since it was formed five years ago. It didn’t need capital, but it still made sense to compensate those who had contributed to the company’s early days, said Max Bardon, WhitePages.com’s president and chief executive.
So it sold stock to private investors eager for a piece of the company. But unlike venture-capital deals, in which investors buy stock in a company, a couple of private-equity companies bought stock directly from WhitePages.com shareholders.
In all, the unidentified investors purchased $31.7 million in stock from the founder, friends and family and employees. About $9.4 million more replaced working capital the company had sent out as dividends.
These so-called “founder sales,” or variations of them, have been happening as investment capital becomes more available and companies stay private longer. This pattern is a reversal from the past couple of years when companies could barely attract money for operations, let alone shareholders’ pockets.
But now, as more companies weather the rough patch and, in some cases, reach profitability, surviving startups have found it easier to attract cash.
“This is absolutely a positive event,” said Matt McIlwain, a managing director at Seattle-based Madrona Venture Group, which does not have a stake in WhitePages.com.
“You have these companies that were able to survive and thrive. Investors are saying, ‘Here’s some capital, so there can be some realization today for the hard work that you’ve done.’ “
Purse strings loosen
The purse strings have clearly loosened for companies raising traditional venture capital, as well as private-equity investments.
In fact, more money flowed to Washington state companies during the third quarter than in any quarter in more than three years, according to a quarterly venture-capital report being released today by VentureOne and Ernst & Young.
During the quarter, 26 companies raised $243 million. The last time companies attracted that much was in the second quarter of 2002, when 29 companies raised $246.1 million.
The survey counts only traditional venture capital for early to midstage private companies in return for equity.
WhitePages.com’s deal fell into the category of private equity, which targets later-stage companies. But deals such as WhitePages.com’s are found among venture-capital–backed companies as well.
Tony Audino, a managing partner at Seattle-based Voyager Capital, said when his company invested in Mercer Island-based GMI, it bought shares from the founder.
GMI, which conducts market research through online surveys, was founded by Rob Monster in 1999 and has since grown to about 140 employees domestically and 170 offshore. Monster plans to take the company public late next year.
Audino said because Monster owned a large portion of the company, it was a great way for investors to get a bigger stake and for Monster to cash in some stock.
Audino said some people think owning less stock would lessen a founder’s motivation, but he disagrees. “It enables them to swing for the fences,” he said. “If everything they own is sitting in the company and something bad happens, they’ve lost everything. If they’ve got some money off the table, they can really go after it. For someone who has a family, it gives them peace of mind.”
Because investors and founders look at a founder sale as positive, Audino said it’s likely to become more in popular.
Janis Machala, founder and managing partner at Paladin Partners, a consulting firm, said she saw another instance of this happening recently, but declined to name the company.
In this case, two venture capitalists vied to invest in the same company. To win the deal, one sweetened its offer with a founder sale. It worked.
“One of the ways they tipped interest toward the one VC was that the founders were able to take some cash out. It’s an interesting strategy,” she said.
Other examples of founder sales nationwide include eHarmony in Pasadena, Calif., and Webroot in Boulder, Colo.
But it hasn’t always been in style.
Randy Conrads, who founded Classmates.com, said he attempted one in 2001 and 2002 and was largely unsuccessful.
“I tried,” he said. “I thought they might be interested at ridiculously low prices, but there was supply and no demand.”
He wanted the cash to fund his new company, RedWeek.com, which allows owners of time shares to sell their designated weeks online.
“It is nice to diversify a little bit and take some cash home to your wife,” he said.
In the end, he sold shares twice to existing investors, but at prices he thought were a bargain. “I would have liked to have put a larger chunk [into Redweek],” he said.
WhitePages.com is a textbook example of how a founder sale happens.
Alex Algard, the company’s chairman, started the Web site in 1997 as a hobby, while he ran CarDomain Network, an auto-enthusiasts Web site.
But he noticed WhitePages.com — in which he spent less than $700 — was generating more than 1 million new visitors a month.
That’s when the company’s CEO, Bardon, entered the scene.
The company makes money by selling advertising on its Web site, where visitors can look up residential and business listings. It also provides a directory service to companies, including MSN, Verizon SuperPages and YellowPages.com. Last month the company clocked 17 million unique visitors to both its sites in the U.S. and Canada.
Bardon said he sees the growth continuing because only 10 to 12 percent of business and residential directory searches are done online.
“If we weren’t doing well, private investors would not have been interested taking a stake in the company,” he said. “The difference with venture capital is that it provides growth capital to early-stage companies that are not yet profitable. We are a strong business, we are profitable. We have a different reason why we are doing this.”
WhitePages.com did the financing because there were no other opportunities for shareholders to cash out in the short-term. Initial public offerings were out of the question since the company really didn’t need to raise money for growth, Bardon said.
“We view any type of public financing as a method of raising growth capital. That’s not something we are planning on doing,” he said. “We are able to fund our internal growth on internal funds on profitability.”
The company, which has about 90 employees, may go public or seek a merger or acquisition, but not for three to five years, Bardon said.
“Our mentality at WhitePages is that we have a growing, valuable business and so it has its options open to it, whether that be a public offering, an opportunity to be in a merger or be bought out. We don’t have any immediate plans,” he said.
Tricia Duryee: 206-464-3283 or firstname.lastname@example.org