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VC veteran: How to escape from microcap hell

Rick Rickertsen, COO of VC firm Thayer Capital, says top managers have an even greater incentive now to buy out their struggling companies and become full-fledged entrepreneurs.
Written by Mark Mehler, Contributor
Venture capital veteran has some tips for troubled managers

Rick Rickertsen began writing his book, 'Buyout: An Insider's Guide to Buying Your Own Company', before the technology market crashed. So his advice to managers on buying back their companies is littered with terms like "personal fulfillment" and "realizing your dreams".

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But while that language no longer resonates in a devastated market, the COO of VC firm Thayer Capital says, if anything, top managers have an even greater incentive now to buy out their struggling companies and become full-fledged entrepreneurs.

"The small publicly held Web consultancies are living in microcap hell," says Rickertsen, who has particular expertise in this sector. Thayer Capital currently funds four private consulting firms: Concours Group, Iconixx, Immedient and Impresa.

Rickertsen says the public market is the bane of professional-services firms that should never have gone public to begin with. For openers, most of them already have been abandoned by serious investors, and their miniscule market caps put them under the radar of the large Wall Street brokerage houses.

"The smart money got out of these companies well before the bottom," says Rickertsen. "The only investors left are the penny-stock [followers looking to] pick up a quick buck on a tiny move."

Moreover, he argues, with their companies trading under their cash values and losing money hand over fist, the last thing managers need is the distraction of public life – the expense and time involved in filing hundreds of pages of documents, undergoing regulatory scrutiny, and trying to keep employees onboard amid all of the bad news on the street.

A VC's dose of advice for managers looking to buy their way back from public life takes the form of having to make tough choices.

For those senior managers desiring to take the plunge, Rickertsen suggests the following:

  • Line up an experienced, reliable equity partner, not only for financing assistance but also to help you deal with your fiduciary responsibilities and offer strategic advice.
  • Expect a few lawsuits from disgruntled investors, but don't worry too much about them. "Your investors are big boys and girls," says Rickertsen. "If they believe your stock is underpriced, why aren't they out there buying more and bidding the price up?"
  • Form a "special committee of the board" composed of independent directors, and make sure that all of your directors are behind you.
  • Price the deal fairly. Typically, a 30 percent to 40 percent premium over the current price is reasonable. Understand, however, that once you make your offer, you've put the company in play, and if you've underpriced your bid, there's an excellent possibility that some large integrator will come along and grab the company away from you. Remember RJR Nabisco and the barbarians at the gate?
  • Write a tight business plan that will impress potential partners with four key elements: a sound valuation, a long-term vision, a differentiation strategy and a first-rate management team. A year ago, equity partners might have glossed right over those things. But not now. The gilded age of technology has passed.
  • Don't try spinning your financial partners. They may have been bamboozled by the first wave of Internet hoopla, but by now they've learned to recognize hype when they hear it.
  • And, whatever you do in your business plan, don't build your case around an eventual return to the IPO market. Your goal has to be building, or rebuilding, a business. We've all seen what happens to consultants who treat the IPO as an end in itself.
    Given all of the negative energy, Rickertsen can't figure out why public consultants haven't begun the exodus back to private life. The only explanation he can come up with is that their potential equity partners are reluctant to help fund these transactions until they're sure that the market has finally bottomed out. "I know people are looking at it seriously," he says (see E-Consultants can go home again). "But the overall economic outlook right now is so gloomy, that private equity firms like Thayer and Francisco Partners are holding off …"

    While the public IT services firms are getting battered, the private ones also are feeling the sting. But being private has to be better than burning in microcap hell.

    Hit the books
    Their glory days were brief. For some of the IT services firms, their stock prices defied comprehension when the good times were great. But the recent downdraft may give management new ideas. Below are some companies that should reconsider microcap hell and read Rick Rickertsen's book, "Buyout: An Insider's Guide to Buying Your Own Company" (Amazon, 2001).

    iXL Enterprises is a former darling with a stock price in the $40 range about a year ago. Then the company's stock sank below a dollar after some major snafus by management. They should forget about the stock market.

    Rare Medium Group fell hard from grace in the $86 range a year ago, to the $1.65 range. The company's Q4 loss didn't help. Let's buy these guys a couple of books.

    Razorfish was once the prince of Web integration until the dot-coma syndrome took over. Its year-ago high was $40, and its stock price has tripped in the dollar range. Besides humility 101, company execs must read "Buyout."

    Renaissance Worldwide is still struggling and has remade itself into a staffing and project consulting firm. Its stock price fell from $7 a year ago to below a dollar, and now hovers around $1.06. Neither the public nor private market seems to suit this company.

    USinternetworking is hanging by its ASP thumbs in the $2 range. The analysts still like the company. Why?


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