Capital Matters When Markets Get Tough

Capital matters, especially when the markets get tough. Let me share two examples from my time at Intellon Corporation. Fifteen years ago today, Intellon completed its 2007 IPO under adverse market conditions that would soon become even worse. It was difficult decision for a company that had been forced to pull its initial IPO attempt some eight years earlier.

Founded by James Vander Mey , Intellon was a global leader in powerline communications ICs. ?The company first filed for an IPO in 2000, hoping to take advantage of the dot com tech boom. I was on the Intellon board at the time, unconvinced that the company was ready to be public and seriously concerned about the growing bubble in tech stocks.

The Nasdaq stock index peaked on March 10, 2000, at 5,048, nearly double over the prior year. It would prove to be the day the music died--although not everyone was willing to admit it at the time. Convinced the market decline would be temporary, in August Intellon filed a registration statement for its IPO. The timing was a disaster. From that March 2000 peak to the trough on October 9, 2002, the Nasdaq index would lose nearly 80% of its value. In the meantime, the company kept spending, calculating that the private venture market would supply capital if the public markets would not. That worked for a few months but at declining prices that triggered massive antidilution adjustments in the outstanding shares.

The private capital markets soon dried up along with the public markets. Short on funds, the company slashed people and expenses in an effort to land enough bridge financing from current investors to yield a year of runway. In October 2001, the board named me Chairman and President. After we raised the bridge financing, I became CEO in March 2002. After stretching the bridge notes to 18 months of runway, in June 2003 we executed a painful 100-to-1 reverse recap as part of a new round of financing that raised only $15 million of new funds at a $30 million valuation. Getting the deal done required approval or consents from seven different classes of Intellon securities. It was one of the harder deals I have ever had to negotiate and by far the most painful down round I have ever faced.

After accumulating a deficit of $70 million, we were effectively starting over. The alternative would have been bankruptcy. It was a long, painful process that punished existing shareholders (particularly those who could not reinvest in the new round) and offered significant upside to new shareholders. But it worked. The round refueled the company and gave us a chance to continue. It also brought us some exceptional directors. To my amazement, the new board kept me on as Chairman and CEO.

It took us four years after the recap for Intellon to be in a position to pursue an IPO again. This time, I was convinced we were ready.

In early 2007--another heady period for stocks--Intellon filed a new registration statement for an IPO. The markets were good, almost too good. In October, the Dow Jones Industrial Average (DJIA) closed at a?new high of 14,165. But investors were getting nervous about subprime mortgages and potential asset bubbles in stocks and real estate. Timing was once again becoming a factor.

As we moved toward our planned effective date, the storm clouds of what would become the Great Recession were gathering. After we experienced a minor hiccup in our quarterly results, our lead investment banker wanted us to wait until early 2008 to go out. Worried about the economy and our need for funds, we replaced our lead banker and pressed ahead. The IPO went effective on December 13, 2007, with no room to spare. That same day, the Federal Reserve coordinated an unprecedented action by five leading central banks around the world to increase global liquidity by offering billions of dollars in loans to banks. Things became much worse from there. Our offering was the last tech company IPO for roughly two years. If we had waited until early 2008 to go out, I doubt that the company would have survived.

Despite the worsening markets, the value of Intellon’s shares increased 30% over the $6 IPO price during the first two weeks of trading. We were excited. With the net proceeds from the offering, Intellon had $52 million of cash and cash equivalents at the end of 2007--funds that would enable us to continue to drive our sales, revenue and gross margin through a challenging economy.

However, as we moved into 2008, the capital markets reminded us that they control the cards we get to play. Like the stock of many other companies, our stock slammed the wall. A year after the IPO, Intellon’s shares were trading in a range from $3.82 to $1.80 per share. By year end 2008, we were on the verge of being classified as a penny stock.

Our financial results seemed to have no effect on our stock price. Intellon sold 12 million of powerline communications ICs during 2008, a 56% increase over 2007. Over 50 original equipment manufacturers (OEMs) were integrating our chips into their products. ?Annual revenues reached $75 million, a 44% increase over the prior year. Sales for use by more than 45 service providers drove the revenue gains, increasing 83% year-over-year. We achieved our first year of GAAP profitability with $900,000 of net income compared to a 2007 loss of $7.3 million. Best of all, we still had $56 million of cash and cash equivalents to take us through the economic downturn that was unfolding around us.

That cash position enabled us to keep moving ahead. A year later, in December 2009, Atheros acquired Intellon in an attractive cash and stock deal. Shareholders who stayed invested in Intellon (and later Atheros) did well. After that deal closed, I became a director of Atheros until its acquisition by Qualcomm.

The moral here is simple. Cash is always important. But cash is your lifeblood when conditions in the capital markets are especially adverse. With cash, you have a shot at controlling your destiny. Cash can enable you to survive. It can also enable you to do things your less well funded competitors cannot do. Without cash, you have little leverage and even less control.

Deciding to move ahead with Intellon's 2007 IPO was not easy. We had to accept a lower than planned IPO price to complete the offering (in part because Intellon was competing in the capital markets with Entropic, another home networking company that went public a week ahead of Intellon). Shareholders who viewed our IPO as an exit opportunity were unhappy with our IPO price. As much as we all wanted a higher offering price, we understood that the IPO was an opportunity to raise efficient capital and provide shareholder liquidity. If we walked away from the IPO, we would need additional capital within a few months and we were not prepared to risk a repeat the disaster that occurred after the first IPO attempt. Moving forward with the IPO enabled us to deliver value and a strong exit for our shareholders.

A personal note to close: I spent more time at Intellon than I did with any other company in my eclectic career. I am grateful for the experiences I had and the things I learned. Most of all, I am grateful to have been a part of the team we assembled. For a small tech company headquartered in Ocala, Florida (in Orlando post-IPO), Intellon had a remarkable group of employees led by a dedicated group of managers who fortunately knew far more about ICs than I did. After their time with Intellon, most of those people went on to even bigger roles with Atheros, Qualcomm and other companies. (Check out their bios.) The executive team included people like Bill Earnshaw , Brian McGee , Bill Casby , Cameron McCaskill and Larry Yonge , among so many others. Along with Rick Furtney , Intellon's President and COO who passed away in 2020, these talented people made it happen. I was honored to be along for the ride. #capitalraising #ipo #startups #team #techcompanies #success #grateful