Spotlight on Rudy Burger - Woodside Capital Partners

The Exit – Why VCs Get it Wrong … and Other Juicy Bits

I spoke to Rudy Burger about that thing many companies don’t want to talk about … at least not soon enough: The Exit. We talked about this, and much much more!

Elizabeth Perry/White Bull:

Before we get in deep, Rudy, tell me - why the business you’re in? How did it all start?

Rudy Burger/Woodside Capital Partners:

Well, I was an engineer by trade, and very lucky, because the area I got interested in as a teenager  - electronics - just happened to become a hot industry. I had been building radios, tinkering, and then got into signal processing/image processing. I did my BSc and MSc EE at Yale and my PHD at Cambridge University. From there I decided to explore the consumer applications of image processing and thought, wouldn’t it be cool if cameras became digital devices?

I started seven companies, all of them in the digital media space. Among them was Camtrel (scientific image processing), Avalon (first color photo editing software for the Mac), Savitar (color calibration technology).  When my son was born I decided I should get a realjob and went to work as VP Software at Xerox. Xerox was not a good fit for me … I found the process driven environment to be antithetical to entrepreneurialism. I left to join Visioneer, which then went public in December of 1995.  I was later recruited to go over to Europe to head up a $40M joint venture between MIT and the Irish government - MIT Media Lab Europe.

In 2002 I moved to the UK to restructure a public company called Scipher – spinout from Thorn EMI. Within 18 months I had sold off 11 of the 13 business units, and decided I liked the challenge of mergers and acquisitions. When I returned to California I bought into Woodside Capital and became managing partner in 2005.

WB:

Happily?

RB:

I love what I do.

WB:

So, you’ve spent some time in the USA. … Whatever happened to that thing about not really being a success until you’ve failed at least once? You know, failure being a sort of badge of honor?

RB:

Oh, I have had my share of failures! For example I started a company in 1998 called uRocket that was focused on Internet music distribution. It was essentially a stereo version of the iPod. I thought it was cool. We raised an A round of financing from Intel Capital and Lazard. … Long story short, it was way before its time and we were unable to raise a B Round. Lesson Learned.

Another story: Michael Rogers (The Practical Futurist), who was with Newsweek at the time, came into my office in 1991 with this whole optical disk setup. It was an interactive digital version of Newsweek he had created.  I thought: Who the heck wants to read a magazine on a computer screen! Again, I got it wrong. It was a precursor to the web.

WB:

Ok, so now let’s talk about the Exit. Speaking of getting it wrong. … You say VCs often do. What do you mean?

RB:

There are a number of dimensions to that. Companies go through certain stages of growth. For the first three years or so, the value of the company has nothing to do with financials. Investment bankers often like to go on about multiples of revenue and EBITDA, but there’s more than that to factor into the real value of an early stage company. In fact there are two things: The Strategic Value of a company is the first thing.  That’s like the hope value … like, wow if this thing gets to market this is going to be transformational. That’s when there’s venture backing, little or no competition, hype, and the promise to be the next big thing. At a pre-revenue stage there is no useful way to value a company based on financials.   

The problem is that this strategic value often peaks out around the B round and then starts to decline. After this, the company goes into execution mode. Now they have to deliver. And now they have issues like working capital, competition, and maybe 50-100 employees to manage. … So, the risk is higher and the value is perceived to be less. It may take two or three years to build it back up to where it should be. … In other words, in many cases, the best window of opportunity for founders to Exit is often around the B-round. If you misunderstand the difference between strategic value and financial value, you can lose your chance.

Second thing, which has to do with timing is that we are no longer living in the same world we were in say the 90s where many venture-backed technology startups could expect to go public on NASDAQ and be worth at least a billion dollars for some short period of time. In this period, VC liquidity preferences weren’t so much of an issue. In contrast, now founders often sit behind a wall of liquidity preferences. So, let’s say a company raises $50M with a 1X liquidity preference. Then the company is sold for $50M. … The founders get zero. This is relevant because most Exits are trade sales nowadays and the median trade sale valuation for technology companies is between $40M and $50M. There is therefore a strong argument to be made for founders to raise as little money as possible and Exit as soon as possible, in order to maximize their return.

The third point is this: I think VCs for the most part do a poor job of Exit planning. Everyone understands that VCs are in it for the Exit. Therefore Exit planning from Day One should be a priority. Instead, the CEO and his company are told by the VCs to focus on building the business and not to worry about the Exit. … What happens within the life cycle of the company is that one day the board suddenly realizes that there is very little cash left and the VCs are tapped out. So, there’s a mad scramble to appoint an investment banker before the cash runs out. … In other words, since the Exit is the most important thing for the founders (often) and the investors (always), it should be planned from day one!

WB:

Are there emotional reasons for not wanting to think about the Exit early on?

