Zeacom founder on the US, patent trolls and why he didn't float the company
- 30 January, 2013 00:23
Call centre software specialist Zeacom might have joined the small list of technology companies on the New Zealand stock exchange if the sharemarket analysts hadn't stood in the way.
Instead, the company was sold to Enghouse Systems, a Canadian enterprise software company, for US$30.6 million ($36.9 million). Zeacom founder Miles Valentine says that when he needed to raise capital for expansion into the US market, his first choice was the NZX, but the reception he received from the stockbrokers was unwelcoming.
"We went to them when we were probably a $30 million turnover business and making a reasonable profit and they were generally negative," Valentine says.
"They were not at all encouraging, they didn't understand the market, their valuations were low... it's like 'this is too hard.'"
Instead Zeacom sought out private equity firms in the US for an investment in the Microsoft Lync platform, and was approached by a couple of companies interested in buying the company. The deal was settled in June this year and Valentine was made Zeacom regional president of Asia Pacific, managing a staff of around 100 in Auckland.
Late last year he quit the company. So why did he leave?
"I don't think I'm a very good employee after 18 years of running the show," he says. "They [Enghouse] are a decent company but they've got a lot more rules, they're a large public company."
"Part of the enormous attraction and enjoyment for me was dealing with the American market and I wasn't looking after that any more, I was just Asia Pacific, so I didn't have the enjoyment of the travel and that took a lot of the fun away."
Exporting to the US
Valentine drove Zeacom's expansion into the US market, living in California with his family for seven years and continuing to commute to the States on a regular basis after moving back to New Zealand about five years ago.
"It [the US] is demanding and a higher quality is required. They can ring up and say they're going to sue you at a minute's notice. There are all those negatives about it, but it's just got an enormous amount of opportunity," he says.
"Gartner said we [Zeacom] have got 2.5 percent market share, really? Wow that's great -- 2.5 percent, 97 percent to go, we haven't even scratched the surface yet."
But the US is not for the faint hearted, according to Valentine, who says it cost Zeacom's millions of dollars to set up stateside. He says he talks to New Zealand companies now who tell him they've got $240,00 to go to America and his advice is "don't go."
"Getting established is hard and I think that's something that New Zealand companies underestimate dramatically. While you are wasting that two or three months [getting set up] you've got people sitting around contemplating their navels, you're spending a lot of money," he says.
The initial hurdle, Valentine found, was having no credit rating in the US, which meant paying for everything up front -- the lease on the car, the rent on the office building and the family home.
The next hurdle was acquiring the various state and federal licences that would enable Zeacom to do business.
"You're trading in America, you've just started and there are 50 states and every one has a different sales tax regime. So where do you get your sales tax filed because quite quickly you start selling in 15, then 18 then 25 states," he says.
"Every regime is different. And then you get a sales tax audit. You get a nice letter from the Texas IRS or whatever saying 'We're going to audit you for sales tax.' You don't want one of those too early."
Then there are the patent trolls -- patent holders that target companies for a pay out. Valentine describes two instances when he was forced to pay for alleged patent infringement.
In the first case Valentine says that Zeacom's technology didn't have the kind of priority calling software capability of the patent it was alleged he was infringing. "It was going to cost me $1 million to get to court to tell them that so I gave them $350,000 to go away, that's the way it works."
He say the second time it happened the patent holder sued 86 companies on the same day and they nearly all (including Zeacom) paid out. He won't disclose the amount paid but he says that case was settled five minutes before the Enghouse deal went public.
"Patents are a big, big nasty area and local companies by and large have no idea how it works. It is ugly. As soon as you get your head above the parapet you've got a problem because there are all these trolls going around in every industry just waiting to see who they can have a go at.
While the Patents Bill -- with a disputed addition that doesn't entirely exclude software patents -- may soon be passed in New Zealand, the issues around patents need to be sorted in the US, says Valentine.
"But there's an enormous patent attorney lobby that I'm sure will never want to go there."
Meanwhile, back in New Zealand, Valentine says Zeacom's new owner, Enghouse, is finding that this is an attractive country in which to base a research and development team.
"Within the first three weeks of acquiring Zeacom they renewed the lease for three years, which is a year longer than they needed to," he says.
"If they get a renewal of the Ministry of Science and Innovation grant [now part of the Ministry of Business, Innovation and Employment], they will keep more development here. He [CEO Stephen Sadler] would rather put money here than in America because you don't get paid in America anything," he says.
Valentine estimates that skilled New Zealand labour is cheaper than in the US. "If you are paying $100,000 for a developer [in the US] you basically have $18,000 of the costs [for example healthcare] over and above that."
As for his next move, Valentine says he is yet to make a decision, other than he will visit the US next month, possibly to look at new business opportunities.
His advice to aspiring tech entrepreneurs is to start early. "I think entrepreneurship should start out of university, that's the best time to be an entrepreneur, when you can live on $50 a week."
"It's as hard making an idea work in IT as it is in anything. We have a number of disadvantages in New Zealand because we're further away and we've got underdeveloped capital markets and it's still a problem."
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