Regardless of entrepreneurial whines that only companies with demonstrated revenue streams can secure venture capital, not everyone with a first-mover product and big-name customer base is receiving an overwhelming reaction from the investment community. In fact, reaching such basic business milestones can actually act against a firm in search of first round financing.
Take ServiceCentral Technologies Inc., an Atlanta-based enterprise software developer that sells solutions to clients eager to better automate their product failure data accumulation and analysis. The company was founded in 1992 as a consulting firm, but quickly transformed itself following discussions with BellSouth over the telecom provider’s desire to integrate its service chain software with its electronic warranties and other back-office services.
Until last year, ServiceCentral had completely survived on revenue from customers like Hewlett-Packard, Westinghouse and Verizon, but decided to grab a little extra from a $2.8 million angel investing round that included former Coca-Cola President Doug Ivester, a local brokerage house and assorted friends and family members.
“It was the difference between just surviving and growing exponentially,” said John Sheppard, president and chief operating officer with ServiceCentral Technologies. “We could have survived on existing revenue, but we needed to expand the product offering substantially since it doesn’t make much sense to be a small player in this market.”
As a follow-up, the firm then launched an official Series A private equity round designed to net between $3 million and $5 million. When it approached local institutional investors, however, it met with a remarkably mixed response.
“We found a lot of the Atlanta-area VCs to be pretty myopic in their ways of thinking,” Sheppard said. “They are used to dealing with two-month-old companies that trade 80% stakes for just a couple of million of dollars, but our valuation was north of $20 million, and a lot of the [VCs] just couldn’t get their hands around that.”
In the end, the company did find a willing local participant in LiveOak Equity Partners, an Alpharetta, Ga.-based venture outfit currently investing its $70 million inaugural fund. The investor took the lead on a $4 million deal, which closed last Tuesday and was also joined by the new venture arm of Agilent Technologies Inc.
As part of the agreement, Agilent will be embedding ServiceCentral software within its wireless box product.
“The little box we sell costs around $20,000 and helps network technicians run tests on phones which customers have returned due to some sort of failure,” said George Sparks, vice president of Agilient’s wireless solutions division. “The results of those tests will now get fed into the software so that they can be amassed and analyzed.”
The combined product will probably begin being produced this summer, after ServiceCentral releases a new version of its software.
Sheppard said that the Series A investment is a precursor to a larger deal scheduled to be launched this fall, and slated to raise between $8 million and $10 million. At that point, he said the company should be cash-flow positive.
Dan Primack can be contacted at Story Feedback.