RB:

I think there is a lot of emotion that goes into to this. Thinking about the Exit is a distraction. The typical VC doesn’t want the CEO to focus on that, but on building the company. But, I think a company should bring corporate development to the table right at the beginning. They should have a resource available from the get go to start thinking about it. They can certainly do this financially. It’s not a dollars and cents issue. It’s about planning. … Lots of VCs are struggling at the moment.

While Venture Syndicates think they are struggling to support and do what’s best, they’re only exacerbating the situation. So, the message is simple: Founders and VCs need to take a more strategic view of the Exit, recognize it at the very beginning, and invest time and money accordingly.

At Woodside Capital, we love nothing more than to be engaged with a company a few years ahead of any formal Exit. It’s so much more powerful to be prepared than it is to say “Here’s a company and you’ve got two weeks to act. …” One of the things we’re doing is introducing perspective buyers well in advance of an Exit to start building a relationship. Then when a company is ready to Exit, we already have a strong relationship in place.

Let me be clear on one thing. The companies that are making the headlines every day with billion-dollar valuations, such as Facebook, and Twitter … These are not our clients and they do not represent the vast majority of M&A activity

WB:

Can you give me an example of a company that did it right?

RB:

Absolutely. Recently, we announced that our client Silicon Clocks was acquired by Silicon Labs. A year and a half ago we brought Silicon Labs to the table to form a commercial relationship with Silicon Clocks and to make a small equity investment. … This helped the eventual Exit process go smoothly.

WB:

Let’s talk about European Innovation. What challenges do you see here?

RB:

What I see happening time and again is European companies getting started around a bright “technologist” with enormous ideas and deep science. … But the founders are often worried that someone will steal those ideas. Then, they cautiously go to market, then back to the lab in the first three years. And, there is often no one on the team in the first few years engaging with the market.

Many of the most commercially successful Internet technology companies have been created recently by bolting together off the shelf technology, leaving the content to be created by the customer!   Facebook is a classic example of that. The idea is to let the customer decide what they like and get customer feedback from day one.

Another example was CDDB (later changed its name to Gracenote, and was acquired by Sony in 2008 for $260M). When I first saw this product, I thought there must be tens of thousands of people working in India, building a database containing the information about every music album ever produced.  But in reality what they did was put in the first few 100 albums, pushed it out to market and then let the customer build the product for them! The first customers would often receive the message: “CD not recognized” so they would fill in the information themselves. This is one of the talents of a good product marketing manager.  They own the roadmap, have to know what the technology is capable of, and know what’s going on in the market and who their competitors are. Unfortunately, world-class product marketing managers are often hard to find in Europe.

WB:

Do you ever work with the early stage companies?

RB:

I do. I’m on the board of a couple of AIM listed companies in the UK, for example, and I mentor early stage firms where and when I can. My ability to do more of this is hampered by the fact that many VCs don’t want investment banks to be engaged with their portfolio companies at this stage. When they see an investment bank coming they worry that it will look like they are hanging a “for sale” sign out and that it will send the wrong message.

WB:

What makes Woodside Capital different from other investment banks?

RB:

Well, first off, we’re one of the few shops that do M&A sub $100M transactions and have a global footprint. About 50 percent of our deals are cross-border transactions.  

Second, we are staffed with individuals with deep operational experience. All of us have started and run companies. With that comes the technical and domain experience. We are well positioned to understand the strategic value of companies.  There are surprisingly few investment bankers who have started and run companies themselves.

Next, we provide a unique investment banking service for companies that are not yet ready for a formal Exit process. We help them form relationships with the companies that are likely to eventually acquire them.

Lastly, I think we have a pretty unique compensation model, aligning our interests with the interests of the shareholders of the company. None of the senior members of WCP gets paid for just showing up! No one makes a penny unless we complete a successful transaction. We’re proud of that. … And no, we don’t know any other company doing things this way.

WB:

So, you’re coming to White Bull 2010, Pathways to Exit. What will you be looking for?

RB:

We are looking for companies within our sector of expertise that have deep and fundamental IP with the potential to impact a large and growing market. We will invest our time over a period of years, ultimately helping companies get to a good Exit. That’s where everyone comes out on top.

WB:

What are the trends? … Or, let’s say areas of opportunity?

RB:

Within my area of focus - digital media technologies - there are a number of exciting opportunities.

1. Most digital cameras ship today as part of mobile phones. There is an enormous market for them, but they take lousy pictures! I see a big opportunity there for the company that develops and inexpensive solution to this problem.
2. Gesture interface. So, the first generation of gaming consoles used tethered control interfaces. Next came the Wii device which was wireless. Next to come is the gesture interface - waving your hands around with no device at all. … The device that can see! 
3. On the Internet, online games as social media are very hot.  The medium becomes the social context for communication and interaction. I see an increase of games like this, especially on mobile devices.

WB:

Ok. Last question: What kind of phone do you use?

RB:

The iPhone. I’m a bit of a gadget hound, so I’ve tried most of the new smart phones on the market.  But Apple has created an elegantly simple product that is hard to beat. …

WB:

Thanks for your time, Rudy! We’ll look forward to hearing more from you in Barcelona!