Lineo Trades In S-1 For Term Sheets And $20 Million

Foiled by Wall Street?s sudden disenchantment with technology plays, Lineo Inc. pulled the plug on a pending initial public offering earlier this year and instead opted to pad its path to profitability with another round of venture financing. The result was a Series D infusion worth $20 million, the Salt Lake City-based embedded systems provider is expected to announce today.

“We could have gone out [to the public market], but not at the price we wanted,” said Bryan Sparks, chief executive with Lineo. “We weren?t ready to go public if the market wasn?t willing to allow us to be publicly traded. If we had, I don?t know where we would be trading now. We would have been an early IPO.”

Sparks added that the company would have been in trouble if it had not completed its latest venture round, but he believes remaining private, at least for now, is beneficial to Lineo, especially from a competitive standpoint.

“When you?re in registration, you end up letting all of your competitors peek into your underwear,” he said. “We didn?t want to tell our competitors what we were doing.”

The company?s decision to pull its S-1 registration papers from the Securities and Exchange Commission?s shelves was not indicative of any dire financial circumstances, however, said John Fowler, director of technology for corporate strategy and planning at Sun Microsystems Inc., which prepared the term sheets for Lineo?s most recent financing.

“Operating under the restrictions of an S-1 is kind of like living with handcuffs on. You can?t run your business normally,” he added. “Often, companies don?t pull their registrations because they?re going out of business, but because they need to get back to running their companies instead of constantly talking to the SEC. Lineo was in the same boat.”

While Sun prepared the terms for the Series D transaction, Lineo insiders actually led the deal, Sparks explained. Although most companies first sign on a lead VC to corral other investors, Lineo has eschewed the traditional approach, choosing instead to seek capital mostly from strategic players.

In keeping with that theme, Hitachi Ltd. also signed on along with Canopy Group Inc. and Egan-Managed Capital.

“It was close at the end, because everyone watches the market, and you hope it doesn?t collapse before you do the deal,? Sparks said. “But we got what we were looking for.”

The company?s latest venture windfall is expected to lengthen its cash runway to profitability. Beyond that, it has no grandiose plans, except to continue its product development and build out its sales infrastructure. An inherently acquisitive company ? it has paired with seven targets in the past year and a half ? Lineo may also pursue other such transactions, but the currency will likely be stock, not cash, Sparks said. Most recently, Lineo acquired Houston-based Embedded Power Corp. in order to augment its product offerings for original equipment manufacturers (OEMs).

“One of our motives for going public was that we had built an acquisitive culture,” Sparks noted. “With a public currency, [such transactions] would be easier, of course.”

As such, Lineo plans to take another gander at the public markets sometime next year, if and when overall conditions improve.

Its business model, Linux-based embedded and real-time computing solutions that enable OEMs to create devices and systems that interact with the Internet while reducing system requirements, per-unit costs and time-to-market, is still relatively rare in the marketplace. Therefore, Lineo may stand a good chance on Wall Street if it can differentiate itself and establish a strong leadership position. However, its largest competitor, Wind River Systems Inc., will likely be a formidable foe, as it currently dominates the embedded systems market.

“We?re Linux-based, they?re not,” Sparks said. “Doing embedded Linux allows us to differentiate from them easily, and we?ve found a willing audience.”

Indeed, Lineo counts Hitachi among its customers, and plans to announce shortly some significant partnerships in the set top box and residential gateway arenas. Lineo?s last trip to the private equity market was in April 2000, when it captured $18 million in a Series C round led by J. & W. Seligman and Co.

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