Wednesday, July 04, 2001
Bringing a bit of magic to a VC
Timothy Jackson's sleight-of-hand worked at PixStream, where he helped sell the company as tech values dropped. Now he wants to bring some sparkle as a venture capital investor in southern Ontario startupHoward Solomon, eBusiness Journal
Timothy Jackson can do magic. He'll sit at your side and ask you to pull out a card at random from a deck. You sign the card and put it back in the deck. The deck gets shuffled. Jackson grandly says he'll now pull out the card. He draws one card, then another, then another. Your signed card seems lost. The magician looks like he blew it.
Then he asks you to stand up. You're sitting on the card.
Magic, of course, is sleight of hand. So, some might argue, is the art of buying and selling a company. Last summer Jackson, as chief financial officer of PixStream Inc., a Waterloo, Ont. video networking startup, helped architect a bit of legerdemain in selling the company to Cisco Systems Inc. for $369 million in stock as the values of startups were being erased.
After looking at several offers, the PixStream board was facing a firm proposal from a competitor. But could it get more?
PixStream gambled, put out the word that it was still available, and won. Then it lost everything. Burdened by debt, Cisco said it would shut the division in April, four months after the purchase closed.
By then Jackson had left the company but was also helping Cisco with the transition. They looked at options like cutting staff. Jackson tried to help pull out a management buy-out of the unit. But nothing short of magic could save PixStream.
Looking back at the history of the company, he admits that along the way it got a lot of breaks. "We were quite lucky," he says. "I do believe that you make your own luck, but if things hadn't happened the way they had ..."
Instead, he wound up selling some stock for around $5 million, gave some of it to his family, and got a new job. He's a partner at Tech Capital Partners, a Waterloo, Ont., early stage venture capital firm run by Andrew Abouchar, whom he's known since university. After years of raising some $50 million from VCs, Jackson is now on the other side of the table evaluating business plans and scrutinizing management looking for his money.
"Management is huge, management is key," he says of what he's searching for. "Andrew and I have to get along with the individuals, and the reality is we're going to be spending a lot of time together in the early stages.
"We're looking for people who recognize their limitations — the philosophy of the PixStream founders had of sharing the wealth. By that, I mean owning a smaller piece of a stronger, bigger management team is better than owning a big piece of a weak management team."
His goal is to help Waterloo area entrepreneurs by sharing his experience at PixStream and other companies — the good and the bad. Watching PixStream close was probably the worst.
Jackson grew up in Oakville, Ont., went to the University of Waterloo and took accounting. But not to go over rows of figures. He wanted to help build companies. One of his accounts was a company that had just been acquired by FirstService Corp., at the time a small private firm, run by Toronto lawyer Jay Hennick. Hennick, who aspired to build a conglomerate specializing in service businesses like property management and security and lawn care, liked Jackson enough to make him employee number three.
"Jay was very much an individual who let you do your own thing, who let you make mistakes," he says. Over the next five years, doing some 30 acquisitions and First Service's public offering on the Nasdaq as vice-president, Jackson made a few mistakes. All, apparently, were forgivable.
Then he went to an Atlantic City stag for Brad Siim in 1998, a high school friend and PixStream co-founder. The gambling became more than the action at the tables. Come join a fledgling company you can help shape, Siim urged. Jackson became employee number eight.
Three years later PixStream was pulling in $7.3 million in revenues with clients that included Bell Canada, NB Tel, Quebec Tel, Nortel Networks, Cisco and a division of Lockheed Martin. By January 2000, with valuations peaking, the company expected to go public although was open to an acquisition.
So began the dance. It hired Latitude Partners of Toronto, a telcom investment bank, to let it be known PixStream was looking for a strategic investment of $25 million from a customer or partner. Companies asking Latitude if PixStream was open to an acquisition were told that wasn't the purpose, but brought word back to management. Deals were quietly suggested.
Initially, Cisco wasn't interested. Finally, one company — Jackson won't say which one — put a firm offer on the table. It wasn't perfect: for one thing, PixStream employees would have been forbidden from selling their shares for three years. So the board gambled and told Latitude to let the word out that PixStream was looking at a term sheet, and did anyone want to counter offer? Cisco asked for a few days.
It bettered the offer on the table financially, putting 90 per cent of the purchase price up front on closing. There was no shareholder lockup. PixStream said yes. There was a lawsuit by minority shareholders, but by last December it was settled for $25 million to get the deal done.
"I always wonder if I knew now what I'd known then whether I would have left the security of FirstService," Jackson reflects. "NB Tel really took us under their wing and worked with us while we were developing product. If we hadn't been able to secure them as our first customer, who knows if it would have been another 12 months before we secured a customer? If we were six months later, we would have been trying to sell this company or trying to go public while the markets had fallen away."
Cisco offered him a position, but Jackson declined. "I knew a large multi-national wasn't where I wanted to be." He wanted to stay in the Waterloo area and help young companies with their corporate governance, recruiting and raising money. So he joined Tech Capital, a small firm with $30 million in two funds and a portfolio of two. Brad Siim is on the VC's advisory board. The pace is less frenetic and he can spend more time with his wife and two sons.For the past few months, Jackson's been raising money for its new fund. Now, he says, "the fun starts."