PART I - The THW scrubbing Process.
How we scrubbed the company before making a decision to invest and why we are introducing them to our other readers and also to our major investor and financial connections?
There have been many questions that have been asked THW on a number of forum threads. This Due diligence profile has been created to discuss the facts about THW and why many consider them a solid investment with considerable upside potential over the next 1 to 2 years.
This post is to discuss THW and there potential as an investment for some who consider in taking the risk to invest in a small growing high tech software company. This is a three part series and we will point out some of the risks associated with it as a possible investment, while identifying the reasons as to why we think THW has considerable potential.
Here is the first of a 3 part series on just the facts:
PART I - The THW scrubbing Process.
How we scrubbed the company before making a decision to invest and why we are introducing them to other major investors and financial connections that we have relationships with? Written from a investment due diligence perspective.
PART II - The Web design tool industry, the major potential for rapid growth, and how THW fits in and how they plan to succeed. More on THW's financing goals and objectives for Growth in 1999. Written from Investment opportunity/risk perspective.
PART III - The Potential and the Challenges for THW in the Road Ahead.
Long term outlook on the Web design tool industry and potential for THW's growth. Written from Investment opportunity/risk perspective.
Even if you are already an investor in THW, Part I might provide some insight into THW, the management, and team, and some things that you didn't already know.
We do mention the potential for THW and the risks associated, but
our focus has been some of the overall investment criteria facts that we have gathered on THW during our Due Diligence process over the past month. It also deals with our decision to do what we can to introduce them to others that can help them achieve their business goals. Keep in mind that we are not the only group that believes in THW or is writing about them, or assisting them. There are two other reputable groups that are trying their best to help THW to achieve their business goals.
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Our investor group spent considerable time conducting due diligence on THW during the summer and we continue to follow up on this process as any savvy investor would continue to do.
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My group gained a considerable return on investment from a previous investment in one the THW CEO's (McCallum's) previous software ventures back in 1992-1993 and early 1994. We have followed his progress through late 1994, 1995, 1996, and 1997 and then into 1998 when we decided to get more involved with THW as an investment. Our criteria is no different than that of a traditional venture capitalist group. Even though we are a group that makes major investments in the software industry, we might not have known about THW had we not had a history with McCallum and a previous investment success.
The process that we went through to determine whether THW was a good investment is very simple. Keep in mind this is our due diligence process and even though it follows traditional venture capital methods, it MAY or MAY NOT satisfy everyone in their investment needs or portfolio plans.
There are many business opportunities to put our capital into and since we are a group of entrepreneurs ourselves, we use the same investment scrubbing criteria as the venture capitalists use to identify a company with potential. We wouldn't waste our time on THW if we didn't think it would provide us with a major return on investment. Judging the risk we took on McCallum's last venture back in 1992, we rate THW's chances of success far higher than that of McCallum's last venture. This is mainly to do with the experience of THW's management team, the talent of employees, their products and the industry opportunity that is far greater than back in 1992-93-94.
However, there are risks and we continue to identify and assist THW to overcome these risks by working hard to introduce them to the right people. Others are also helping THW and THW has considerable potential to succeed and we believe they will. But this is not an overnight process. It takes time to do it right, and THW's management recognizes that it takes time, and they are very focused to gain long term success for their shareholders.
This process and the time may not be right for some investors, but for others that are patient with their investment picks, THW can have a considerable potential gain over time. The risk and the reward of any investor, is to pick them right. Perhaps this document can help you make up your mind if THW is the right investment for you.
My group has read hundreds of business plans in the past 6 months. We look at the people first and business plan second. Since we had a history with McCallum, we decided to meet with THW in the summer to find out more about THW and where they were headed.
Our initial concern was that McCallum had not fully recovered from the past venture and that he might be trying to do things by himself again out of extreme caution. He was all alone back it his first venture and that was and eventually proved to be the biggest risk for investors. Without McCallum, the last company died a miserable death. We managed to get in early and out clean and it proved to be a winner for us.
