Venturing in Manhattan

Ten Startup Entrepreneurs Pitch to Angel, Private Equity and Venture Capital Investors at iBreakfast

Ten startup companies pitched their companies to a panel of five angel, private equity and venture capital investors on Thursday, at a meeting in Manhattan sponsored by iBreakfast.
Investors on the panel included: Thomas Blum, partner, Andersen Partners, New York; Toby Moskovits, managing director, Cammeby’s Capital Group; Ellen Sandles, executive director, Tri-State Private Investors Network, New York; Mike Segal, general partner, Joshua Capital Partners, New York; and Scott Wilson, NY Angels and Mid-Atlantic Angels.

Presenters included: Randy Taylor, president, StockPhotoFinder.com, New York; Aaron Etra, chairman, PhV Corp., New York; Christophe Popper, CEO, KnowledgeBears.com, New York; Jennifer Magee, director, Urban Probe, New York; Dario Laverde, president, medicatracker.com software, New York; Gene DeRose, House Party, Inc., Irvington, NY; Daniel Harris, MediaPass Network, Culver City, CA; Amit Dave, president, salesElement, New York; Robert James, Omega Nexus Group, New Rochelle, NY; and Hiro Hara, CEO, Aerogel Composite Inc., Bloomfield, CT.

IBreakfast provides a forum that brings together technology-related entrepreneurs, investors, service providers and others interested in the entrepreneurial economy.

Broadcast International Provides Enterprise Content Delivery with Patented System That Significantly Reduces Bandwidth Requirements

A presentation on Monday evening in Manhattan discussed the high-technology communications capabilities available to corporate users to reach out to employees in many locations in the U.S. and around the world.

Rodney Tiede, president and CEO of Salt Lake City-based Broadcast International, discussed how the 20-year-old company deploys its patented its CodecSys system for providing enterprise content delivery services.

A CODEC is a compression/decompression algorithm used to shrink large files or data streams for efficient transmission over a network.

CodecSys provides enterprise content delivery services by integrating production; installation and network management services; and advanced video technologies, using a combination of satellite, Internet and wireless platforms.

Applications of the system include corporate communications; digital signage; distance learning and rich media; sports media; and e-media.

Tiede said CodecSys is the first “automated multi-Codec operating system” for video compression technology, which minimizes the use of bandwidth at a ratio of 10:1 vs. MPEG-2.
Current clients include Staples, OnCommand, Caterpillar, Yahoo, Subway, Sprint, Albertsons, The American Bar Association, AT&T, Safeway, Scottish Power, Butiken Swedish TV, Allstate Insurance, Chevron and Muzak.

BI had $5 million in revenue last year, and has a $15 million contract base for 2006. It has a longer term pipeline that includes Washington Mutual ($13.8 million), Wellpoint ($15 million), AG Edwards ($5.2 million) and Government/AT&T ($10.8 million).

Among its many opportunities, BI currently has signed a letter of intent with China’s Sun New Media to deploy the CodecSys system in China for mobile video and IPTV (Internet Protocol TV) applications with China Telecom. China Telecom has 180 million cell phone users.

Furthermore, the company has significant additional revenue potential from licensing CodecSys technology.
BI went public in 2002 when it merged with an already public company, Laser Corp. Tiede says that it has significant potential from several other patent-pending technologies.

Broadcast International expects to become breakeven this year (EBITDA), and projects positive EBITDA of about $12 million to $13 million by 2008.

I attended a breakfast meeting on Tuesday on the subject of “Equity-Based Compensation: How to Avoid the New Regulatory Land Mines,” sponsored by the New York Angels, PricewaterhouseCoopers (PWC) and the law firm Goodwin Procter.

The meeting, held at the Madison Avenue (42nd Street) headquarters of PWC, focused on the accounting issues surrounding recent legislative and regulatory developments in equity-based compensation. Equity compensation is particularly important to startup and early stage technology companies, which are typically short of cash, and which enable upside potential for executives.

