AIM4Tech

Coming Home: From New Jersey, to AIM to NASDAQ – The Round-trip IPO!

As educated readers of aim4tech.com will no doubt know, Amazon will sell you two quite different DVDs titled “Coming Home”.

The first – the classic released in 1978 and starring Jane Fonda and Jon Voight - is the massively powerful commentary on the Vietnam War seen through the lens of the men who went to fight and their women who waited behind.

The non-identical twin of the Fonda/Voight saga is the movie version of Rosamunde Pilcher’s blockbuster novel of the same name. This one starred the very lovely Joanna Lumley and Peter O'Toole and is also about the effects of war on ordinary people, although this time it’s WWII that acts as the story’s pivot.

So which is the real Coming Home?

A bit of investigative digging reveals that, in a flagrant disregard of international IP laws and cocking a hearty snook at the special transatlantic relationship trumpeted this week by leaders Bush & Brown, Ms Pilcher ‘borrowed’ the title for her book when it was published in 1995.

Clearly she liked the name and could see no reason to let petty regulation stand in the way of her own pursuit of fame and wealth.

As a dedicated follower of Adam Smith I find this open-minded free market attitude to commerce massively refreshing and a very helpful theme for this edition of the blog.

Coming Home is a constant theme within literature capturing, as it does, the need of humanity to return to our roots in order to find true happiness and personal fulfilment.

Nowhere is this more true than in the realms of international capital – or at least – US perspectives of international capital.

I have lost count of the CEOs of NOs (Nasdaq Orphans) who start out all excited by the prospects of realising their websites’ promises to become truly global suppliers by IPOing on London’s AIM exchange.

One minute it’s all macho bluster and then their CFO steps up and reminds them that floating abroad is, well…..abroad.

And abroad is foreign, dirty - a form of self-imposed exile - a bit like dodging the draft.

The only true path for a real man, they assert, is Nasdaq.

“You see.” these quivering wrecks will say.

“Since I wrote my first line of code/sold my first solution/raised my first Series A round, it has been my singular ambition to float on Nasdaq. Nasdaq comes a close second to apple pie and ahead of Motherhood on the scale of life.”

And their lips start to tremble as they sob:

“I know that if I go to London I will raise loads of cash, raise my profile, gain paper for acquisitions, get rid forever of my preference share holders and get to take money off the table for myself and my family – but I will have to give up Nasdaq.”

And at this point a mantle of deafness falls over the CEO and, though he watches my lips move, he doesn’t hear me say:

But that’s just not true.

Even if a company chooses to taste a life far away in a land free from the Four Horsemen of the Apocalypse (Sarbanes Oxley, the SEC, Nasdaq’s disinterest in young companies and the Plaintiffs’ Bar) it can decide that milk and honey is too fattening a diet.

And there is nothing to stop them from a Nasdaq IPO.

Nothing at all.

An AIM IPO isn’t like boarding the Mayflower - it’s like a trip booked with Expedia.

And if I can ever get his attention long enough to explain to a NO CEO that it’s perfectly possible to have a round-trip strategy, they look at me askance and say, always in a disbelieving tone

“But has anyone ever done it?”

Oh dear! Oh dear!

The pilgrims who settled the East, and the pioneers who won the West, must spin in their marked and unmarked graves as they hear their weak-kneed descendants sounding more like home-bodies than homesteaders.

To a Brit this all seems very un-American. Imagine what a dull movie Apollo 13 would have been if everyone at Houston had said “well we told them that they could never get back.”

Fortunately it no longer matters because today saw the upbeat inaugural webcast of a round-trip pioneer’s results as Ocean Power Technologies announced its maiden Nasdaq numbers in a webcast at 11:00 EST.

Theirs is the typical tech start-up to riches story that powered the growth of Nasdaq (and much of the US economy) in the 80s and 90s. Founded in 1994 as a Delaware corporation and based in New Jersey, Ocean invented PowerBuoy™ technologies to harvest the sea’s energy.

In their early development stages they installed prototypes off the coast of Atlantic City and gratefully received money from the US Navy.

In 2004 they became Stage 1 pioneers by floating (sorry – I couldn’t resist it any longer) on London’s AIM. They raised around $50m with a market cap north of $120m (calculated at today’s rate of 1 Starbucks skinny latte to the $5.00).

Ocean Power used this money and profile to expand internationally, picking up the former Managing Director of Powergen’s Generation Business as European head and winning contracts for systems in Spain, France, England and Scotland as well as continuing to build their US flipperprint with generators off Hawaii and Oregon.

This year, flush with those successes Ocean Power made waves by following in the Pilgrims’ footsteps by adding a Nasdaq listing to their London quote.

In true Rosamunde Pilcher fashion, on May 1st OPT was joined by OPTT as the company made its IPO on Nasdaq.