A) Even though we were impressed with McCallum's ability to gather solid engineering and design talent in the past, our concern was his ability to bring in a solid management team into THW to maximize potential and minimize risk for shareholders. When we went to visit, we found a very different McCallum from 1992-93-94. The smartest move he made was to bring in this Brian Leeners as President, and with Leeners, he has cleaned up some co-founder and capital structure and management problems in 1997 and early 1998. More on the McCallum/ Leeners relationship and the significant value that it represents to THW later.
B) When considering an investment opportunity we look at the obvious trends and market niches and how the company is targeting these markets. The most important factor that we learned about THW was the quality of the people that McCallum and Leeners have been able to attract and how they have done it. Investors that make an investment in high-tech should always look at investing in people, people and people.
We know that a huge market opportunity exists because Macromedia, Adobe, Microsoft, Corel and all the others can't be wrong. THW is carving out a niche in this huge market and that is their strength.
c) We focused first on the management team's background and whether they have the ability to deliver on their business plan objectives. We used a combination of measures that we have developed over the years and rely heavily on gut instinct.
What we looked for at THW in the summer:
C-1) LEADERSHIP: leadership combination strength (THW has a very good combination of McCallum and Leeners)
McCallum (technology industry visionary, considerable experience with many successes since 1986, and also the valuable experience of a past failure and major setback in 1994)
Leeners (day to day business operations, marketing, sales, administration, finance, his experience balances the weakness areas that McCallum has recognized and vice versa)
Leeners and McCallum make a very good combination. There is a major trust and bond here. McCallum is older and more experienced but he has recognized that he needs the younger, more energetic, charismatic Leeners to balance things out. McCallum has shown us that he has an immense amount of respect for the younger Leeners. What was really important for us to consider, was to make certain that Leeners respected McCallum and the team respected Leeners. We have concluded the Leeners has an immense amount of respect for McCallum and knows McCallum's strengths and weaknesses and also his own. Leeners knows that McCallum brought him in to address his own weaknesses to bring a balance to the company. By running the day to day operations with the challenge to build the marketing and sales team, Leeners has gained the respect of the development team.
Last week, we learned that Leeners has been nominated for the Entrepreneur of the Year award in Vancouver for 1998. McCallum is extremely proud of Leeners and it is said that Leeners is just as proud of McCallum. McCallum won this BIV EOY ward in 1992.
They are essentially the visionary software guy and the marketing/sales/finance guy, and make a great combination to lead their team and don't step all over each other. They have checked their egos at the door so their is no challenge here. Just a solid, trusting relationship to build a winning team and company.
McCallum is a master at strategic vision and has a unique ability to build a sense of leadership in his employees. He lets Leeners run the business and stays out of his way, but makes sure he is always available for key decisions. He works at home 3 or 4 out of 7 days to not be looking over Leeners shoulders all the time. He encourages Leeners and their team to think independently.
McCallum is proud that he has made everyone understand that they are their to build value for the shareholders and that the reward for these employees and management will happen when the company delivers for the shareholders. Rajiv Aggarwal obviously didn't fit this category and mold and he is gone. All of THW employees have chosen to earn less for an opportunity to work at the company and all have been given an escrow performance equity position by the co-founders, and all of this equity has come from the co-founders original equity stake from 1995.
McCallum has made certain all key employees are given the proper incentives. And most importantly, he made certain that Leeners became a founding shareholder with a significant equity position. But Leeners had to first gain the repsect of management, the key employees and major shareholders. And all of this founder equity to Leeners came from McCallum and the other co-founders and this has not diluted the shareholders. This is because of McCallum's former experience and major investors look for this quality.
Is the capital structure the best it can be or is there a need for change? McCallum had the exprience to make the necessary changes. And Leeners is making certain that all new employees understand the risk, reward ratio at THW to ensure future growth.
C-2) VISION - McCallum and his engineering team have a unique vision of the industry and where it is headed and how to build solutions for customers. McCallum is regarded as an industry visionary and his experience and vision with this experienced engineering team has been critical to THW's success since 1995. This is a key strength and he knows how to build a small, and extremely talented development team. This team has a incredible track record of delivering award winning products on very limited budgets. We rate them very high in this area.
