Two years ago, Bob Shelton repositioned Ultryx Corp., his then-14-year-old business, in order to exploit e-business opportunities.
His challenge was to get his repackaged products to market before his competitors. To do this, he had to move fast. To move fast, he needed outside investors.
He turned to the venture capital community for financing to develop, market and sell his product, as well as to get business advice and connections that will help him sell the company when the time is right.
In doing so, he handed over control of the business to a board of directors and hired a stronger management team. In addition, his ownership stake decreased dramatically. That’s fine with him; he figures he’ll still end up ahead.
“The 90 percent I used to own will be worth less than the 30 percent I now have,” says Shelton of the $3.1 million deal he cut with two venture capital firms and seven high net worth individuals, or angel investors, in December 1999.
In fact, by the end of this month, Shelton plans to secure another $2 million in his second round of venture funding, decreasing his ownership even further.
“This is not an issue for me,” he says. “One of the attractions to this approach for me can be an impediment to others. Once you start down the venture capital track, their motivation and intent from the beginning is quite clear. They need to see liquidity on their investment in three to five years. Either you sell to the public through an IPO or sell to another company. In either case, it ain’t going to be your baby anymore.”
“As someone who is 56 years old,” Shelton adds, “and having built the company for 16 years, a definable window for an exit strategy is good.”
Banks weren’t a financing option for Shelton.
Banks secure loans on real assets, such as land, buildings and furniture — and they want to see a profitable company producing payments on interest and principle. Ultryx didn’t fit that mold.
Although the company had revenue of more than $1 million in 1998, it planned to lose $250,000 a month during its product development phase. Net loss the first year was only $1.7 million, however, because Ultryx was able to sell existing product.
But that didn’t change the fact that “banks don’t want to finance losses,” he says.
Another option was to find a customer to fund the project, but “that’s a slow way to go,” Shelton says.
Venture capital and angel investors became the obvious choice.
“It was primarily a time-to-market issue — that product development life cycle,” he says. “In our previous economy, it would not be unusual for that to be a year to 18 months. By Internet standards, that’s three generations. There are too many large competitors with lots of money to set aside and focus on that to capture that opportunity much faster than we could. The opportunity might have disappeared.”
Shelton couldn’t afford to let that happen.
Cutting a deal
There’s a good amount of venture capital flowing into Columbus area businesses these days. Just how much depends on whom you ask.
According to a PricewaterhouseCoopers quarterly survey of more than 700 venture capital firms nationwide, $103.1 million, or 36 percent, of the reported $288 million in venture capital money invested in Ohio businesses went to Central Ohio firms in the past four quarters.
According to a survey done last year for The Columbus Venture Network, venture capital invested in Central Ohio accounted for more than $464 million, or nearly 70 percent, of the $665 million in venture capital invested in Ohio.
To get a piece of that pie, Shelton started networking in hopes of getting connected with the right venture capital firms and angel investors.
“I met an individual who was a venture capitalist,” he says. “He became interested in the company and offered to put together a syndicate of people like himself. He eventually located The Ohio Partners and brought them to the table.”
In addition to The Ohio Partners, Ultryx’s investors include Venture Assets Ltd. and Bridlespur Partners LP, the investment firm of former Scotts Co. chairman Tadd Seitz.
“Most venture capital firms prefer to invest in companies where there is already a product complete and there are at least a few customers,” says Mark Butterworth, vice president of The Ohio Partners, the venture fund of Dispatch Printing Co. chairman John F. Wolfe.
Ultryx met that criteria.
“At the time we started the transaction, we had 18 employees and a fairly large customer base for our products,” Shelton says. “We had 300 customers on the list, half outside the U.S.”
In addition, Shelton’s vast knowledge of manufacturing was viewed as an asset by investors.
“The first thing I always look for is good management and good people (or the willingness to hire them),” says Ultryx angel investor George Jenkins, who is also a law partner with Vorys, Sater, Seymour and Pease LLP. “If they don’t pass that test, then I have no interest in them no matter how good the idea.”
Although Shelton and his investors signed a letter of intent in September 1999, it took another 90 days to close the venture capital transaction. As a privately held company, Ultryx had never done an audit of the kind needed for a due diligence report required by investors.
Preparing that audit cost about $50,000, Shelton says, but that cost was built into the budget of how he would spend the investors’ money.
Another large expenditure would be hiring a top-notch management team. When Shelton signed the term sheet, the only senior executives were himself and his vice president of marketing.
“Clearly, venture capitalists invest in people,” Shelton says. “The initial investment was an investment in me. But going forward, they were betting on me and the company I assembled around me.”
With the advice and consent of investors, he began recruiting vice presidents of finance, product development and professional services who are now on staff. He again turned to networking.
“Venture capitalists were helpful in nominating candidates,” Shelton says. “Early round investors like to tap you into a network of talent they know of from other investments and contacts.”
The deal also required Shelton to form an advisory board — and give five of the six seats to his investors. Shelton holds the sixth seat.
The monthly four-hour board meetings “are a good discipline for the management team, knowing you have to stand up and be accountable so things can’t get off track,” Shelton says.
“We don’t pay anyone to attend the board meetings,” he says. “We get candid and savvy advice whether we want it or not.”
Board members also come in individually each week to share their expertise.
Still, Shelton doesn’t indicate having any regrets about seeking venture funding for his now-$2.7 million company. Perhaps that’s because he was able to let go.
“You really have to cross the chasm of control and ego, of being the total entrepreneur and (in) total control of your own destiny. If you can’t cross that, you’re not going to have a pleasant experience.” How to reach: Bob Shelton, Ultryx Corp., 410-2020; Mark Butterworth, The Ohio Partners, 621-1243; George Jenkins, Vorys, Sater, Seymour and Pease LLP, 464-6381; Columbus Venture Network, 225-6938; PricewaterhouseCoopers MoneyTree Survey, www.pwcmoneytree.com
Andria Segedy ([email protected]) is a free-lance writer for SBN Magazine.