December 16, 2003 - Scoop!
Chicago-area In Pipe Technology receives venture investment
by
Bill Snow
Who says venture investment
is dead in Chicago? I’ve seen the articles. I’ve scanned the e-mails from the
local gossip hound and scandalmonger. I’ve heard the talk at Chicago networking
events. I’ve even had Chicago area venture capitalists ask for my opinion as to
why Chicago is a venture capital backwater, and a virtual wasteland
of early stage capital investment.
Using my dead-on Mongo*
impersonation, I typically reply, “Dunno.”
With all this talk of
backwater and wasteland, I find it especially fitting that Wheaton based
In Pipe Technology, a company
that helps municipalities and companies treat wastewater, received a bona
fide, venture capital investment in November 2003. But before In Pipe secured
the funding, the company went through what Dan called, “Bootstrapping 101.”
Introducing Dan Williamson
I’ve had the great honor of
knowing CEO Dan Williamson for the past 18 months, and I know first hand the ups
and downs he went through securing this round of funding. I recently met with
Dan, and after the cobwebs of the multi-martini celebration cleared my brain, I
gave him a phone call.
For those of you who plan to
seek venture capital, you might want to rethink those plans. As Dan said, “if I
have ever have to raise venture capital again…it means I blew it!” Dan is very
appreciative of his venture capital partners, but he wants the company to be
able to stand on its own. I have no doubt AsiaWest, the main investor in the
November round, would agree with that sentiment. Profitability and growth are
good things. Raising venture capital is difficult.
And if you still plan to seek
venture capital, and if you don’t already play golf…learn to play golf! This
goes double for all you service provider types. My sage business advisor told
me a long time ago: The real business deals get done on the golf course. Keep
reading, and you’ll see where golf figures in this story.
The In Pipe Story
In Pipe produces revenue. In
Pipe has patents. In Pipe solves a real problem. The CEO is highly skilled in
his field, and has spent his entire professional career in the industry. In
Pipe has a highly scalable revenue model that provides monthly recurring
revenue.
From the start of the process
in summer 2002, In Pipe company took 18 months to raise venture capital.
Actually, the story of In Pipe’s quest for venture capital goes back even
further: Spring 2000. But before we go through the story of raising capital,
let’s review what In Pipe does.
A Truly Crappy Company
It is not an insult to call
In Pipe Technology a crappy company. After all, if you spend a few hours with
Dan Williamson, you’ll know more about what happens after you flush the
toilet than you even thought possible. In Pipe deals with what Roe Conn and
Garry Meyer of WLS call “big potty.” Still don’t get it? Think of Tim Robbins’
500-yard crawl to freedom in The Shawshank Redemption.
The In Pipe method introduces
a proprietary mix of naturally occurring bacteria into sewer lines to speed the
break down of human waste (politely called “sewerage”) before the waste water
reaches treatment plants. In addition to greatly reducing odors, the In Pipe
method reduces the amount sludge and that needs to be removed from treatment
facilities, and it reduces the amount of energy required to treat wastewater.
Believe it or not, this is a major problem in America, as well as most of the
world.
As an example, one of In
Pipe’s clients, a Chicago area municipality, was facing steep EPA fines because
the effluent being released by the municipality’s two treatment plans into one
of our local rivers exceeded EPA limits. Nice, huh? To remedy the situation,
the municipality was spending $12 million and taking 2 years to build a third
treatment facility. Unfortunately, due to rapid growth in the area, the
engineers knew the new facility would not be enough to bring the municipality
into compliance. $12 million of taxpayer money spent. 2 years invested. And
the city was still facing big fines. Fines paid by the taxpayers, of course.
The municipality learned
about In Pipe, placed a call, told Dan about the problem, and asked, “If we use
In Pipe, how long before we’re in compliance with the EPA?”
Dan took a look at the data,
and said, “about six weeks.”
Five days later the deal was
done, and In Pipe added another $25 thousand a month of its stream of monthly
recurring revenue. I told you the revenue model scales. In Pipe never starts
a month at zero. For a crappy little company, it sure is a nice deal!
Back to the Funding
You remember the spring of
NASDAQ 5000, don’t you? The world was replete with over-educated expense check
entrepreneurs, and everyone and their dog was raising venture capital. It was
in this environment that Dan presented at one of the first Prairie Angel
meetings. In Pipe was still pre revenue at this point. A full house was
anticipated for the subsequent follow-on meeting. Unfortunately, this meeting
coincided with April meltdown of Nasdaq, and everyone was suddenly worried about
their current investments. Potential investments took a back seat.
The world changed, and Dan
decided to self-fund the company. Fortunately for Dan, he was successful in his
last company, and was able to sell that company to a large industry player.
About a year later, as sales
began to ramp up, Dan began investment discussions with a company that was
affiliated with a Fortune 10 company. Things looked good. The other company
“got it.” They had plenty of money.
But on the third day of
negotiations, Dan (and his partners) decided to quash a potential deal. They
went with the “tummy technique,” e.g., their gut feelings. In Dan’s words: “It
just didn’t feel right.”
Turns out Dan’s gut feeling
was right, because the Fortune 10 company in question was none other than Enron.