Leener's vision or challenge is to equal or better McCallum's development team in the area of building a top tier marketing, sales, support and distribution team for THW. Leeners has had a limited budget, and even with that limitation he has been able to do some pretty amazing things. He has built an excellent core sales and marketing team, and the support and administrative systems in place are far beyond those of companies many times THW's size.
The challenge is to raise a significant marketing and sales budget and Leeners and McCallum are working on it. This is a risk and a challenge area. We know and they know that they need more capital in this area and this will be a challenge area. They are creative, but to grow significantly they will need to raise about $2.5 to $5 million in the next 6 months and earmark it for sales and marketing.
C-3) INTEGRITY: THW is full of integrity and this is crucial to investors. We knew of McCallum's impeccable integrity, but the big question and challenge to us was to find out about Leener's character and especially his integrity.
THW's management had an early goal to build a constructive team with a relationship built on mutual trust. They had some challenges in 1996 and 1997 and were very open with the problems surrounding the former president and co-founder, Rajiv Aggarwal. How McCallum and Leeners dealt with this problem impressed us the most. This was the biggest issue in late 1997 and 1998 and the removal of Aggarwal and redistribution of THW's co-founder equity was extremely important to us, because it could have been a company killer.
These people have gone through some major successes and challenges together, and they support and have mutual respect for each other. They have the integrity and honesty that smaller investors should be looking for in risk based companies.
They are very well respected in the industry. McCallum looks after the development industry side of THW and Leeners is very well respected in sales and marketing side. Leeners is also a leader for the company in the marketing and sales part of the industry, and he has gained an excellent profile in the Vancouver area which will grow across the country and into the US over the next two years.
McCallum is very active in the industry, but quite reclusive in the Vancouver business community. He does spend time assisting other entreprenuers with the issues of building a start-up company and he has gained considerable respect in this area. His lessons from the past have assisted many local area start-ups.
Leeners deals with the financial markets and the public markets because McCallum is not the most comfortable in this area, even though McCallum is very good at raising start-up funds. The challenge for Leeners is in the investor and financial community. They are very conservative when it comes to public market PR and this is THW's challenge. They are planning to become more agressive to propel the company to the next stage of growth, but how they become more agressive without being seen as hyping is their challenge. We believe they will do it, because they have a real company, and excellent team and a real solid business plan.
Timing is the key and THW knows it is very important. They are hard working and also very generous. They know how to build a reward system for their employees and the management which is key to benefiting all shareholders in the long run.
McCallum and 4 of the other company co-founders had a major problem on their hands and they showed their true colors and did something about it. They challenged one other co-founder on the issue of his integrity and honesty and they finally had to take it to court to do the right thing for shareholders. That former co-founder is gone and McCallum and the 4 others have redistributed the co-founder equity to others that are working hard for the benefit of all shareholders. We give them very high marks in this category, but Leeners still has some challenges to impress upon investors that THW is here to stay and grow. They also have an impecable record with the ASE and with the industry and also with certain analysts.
C-4) OPENESS. They are open in the industry and have established many very solid strategic relationships and have a built on a growing customer base.
They are now just starting to open up more in the financial area, and they know this will be a challenge area for them. They are very focused and know that timing is everything. They have been patient to focus on building the company infrastructure to support their growth.
Keep in mind that McCallum went through hell in 1994 and those are usually wounds that many entrepreneurs don't recover from. He has essentially re-invented himself with the assistance from Leeners, when some in the Canadian financial community wrote him off.
His ability to recognize and bring in Leeners has impressed many people in Canada and Vancouver. Their challenge is the public relations campaign to show investors that they are making solid progress for the benefit of all shareholders. They are consistant and focused in their efforts. They are getting assistance in this area from reputable groups. Look for major progress in this area in the next 2 to 3 months.
