Bootstrapping a $175 Million Business with Services: TEOCO CEO Atul Jain (Part 5)

Sramana Mitra: What year are we talking about?

Atul Jain: We did our first acquisition in 2006 when we were around $20 million. Over time, we have done five acquisitions and this year, our revenue is going to be about $180 million.

Sramana Mitra: So in 2006, you bring in another $5 million of revenue with an acquisition and then you launch this analytics product into your existing customer base. What did that do to your revenue?

Atul Jain: We were able to get to north of $30 million.

Sramana Mitra: In what timeframe?

Atul Jain: Probably 2008.

Sramana Mitra: In 2008, you have $30 million in revenue. What’s your next strategic move?

Atul Jain: We bought another company by the name of Vero System, which was doing routing management in telecom carriers. All of our business is in the telecom sector. We bought this company that had got into trouble. They were one step away from bankruptcy. In fact, we bought it and its assets and liabilities for $1 million. The liabilities ended up being north of $10 million. We spent about a good $10 million to deal with the liabilities that were attached. In reality, you can say we purchased it for $10 million even though we paid $1 million as purchase price, but we assumed a lot of liabilities. It was about an $8 million revenue stream.

Sramana Mitra: You were at $38 million in the 2009 to 2010 timeframe, right?

Atul Jain: This acquisition was done in late 2008. Then we continued to do some organic growth. In 2009, we ended up doing a little north of $45 million. We had an EBITDA of about $15 million that year. Then we had a private equity investor call on us who wanted to invest in our company.

Sramana Mitra: Who was that investor?

Atul Jain: A company called TA Associates. They ended up taking a little over a third of the stake in the company. They came in as a private equity player in October of 2009.

Sramana Mitra: The new money coming in through TA Associates—did all that money go into the growth of the company or did some of the founders take some money off the table?

Atul Jain: Initially, when we had negotiated the deal, it was supposed to be $40 million liquidity and $20 million growth. Before the deal closed, they changed their mind. They wanted to do $60 million liquidity and no growth.

Sramana Mitra: Why is that?

Atul Jain: They felt that they wanted to get the greatest amount of ownership. You know how it happens when you do growth. You get lesser ownership because the money goes into the company, so the overall valuation goes up, right.

Sramana Mitra: Yes.

Atul Jain: If they put less growth capital, they would have a greater ownership percentage. I fought against them tooth and nail. I said I don’t want to take all the money out. I want to leave money in.  After a lot of negotiations, they agreed to leave $3 million in. In the final deal, $57 became liquidity capital and $3 million became growth capital.

Sramana Mitra: Oh my god!

Atul Jain: It’s what happens in most deals. The founders want to take the money out and the investors want to put the money in. Here, I was fighting in reverse. I want to have money for growth so we can possibly have more safety, more growth capital, and more acquisition capital. They said, “You guys are making so much money. You have positive cash flow. We don’t feel that you will struggle for cash flow. If you do, you can take a loan.” We were not into taking loans.

Sramana Mitra: It is an unusual negotiation for sure. You have now TA Associates as a partner, which means that you’re no longer a full private company. Now you have to put yourself on an exit path.

Atul Jain: That’s correct. One other thing that I wanted to share with you that might be of some interest to you is the liquidity that existed was about 35%. Because I had a commitment of making sure that I shared in the success of people, I offered every existing shareholder an opportunity to cash out up to 60% of their stock. It was important to me that people felt assured that when the money showed up that I wasn’t going to get greedy about it. Every existing employee had a chance to cash out up to 60% of their equity and I made up the rest. That created a very positive sentiment in the employee base because they felt that they had a chance to benefit, to some degree, before I did.

Sramana Mitra: How many employees did you have at this point?

Atul Jain: I would say probably 250.

Sramana Mitra: What is the geographical configuration of your company at this point when the private equity deal was happening?

Atul Jain: Almost all North America.

Sramana Mitra: All Virginia and Rochester. Where did Vero come from?

Atul Jain: Vero came from New Jersey. They had a small office in New Jersey and a small office in Atlanta.

Sramana Mitra: It was all mostly in the New York and Washington area, right?

Atul Jain: Yes.

This segment is part 5 in the series : Bootstrapping a $175 Million Business with Services: TEOCO CEO Atul Jain
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