From there, In Pipe presented
at venture capital conferences in Chicago, Indianapolis, New York, and other
locations. Sales continued to increase, hitting about $30K per month in late
summer 2002. The company still was not profitable, but Dan felt profitability
was only a matter of time. And money. While Dan had some money from the sale
of the other company, his funds were not a bottomless pit. Some angels came in
and provided some operating funds, but this was still not enough to take the
company to profitability.
These are the days that
entrepreneurs wonder if the gamble will pay off. All entrepreneurs have them.
I think it occurs every day.
The Push to Toronto
By fall of 2002, Dan was
feeling discouraged. In Pipe hadn’t yet raised enough money to get to
breakeven, and Dan was beginning to doubt whether presenting at all these far
flung conferences was really worth it. According to Dan, I provided him with
some advice, advice that he actually followed. This makes me smile, because my
career is littered with the remains of people who did not listen to my advice –
myself included in that list. So I was a bit surprised when Dan reminded me of
what I told him when he was debating whether or not he should cough up the money
to attend the conference in Toronto:
“If you don’t go up to bat,
you’ll never hit the ball.”
Long story short, Dan went to
Toronto, presented to the conference, and In Pipe was selected, “Most
Promising Company” at the November 2002 CleanTech conference. Of the
four angels who eventually invested in In Pipe, three came from the Toronto
trip. And the Toronto trip began the yearlong odyssey with AsiaWest, In Pipe’s
first venture capital investor. But before we get to a successful close of
venture capital, In Pipe needed more money. Where to go? How about your local
friendly neighborhood bank?
Bankers believe in hometown success story…Don’t believe it
While Dan eventually
succeeded in obtaining an investment from AsiaWest, the process took a full
year, and Dan needed money to feed his growing company. Thinking a line of
credit would help him manage his receivables and payables, Dan looked to the
bank that handled In Pipe’s account.
“The Wheaton branch of
La Salle Bank choose not to grow
with a local start up company…even when we agreed to personally guarantee a line
of credit,” said Dan, as he recalled the trials and tribulations of In Pipe’s
scramble for money. “And you can quote me on that.”
I just did. Some statement!
That statement is even more
telling when you considered what happened shortly after Dan and In Pipe were
rebuked by “the bank that works.”
Take Up Golf
In the summer of 2002,
shortly after getting the “no” from LaSalle, Dan was playing in a charity golf
outing for Wheaton High School, and discovered he was paired with some bankers
from
Northview Bank & Trust. On the
first hole, as the foursome was going through the customary “so, what do you do”
conversation, Dan stated: “I’m looking for a bank that wants to grow with me.”
The bankers essentially said
“great, let’s talk after the round.”
The foursome went on to have
a rollicking round of golf, and a great time was had by all. When Dan called
them the next day and reiterated his first comment, the bankers said, “oh, you
were serious.”
“Yes, I want to move my
account and get a $50 thousand line of credit.” Northview took the time to
understand the business, provided the line of credit, and Dan moved In Pipe’s
account. The line of credit of instrumental in helping Dan hold on until the
AsiaWest deal closed in mid-November.
Turns out Dan is such a good
credit risk that the bank wants Dan to move his personal portfolio to Northview.
I guess there are two key takeaways in this section: Take up golf, and do your
homework.
The Close
The round of funding, led by
AsiaWest, closed on November 14, 2003. This was one year to the date of In
Pipe’s presentation at the Toronto conference. One year of ups and downs, of
sweat and worry, of thinking the deal was in the bag, and then thinking the deal
was dead. One year of seeing the valuation go on yo-yo diets: up and down and
up and down. One year of worry and uncertainty.
The Final Tally
Today, In Pipe has about 15
clients, all of whom have long-term contracts that pay In Pipe monthly recurring
revenue. Every client that has come to the end of the initial contact has
renewed its contract, and depending on the size of the next deal(s), Dan
estimates In Pipe only needs 1 or 2 more contracts to reach break even.
November 2003 was In Pipe’s
best month to date, with over $100K in sales. That’s up from $40K a month at
the same time last year. Dan estimates 2003 will finish with about $1 million
in revenue (a $1.3 million run rate), and figures he can grow revenues by 250%
in 2004.
Tellingly, and perhaps
disappointingly, most of In Pipe’s investors have come from outside of the
Chicago area. Here’s the final tally of investors who believe in Chicago-area
In Pipe:
First round angels: Three
individuals: St. Charles IL, Bloomington IL, and Austin TX.
Venture Round: Led by
AsiaWest, which is headquartered in Connecticut, and is committed to developing
US technology to address China’s environmental concerns. In Pipe met AsiaWest
in Toronto.
New angels: Four individuals:
Lighthouse Point FL, Winnipeg Manitoba, Denver, and Vancouver BC. Three of
these four angels originated from the Toronto conference.
Eight different investors,
with only 2 from the Chicago area, and that’s if you ignore the 2 hour drive to
downstate Bloomington. No editorializing here, just the facts. I’ll let you
decide what this means.
* This week’s “Snow’s Pop
Culture Reference” features a quote from the paean of political incorrectness:
Blazing Saddles.
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