Multiple bidders increase the selling price 50%
The ‘original’ founder of Parasun was Barry Carlson. Barry is one of the pillars of our local tech community. He founded and ran a number of local tech companies. Barry is credited with founding the BC Technology Industries Association, by far BC’s largest tech trade association. He launched Parasun in 1996 as a dial-up ISP.
I believe Steven MacDonald should also be counted as a ‘founder’ of Parasun. He joined the company when it was still just Barry and a few others. It was Steven who conceived and built the business model that made the company a success. Steven started as sales manager, and went on to earn the positions of President, and CEO, as he demonstrated to Barry that he was the best person for the jobs.
Parasun partnered with small and mid-sized cable television companies to provide broadband internet. When broadband over cable TV networks became a reality, the large cable companies hired entirely new teams of people who understood high speed data. These new teams built data centers, and the other infrastructure, to deliver high speed internet to their subscribers. The small and mid-sized cable operators either couldn’t afford to, or didn’t want to, to build out their high speed data offering in house. Parasun offered them an alternative by delivering everything they needed to sell broadband as a turnkey service. This was an excellent early example of a Software as a Service (SaaS) company.
When I first invested in mid 2004, Parasun had 35,000 end customers, revenues under $3 million and was operating around break even.
By the time the company was sold in May 2007, it had grown to provide broadband in over 160 communities and to 140,000 customers in North America. Over 80% of revenues were in the US. The company had been growing organically at over 30% annually, had revenues over $10 million and EBITDA of approximately $1.5 million per year.
Bootstrapped and a Little Friends and Family Financing
Parasun was almost entirely bootstrapped. In the very early days, they did a small friends and family financing. That capital came in as debt and was mostly repaid before I invested.
Parasun’s First Almost Public Financing
Once it was clear to Barry and Steven they had a winning model, they decided to look for financing to grow the company faster. They twice attempted to merge with public companies, one in a similar business and one that was a shell. They thought this would be a way to do a financing and provide some liquidity for their existing shareholders. In the shell transaction, they actually got to the point of signing documents before Barry and Steven figured out that it wasn’t the right strategy and they needed some help to extricate themselves from the transaction.
One of my partners at BC Advantage Funds, David Raffa, was a securities lawyer before becoming a full time venture capitalist. Barry and Steven found David when they were trying to extricate themselves from the reverse takeover with the shell company. It was not easy to do, but David was the kind of lawyer you’d want at your back during a legal knife fight, and he found a way to terminate the transaction.
Over the years, both Barry and Steven often used the term ‘saved’ to describe the help David provided in getting them out of that transaction. I have no doubt that if they had completed on that reverse takeover it would literally have killed the company. It’s not that the guys on the other side of the transaction were not honest, sincere guys who wanted to do something worthwhile with their shell. It was much more because Barry and Steven were just not the kind of guys, nor was Parasun at that time the kind of business, to make a successful public company.
Barry and Steven invited David to sit on their board and to be their company lawyer.
My Early Stage VC Fund and Angel Fund Investments
I invested in Parasun twice. David introduced me to the company after we raised the first money in the BC Advantage Funds. Parasun was the first investment in my early-stage, or seed, VC fund, the BC Tech Fund. In mid 2004, I invested $500,000 at $0.40 per share. The valuation was about 0.75x revenue.
In mid 2005 I made another investment in Parasun through my new angel fund, Fundamental Technologies II, at $0.55 per share.
Two Secondary Financings
Both of these financings were in part second financings. There was a secondary in conjunction with the first financing and the entire second financing was a secondary offering. A primary financing is when the investors’ money buys treasury shares and the cash goes into the company. This is the case in 99% of financings. In a secondary financing, the shares are sold by existing shareholders and the investors’ money goes to the existing shareholders as payment.
It’s normally very difficult to get a secondary financing done. One reason is that investors want to see their capital going into the company to increase its value. Another is that it is never easy to convince an investor that you have a really great investment opportunity while at the same time trying to sell your shares in the same great opportunity. A third factor is that most funds, including my BC Tech Fund, are specifically precluded from purchasing any shares other than those issued from treasury.
One of the reasons Barry and Steven almost merged Parasun with a public company twice was in an attempt to create some liquidity for their existing shareholders. This was completely understandable as some of these individuals had been shareholders in the company for eight years when I first invested. It was understandable that some of them wanted to sell some of their shares.
This posed an interesting challenge for me as the fund manager of the BC Tech Fund. I knew there was a good chance that after I invested, some of the early shareholders would probably sell some of their shares to other accredited investors. In a secondary transaction, the price is usually lower than the price paid for the same shares issued from treasury. The discount is often in the range of 30 to 40%. This reflects the challenge in finding buyers for secondary share offerings.