But unlike Coming Home, the result wasn’t nominal confusion.

Instead the principal result was - money!

The OPTT Nasdaq release says it all:

“Ocean Power Technologies, Inc. announced the completion of its initial public offering of 5,000,000 shares of its common stock in the United States at $20 per share. The Company received net proceeds from the offering of approximately $90.1 million after payment of underwriting discounts and commissions and estimated offering expenses. The shares sold in the offering are listed on the NASDAQ Global Market and the Company plans to apply for these shares to be listed on the AIM market of the London Stock Exchange. The Company intends to use the net proceeds from this offering to: construct demonstration wave power stations; fund minority investments in OPT wave station projects to encourage market adoption of our wave power stations; fund the continued development and commercialization of our PowerBuoy systems; fund the expansion of assembly, test and field service facilities; expand our international sales and marketing capabilities; provide working capital and funding for other general corporate purposes, including potential acquisitions of complementary products, technologies or businesses. The joint book-running underwriters for the offering are UBS Investment Bank, Banc of America Securities LLC and Bear, Stearns & Co. Inc. First Albany Capital Inc. is acting as co-manager.”

Now if that doesn't strike confidence into the hearts of every wannabee Nasdaq CEO, I'm not sure what will.

As the share price graph below shows (click on it for more detail) - OPT has enjoyed a grown-up ride as a public company:

And you know what makes it even more interesting – Ocean Power Technologies still don’t make any money!

Check out their financial highlights below:

But there are over 100m reasons why the management of Ocean Power don't mind!

As described in an earlier blog there are 5000 privately owned companies in the US tech inventory.

While they sit on their hands waiting for their turn over the next 12 years to make their break for freedom, the management of Ocean Power Technologies are racing ahead with their vision.

Remember those days when exciting companies made their IPO on Nasdaq and all was well with the world?

For those CEOs who want to return to those days, there is a round-trip ticket available!

And those who choose to take it don’t even have to be pioneers!

What exactly don't you understand about raising $130m taking $50m of it off the table and a combined market cap of $630m?

I was in the Valley last week meeting with a group of gloomy young tech companies contemplating their futures.

You know the scene - a few years ago these were the priapic kings of the next tech coming. Now they are the decreasingly less grateful recipients of millions of dollars of decreasingly less enthusiastic VC investments.

These aren't start-ups - they have revenues, in some cases they’re profitable – or could be if they spent less building their sales forces and the next generation of the product.

Simply put, the companies’ leaders have proved the business model, slain the dragons of a reluctant market and established themselves sufficiently solidly that their websites’ boast of being a truly global leader begins to look vaguely possible.

So why are they so downcast?

Regular readers of this blog will know the answer – these heroes are trapped in a diabolical paradox.

On one hand lies the prospect of growth and untold riches. All that is required to exploit it is to escape from the shackles of the Preference shareholders and the injection of one more round of development capital. Oh, and a restructuring of the option pool.

Success is so close they can taste it.

But unfortunately their backers have lost patience – worse they have probably lost interest. Yesterday’s hot property is, well yesterday’s. Today is all about clean energy, web 2.0 and the riches of user generated content.

Just when everything is really ready to take off, yesterday’s stars are starved of that most precious commodity – expansion capital.

It didn’t use to be like this of course. Once upon a time, this hapless bunch would have moved on, in particular, they would have moved on to Nasdaq.

But it ain’t going to happen now so instead they are trapped between a rock and a hard place – either slug it out and grow organically or sell out to a bigger player – rolled up as part of someone else’s vision.

There is an alternative however – London’s AIM.

But when I gently suggested that they look across the Pond for capital and hope, I was met with a polite wall of disinterest.

So why are American companies so reluctant to take the plunge?

To talk to them you would think that listing on a foreign market was as unpatriotic as dodging the draft!

So much for the special relationship!

Actually I hear the three most quoted reasons for not even contemplating a London listing trotted out like a mantra every time I visit the US:
1. There’s no liquidity in London
2. There’s no regulation in London
3. American companies don’t do well in London

I have dealt extensively with the first two pieces of nonsense elsewhere in www.aim4tech.com so it’s time to deal with the third piece of nonsense.

Let me be clear, AIM is a free market in which good companies do well and bad companies do badly. Just like Nasdaq and all the other world exchanges being listed isn't a guarantee of fame and fortune - to get this, ask Jeffrey Citron, chairman and CEO of Vonage whose shares have plummeted 80% since their debut on Nasdaq last May.

However, if you're a young high-potential company with attitude, AIM is a great place to raise the cash, paper and profile that aggressive companies need.

Two AIM examples – one Canadian and one Californian - serve to make the point.

And, as the following chart shows - their shareholders and leaders have a lot to be happy about:

Read on for a tale of liquidity, fame and fortune!