C-5) DEDICATION : They are more dedicated than companies 20 times their size. Name me another small company with less than $3.4 million CDN in capital invested since 1995 to still be around. THW is capturing the industry and customers attention all on a very limited investment base.
They are very focused and what they have done with so little in investment capital is quite amazing. If they were private today and not listed on the ASE, they would be have droves of VCs pounding their door down to invest in them. They understand that they had to do the ASE route in 1995 because of being Canadian based. People like us and some others recognize this and have come in to assist them to get connnected with the right people. They are being assited by 3 different groups and they have their own sources.
The THW story is superior to many private companies and they own about 75% of the company between key people and close associates. It goes as high as 85% when you take into account long term shareholders. Even though THW is public, they are now in discussions with major US players that are trying to indentify how to bring THW to the US investor base and public market. Since they are already public it is a bit of a challenge, but this is where the dedication shines through. They have shown that they never backed down from a challenge and they are making people take notice.
It is our belief that THW will get the major financing that they need in the next 3 months.
Much has been written about McCallum as an entrepreneur in Canada. He has a stubbornness, a unmatched dedication, a relentless pursuit of a goal, despite considerable adversity and his perseverance, it is equally matched by Leeners and the rest of the THW team. They all believe in the company goals and the challenges ahead, and they believe in reaching their goals.
These are the traits that we sought out to add THW as one of our investment companies. THW passed all of our initial rigorous tests and they will have to keep passing them. There are always risks as a company grows, and the best thing we can do for THW is to introduce them to key players in the US financial markets and the software industry.
We think they are a good investment that shows considerable promise, but it is not a short term 3 or 4 month investment. This is one for the portfolio over the long term because of their considerable potential in a rapidly growing and lucrative market segment.
SUMMARY IN PART I:
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Even though THW is public, we really see them as a quasi private type company (different than many Canadian listed public companies) and investors should start to look at it that way.
THW is not an investment that you should be expecting big earnings and revenue growth from right away. Consider it like many other Internet related companies in the US. Many of them don't have major revenues, but show major promise. And when you start to compare THW on this basis to some of these over inflated Internet plays, you will see that they are undervalued, mainly because they are in Canada and listed on the ASE.
If they were on a US exchange they would be trading at a considerably higher market capitalization, but THW is patient to get their in time. That's is what has really impressed us about this company. They are patient to do things right and not let anxious shareholders dictate their business plan to try and force them to promote it for the short term gain.
THW'S ABILITY TO IDENTIFY AND BUILD ON A MARKET NICHE
World class companies emerge when they demonstrate the ability to identify and attack a market niche. In a large part, THW's management understands this better than most other small companies in their category. THW has compressed the normal corporate development cycle into one-tenth the time it used to take to grow a software company. And they have done it on a very limited budget from Canada. Their US competitors have considerable access to capital, but THW has demonstrated an ability to grow and become a recognized player in a highly competitve market with limited financial resources.
From the very first day, THW has shown us they understood how they needed to be competing for customers against well managed, well capitalized companies such as Macromedia and Adobe. Out of necessity, THW's corporate adolescence has been brief, but it wasn't without challenge. McCallum told us he knew that changes needed to be made in late 1996 and 1997, but he also knew that those changes would take some time. He liked them to a micro surgery. He knew Aggarwal was not right for THW as President or even as a co-founder, and he knew that he needed to bring in someone like Leeners to guide the company to success. Leeners has demonstrated that McCallum understood the need for a sophistication in planning and execution.
THW HAS GATHERED THE TEAM
THW's management has gathered a solid, outstanding core team that we believe will take them rapidly beyond a few million in sales in 1999 and 2000. McCallum and Leeners have shown the ability to identify and attract exceptional individuals that such growth goals demand.
- THW's team builds Excellence in software.
- THW's challenge is to build a similar marketing, manufacturing, sales, finance and general management team to match this excellence in development. This is a challenge in process and in this lies the risk, but we believe that THW's management will build a solid team. The challenge is raising the sales and amrketing capital that they need.
