Lately I’ve been writing a lot about the downsides of small-to-mid sized Tech IPOs. Fuze Box’s CEO, Jeff Cavins, can vouch that I’m not exaggerating. Last October he found himself in charge of a decade-old and dusty company—then called CallWave— that had a surprisingly modern and sexy new product. Called Fuze Meeting, it was a cloud-based way to collaborate in real-time, on any computer, BlackBerry or iPhone in high-definition. It had just launched its the beta iPhone app version of the product to positive reviews.
But Steve Jobs himself endorsing the app would have done little to alleviate the company’s core problem: It was a publicly traded company with all of the downsides and none of the benefits.
The downsides of a running a public company are well documented. Cavins had to spend a huge chunk of his time managing Wall Street and running the company on a quarter-to-quarter basis. And the company was spending upwards of $25 million a year in public company costs like directors & officers insurance and Sarbanes Oxley compliance.
But in Fuze’s case the upsides weren’t there either. The stock didn’t trade enough to give anyone any real liquidity or give the company any real access to raising additional capital. The final straw was the October financial meltdown: The measly two analysts covering the stock got laid off in all the Wall Street bloodletting. Imagine an earnings call with nothing but crickets chirping during the Q&A. No research means even less press and even fewer buyers. Ouch.
As a publicly traded company, CallWave, Fuze Box, or whatever you want to call it was just a failure. It had a weird mix of old CallWave shareholders who were trapped in the stock, and new believers in the Fuze Meetings product that were never going to get much appreciation no matter how well the product did.
That’s when Cavins went to his board and suggested “an LBO, without the L.” In other words, taking the company private using the cash of the company, not debt. Fuze Box’s bankers couldn’t find another example of this happening in tech or Silicon Valley history.
Here’s why it worked:
- The stock was 67% owned by the board and Cavins who agreed not to sell shares in the transaction and vote with the management to approve the deal.
- The company had some $33 million in cash—enough to give the shareholders a 44% premium on the stock and have $20 million still left in the bank for growth.
- There actually was a pretty good vision and product for the future. Fuze Box also has a Fuze Messenger product and a Fuze Movies project in beta that helps Hollywood filmmakers collaborate on dailies and special effects in real time and high definition.
Here was the downside: Fuze Box announced the tender offer in May– the same time it released its full Fuze Meeting product that the new company is being shaped around. Because Fuze couldn’t afford any price swings, Cavins had to duct tape his marketing department’s mouths shut. (Although our own intrepid Jason Kincaid ferreted the news out and liked the product, as you can see here. Others do too.)
The silence didn’t stop sales. The company will announce Thursday morning that it has 1.1 million registered users in the short time the product has been out. It gives the software away for free for three-person conference calls so the majority of those users don’t pay. That said, in coming months the company will be announcing a new Fortune 200 customer who spent several million on the software, and a big Hollywood studio using the Fuze Movies product to remotely collaborate on special effects for an upcoming Denzel Washington blockbuster.
Fuze Box has roughly $20 million left in the bank and is on a $25 million-revenue run rate. It has a software-as-a-service business model, but Cavins insists that unlike other SAAS companies like Salesforce.com and NetSuite, it won’t have to hire up huge sales and marekting staffs. We’ll see.
But even if it does, at least the company is saving more than $25 million by being private.
(PS- Hey, Cavins: You can find out more about that sweet T-shirt here.)
“And the company was spending some $250 million a year in public company costs like directors & officers insurance and Sarbanes Oxley compliance.”
Isn’t that a lot of money, particularly compared to their $25 million-revenue run rate?
i believe the article says 25mil…
So without noting the update, the article changed $250 million a year to $25 million in public company costs. But it was still spending its current revenue run rate for the year on public costs? That still seems incredible.
There is no way that the costs of public compliance are $250 million. Might want to do some fact checking there.
Even with your updated “$25 million” in compliance costs, that figure is still way too high. Try approx. $2-5 million for companies under $1b marketcap.
A simple Google search would suffice (even with the supplied figures, there is no way D&O insurance costs $20m a year).
http://www.fole...aspx?pubid=2849
Don’t forget that factchecking!!!!
+1
welcome to sarah lacy, the sarah palin of tech reporting
ROFL.
This was a good one!
Let’s watch how long will it take here to change 25M to the REAL number (around 2.5 I guess).
After all, who cares about the couple of zeros, right? It SOUNDS cool when there are more of them.
