Environment and Technology

CHRIS KATTERJOHN Commentary: Textbook cases of entrepreneurism

May 1, 2006

You get an idea; you build a business; you sell it and make a bundle. So it was with the recent deals that took out IBJ's No. 1 and No. 2 fastest-growing companies from 2005, Performance Assessment Network and Suros Surgical.

We can bemoan the loss of headquarters, but let's face it, these are the kinds of payoffs most entrepreneurs dream of.

In just a little over five short years, PAN investors put up $7.5 million in capital and sold out for $75 million-reaping a tenfold return on their investment. They built a company with $30 million in revenue and operating margins north of 25 percent.

Started the same year as PAN, Suros finished 2005 with $27 million in revenue. The company's target for '06 is $40 million. Like many growing, R&D-intensive companies, however, Suros hasn't been profitable in spite of the revenue growth.

While contemplating its own public offering, Suros got an offer it couldn't refuse from a public company 10 times its size in terms of revenue. The deal was for $240 million-$132 million in cash and $108 million more in cash, stock or a combination thereof.

I'd suggest $240 million is a whole lot more than Suros could've raised through an IPO. Potential investors wouldn't have seen that value in a business that wasn't highly-or at least, regularly-profitable. It took a company in the same industry to see what was there.

In both cases, the buyers saw proprietary technology products with great promise for growth, as well as management teams and employees with the talent and vision to create more of the same.

Judging by the apparent multiples paid in the two deals, I'd say Suros' biotech business was a lot sexierlooking than PAN's human-resources thrust.

Yes, it's a shame that both PAN and Suros did not stay independent and grow into the "next Eli Lilly" everyone is looking for.

On the other hand, we should be ecstatic that we are creating an environment in central Indiana that can spawn and nurture these kinds of companies, whether they remain independent or cash out. We want the Lillys and the Wellpoints, to be sure, but the Suroses and PANs are also where our future lies, at least in part.

Times have changed. The growth of the venture capital community here is a double-edged sword. Yes, there are more funds to invest in startups with promise, but venture investors usually invest with the goal of cashing out. And their time frames for doing that have shrunk. In the early days, VCs typically would hang on for 10 years; these days, the window is more like five to seven.

These types of deals are felt more acutely here in Indiana because we have relatively few companies like Suros and Pan compared to a place like Silicon Valley. There, when a successful startup gets taken out, dozens more are still standing.

This is one reason it's so critical to have targeted state initiatives like the 21st Century Research and Technology Fund, a multimillion-dollar pool of money created to invest in just such companies. With tools such as these, we can build a critical mass of innovative new businesses.

And don't forget, one of the likely desirable outcomes from the sales of Suros and Pan is that the deals leave individuals and institutions that will remain in the market with considerable funds that can be invested in new ventures to start the cycle all over again.

It certainly isn't desirable that Indiana has lost more than its fair share of corporate headquarters over the last three decades. However, if we can build a reputation as a breeding ground for innovation and companies that capitalize on that innovation, that situation will take care of itself in the long run.



Katterjohn is publisher of IBJ.To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to ckatterjohn@ibj.com.
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