Making money from a deal is great, but that’s not what drives Hugh Cathey.
“It’s easy to say that you enjoy making money,” says Cathey, a serial entrepreneur and venture capitalist who’s invested in nine early-stage companies over the past 15 years. “That’s not special. Everybody enjoys doing well financially.”
Seeing employees benefit from that success is the real incentive, says Cathey, who has taken an advisory or operating role in all of his businesses, leading five to exits with a positive ROI. For example, there was the day his executive assistant sold her stock options after the company’s IPO. She used the money to pay off her house, fund her daughter’s college and buy a new car with cash.
“I never preached that everybody had to share the wealth; I just did it because that’s the way I was raised,” Cathey says.
In this month’s Master Dealmakers, we spoke with Cathey, currently CEO of the startup ChromoCare, about what’s changed in M&A, one of his biggest deals and the importance of learning from career wins and losses.
Dealmaking, then and now
Capital was easier to come by. People — high net worth investors, angel funds and so forth — were willing to take more risk in their investments. Today, investors are more thoughtful about the companies they invest in. They look harder at the management team and their track records. They look harder at the uniqueness of the product or service. Raising capital is a more deliberative process than it was 15 years ago.
There are more nuances to it now. We need to be building a company to be a good company. Then, if you do that well, a good exit will come. I don’t think it’s right to say, ‘We’re starting this company. We’re going to build it and sell it, and that’s our plan.’
Today, it’s easier to find the company that will acquire your entity. There are more large companies out there that are willing to go in and buy a $10 million annual revenue company with the belief that they can expand upon it to fit into their portfolio of products or services.
Hitting a winner
I joined up with a Columbus-based e-commerce software company, Znode, in 2007. I joined them right after they started. It was two software engineers — very bright guys. They had a great idea for building an e-commerce platform that companies wanting to sell online could implement. It would speed their path to selling online. Remember, this is 2007, e-commerce was new.
We bootstrapped from 2007 to 2010. I spent a lot of time on product development. Then, we raised about $1.5 million from individuals and the Ohio Tech Angel Fund. So, I found the capital and the bulk of the customers. In 2012, we’d generated about $2 million in annual revenue the prior year. We found a buyer, through an introduction of a friend of a friend of a friend, who needed an e-commerce platform to incorporate into a $6 billion company.
Their initial offer was to pay $18 million for the company and its debt. We had about $2 in debt. So, they paid $20 million for a company generating just under $2 million in annual revenue. In two years, we returned a 5x return to the investors — and that’s a grand slam. It’s still one of the highest IRRs achieved by a Columbus company.
A learning process
I was involved with a local telemedicine company called HealthSpot. We’d raised about $45 million in Columbus-area capital. That’s a major accomplishment, to raise that much money in one sitting. The company ended up going into bankruptcy amid litigation.
We developed our product to be a Cadillac product. If we had it to do over again, we would have built an economy car, gotten it in the market, gotten early customer feedback, and then started building out the Cadillac version after we had more customer data.
At one point, we had no revenue and 100 employees. If you are a $100 billion company that’s no big deal, 100 employees is nothing. If we had that to do again, we probably wouldn’t have hired half of that. I mean, we had a five- or six-person marketing organization. You just don’t do that in a startup. It was all well-intentioned. We did the absolute best job we could, but we learned some valuable lessons en route to our failure.
All I have is my reputation. After we put the company into bankruptcy and the bankruptcy closed, I went back to the investors to talk to them and see how they felt about me. I needed to know whether or not that they felt I was still an investible person, and I got positive feedback from all of them.
The last word
Investors are looking for people who can say, ‘Yeah, I had a major failure in this situation and here’s what I learned from it.’ Investors are willing to recognize today, more than they would 15 years ago, that having a failure or two — and I’ve certainly had mine — makes you a more seasoned manager.