@Corazal, looks like the number was revised downward by an order of magnitude, but that *still* doesn’t make any sense. There’s no way a $25MM company is spending an amount equal to 100% of revenue on D&O and SOX.
“it was a cloud-based way to collaborate in real-time” Really ?
-Tarun
So without noting the update, the article changed $250 million a year to $25 million in public company costs.
If you were ever unsure as to what the difference between journalism and blogging is then look no further than Techcrunch.
yeah, but according to Techcrunch journalism will die out and this shit will take over.
lately techcrunch can’t even get their numbers right and their facts are plain wrong
I suggest you go read other sources then.
and please take the comments with you.
“spend(ing) a huge chunk of his time managing Wall Street and running the company on a quarter-to-quarter basis.”
this is a huge cost in america, resulting in very damaging short-term thinking …
it has to go or we collapse
I used to think quarterly focus was a bad thing until I worked for a public company that didn’t care about the quarterly numbers, investor relations, or attracting analyst coverage.
All they seemed to care about was beating last year’s numbers and increasing dividends. Not a bad goal but it there was no plan on how to reach the big revenue or EBIT goals.
Companies, management and boards need focus. I’d call it a vision, but people get confused about company visions.
A company exists to make profit. Professional management exists to deliver those profits (with an incentive to exceed market returns).
In the absence of focus on the long term, a quarterly focus is better than nothing
Like others, I’d question those costs of being a public company. I’ve worked for and consulted to small caps.
At a stretch they’d be paying $2.5M.
But then again they’re sitting on $33M in cash so I’m guessing they either started with a big wad or once make some serious cash. In both cases their cost base would be higher than for a $25M turnover company.
Oops I forgot to add that I think it’s a simple typo.
Regardless of the actual cost of being a public company it significantly exceeds the cost of being a private company. Plus there is the significant additional soft costs and liabilities of dealing will stakeholders (and shareholders) when you are public.
Without a need to access equity markets Fuze Box is too small to become a dividend play so why stay public?
I think the Sarah Palin Sarah Lacey jokes are a little harsh. To er is human and all that…
We wrote an open letter article on our shanzai.com website earlier this year listing several reasons why Sarah should come and write for us.
http://www.shan...ed&Itemid=9
Despite the fact that the other TechCrunch authors participate in the comment discussions on their articles more than she does we would still welcome her onto our team.
We are also not a publicly traded business.
Way to give head: “We wrote an open letter article on our shanzai.com website earlier this year listing several reasons why Sarah should come and write for us.”
… and spit it out : “Despite the fact that the other TechCrunch authors participate in the comment discussions on their articles more than she does we would still welcome her onto our team.”
… All in the same breath. Of course you’re not publicly traded.
Every new start ups dream is to join the start market and make it big! Fuze Box experience is not unique. Getting to stock market prematurely is very dangerous for a fragile new start up.
$25mm? i cant believe this still hasnt been corrected. outlandish. pls, dont comment on the issues of being a public company if you cant tell that $250mm or $25mm are just ridiculous #s. you’re doing a disservice to anyone interested in a vibrant ipo market, including most of the VCs that back startups
Hang on, what does this bit mean
“The company had some $33 million in cash—enough to give the shareholders a 44% premium on the stock and have $20 million still left in the bank for growth.”
That $33m is already the shareholders money.
Sounds like someone could have bought 33 million dollars for 9 million dollars?
33 million – 20 (for growth) = 13
13 / 1.44 (premium) = 9 million
Something doesn’t add up here – guessing my math isn’t correct.
Your math is not correct but she is right. I was a shareholder and even though I got a 44% premium shareholders still got shafted because they kept $20MM of our money.
very good story!
There’s a reason Lacy didn’t major in Math.
i used to spend $25 million at starbucks, so i bought a coffee machine, saved a ton
correction: $2.50
That would put the average annual revenue into the stratosphere. Check those numbers again.
Interestingly, I wonder if this if the future of media. Information is pretty much free, it’s the analysis that’s the hard part. Either you pay for it (FT, economist etc) or you get it gratis like here on TC.
As a downside of getting it for no cost, there is less QC on the articles, leading to the issues we’ve seen here. But fortunately, we have the community present to correct the errors (bugs/eyeballs etc), and the author can then feed these back in to the article. Pretty similar to open source software dev!
I don’t think we should all be jumping on Sarah for the mistakes in the article – we should work on improving it through feedback.
So are we going to get part of Sarah’s paycheck for helping?
