40 Million Dollar Company, Paying Dividends, Growing Steadily: 3CInteractive CEO John Duffy (Part 7)

Sramana: Are the investors you work with accredited, or are they more friends and family without much of a professional investment angle?

John Duffy: In most cases, we require people to be accredited investors. We have several professional investors on our cap chart, but their personal funds are used instead of having professional investors. But we have sophisticated investors. John Sculley [former vice president and president of PepsiCo and former CEO of Apple, and now a partner in a private investment firm] is one of our biggest investors, and I think he is as professional as you will find.

Sramana: How did you get to someone like John Sculley to pitch an investment opportunity to?

John Duffy: Another friend, Dan Marino, introduced him. Dan is a very successful football player and a friend of my family. He always helps when we are putting together new initiatives. He has exposed his relationships to us and has generally helped us where he can. He felt that I could benefit from having John as a mentor, and that has been fantastic. John is now the chairman of the board of our company.

Sramana: When you are doing an individual investor syndicate for a company, what are your thoughts about the optimal number of investors you want involved, and what is the optimal denomination you look for?

John Duffy: I make the first capital contribution into a business and then do my best to take as much risk out of the business as possible before bringing friends and family into it. I like a smaller number of investors, and I prefer smaller denominations. Our first round involved about $5,000 per investor.

Sramana: With those types of denominations, it would take a lot of investors to reach $4 million. How many investors do you have in your syndicate?

John Duffy: Fewer than 100 investors. Some investors, like John, decided to purchase multiple units.

Sramana: What is the process you follow to manage 100 shareholders? Anything over 499 investors, and you have to report to the SEC.

John Duffy: More transparency is better. I produce quarterly updates for our investors and keep them in touch with our successes and failures. In 2009, we started audits, and I give them access to the audits. I use public filing protocols as the model. I find that makes it easy to manage.

Sramana: What is your ramp rate like?

John Duffy: In 2005, we had zero revenue. In 2010, we put close to $40 million on the board. It has been a very linear growth curve.

Sramana: Where do you go from here? What are the expectations from your point of view and from your investors’ points of view? Are you looking to sell or give dividends?

John Duffy: I have never built for an exit. I like to build the business to distribute excess cash to shareholders. We started doing that in 2010. If there is an opportunity for a liquidity event, we are in a position to close on it quickly, but that is not our goal. Our customers think we are valuable, and we have good cash flow. We are not in a hurry to do anything but add customers.

Sramana: The dividend model has disappeared these days. I like this model a lot, and I don’t understand why we are overlooking dividend models.

John Duffy: I have not spent any time in the Valley or New York City. I was raised to think that you start a company to create cash flow. That is how I have always operated, and nothing has changed my mind about that. I am very careful with capital and, thankfully, I do not need a lot of it to create a valuable business.

Sramana: Do your investors have to buy into your dividend model?

John Duffy: My role model is the founder of Kayne Anderson, Richard Kayne, who described his strategy through an analogy of a pig and a cow. He talked about a pig being an animal that is born, and you feed it and take care of it every day. Eventually, you will take it to the market and sell it. You hope to cover expenses and make a profit. A cow is born, grows up, and you milk it every day to sell the milk. His philosophy is to invest in cows, not pigs. I like that philosophy. I think there are some people in the investment community who understand good yield and that return of capital is as important as return on capital.

Sramana: Very well put. Congratulations on your business, and thank you for sharing your story.

This segment is part 7 in the series : 40 Million Dollar Company, Paying Dividends, Growing Steadily: 3CInteractive CEO John Duffy
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