Sramana: What was so promising about the new technology that made you want to acquire it?
Steve Cotton: In the world of battery monitoring, we were frustrated with monolithic systems based on 1980s designs. You would have a big panel sitting in a wall with batteries from floor to ceiling. Those systems were customized and difficult to manufacture. There was a migration from monolithic systems to modular systems, but even then you still had a lot of wires to deal with, and it was difficult to manage.
The technology we acquired had one node that you would stick in the battery between the positive and negative terminal and connect them with a cat 5 wire to a controller. It was unique to the marketplace. They had applied for and received two patents on the technology. It engineered out all of the problems that we had seen and offered promise to engineer in a lot of unique benefits.
Sramana: It sounds like you saw this technology as a means of delivering solutions to problems you had already encountered at customer sites.
Steve Cotton: Exactly. It was the iPhone of the data center battery power monitoring space. You don’t even need a user manual because it is just so easy to use. It is also a system that allows new capabilities to be added. When we saw it, we knew we had to go for it. It was a big risk because we had to write a large check to buy the business. It was an inflection point between a few of us at that time. We had to determine if we wanted to continue building our business slowly and take the cash for steady growth, or if we wanted to invest that extra cash and grow. That was the decision we had to make.
Sramana: What did you have to pay to acquire the technology?
Steve Cotton: We got it for pennies on the dollar in terms of what was invested. Millions of dollars were invested in the product. Even then we still had to pay a significant amount of our EBITA for the year to get that technology. It was taking all of the cushion that we had in the company to bet on the technology.
Sramana: Did you ask why they had failed in the marketplace up to that point? At the end of the day, you were buying a technology that had failed.
Steve Cotton: We did ask that question, quite a bit. What it came down to was smart engineers with incredible ideas but without customer or market access. They were based out of Michigan, and they were funded by multimillion dollar cherry farmers. They did not have the market access that we did. Getting money from sources is one thing, but you also have to work with sources of money who can also help you get connected. You need smart money.
Sramana: We clearly advise our entrepreneurs to avoid taking dumb money for that very reason.
Steve Cotton: It is really important. When we did our private equity round last year, we refused to take funding from the wrong partners. It had to be the right model. That is my assessment of why we did not make it.
Sramana: What year did you make the acquisition?
Steve Cotton: That was in early 2007. It did take us 18 months to figure it out. We suddenly had engineers on staff and a lot more overhead. That overhead cost was not going to generate revenue for over a year. We had to invest in buying the business as well as completing the product to the point that we could do a beta test in a customer data center. The last thing we wanted to do was deploy something prematurely. It was a process to get it out to the field.