No more than you get paid for finding bugs in any open source software (or indeed most paid software).
this was a good story. I would like to see more “real” stories like this. The tech market is a bloodbath and IPO’s are not the panacea everyone thinks they are.
google.com/finance?q=CALL
$1.62 ????
LOLZ, I would buy at 0.001
good story
Only someone who’s never run a company would believe that the public company admin costs were $25M.
That’s a ridiculous figure. The point is still the same at $2.5M, thoug, which is likely what the figure actually is.
Total garbage, check your facts . Shame on you! this is an ‘84 HONDA!
Doesn’t anyone see a larger problem here. As Sarah pointed out:
“…Cavins had to duct tape his marketing department’s mouths shut”
So basically, management knew there was a major opportunity to take the company up another level but wanted to buy out the existing shareholders first while the stock was depressed.
Isn’t that what everyone should be talking about. This is crazy. If this is actually the case (it may not be) and i was a shareholder ing Open Wave / Fuze, i’d be suing these guys and having the SEC investigating.
Please tell me if i’m seeing this wrong.
My thoughts as I read the article as well. The “new” product line was viewed as material to the company’s future. If the buy-out went fwd without making that known to shareholders, I’d have them in court as well. We used to call that “theft.”
you’re not wrong…that is a very serious offense
you’re not wrong, AFAIK. there’s already an investigation underway by investors.
http://www.lawf...se.asp?ID=21842
callwave is and as far as i’m concerned, has always been a sham. friends of mine who had worked there (they laid off more than 90% of their original employees from ‘07-09) tell horror stories about the shady and potentially illegal business practices that they had to be tight lipped about.
most notably for their “internet answering machine” service, giving call waiting to dial-up users. apparently, when users would cancel their service and uninstall the program CW would not stop charging them in many cases b/c the charges were being delivered via the phone company, not CW directly.
CW executives knew this was happening (and even bragged about it to former employees), and when the last major wave of employees were let go (jan ‘08 i believe), one insider said that there were still nearly 100K former callwave users being charged about $3 a month for a service that they thought they cancelled.
only when these users realized the phone company was still charging them for the conditional cal forwarding did CW finally stop billing them. S-H-A-D-Y if you ask me.
i wouldn’t be surprised in the least if this company is claiming to have X number of users from all of their services combined, just to seem like they are bigger than actuality.
$25 million? Seriously?
This was one of the best articles I read in a long time.
Sara, you are the most disgusting rumormonger I’ve ever known.
I was drawn to Sarah Lacy’s blog by her interesting article on the lessons for CleanTech from the NanoTech investing experience. In reading her blog on Fuze Box, I was surprised at the overstatement of public costs. As the CEO of a publically traded shell [OTCBB: GHBAA], formerly a SPAC, I am well aware of the costs of being public. Sarah’s estimate of public costs at $25 M are off by a factor of 24 – 56X.
The primary costs for supporting a public listing for a firm doing $25 M in revenues are:
Public auditor costs: $80-$125 K;
Legal costs: $60 to $180 K;
Internal controls and compliance costs: $100 – 250 K;
Directors & Officers insurance: $50-100 K;
Investor Relations: $120 – 360 K;
Miscellaneous including registrar, EDGAR filing fees, etc.: $30-80 K.
The total ranges from $440 to 1,015 K. Interestingly, if the company were private, the cost for these services declines to $200 K to provide reliable GAAP reporting for investors. The key to minimizing compliance costs is finding high quality service providers with low overheads. These costs can double, if you use Tier I law firms, audit firms and investor relations practices. The value, however does not double.
The biggest intangible is the distraction costs for the CEO, CFO and Board from dealing with the public investors and the SEC. Add to this that many tech founders and marketing CEO’s are neither equipped nor relish the public interface.
Today there are two reasons to be public: 1] as a liquidity and exit vehicle for investors; and 2] to have a public stock as a medium of exchange for growth by acquisition.
In taking the company private, the advantage is that more of the future value creation will accrue to the benefit of a smaller group of investors, assuming their exit is via a strategic acquirer. The downside is the near term illiquidity for small investors.
By the way, it is possible to maintain compliance on a public shell [with no operations or employees], but incuding D&O for directors for a total of $53K a year. Once you add operations and revenues, the SOX compliance costs scale rapidly.
If you read the SEC filing from when they took it private it gives you the number, and then everyone can quit guessing. And of course she was wrong, I think that’s obvious. I was looking to buy the company out around the same time, if I recall correctly, going private saved about $1.5/yr