2007 March | Savvy Sage and Wise

Archive for March, 2007

Mar27th

Harmonic Capital?

Tuesday, March 27th, 2007

- - - -HARMONIC CAPITAL - - - -

by Jacques Nichols

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There are two other defining moments that have contributed to my desire to start a new kind of venture capital fund. Actually, there are three, although the third reason may have to be left for the Rest of the Story, as Paul Harvey used to say.

The first one defined who is an ‘angel’ investor, although in 1981 when the particular investment was made, no one needed to use a label for private investors as being ‘angels.’ That came about later after the venture capital funds saw their money as the most important ingredient in the equation between entrepreneurs and VC’s.

This story goes back to the early investment in FLIR Systems, Inc. I had invited Chuck Wiper, an original NIKE investor to come with me to the Reno Air Show for a demonstration of FLIR’s infrared sensor. We took a flight in a helicopter at night and once airborne the monitor, in its greenish cast, showed the ground below. Suddenly two figures were spotted in the desert below, waving their arms. Looking out of the windows, only pitch black was visible.

When the craft landed I saw that Chuck was crying. His experiences in World War II as a B-17 pilot had come flooding back. I’d heard that he had survived a plane crash and engaged in hand-to-hand combat. He only said: “I wish we had had this during the war.” That comment was followed by: “How much money do you want?”

I replied that the company wanted to raise $2.5 Million and I added that a venture capital fund in Seattle was on record as offering to take one-half thereof. Chuck said, in a few words, that he would get the other half together with his brother and a couple of other friends. Three days later I had checks that came in the mail and his word was good.

About ten days went by and Chuck called me. “Has the fund sent in their money? He asked. I suddenly realized that I had not heard from them since I was at the home of the managing partner for dinner. I recalled that before leaving he had gone into a closet and came back into the room wearing a T-shirt that said: “He Who Dies With The Most Toys, Wins.” Maybe it was a prophetic message for a venture capitalist, as he did point out the large yacht moored at the dock below his home on Lake Washington. Apparently he was on his way to dying.

I promised Chuck that I would call Seattle for a status report. I did and was told that the attorneys were preparing a Stock Purchase Agreement. It arrived a few days later. Just based on the number of pages I suspected it would require a careful reading. But, I also knew that Chuck would be impatient if I did not immediately send him a copy.

Chuck lived in Eugene, Oregon and the mail service was swift. The next afternoon he called again and there was irritation in his voice.
”Have you read this? He asked.

“No, not yet,” I replied.

Chuck continued. “ Read it and go to page 42. Tell me what it says?’

I quickly flipped pages and started to read. He had obviously been referring to a section that said if he and his co-investors, at any future date, desired to sell any of their FLIR shares, they would have to first offer them to the venture fund. I read the offending language out loud to him.

Then he said: “We don’t need them. I just came back from the post office. I’ve mailed you another check for $1,250,000. Call them up and tell them you just got some screw you money!”

I made the call. It only lasted a couple of seconds.

The lesson I learned this time was that one person’s money ought to be as good as another person’s. That is a lesson that the venture community has lost sight of. Once they invest they look down at the early investors, notwithstanding that but for those investors the company would not exist and they couldn’t make an investment.

The second story is also FLIR related. It is in two parts too. During my tenure on the board of the company I urged the hiring of Dick Kerr, Ph.D. Dick had been the president of the Oregon Graduate Center. He held three degrees from Stanford, including the Ph.D. in Physics. FLIR needed a scientist to advance its product offerings and fortunately for Chuck and the other shareholders, Dick accepted an offer to be the Senior VP for Advanced Development.

Over the ensuing years Dick and I met about monthly, either for lunch or drinks. He kept me informed of progress at the company. Toward the beginning of 2001 he began to talk about a new invention he was working on, one that would combine infrared and radar. The more often we met the more I knew he was going to leave the company and continue under a license to further develop the technology.

One day he called and asked me to join him again. This time he was set to launch Max-Viz, Inc. and wanted me to assist in raising the seed capital. I called on Chuck’s son Tim and a couple of other potential investors I knew. Fortunately for the new company, the money, about $2.1 Million came in and they were on the way. I served for a time on the board of directors and acquired some common shares too.

Shortly after I left the board to concentrate on an offer from a major law firm the company engaged in a round of financing from a group of venture capital funds. The valuation at the close of the offering represented a 50% increase over the price paid by the investors I’d introduced to the company. I felt good about this, for all concerned.

Even though the VC’s took control of the board of Max-Viz, somehow the funds were spent before the cash flow could support the undertaking by management. However, knowing that the company and its technology were catching on in the aviation industry, these investors, and a few new ones, continued to support the company with monthly bridge loans. The conversion price for the loans was to be the same per share price as the funds had paid earlier for their preferred shares.

Somewhere along the way, and just before a shareholder’s meeting to approve the sale of shares upon conversion of the notes, the pricing and valuation for the company dropped like a rotor falling off of a helicopter. We are talking about a down round greater than a 90% drop in price! I’ve called it the Down Round from Hell. Nothing so adverse, in my opinion, had happened to justify such action, other then greed.

I spoke at the shareholder’s meeting of my disappointment. I told the story of Chuck and the famous line about the “ . . .screw you money!” As I rose to leave the room, I added: “If I can, I am going now to find some more of that screw you money.”

Here the lesson learned is one I actually knew from the days with First Source Capital Fund. Keep the number of investors down and be sure you know your co-investors well. Having different agendas among investors is more damaging to a company then not having enough money. Management can’t figure out whom to listen to among a room full of investors/directors.

The third story has to do with the termination of First Source. To know that story and the lessons I learned that time, you’ll have to get a copy of my forthcoming book:

WHO THE HELL SIGNED ME UP FOR THIS CLASS?

IF YOU WANT TO SEE GOD’S FOOTPRINT, CHECK YOUR BUTT!”

If you wish to reprint, pass around, or copy for any reason, please contact me for permission. I am happy to share my written materials as long as I am given credit for the writing and you have included my blog address.

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