Undaunted By Fund-Raising Setbacks, Correctnet Reels In $5.2M

After several months of cold calling VC firms looking for investors and seeing one round of venture funding unravel at the last minute, application service provider Correctnet Inc. last week announced it had received $5.25 million in its first institutional round of financing. Edison Venture Fund and NewSpring Ventures LP co-led the round, which also included Charles Schwab Corp.

The five-year-old company, which develops Web-based applications for the business partners and customers of Global 2000 companies, attracted VCs’ attention because of its business model, which includes strong recurring revenue from its customers — a blue-chip client base that includes Morgan Stanley, recruiting firm Kforce and Schwab. The quality of Correctnet’s management team also was appealing to investors, said Marc Lederman, an associate at NewSpring.

Correctnet’s business model calls for sponsoring entities such as Morgan Stanley to pay anywhere from $250,000 to $750,000 to build a product. The sponsoring company then offers the product to its third-party partners, who, if they decide to buy it, pay a service fee of $4,000 to $20,000 to Correctnet for one year’s worth of service.

In Morgan Stanley’s case, Correctnet built a Web-based product the financial services firm can offer to the hedge funds it maintains relationships with, so Morgan can further tighten those relationships through branded technology.

Approximately 85% of Correctnet’s revenue over the last two years has come from these third-party service agreements, said Robert Miller, the company’s chief executive officer.

While he declined to provide exact revenue figures, he did say that Correctnet’s revenue had grown by nearly 100% last year and should grow by another 100% this year. The company is currently cash-flow positive, Miller added. NewSpring’s Lederman said CorrectNet’s 12-month trailing revenue was in the $4 million to $5 million range.

While 80% of Correctnet’s clients come from the financial services arena, NewSpring is not overly worried about how the current iffy condition of that sector will affect the company, Lederman said.

“The financial services industry is not going to go away. There may be some consolidation, but it’s an integral part of our economy and it’s here to stay,” he noted. “That Schwab invested also provided added comfort. It was nice to see them put their money where their mouth is.”

Correctnet, which had been employee-funded up to this point, decided to seek private financing at the beginning of 2001 because the firm had come to an inflection point in its growth that called for more capital in order to create a thriving enterprise, Miller said. In a move he now refers to as excruciating, Miller took it upon himself to solicit 200-plus venture firms over the course of 2001.

Miller’s fund-raising efforts likely could not have come at a more difficult time, as the venture market was beginning to collapse under its own weight just as he began approaching investors.

“The biggest challenge during the process was maintaining positive inertia for the company in a tough time,” he said. Eventually, it seemed that the company had put together a $5.5 million round involving five VC firms, only to have one nervous investor back out at the last minute, scuttling the deal.

NewSpring was one of the potential investors in the aborted round, and after considering walking away from the deal as well, the firm decided it had enough faith in Correctnet to put together a new round.

“We really liked the company, so we decided to make some introductions between Correctnet and other firms. It took a lot of work to overcome the stigma of a broken round, but it probably helped the company that we stuck with them,” Lederman noted. Altogether, it took about four to five months to close the successful financing after the failed round blew up, he added.

The Hauppauge, N.Y.-based company will use the money to build out its sales and marketing efforts in order to grow its business, which means there will be fairly significant expansions in Correctnet’s sales staff, Miller said.

The company has no future fund-raising plans at the moment, and would likely only tap the private markets for capital to finance acquisitions, Miller said. Correctnet has no plans to go on a buying spree at this time, however.

The company has given no thought to an exit yet and is simply focusing on its own growth, he noted.

Alistair Christopher can be contacted at:Alistair.Christopher@tfn.com