Letting In the First Outsiders
We wanted our own business. As an MIT undergrad, my brother Alain -- he's our president and chief technology officer -- had run a research project for managing computer networks. I'd been a consultant at Booz Allen Hamilton. We were only in our early 20s, but we had a great product concept, and a realistic idea of what it would take to build a company. Plus, we're lucky we get along well; we'd grown up in Africa -- our dad was a diplomat -- so there was plenty of opportunity along the way to test our fraternal bonds. We knew how we wanted to run the business -- clear division of responsibilities, and the structures and processes to make it a long-term success. We put together approximately $30,000, and launched in August 1986.
Things went well from the start. We took our network-management software to trade shows, and to Beltway contacts I had made at Booz Allen, and it caught on fast with network equipment manufacturers and government defense organizations. We struck gold in 1987 with our first big sale to Mitre Corp., but even so, it took four or five years before we reached annual sales of $1 million. Our financial model was straightforward: the next quarter's budget equaled last quarter's revenue.
When we first met Bruce Evans at a trade show in 1993, we had no interest in seeking private equity. We had strong cash flow, money in the bank, and no debt. Bruce is a managing partner at Summit Partners, a private equity and venture capital firm, and he was visiting private companies that might be investment possibilities. Alain and I learned we had all the ingredients to attract investors: cutting-edge technology in a rapidly growing marketplace; solid market share; strong financials; and -- Bruce's words -- a sharp management team. It was the first time we learned about equity firms that help established, later-stage businesses. We felt we had made a good contact in Bruce, and we knew it was important to get OPNET to another level, but it wasn't something we were debating every day.
As OPNET became more visible, other financial firms began to call. Every now and then we'd meet Bruce at a show, or he'd call us and we'd chat. We started thinking more seriously about an equity partner. The biggest question was, what would it mean to bring in an outsider? We talked with our lawyers and other business partners to understand the implications. By early 1997, high-tech was really starting to take off, and the idea of an eventual public offering seemed to make sense. You only get one chance to go public -- you can't mess up so we'd need help there. Alain and I were excited about partnering with experienced people; we also liked the idea of taking some cash out of the business. Selling a stake began to become more and more appealing. So we made the commitment to look for an equity partner who could help us get to the next level.
Alain and I agreed that it had to be the right kind of equity partner. We saw eye to eye on two crucial filters. One was the partner's reputation: the importance of going with a "name-brand" firm. The second factor was who would run day-to-day operations. We'd heard all the horror stories about venture capitalists grabbing control. So when we started looking, we focused on the relationship. We screened for firms that disavowed an operating role and showed genuine interest in what OPNET was doing. We looked for firms that wanted to help build rather than just invest. The shortlist came down to two private equity firms, with our screening process based on subtleties like whether they kept appointments and made meetings on time. We checked everything with references. We even talked to references where things hadn't gone well for the equity firm because we wanted to know how it behaved in difficult situations. We chose Summit Partners, not least because they went out of their way to show they wouldn't interfere day-to-day.
But our commitment to bringing in an outside partner was just the first of several stages at which we really had to validate the decision. Although Alain and I held most of the equity, we had to get the buy-in of other constituencies.
Persuading the minority partners
OPNET also had three minority shareholders, and their acceptance was important. They feared they might lose their board roles -- which did in fact happen. We were well aware that family businesses get hurt when minority stakeholders disagree over equity control issues so we were upfront with our other owners early on. We presented it in terms of the company's lifecycle -- before, during, and after outside investment. We talked about the value built over 11 years, and painted a picture of what OPNET could become with outside capital and expertise -- and how owners could get a payout now and a second one -- probably much larger -- when we went public.
Proof of the pudding in negotiations
The next test of the decision came during actual negotiations. When we sat down to work out a formal agreement, we wanted details on how much we'd give up. If Summit had proposed more than originally discussed, it would have been an immediate red flag. But the numbers jibed with what we'd heard before: at least $5 million for 10% to 15% ownership. We knew quite a bit about valuation; I'd once taken a seminar on it, and I had a binder full of ways to calculate fair market value. We obtained more data on revenue multiples from banks, other potential investors, and our lawyers. The discussions with Summit were very frank; we had a long dinner one night, with spreadsheets on the table. At this stage, nobody else could ensure we were getting a fair deal; although Summit had done this many times before, Alain and I had not. But all our preparation paid off. We were comfortable because we'd checked with other companies who confirmed that Summit did what it said it would do. Summit's numbers and reasoning made sense, and we shook hands on a draft deal.
Convincing the workforce
That wasn't the end of it. We needed to get our workforce on board. Some companies choose not to tell their employees, but we felt it was the right thing to do. So we asked Bruce to come and talk. He got plenty of questions. Will we be downsized to boost profits? What if we don't make our numbers? Will OPNET still be a nice place to work? Bruce reassured them the business wasn't about to be sold off. He confirmed Summit would leave operations alone, and said everyone would be doing the same jobs, reporting to the same bosses. He gave examples of other companies in Summit's portfolio to show how the investment would accelerate OPNET's growth. Everybody was excited about that. Everybody had stock options, and everybody wanted to be part of something bigger.
We have a deal
We agreed to sell 15%, giving Summit one board seat. A few days after we'd inked the deal, OPNET's bank account was $7 million larger. It was a strange feeling the day after -- a bit of an anti-climax really. The first board meeting was another test of our decision; we were all interested to see how the meetings would change -- what Bruce would say, and how he'd act. He talked a lot about board meetings themselves -- how the agenda should always include discussion of strategy, not just results and fire drills. And he pushed for decisions.
We knew we'd done the right thing when OPNET successfully went public three years later. We were one of the strongest technology IPOs of 2000. Summit had helped us get to where our financial results looked good to investment banks, and their contacts helped. It was interesting: the investment banks referred to us as "a Summit company." Since then, things have moved right along. We continue to grow revenue in one of the most challenging periods in the history of high-tech, and we're profitable. Today, we've got offices around the world, and we're nicely positioned for growing our market opportunities.
Postscript: The Cohen brothers present a textbook case of how to open up a family business to outside influences. They were superbly prepared for every meeting and every major decision. They'd done extensive fact-finding and sought counsel from key business partners. Those traits are a reminder that great companies don't get going when the first outside investors arrive. They are painstakingly built by the entrepreneurs inside.
Marc Cohen is chairman and CEO of OPNET Technologies, Inc. and his brother Alain is president and chief technology officer. They can be reached at the company's headquarters at: 240-497-3000. The company's Web site is: www.opnet.com.
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