If it looks like a duck, and walks like a duck, it must be a duck.
In 1998, I raised some money from the notable venture capital firm, Kleiner Perkins Caufield & Byers (Kleiner Perkins). I learned a lot about investor perception in the weeks prior to that agreement. Kleiner Perkins had done some extensive work reviewing our business model and seemed intrigued enough to begin negotiations on valuation. Meanwhile, the buzz of an imminent deal began to trickle through various other top Silicon Valley venture capital (VC) firms. About 18 different firms reached out to me, interested in participating in the upcoming round of financing.
Putting a valuation on the company did not appear to be an issue, but determining how much we could have was challenging. Due diligence by these investors varied but for the most part as long as Kleiner Perkins was leading the charge, it seemed that beyond the simple, “what do you do?” the decision to go forward was based on the terms and conditions of the investment.
I felt pretty good about things. I was talking to the top guys at the top funds in the nation and I could feel the momentum building for Intraware. We were quickly coding SubscribeNet,an on-demand service designed to help companies convert from a physical supply chain process to a digital one. We picked up a major contract from Netscape and revenues were growing faster than plan.
Kleiner Perkins set up a meeting in November 1997 to have me present to all of their partners. The partner on our account let me know that this part of the process was necessary but really was nothing more than a “rubber stamp.” The other VC’s were aware of the presentation and began to commit up to $8 million dollars and the size of the round started to look like $15 million vs. the $2.5 million we were initially looking for.
I knew that one weakness in our business plan existed: Most of our potential customers were in no hurry to convert to digital supply chains. They enjoyed a quarter or two of padding by shipping products to their two-tier distribution. Once they filled the channel with physical goods they could recognize revenue. Our process would bring actual use of product to real-time.
I presented on a Monday morning and was told that they would figure out the financial figures later that night. By midday on the following day, I had received plenty of calls from the other VC’s committing millions of dollars, even without knowing what Kleiner Perkins was committing.
Kleiner Perkins called back at 2 p.m. Tuesday afternoon saying that their partners had a few issues and couldn’t get comfortable with funding the round. After a dozen calls to the other VC firms, I realized that the word was suddenly out and all of the other VC’s quickly declined as well.
I didn’t sleep well that night but was delighted by a call I received from Kleiner Perkins the next morning indicating that they had gotten past their internal differences and were ready to fund. I declined additional funds from the other VC’s and closed the round solely with Kleiner Perkins in December and opened a new round at two times the price three months later. A year later we were public with a $500 million valuation and two years later our valuation was $2 billion.
Then the bubble popped, and we popped with it. SubscribeNet hadn’t grown and we tried to play in multiple other markets only to build overhead to a point where a $0 valuation seemed imminent.
That was six years ago. Today I can sleep at night knowing we are a much stronger company, with a leading technology and expanding market opportunities. We went from sizable debt and a couple dimes in the bank, to growing cash with no debt. With strong working capital, positive cash flows, and over $35 million in federal and state NOL’s, the company’s financial position is secure. We have seen tremendous traction in the end users leveraging our trusted platform. And, while Netscape represented 95% of our business in 1999, the company does not have one 10% customer today. Intraware is successfully converting technology providers of all sizes including some of the larger software providers in the world to its SubscribeNet service.
Intraware’s solutions provide a single on-demand platform for managing all critical digital assets. Our entitlement management engine that powers our on-demand services meets emerging market demands in many digital media markets. We have moved past just delivering enterprise software to managing multiple forms of digital media including consumer software applications, games, maps, consumer entitlements, and hardware entitlements and licenses on behalf of our customers. Our on-demand offering continues to have expanding applications in the market as the world moves digital. In addition, our SubscribeNet offering provides a very credible and defendable ROI that has historically met customer demands in times of economic stress.