Scott Webster and William Weiss, both of Goodwin Procter, provided an overview of the new legal and regulatory issues, including the new deferred compensation rules under Section 409A of the Internal Revenue Code.

Carl Weinberg of PWC provided background on “FAS 123R and Venture-Backed Non-Public Companies.” He included a discussion of the key provisions of 123R related to equity awards.

Elaine Glide, a board member of the New York Angels, and Brian Hirsch, managing partner of Silicon Alley Venture Partners, provided real-world discussion of issues related to equity-based compensation for venture and angel-backed companies.

Given the new regs, and the importance of equity compensation to startup and early-stage companies, this subject is sure to evoke continued interest into the foreseeable future.

The March 13 issue of Forbes, in its cover story, “Buyout Bubble: The Mad Rush into Private Equity – Is Your Retirement at Risk?”, takes quite a different view of private equity funds than the one described in the February 27 issue of BusinessWeek (see Venturing in Manhattan, February 21).

While the BusinessWeek article focused on the shift of public company superstar executives to the much more lucrative private equity business, Forbes emphasizes the downside of private equity transactions for the shareholders/investors in the entities being traded, and for pension fund investors into the P/E funds.

Forbes says the brutal tactics of private equity firms’ general partners and the Wall Street firms that help put the transactions together are reaping billions of dollars of quick profits, while company owners, private equity imited partners and institutional investors may become big losers. About a half dozen giant PE firms control about half of all private equity assets, notes Forbes, with three behemoths – Blackstone, Carlyle Group and Texas Pacific Group – controlling companies with 700,000 employees and $122 billion in sales.

The article notes that, with buyout firms “adept at reaping riches whether their investors win or lose,” ten buyout chiefs grace the Forbes 400 list of wealthiest Americans, including Stephen Schwartzman of Blackstone Group, as well as Henry Kravis and George Roberts of Kohlberg Kravis Roberts, and Thomas H. Lee, Of Thomas H. Lee Partners.

The article also points a finger at the Wall Street investment firms that Forbes says aid and abet the buyout funds in the buying and selling of company assets. “Egging on the buyout boys: all of Wall Street, which collects marvelous fees from all the buying and selling,” Forbes says. “While it was making its own executives quite comfortable, Blackstone rewarded investment banks with $358 million in fee revenue last year. Investment banks get fees for brokering or advising on tender offers; get fees for underwriting bonds or arranging the bank debt to pay most of the acquisition costs; get more fees for selling off some of the assets to pay back the debt; and get still more fees for taking target firms public all over again.”

The Forbes article also documents what it says are some of the many deals that have, in essence, cheated owners and shareholders in these dealings, while in many cases also destroying the companies they have taken over.

“There would be no reason to begrudge the financiers their take if they were building enterprises and creating jobs,” the magazine says. “But they do not make their fortunes by discovering new drugs, writing software or creating retail chains. They are making all this money by trading existing assets.”

“Moreover,” it adds,” some buyout shops ply rape-and-pillage tactics at their new properties. They exact multimillion-dollar fees advising businesses they just bought. They burden a target company with years of new debt, raised solely to pay out instant cash to the buyout partners.”

Noting that pension funds are increasing their investments in buyout funds to raise their returns to cover future pension obligations, it adds that they do not have sufficient resources to do proper due diligence on these investments.

“The biggest suppliers of capital” – the pension funds – “are the most thinly staffed and underpaid,” the article quotes a manager at a midsize buyout firm. The article adds, “State plans with a few employees oversee billion dollar investments and report to ‘political entities.’”

These funds “aren’t any match for the buyout guys – who already are anticipating a coming correction and are preparing to profit from it,” the article says. “Some of the biggest names in buyouts – Blackstone, Carlyle, Apollo Advisors – now are raising ‘distressed investment funds’ (read: vulture funds). Feeding on big discounts, they will buy the equity and debt of companies their brethren helped get into trouble.”

For entrepreneurial firms seeking private equity funding, one lesson to take away from all this is: Do your homework on the buyout fund; have the deal carefully studied by legal counsel; and make sure that the deal makes financial and economic sense.

