Government and Technology

PAN deal lucrative for owners: Small number of investors share $75 million bounty from Carmel IT firm's sale

April 17, 2006

It's the scenario entrepreneurs dream about.

After just over five years in business, the founders of Carmel-based Performance Assessment Network Inc. have sold their company to a publicly traded St. Louis firm for $75 million in cash.

Since PAN had only a handful of investors, its backers' profits are enormous. What's more, they can enjoy their payday with a clear conscience. Although PAN's acquirer is headquartered outside state lines, TALX Corp. plans to keep growing the operation here. PAN's executives will remain in place under contract for at least two years.

"We wanted to be able to look our employees in the eye and say, 'Not only did we get some money for our stock, but we found the right fit,'" said PAN CEO David Pfenninger. "We're kind of like kids in the candy store."

PAN distributes human resources and other professional development tests over the Internet. Last year, it was the fastest-growing private company in central Indiana, according to IBJ's annual ranking.

With PAN's sale, Pfenninger and a core circle of company executives are now multimil- lionaires. Indianapolis-based Volatus Advisors LLC, PAN's sole venture capital investor, also is sharing the wealth. So are the two dozen angel investors who originally took a chance on PAN.

Pfenninger and his associates say they're keen to start the cycle anew by reinvesting some of their gains into other high-tech businesses. With their money and proven expertise, they could become a much-needed resource for the local IT sector.

When PAN sought startup capital in 2000, Pfenninger said, the local venture capital firms turned a cold shoulder. The only exception was Volatus, a venture fund that barely got off the ground because Indiana investors balked at putting up money.

Now that the tables are turned, Pfenninger plans to be more open-minded.

"I think it's fair to say a lot of business plans will be coming our way," Pfenninger said. "Our hope is stories like [PAN's] will get out there and cause people to be more open to look at [early-stage high-tech] investments. I know I want to put some of that money to work in growth opportunities."

Founded just before the dot-com bubble burst, PAN had a rocky start. Webbased businesses were red hot in 2000, but ice cold 18 months later. PAN ultimately cobbled together just $3 million from investors to get started.

Pfenninger said PAN's positive results were directly related to its thrift.

"We sure didn't spend it on pinball machines and plush lounges for our programmers," he said. "We avoided all those trappings of excess and remained very frugal."

In PAN's early dark days, few investors were willing to speculate on an unproven IT startup. Everyone struggled to raise money, even the venture capitalists. Volatus, which boasted some of the city's most proven high-tech executives at the helm, once hoped to form a $100 million fund, but gave up after attracting only $5 million.

Volatus put the bulk of its money into PAN, then reorganized as a consulting company for fast-growing technology startups. Volatus partner Raul Zavaleta opened the floodgates for similar deals.

From then on, PAN grew on its own profits, never seeking more outside money. By the time local venture capital firms began contacting PAN in droves, Pfenninger said, he didn't need their money anymore. As a result, senior management, including COO Doug Cole, Chief Science Officer Reid Klion and a handful of key employees retained 65 percent of PAN's shares. That makes their payday this month $48.8 million.

On its new rocket trajectory, PAN garnered revenue topping $25 million each of the next three years, Pfenninger said. The company posted EBITDA-earnings before interest, taxes, depreciation and amortization-amounting to about 30 percent of revenue. By 2004, it had paid its original investors a dividend that covered their $3 million and more.

The dynamic growth turned heads. It also attracted five formal suitors, Pfenninger said, prompting the company to hire Minneapolis-based investment bank RBC Dain Rauscher to field offers.

Pfenninger began acquisition negotiations with TALX in October. With the help of TALX's additional sales and marketing resources, he said, PAN should now expand even faster.

It also was an opportunity for PAN's founders to take some of their chips off the table.

"Now we can be aggressive. When your entire net worth is dependent on didn't reveal the specifics of the fund's PAN investment returns. But he did say Volatus is now considering another run at raising a venture fund.

There's still a need for such a fund because, despite the local venture capital sector's growth in recent years, Zavaleta said, companies in the local high-tech sector continue to struggle to attract capital.

"People in Indiana have a reluctance to invest in intellectual property. They're more likely to invest in things that have a tangible asset," Zavaleta said. "I hope that success like PAN's will begin to change that mind-set."

The turning point for PAN came in the aftermath of 9/11. The federal government's new Department of Homeland Security needed reliable tests to screen airport security personnel. And it needed them fast. When PAN won the contract, it your enterprise, there's a conservativeness that creeps in, an unwillingness to gamble because the stakes are so high," Pfenninger said.

"With the additional octane of knowing that we've got big public company resources behind us, we're going to be busy trying to exploit the opportunity. Frankly, there's more money to be made here for everybody."

Kevane Wong, a senior analyst for San Francisco-based JMP Securities who follows TALX, said the acquirer is unlikely to move PAN from Indianapolis anytime soon, or even substantially alter the operation.

PAN's testing products will provide another line of business for TALX, which mostly concentrates on electronic human resources services, such as payroll and employment verification. PAN is the company's 12th acquisition since 2002.

"I don't think these guys are going to be merged into another part of the business or closed down. You're not going to see employees chopped or anything like that," Wong said.

Today, Pfenninger is scathing in his critique of Indiana's venture capital firms. If aspiring Hoosier entrepreneurs hope to replicate PAN's success, he said, they shouldn't expect any more local interest than PAN generated in its early days.

"I think the future of our young technology companies is outside capital. And I despair over whether we'll ever repair that," Pfenninger said.

"But the good news is that, with the success of companies like PAN, [coastal venture capitalists] will come out here and look. It's not going to happen through indigenous venture capital, because that cast of characters isn't on the ball."
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