Sandvine is a real tech infrastructure company making network equipment for DSL, cable and wireless residential broadband service providers.

They’re based in Waterloo, Canada, home of two other great companies – RIM (maker of the Blackberry) and Open Text (the largest independent Enterprise Content Management developer and on whose Board I'm proud to serve).

OCZ is also a 'real' IT business. They design and manufacture the high performance memory chip technology much beloved by overclocking geeks. OCZ is based in Sunnyvale alongside far too many other great technology firms to list here.

Both Sandvine and OCZ listed on AIM last year.

Sandvine's IPO was on March 21st last year and they raised around $50m. $40m of the total was for working capital and $10m was taken off the table by founding shareholders. Their opening market cap was $170m.

In October 2006, Sandvine then went for a dual listing on the Toronto Stock Exchange raising a further $35m over $20m of which went to existing shareholders.

In January this year, Sandvine announced their first year’s results as a public company. Revenues had doubled to almost $30m and they practically broke even compared to a loss of $2.5m in 2005.

These great results were followed up last month with Q1 results that blew the roof off with revenues up 121% over the previous year and a profit of around $6m.

Most importantly, the company had more than $60m in the bank!

And, flush with that success, last week, the company announced that 3 Directors sold between 11% and 33% of their shareholdings to realise a further $4m for themselves.

OCZ’s IPO was in June 2006 when they raised around $10m with a market cap of over $50m at a share price of $1.25.

Four months later in October 2006, OCZ proudly rolled out their 6 month’s results announcing revenues up 100% on the preceding year at $26m (although their losses were up at $655,000 compared to only $470,000 a year earlier).

And their global ambitions had taken a leap forward with the opening, ahead of schedule, of a development and logistics center in Taiwan.

A week later on October 12th the company announced a small secondary raising of almost $2m for expansion capital and the two founders sold $2.5m worth of shares, both transactions were at around $1.60 a share a 30% premium over the IPO price.

Last month, OCZ put out their 12 month results with the headline:

“Revenues jump 90 per cent. as OCZ gains momentum“

The detail went on to describe:
- Revenues of $68m
- Launch of 150 new products and
- Explosion in European sales to 40% of group turnover

Ryan Petersen, CEO said:

'We are proud of our continued strong revenue growth, geographical sales expansion, and successful opening of our Taiwan facilities ahead of schedule. Our strategy of investing for the future has already delivered improvements in efficiency that are helping to build long term value for our shareholders.

'I am pleased to report that 2007 has begun very well and we are confident of maintaining our strong record of revenue growth, technological innovation and operational improvement.'

Then just last week, OCZ raised a further $30+m half of which went for working capital and half went to three members of the senior management team

This time, the share price was $2.50 – a 100% premium over the IPO price of a year ago.

So what does all of this mean?

Take a look at these charts and make your own mind up.

Between them Sandvine and OCZ have raised nearly $135m of capital from the markets and they have been rewarded for their hard work and delivering on their promises by seeing their market caps rise by nearly 300% each from $170m and $50m to $500m and $130m respectively.

Which, in a single blow explains why there's only one word to describe those quality US tech companies that are too nervous, or too pressured by the negative New York propaganda to consider a London float - "DUMMIES"!

Ask Dave Caputo or Ryan Petersen.

Go East Young Man – The Banks are Buying The Real Estate

We’ve all see the movies and we know just how the West was won. Tough prospectors, brave farmers and fearless law officers turned opportunity into the wealth on which America was built.

But cast your mind back to the last Western that you saw. What were the leading edge indicators that pointed up imminent civilisation? What was it that presaged the day when the defining characteristic of Dead Man’s Knee (to choose a generic name for all frontier towns) was about to switch from sweat to milk and honey?

It wasn’t the influx of hordes of jailbird pioneers, the creation of the first vaudeville hall or other temples to pleasure. Nor was it the appearance of the chisel featured and saddle sore Marshall.

No, it was the arrival of banks.

And not just any banks. Carte blanche for the fine crinolined ladies and weak-jawed popinjays of rich parents to strut the boardwalk didn’t come when the local gold digger tried his hand at amateur banking. Remember your cinematology – those men (I think the technical term was saps) merely provided an efficient holding point for the redistribution of wealth from rich to gang members.

Safety was the cargo that travelled out with the proper buttoned-up, 3-piece suited, watch-chain carrying East Coast banks.

Because with banks came a different attitude to risk, the money to pay for security and an iron-clad safe to keep it in.

It was ever thus.

There have been many signs that London’s AIM is moving from being the preserve of domestic micro-caps and a refuge for fugitives from US regulation into becoming the 21st century Nasdaq.

That evolution has just kicked up a notch with the completion, in the last 30 days, of two banner Admissions to AIM.

