As Stephen Wiehe gutted SciQuest, transforming the company from a medical device shopping mart into a software and application service provider, other executives in RTP were watching.
Wednesday, SciQuest announced that Intersouth Partners and River Cities Capital Funds had joined Trinity Ventures as investors in the now-private company.
In what the VCs involved said they believed to be is the first such deal for each venture firm, Intersouth and River Cities agreed to participate in Trinity Ventures’ efforts to take SciQuest private. The companies did not disclose the amount Intersouth and River Cities invested, but a SciQuest spokesperson said, “all three firms are playing a sizable role in helping SciQuest grow.”
The deal puts Kip Frey, one of RTP’s best-known VCs, on SciQuest’s board.
“I had known the original management team at SciQuest, had watched them go through all the ups and downs, and we had gotten to know Stephen,” says Frey of Intersouth. “It seemed to me that Steve had really reinvented the company, the revenue model and the business model. It made a lot of sense. We concluded that the company, although public, had a lot of attributes of a startup company.”
Wiehe, a former executive at DataFlux and SAS, took over as SciQuest CEO in February of 2001 from company co-founder Scott Anderson.
Although SciQuest had been a public company, Frey said the deal “is more in keeping with a typical profile of an Intersouth investment. We participate in early rounds; we get involved with management, and assist in the strategic direction of a company. In this case, the company has revenues, customers, and very good, very referencable customers. That’s a big bonus for us.”
Not cash poor
SciQuest also was not a cash-poor firm. In a public filing for the first quarter of this year, SciQuest reported income of $1.9 million against a loss of 82 cents a share, or $3.1 million. But the company did have $16.7 million in cash on hand, and when the deal closed with Trinity, Frey noted that SciQuest “had well north of $10 million in cash.”
Like Frey, Ed McCarthy of River Cities said he was attracted to SciQuest by Wiehe’s turnaround efforts. “When Trinity expressed interest in a deal, we expressed interest,” McCarthy said. We are fortunate to be able to participate.”
Trinity, a major venture firm with $3.5 billion under management, first invested in SciQuest in 1998. SciQuest, which was founded in 1995, went public in 1999. As the bottom fell out of the “dot com” market, so did the price of SciQuest stock. Over time, Wiehe changed SciQuest into an ASP for management of procurement and inventory services for large firms and universities. In May of last year, a reverse stock split slashed the number of shares in the company to fewer than 4 million from nearly 29 million and raised the stock price far above the 65 cents it was drawing.
But even with a higher stock price and revenues increasing, management decided to take the firm private with Trinity offering $25.3 million in cash. Among the reasons cited for going private were the onerous costs of being a public firm — from Sarbanes-Oxley legislation to huge legal fees for quarterly SEC filings.
Intersouth and River Cities became part of the negotiations and agreed to join the deal. Details on how much either company invested and the breakdown on ownership share, other than Trinity remained the majority investor, were not disclosed.
“When Trinity did the first step, they knew who the investor group would be,” Frey said.
Suzanne Miglucci, vice president of marketing and business development for SciQuest, said Trinity “was interested in getting local money in the deal and was interested in forming partnerships with local venture firms.” She pointed out that trinity “was less interested in mitigating their risk and more interested in having good people at the table. They are a California firm. Having local firms involves gives us immediate resources we can call on.”
Having Frey on the board, she adds, “is a great benefit with all his knowledge and experience. He’s already been a tremendous value to us.”