I had lunch last week with Dom Esposito, the Chief Operating Officer of J.H. Cohn LLP, the 13th largest CPA /consulting firm in the United States and the largest independently owned firm in the New York Metropolitan area.

The venue was Tre Venezie, an excellent Italian restaurant in mid-Manhattan, where Dom is well known by the staff.

Dom, a warm and outgoing accounting industry veteran, was brought in by Cohn three-and-a-half years ago to further grow the firm, which has created a niche for itself with owner-managed companies in New Jersey, Manhattan, Long Island, and California. The firm also does business investigation, corporate governance, and organizational consulting for some of the largest companies in the world.

Starting his career with PricewaterhouseCoopers in 1969, Dom’s strong experience in the industry includes working for Grant Thornton, where he spent 21 years and rose to the position of Chief Executive Officer, and BDO Seidman, where he was a Vice Chairman, before coming to J.H. Cohn.

J.H. Cohn, which was founded in Newark, NJ in 1919, currently has 95 partners and a total staff of approximately 700.

Esposito says that his understanding of the accounting industry has changed substantially over the years. He entered the profession, like most, as a numbers man, but then recognized two realities of the business: (1) In order to move up, you’ve got to morph from a technician to a business development person and a relationship manager; and (2) Becoming the leader of a CPA firm requires leadership and management skills and capabilities possessed by only a few. He believed he had those skills, and sought out the opportunities that would put him into leadership roles, first at departmental levels, later at the organizational level.

Esposito says that the Corporate Governance consulting area continues to present an excellent opportunity for his firm for the foreseeable future, in view of the ongoing assistance clients will need to comply with the complex requirements of the Sarbanes-Oxley Act.

Good corporate governance requires not only fidelity to a company’s true business and financial condition. Governance experts say that one sign of good company management is strong succession planning. Though healthy and vigorous, both Esposito and J.H. Cohn CEO Tom Marino are applying this sage advice within their own firm by grooming a number of their most talented partners in their early-to-mid-40’s to be in position to take on top leadership roles when the time comes for transitions at the top of J.H. Cohn.

On a personal note, with so many marriages at the brink, Dom and his wife, Dorothy, are an exception. They’ve been married for almost 36 years, and their daughter, Karen, and her husband, Michael, have presented them with a beautiful granddaughter, Erica, now 16 months old, whose picture he delights in sharing.

The president of a company called Satellite Security Systems (“S3”), of San Diego, CA, earlier this week discussed the applications of his firm’s satellite-based technologies in homeland security; control and monitoring of mobile fleets of buses, fuel tankers and service trucks, as well as maritime vessels; and tracking of fixed-point assets including utility and environmental sensors.

At a presentation to money managers, financial advisers and investment bankers in Manhattan, John Phillips, president of S3, gave an excellent overview of applications of the firm’s GlobalGuard™ systems in a wide range of applications for many public and private customers.

GlobalGuard combines Motorola’s two-way satellite communications, on-board CPU and an integrated Global Positioning System (GPS), so that users can send data back and forth from a central command unit or monitoring center while being continually alerted to new or dynamic changes.

The company says its technology secures, tracks and controls assets throughout the U.S., Mexico and Canada for clients including the military, government, police and the consumer market.

S3’s applications are implemented with two-way communications capabilities that are linked to a live monitoring and support center (MSC) with trained professional staff on duty 24/7.

Satellite Security Systems, founded in 2000, is an operating subsidiary of Celtron International, Inc. (ticker: CLTR on the Over-the-Counter Bulletin Board).

Current Customers

Public agency customers include the U.S. Department of Homeland Security, the U.S. Secret Service, FBI, California Dept. of Justice, the San Diego Police Department, San Francisco United Schools, Washington DC and Fairfax County (VA) school systems, among others.

Corporate customers of S3 include Borden, Coca-Cola, Comerica, Lowe’s Home Improvement, Siemens International and Snap-On Tools. Southwestern Energy, Sacramento (CA) Air Quality Board and Gateway Cities Project – LA Basin, are among the firm’s utility customers.