MAINTAINING QUALITY
THW's management understands that the risk/reward incentive is essential to maintain the quality of the people and methods of business. We found that this is among the highest priority in building THW as company. This is generally and afterthought in most startups.
THW has impressed us in this area, by demonstrating their ability to build a solid support system for quality before the rapid revenue growth begins. They have identified a big risk that usually kills small companies, because compromises can easily occur under the pressures of high growth. THW has an excellent support system in place and this has all been done on a minute budget. Impressive.
THW's CREDIBILITY
THW knows that their credibility and faith in that credibility is one of their most valuable assets. They have shown that they can deliver solutions for their customers, vendors, employees, and over time they know that they will deliver for the shareholders and financiers. That is their challenge, but it only comes as a whole package and they know it.
THW seems to understand the process of constantly building confidence with all of it's constituencies. THW's management knows that credibility is most fragile within the first 3 years of a small companies existence. And the management has been building a solid infrastructure to do everything possible to accelerate their credibility during this building process.
THW's PATIENCE TO DO A PROPER FINANCING FOR GROWTH
THW has identified the key task to raise money effectively. Even though THW has not had adequate financial resources to date. What they have done to develop and market their products and attract key people and assure major customers has shown us that it can be done on a very limited budget.
Very few entrepreneurs can do this, but THW seems to be an exception. They have found and used alternatives for financing since 1995. And these private placements have taken place properly during the company's stage of development, and its long-term strategy has always been with an effort to not impact the capital structure and pose problems in the future. This is where experience comes into play.
They have demonstrated that they are masters at creative approaches, at critical times to finance their growth, all without selling their soles and causing unneccessary shareholder dilution. THW has managed to build the company, make sure key employees are properly incented and have continually reduces risks, all while balancing it against shareholder dilution.
THW's private financings have all been well planned to help maximize their future financing options. They have for the first time started the process to bring in major capital to finance growth, and they will get this capital.
THW UNDERSTANDS CHANGE
IN 1997 and 1998, THW has clarified responsibilities and have thereby increased the company's stability. THW's management and directors showed the skill neccessary to establish an attitudinal environment where individual ego needs are kept in check and the organizational needs for change can be kept in consonance. THW effectively dealt with a number of key problems in 1997 and early 1998 and became very competitive instead of being a casuality, as so many small companies have become.
THW's ABILITY TO DEFINE THE CONTRIBUTION
THW have shown us that they have always understood the potential of their technology, products and niche marketing approach, and they have started to prove that they solve a customer need better than their larger competition.
One of THW's challenges is their ability to keep expanding the scope of their problem solving capacity as they grow. While McCallum plots THW's vision and product strategy, Leeners has been building a strong strategic business planning process to deliver on the business goals. THW has a firm grasp of understanding the industry and their ability to keep this up will become increasingly critical to their future success.
THW's ABILITY TO DEVELOP INDIVIDUAL POTENTIAL
THW's management experience has a solid balance with McCallum and Leeners in the engineering and marketing areas. Both knew that this would be critcal to grow THW rapidly, and these individuals made certain to be patient and put the necessary systems in place before they start accelerating that rapid growth.
THW's management has informed us that it has been unnerving at times to be patient to grow the team, put the boring systems in place etc, but they knew it was necessary to balance everything to put things in place, all while trying to keep investors satisfied. Leeners and McCallum recognize that personnel turnover is extremely debilitating to fast growing companies and their ability to maximize personal growth within THW has been important to them to prepare THW for the growth that they expect in 1999. How many companies have we seen take off, only to implode upon themselves because they never put the systems in place to adapt with the rapid growth.
THW has put the company systems in place for growth and rewards for employees, they have a great team, they develop award winning products, they know how to identifyy market niches, they have been challenging much larger competitors, and they are very close to concluding a major marketing and sales based financing.
(Week of Oct 19-23)
PART II - The Web design tool industry, the major potential for rapid growth, and how THW fits in and how they plan to succeed. More on THW's financing goals and objectives for Growth in 1999. Written from Investment opportunity/risk perspective. |