For years, yes, Intraware looked like a duck, walked like a duck, so it was a duck. The partners at Kleiner Perkins must have smelled “duck.” But, they somehow got past it, as they did see something long term. Eventually warehouses of DVD’s would be replaced with a more economical process for distribution. Old boxes of retired versions of software would no longer crowd our landfill. To date, 99% of the Fortune 500 companies have received software from Intraware in over 160 countries. Our model’s rapid time to value and platform independence has been winning over skeptical purchasing organization as web-based applications have emerged. We continue to leverage our experience in hosting on-demand applications and we are positioned to benefit from the video and social networking markets that depend on a provider that is here to stay and able to provide leading innovations.
Intraware isn’t a duck anymore. The numbers are beginning to reflect it and the great plan of eleven years ago is finally here. We are focused on continuing to build long-term value for stakeholders, and are confident that our value will continue to reveal itself even through tough market conditions.
It won’t be long until this duck is really seen as an Eagle.
Peter
January 23, 2008 at 6:04 pm
Peter,
Thanks for those words of confidence in the midst of these trying times for the market.
I myself haven’t been losing sleep while the market slides. As an investor in ITRA - I am used to trying times. I feel like we have already been in a recession for many years.
In the past, you have stepped up and put your money where your mouth is. I have appreciated it everytime you have purchased your owned stock when not many others even wanted to look at it. It has given you a moral right to keep talking.
I know your primary focus right now is not on improving the share price, but rather improving the things which will eventually lead to an improving share price.
In light of the recent breakdown in share price (again) to the 4.00ish area, I along with many have hoped/wished you could do something to stop the pain.
One thing I think you can do, which would have an effect to some degree, would be a share buyback. It wouldn’t take much to affect the share price from a supply/demand perspective. It wouldn’t take alot to give investor confidence a shot in the arm.
1/10th of ITRA’s cash would do. If you truly believe we will soon be looked upon as an eagle, it would be great use of the companies cash from an investment standpoint as well.
I don’t expect I will convince you to do what I would like to see you do. What I would like is to hear the reasons you have so far declined to buy back any shares with the companies growing cash. Would you be breaking an agreement with the institution who is currently raking in the retail investors shares thru margin calls and panick @ the 4.00 area? Do you not want to offend Digital River - who paid 6.00 for their stake? Can you think of a better investment for your $12 million?
January 23, 2008 at 7:06 pm
P.S.
1/10 is a very realistic and workable number.
In biblical times and today people gave 1/10 of what they made to God. In the book “The Wealthy Barber” by David Chilton, he suggests people pay themselves 1/10 of what they make first before their money is spent.
Maybe ITRA should commit to paying itself first. Use 10% of what it makes to buyback its own stock until the market is willing to value it more reasonably than 1X revenue when you strip out cash.
January 24, 2008 at 10:45 am
The numbers are beginning to reflect it and the great plan of eleven years ago is finally here.
Great job!
It won’t be long until this duck is really seen as an Eagle.
It won’t be long? How will it get noticed? How does ITRA get on the radar?
This blog does give a nice vote of confidence though.
January 24, 2008 at 6:43 pm
Guys,
I realize its frustrating as a retail investor to continuously get beaten up by lack of interest in this stock. I to have held the stock through the last few years and keep believing in the potential of the company. I believe it would be frivolous and meaningless to have a share buy back, considering that there really is not that much cash sitting around. It might give the SP a temporary spike before settling back to the same valuation, and then ITRA would have a million dollars less to report on the next conference call. I believe the money would be much better used in continuing to execute on the business model. One of the very good improvements I have seen in the quarterly reports is the evidence of very good fiscal responsibility and this bodes well for the long term viability of the company. Let’s not allow a few impatient short sited investors deviate us from our course.
January 24, 2008 at 6:46 pm
A buyback of stock by the company at this point would have little effect other then increase the liquidity issue. I would rather have a strong balance sheet and money available to use to further the business plan. Continue to work hard to make the company a success and a higher stock price will be the reward. Been in this stock since the 90’s. I like your vision and beleive you and the company have a chance of success or I would not be here. Keep up the good work and keep those blogs comming.