Textbook Case

Some of you will have seen the news tonight that our portfolio company Intrinsyc Software International is going to use part of their ~$20MM cash horde to pay out our 2007 debentures early. A few i-bankers and analysts emailed soon after the press release, and its always interesting to hear/see their take on a situation.

The first rule in lending money is always be prepared for someone, usually the best companies in your portfolio, to pay you out early.

Our loans are intended to be of a shorter term nature, and we intentionally avoid the five and ten year bullet maturity business that others play in. And one of the reasons why our firm doesn’t have 100% “make wholes” on the foregone interest is that we want to be as flexible as our clients need us to be. Why force them to pay large sums of unnecessary penalty interest if they want to retire a loan early? Every dollar that doesn’t go to interest invariably winds up in the pockets of shareholders, and as a stakeholder that’s great for us as well. We are aligned with the client’s interests, and that’s the beauty of the model.

Venture debt invariably serves one of three functions: growth capital, bridge to an equity offering, or a bridge to a company sale. While we also do operating lines, this was a 2 year term deal. The word “bridge” suggests short term, but I disagree with that characterization. Two or three years is a lot longer than a bank demand loan, where each and every day they can change their mind should the business hit a bump. And no amortization means your capital is hanging out there a long while.

In Intrinsyc’s case, our capital was sought in August 2005 to help bolster the balance sheet as the company ramped up their development of the Soleus platform. And the ~$18 million in then current revenue from their engineering services and EIS business served as evidence that they had world class expertise in the development field.

After the 3GSM launch in January 2006, the excitement surrounding the Soleus opportunity led the management team to complete a successful $24 million equity offering earlier this Spring. In comes the new CEO, fresh from Silicon Valley, and we’re off to the races.

Although I (naturally) wasn’t part of the Board discussion or decision to repay the debentures, I think any observer would say that the company was very deft in their use of venture debt. Raise debt in 2005 to help develop a new, potentially world beater, product offering. Begin to test it with would be customers and partners. Raise equity at higher prices than the shares were trading at prior to the launch. Take stock of the future under a new CEO. Repay the debt (and save the spread between what you’re paying your lender to borrow the excess funds and what you’re earning on the cash balance in your company’s treasury account.)

A textbook study of how specialty finance firms can help agile, quality growth companies succeed in their marketplaces.

MRM