Looking for the Exits

All entrepreneurs are fuelled by dreams of success and wealth, and in the technology industry employees have bought into the dream.

Especially in startups, tech staff typically have a significant ownership stake in the company. Sure, they get salaries, but unlike most of us, they receive their bonuses in more stock, and they only get to cash in when the company succeeds. Typically, success for a tech startup means selling or going public; in the biz, this measure of success is called the “exit.”

Pity the poor technology entrepreneurs and their employees today. Not only have they already been through a market devastation in the early part of this decade, but technology workers are seeing their dreams disappear – or at least recede farther into the future. To help you understand the psyche of the technology worker (and perhaps to remind those in technology who are reading this), let me share some of the stories on which dreams are made, the successful exits of Crystal Decisions Inc., HotHaus Technologies Inc. and Club Penguin Entertainment Inc.

The story of Crystal Decisions is a story of two exits. The Cunningham brothers started Crystal in 1984. By the time they sold it in 1994 to Seagate Technology LLC for about $20 million, their software product, Crystal Reports, was being sold with database software around the world. Seagate was then acquired by private equity funds in 2000 and the CEO of the software division, Greg Kerfoot, fought hard for a meaningful valuation of his business. After Crystal Decisions filed on its own to go public in a highly anticipated IPO, the business intelligence software companies started calling, and Business Objects SA of France paid over US$800 million in late 2003 to get Crystal. Nice return for the private equity groups that thought Crystal was a throwaway part of the Seagate deal. And now Kerfoot is a prominent part of our community as part owner of a new Major League Soccer franchise.

HotHaus originated with entrepreneurs within Spectrum Signal Processing in 1995. Ross Mitchell was a believer in emerging voice over Internet protocol (VOIP) technology and built a company around delivering the embedded software that would make these systems work in a home or office. He raised some venture money from Growthworks Ltd. and Texas Instruments Inc. In mid-1999, right in the middle of the dot-com hurricane, Texas Instruments bought Telogy Networks Inc., a competitor to HotHaus. Mitchell was despondent. Not only did his favourite exit partner not pick him, but its executives still sat on his board and could see everything that HotHaus was doing. Luckily, Broadcom Corp. called in July, and quickly closed a US$280-million acquisition (ironically earning Texas Instruments great returns in the process).

More recently, the biggest exit in B.C. was Kelowna’s Club Penguin. The Walt Disney Co. paid $350 million in cash in August 2007 for the company behind a subscription-based online social and gaming world for preteens. Disney will pay a further $350 million by August 2009 if Club Penguin hits preagreed subscription numbers. These are staggering figures for a company founded two years earlier by three individuals (Lane Merrifield, Dave Krysko and Lance Priebe) whose own corporate constitutions forbade advertising, focused on safety for children and gave the profits away in charitable donations to institutions focused on kids. I was in Kelowna on Aug. 1, 2007, and spoke to the head of communications. Fortune magazine, Forbes magazine and the Wall Street Journal had called her, but not the Kelowna paper or any form of local media. She had to call them! Talk about under the radar.

These are some of the dreams that the technology industry feeds upon. It sure would be nice to get back to those successes in the very near future, wouldn’t it? Brent Holliday heads the technology practice for Capital West Partners, a Vancouver-based investment bank.