First came the IPO of Somero Enterprises Inc. headquartered in Jaffary NH and with the motto – “Faster, Flatter, Fewer” which certainly beats “Live Free or Die” and yet somehow strangely resonates with it!

The key numbers to remember in the deal are 50, 50 and 40.

The IPO raised about $50m for a profitable company whose trailing 12 month revenues were also about $50m. Importantly - for those remaining sceptics who see AIM as a late stage funding source and not an exit – almost $40m of the funds raised went to provide liquidity to existing private equity investors.

All of which is exciting, but should come as no surprise to regular subscribers to this blog.

What is much more important is that this deal’s Nomad was US bank Jefferies Group.

It’s not the first AIM IPO sponsored by a North American Nomad – far from it – but it is the first for this venerable house whose tech credentials moved into overdrive when they merged with tech M&A supremo, Broadview, in 2004.

Equally symbolic was yesterday’s IPO of Berkeley Resources. Again, it’s not the company’s debut that makes the headline (Although I’m sure that the shareholders of this Australian Uranium miner are delighted; and I’m delighted that the nature of their business adds a little helpful color to my Wild West prospecting metaphor!)

Rather, it is the company’s Nomad that is worthy of note. Berkley’s admission was supported by Canada’s banking behemoth – RBC. Again, RBC is not the first Canadian bank to become a successful Nomad – Canaccord Adams is a nomad and broker to more than 50 AIM companies – but it is the first of the really big conservative establishment players to take the plunge.

I’m pretty confident that the top folk at Jefferies and RBC don’t wear 3-piece suits or sport heavy watch chains. Regrettably, I bet they don’t even wear ties – but as in the days of old, their arrival provides the comfort, not so much that the law has come to Dodge City, but that it is now blindingly obvious to anyone with eyes in their head that lots of money is about to be made on AIM.

Go East Young Man!

Blueprint to a Billion - What are you waiting for?

I was lucky enough to sit down at Il Fornaio, albeit the one in Burlingame, with David Thomson this week.

David, as CEOs with ambition will know is the author of one of the hottest business books around at the moment.

Blueprint to a Billion a must-read guide, defines the 7 essential components of a business that can achieve $1bn in revenues.

David is a charming man whose pedigree includes Nortel, McKinsey and HP - surprisingly in that order!   I warmed to him even before the busboy had had time to pour the water and long before the bread was eventually delivered. 

The reason for the collapse of my usual British reserve was that, unlike so many business book authors, David is a salesman.  And that  means that unlike his peers, his obsession isn't with EPS or gross margin or cashflow or supply chain logistics - David's passion is for revenue.

Now that doesn't mean that all of those other financial measures aren't important, but in a growing company they all have one thing in common - they're a natural consequence of revenue and therefore are subservient to it.

Revenue has many beautiful aspects not the least of which is its close correlation with the value that customers place on the company and its offerings, service and people.

David's claim to fame is to have discovered that only 5% of US comaonies that went public between 1980 and his book hitting Amazon.com last year, account for 56% of employment and 64% of market value.

Those who recall the uncanny power of Pareto probably aren't going tgo be surprised by David's findings.  But then, neither apparently were those colleagues of Newton who had also noticed that all apples fall to the ground eventually but had failed to tie up the discovery's IP.  However, in the same way that the application of Newtonian physics underpinned so much of the last centuries'  technology revolutions, so David's discovery has profound implications for those of us involved in this century's.

As ever with statistics, it's not the general case that matters to you and me - it's the particular.  Knowing that the auto that you have just turned over is one of the industry's most safe isn't of any great use.

And lying at the core of Thomson's Law is the realisation that of the 7,454 companies in his post-1980 universe,  only 387 ever broke through the $1bn revenue barrier.  And just as importantly, the bulk of them managed it in one of three timing sweetspots - 4, 8 or 12 years from IPO.

So that means if you're an abitious CEO with your sights on the $1bn prize speed is of the essence.   Waiting around (see State of Denial) means squandering trajectory time.  And wasting trajectory, means postponing or worse - never achieving - take-off velocity.

Anyone who has suffered under the dilutive pressures of a pre-revenue round, knows that revenue is the best form of equity. David's book tells us something even more profound: that revenue - or rather revenue acceleration - is the best indicator of whether it's going to take you 4, 8 or 12 years to make the big time - or whether you're going to miss out altogether and become one of the 95%. 

Oh, and by the way, he also reminds us that only 1 in 20 funded businesses ever make it to IPO so really the odds against ever becoming a $1bn business are 99.75 against!

So, if you think you've got it in you to pilot your company into the $1bn Stratosphere Club, take a lesson from the Romans and Carpe Diem!

Or put more contemporaneously - what are you waiting for?  You're running out of runway.