Target Markets and Competitive Analysis

The firm’s current target markets include commercial fleet/field service vehicles (accountability, efficiency and cost control), school transportation solutions (safety and security of students through government-reimbursed programs), law enforcement/government services (24/7 support and backup for operations) and hazardous materials transportation (cost-effective solutions for a “soon-to-be regulated market”).

S3 competes in different areas of the mobile asset tracking market with a number of other firms, including Omni TRACS, @Road, People Net, Darby, Teletrack, Discreet, Trimble and LoJack. However, Phillips displayed a competitive analysis chart showing what the company says are its competitive advantages against these competitors, including lower average and monthly costs.

Phillips brings significant experience to the business, including investment banking and federal law enforcement backgrounds.

Company Seeks Working Capital Funding

S3’s parent company, Celtron, had gross revenue of $1.4 million in 2005, but a net loss of $1.3 million. On the basis of what he said is a backlog of $6 million, and a substantially larger sales pipeline, Phillips projected revenues rising to $6.9 million this year, $18.0 million in 2007, and $26 million in 2008, with the company turning a modest profit this year, $5.0 million next, and $7.1 million in 2008.

The company is seeking funding for working capital to move forward on its ambitious operating expansion.

Sandra Holtzman, president of Holtzman Communications in New York, delivers high-end integrated marketing communications services to a wide range of technology, IT, pharmaceutical, and biotech companies, including many startup and later-stage technology companies.

At a mid-afternoon meeting last week at the Blue Water Grill on Manhattan’s Union Square, Holtzman described her approach to handling the communications requirements of emerging technology companies.

“Some of my firm’s marketing techniques have been developed by taking traditional style marketing tactics and adapting them to today’s needs, and, in the process, making them infinitely more efficient, accurate and highly cost-effective solutions,” she says. Her tagline, “Lo Fat Advertising. Big Ideas Without Big Overhead ®.” embodies this approach.

One such solution which she has developed and has been using for about four years is the proprietary methodology she calls OpenMind™ Research. This approach to marketing research is structured by using a brainstorming format to discover the key perceptions of brand, product and website end users, and to develop targeted messaging to those audiences. Using this approach, all interested parties to the research – the agency, the client, the end-users – are present at, for example, the focus session, creating what Holtzman says is better overall research results, derived more quickly and more efficiently. Using this approach, she says, appropriate research results can be generated in a single session.

Selling Value

Holtzman describes her services as “selling value” to clients – and that’s particularly important for startup companies who are trying to maximize the benefits derived from their limited marketing and communications budgets.

“We customize the communications strategy for each client,” she says. “We recommend only what they need at a given time – and not more.”

For example, if she’s working with a small startup with a very limited budget, she will work up only what they need at the moment – e.g., letterhead, business cards, envelopes, a logo and tag line, etc.

That does not mean, she explains, that she tries to penny-pinch on the quality of the work done by her shop. “We don’t compromise on quality – and we’re not susceptible to the ‘I can get it cheaper elsewhere’ arguments from clients. Our goal is to give the highest value for the client – not necessarily to be the lowest cost.”

As the client’s requirements grow, Holtzman continues to work with them to, again, provide the highest possible value within their budgets.

While she has worked with many large pharmaceutical clients, including Pfizer, Merck, Warner-Lambert, Johnson & Johnson, Purdue Frederick and Chesebrough-Ponds, her client list includes specialty pharma such as Stiefel Laboratories and is also studded with small, young companies as well, including NexGenix Pharmaceuticals, Xcellerex, HydroGlobe (a nanotech startup), PEG Pharmaceuticals and New Jersey Institute of Technology’s Enterprise Development Center which houses start-ups.

The Importance of Websites

Holtzman has interesting views on the role of websites in marketing communications today. “Today, websites and the Internet are the predominant method for communicating with customers and getting the word out,” she says. “Printed collateral materials continue to be used to some extent, as do novelty items to be handed out at trade shows, etc. However, when someone wants to know about your company, today, they most often go to your website first.”