As the manager of a new fund, this created a potential problem for me. If a significant subsequent transaction did take place, I would have to ‘mark to market.’ This meant that in the financial statements for the BC Tech Fund, it would look like the value of my Parasun investment had decreased by 30 to 40%. A smart observer would understand that it had not really decreased in value, but it was still a marketing challenge we didn’t want to have in the first investment in a new fund.
As much as I would have liked to, I was precluded from buying these secondary shares in the BC Tech Fund. David and I agreed to help the company and shareholders find some accredited investor buyers for this secondary stock. This worked so well that some of these early shareholders came back to us a year later and asked us to do the same thing again. That’s how my new fund, FTII, managed to invest at $0.55 per share (I designed that fund not to have any restrictions on secondaries.)
This worked out well for everyone involved, the selling shareholders and the new investors.
Monthly board meetings
When I first invested, I joined the board as Chair. The board was Barry, Steven, David and myself from the date I invested until we sold the company three years later. We set and maintained a monthly board meeting schedule. To his credit, Steven managed this process with great efficiency.
At various times during that three years, I met with the CEO, and other members of management, weekly as we tackled specific business challenges.
Annual Strategic Planning Retreats
We also agreed to have annual strategic planning retreats. I believe this is an essential element in growing every company. Strategic retreats are an invaluable opportunity for the board and senior management to develop, and agree on, the major strategic initiatives and goals for the company.
The Exit Strategy and Execution
At the second Parasun strategic planning retreat in September of 2005, shortly after my second investment, the board and management agreed that “Our Core Purpose” was to sell the company for more than $10 million by late 2006 or early 2007. That was a very clear exit strategy.
Before I invested the first time, I spoke with David Raffa about my concerns on exit strategy. It was clear that there were shareholders who wanted to sell some of their shares. Even though Barry and Steven were sure they did not want to do another reverse takeover, I was still uncomfortable they might become enthusiastic about some other exit strategy that might not maximize shareholder value. This was the single biggest hurdle I had to overcome before I was comfortable making an investment.
David and I approached Barry and Steven with an idea to bundle our investment with an agreement to have us lead the development and execution of the exit strategy. They both really liked the idea. Barry was looking forward to retiring and build a big house somewhere. Steven was having fun building the company but, as always, put the best interests of the shareholders first. Both also liked the idea because David and I had both sold a number of companies and they believed we were the best choice to facilitate the eventual sale of the company.
The execution of the exit strategy followed our design almost perfectly. We started with over a hundred suspects on both sides of the border and ended up with a healthy competitive bidding process all the way to the signing of the term sheet. The successful buyer was Uniserve, a local public broadband internet provider. They made the best offer because Parasun provided them the largest strategic value.
In the end, we closed the sale of Parasun in May of 2007 and the effective price for the Parasun shareholders was about $14.8 million, 48% higher than the goal we all thought was ambitious at our retreat two years before. This worked out to about $1.30 per share – providing an excellent return to both of my funds and all of the other shareholders.
This is an excellent example of how a well designed and executed exit transaction can increase the final business valuation by around 50%.
Testimonial from Steven MacDonald, Co-Founder and CEO of Parasun
“The addition of David Raffa and Basil Peters to our Board was a crucial step in our development. The relationship between the Board and management was highly productive with David and Basil working close with us on strategic issues while allowing us to focus on operations.
David and Basil brought considerable experience and insight into strategic matters and served important roles as mentors to our young management team.
During the sale of the company, they built a funnel of potential acquirers and verified the legitimacy of every potential acquirer before involving management in the sale process.
This allowed us to be a part of the sale process while leaving us the time necessary to continue to grow revenues and EBITDA.
David and Basil delivered an outstanding result for the shareholders of Parasun and we are thrilled to have had them involved.”
Steven MacDonald, CEO
Testimonial From Barry Carlson, Co-Founder and First Chairman of Parasun
When the shareholders made the decision to prepare Parasun for sale, we met with Basil and agreed that he would invest in the company, assume the role of Chairman, and with David Raffa, undertake to make a transaction happen.
For almost 3 years, Basil managed the Board processes to position the company for sale, and worked with the management team to develop a viable strategic plan and implement it in detail. He drove the Board and management politely but relentlessly to maximize the value and attractiveness of the company.
I suppose that the sale might have happened without him, but not as soon as it did and certainly not at the valuation the shareholders realized. The shareholders, and remarkably the management team as well, were delighted with the outcome.