In a bylined article entitled “Websites that Click: Who does your site speak to anyway?” (Pharmaceutical Executive, January 2005), Holtzman says that companies that want to reach and influence their customers need to “know and listen” to their audience. “To build an effective website, companies first need to listen to the people who will be using the site,” she states.

This advice is true for companies of all sizes, she says, but particularly so for young companies that need to move quickly to develop their marketplace, and that cannot afford to squander their time or their financial resources on ineffective or off-target website development.

One reason that Holtzman can deliver “big ideas without big overhead” is the fact that Holtzman Communications operates as a “virtual firm,” which is a concept that has been increasingly used by many startup and early-stage companies.

However, Holtzman notes that her colleagues at Holtzman Communications are not just “freelancers.” Rather, she says, they are a “dedicated team” of “creative-director-level art directors and copywriters, CIO-level programmers, information architects, technical writers and strategic management consultants.”

Holtzman sums up her view of the current direction in marketing communications as follows: “As the world continues to evolve toward highly fractionated and segmented audiences, and more and more companies (both large and small) are turning to the Internet for their promotion, ad agencies, PR firms, interactive firms and other similar service providers will have to accommodate these changes toward interactivity so that they can serve their clients — instead of having their clients drag them to the new media.

I spent two hours at breakfast Friday morning listening intently to brainy physician-venture capitalist Christian Mayaud, Managing Director of The Verticom Group, in Bronxville, NY, describe his view of the coming changes in the business environment that VC’s will be facing in the next few years. These changes reflect developing trends in many technology-based industries, as well as their impact on the overall U.S. economy. Mayaud believes these developments will result in a reduction of the potential returns from VC-backed ventures, requiring VCs to globalize their investment activities to earn a significant payback. Further, he believes the changing environment will also open up the opportunity for a new type of fund, with payouts structured differently than the traditional VC fund – enabling greater potential returns.

site mapMayaud, who specializes in healthcare and technology investments, has training in both medicine and bioengineering and has a track record as an aggressive company builder and market entry strategist. In the late 1980’s, he combined his proficiency and commitment to medicine with his background in engineering to develop clinical communication tools dedicated to empowering physicians in the practice of medicine. He founded several physician-centric healthcare companies headquartered in Westchester County, including Physicians’ Online, Inc., Med-E-Systems Corporation, Advanced Health Corporation, and vPORT). He founded The Verticom Group in 1996 and works closely with numerous healthcare and non-healthcare portfolio companies. A board-certified internist, bioengineer, and physicist, he received his clinical training at Columbia (New York), Hahnemann (Philadelphia), Mt. Sinai (New York), and Lenox Hill (New York) hospitals.

Watch this space through the week for more on Mayaud’s views and activities.

Lori Smith, a partner in the Technology Companies practice in the New York office of law firm Goodwin Procter, is a knowledgeable and experienced participant in the city’s venture capital, private equity and angel equity community.

A breakfast meeting with Lori last week – at the firm’s expansive mid-Manhattan offices — revealed the significant extent of her group’s involvement with emerging and startup technology companies in the region.

With over 20 years of experience in the technology arena, Smith has represented both public and private companies – including software, Internet, wireless and other emerging technology clients – in a wide range of functions. These have included structuring, negotiation, and implementation of equity and debt financings and private equity transactions, private placements, acquisitions, mergers, strategic alliances, joint ventures and licensing, manufacturing and distribution agreements.

Goodwin Procter has about 650 attorneys in Boston, New York and Washington, DC. About 150 of the total are involved with high tech deals (software, hardware, telecom, life sciences), representing either entrepreneurs or funders. The firm closed approximately 300 PE and VC deals in 2005. And it closed approximately 100 PE and VC funds since 2004.

In the past two years, the firm added 80 technology, VC, PE, intellectual property and life sciences lawyers from two other firms – 70 from Testa Hurwitz, and 10 from McDermott Will & Emery.

Goodwin Procter’s standing in the technology arena has risen sharply in the past couple of years. Among the many recognitions it has received, last year, Dow Jones/LBO Wire wrote that the firm “is on its way to become one of the top national providers of legal services for technology companies.”

While the firm is most well-known in the Boston region, it is becoming much more visible in the New York entrepreneurial scene – and Lori is contributing to that effort.

Right now, she is working on a number of financing transactions involving companies with innovative technologies or solutions in the fields of consumer electronics, financial services and wireless applications (confidentiality precludes naming names). Over the course of the past 12 to 18 months, she has provided advice with respect to a number of transactions on behalf of both early stage companies and investors, including companies such as Massive Incorporated, Odyssey Logistics & Technology Corporation and CEInteractive, and representation of investors in financings for Koolspan Inc., Assurz, Inc., Spotlight Data, Inc. and ejamming, Inc.

Smith, who earned her law degree (with high honors) from Duke University School of Law, is currently the legal advisor to the New York Angels investment group, one of the leading angel groups in the Northeast, as well as a member of the board of directors of the New York chapter of the MIT Enterprise Forum. As such, she is highly visible in the entrepreneurial community, and is able to provide her legal expertise to both entrepreneurs and investors. In addition, she has arranged an alliance among Goodwin Procter’s Technology Companies Practice, the New York Angels and PricewaterhouseCoopers, in which GoodwinProcter is co-sponsoring a seminar in March on “Equity-Based Compensation: How to Avoid the New Regulatory Land Mines.”

Lori is looking forward to the year ahead, as her group gears up to assist in what appears to be a continuing expansion of entrepreneurial activity in the New York region.

The cover story in the latest issue of BusinessWeek (Feb. 27) , “Going Private,” is well worth reading. It does an outstanding job of analyzing the sizzling private equity market, and why many top corporate CEO’s, as well as a growing proportion of new MBA’s, are moving into this arena. It’s

With private equity controlling over $800 billion in capital (Thomson Venture Economics estimate), it’s easy to see why many of the best and brightest have left the glare of the public company spotlight (e.g., quarter-to-quarter earnings concerns, heavy regulatory oversight) to help build stronger private companies and participate in potentially huge paydays that would make most corporate CEO’s green with envy.

Top corporate execs who have gone into the private equity business include: former GE chairman Jack Welch (now with Clayton, Dubilier & Rice), former IBM CEO Lou Gerstner (now chairman of the Carlyle Group, former Ford Motor Co. CEO Jacques Nasser (now with One Equity Partners, an affiliate of JPMorgan Chase), former Viacom CFO Richard Bressler (now with Thomas H. Lee Partners), and former J. Crew chairman Mickey Drexler (now with Texas Pacific Group working to revitalize J. Crew), to name just a few.

The shift of these corporate superstars points not only to the huge income potential of working in the private equity sector today, but the flexibility to make longer-term operational fixes on private companies without worrying about analysts’ quarterly earnings expectations, regulatory burdens, or the heavy hand of increasingly aggressive hedge funds taking stakes in companies to cause a sale or major restructuring.

In other words, the article notes, private equity CEO’s “don’t feel like the gun is pointed at their heads at all times.”

Most of the former CEO’who are now in private equity that BW spoke with said that because of the hefty income potential and the freedom to restructure/develop company operations for the longer term, they would never go back to the public company sector.

The PE boom is also attracting B-school grads as never before. Though this is of course a rarefied atmosphere, the article cited a median offer of $175,000 compensation from PE firms for 2005 Harvard B-School grads, vs. $135,000 for those going into other industries. For Stanford B-School grads, the numbers were even better — $232,000 for those going into PE, $140,000 for other grads.

Still, BW points out that the tide could turn on the prospects for PE over the longer term – when the PE market eventually slows down and you have a bull stock market. “Wave millions of in-the-money stock options in front of a CEO and suddenly Sarbanes-Oxley and the other headaches of public companies will seem less painful,” BW concludes.