In this final segment of our interview, we discuss some of the current business initiatives, as well as potential exit strategies. My thanks to HP for providing us with his insight to allow us all to benefit from his experience. I also sincerely hope that all the cleantech entrepreneurs and VCs out there would pay attention to the kinds of issues HP touched upon in this discussion, and anticipate those challenges, as well as put contingencies to tackle them.
SM: Sounds like you went to market with the wrong product, HP. Was there a lot of R&D involved in scaling from the PX 40 to the PX 220? HP: Indeed, and we invested essentially our whole future on it. We realized that if we were not able to make the PX 220 we would never be able to get into the major part of the industry. We would always be in just small plants.
You can’t really take a linear scale up. It doesn’t work that way because you are dealing with flow dynamics. You’re dealing with completely different physical properties when you scale up like that. That was a true achievement by our great organization to make the new product happen. We launched that in April 2003 or 2004.
SM: When you have to manage these long sales cycles – 36 months sounds like a very long sales cycle – how do you deal with cashflow issues? HP: Indeed. I will tell you. GE is now building a large plant in Algeria, it is called the Humma plant. It is a 200,000 cubic meter per day plant. And we were working on that order for four years and there are a number of lessons learned in this as well.
We got that order in June 2005. That order to us represented a major breakthrough. Not only was it a major client. It was a client who was willing to bet on our technology. At that time it was one of the largest desalination reverse osmosis plants. That order alone was about 150% of our previous year’s sales. And for these guys to put this type of trust in us was a major achievement but a second one was that it also represented a financial challenge.
We ended up slicing that order up into a series of smaller orders that we could ship and they would pay as we go. So in fact we ended up having to negotiate such that our major customers were willing to sponsor our working capital.
SM: That’s key. Okay great. You’re in 2007 everything is going really well. There is a lot of momentum in the company. What are your thoughts about scaling this business? It sounds like you are at a point now where you can scale really fast? You are probably starting to think about exits. What are your thoughts about the next set of goals? HP: At the outset ERI has never been for sale and never will be. However, the analogy is the house you live in. You have no intentions of moving until one day a person knocks on your door and offers you $10 million for a house that is currently priced at $250,000. Then you sell. I think the same will happen to ERI.
As to the thoughts of going public – that is ofcourse an option, but it requires careful planning and certain organizational changes prior to executing. The nice thing about ERI is that with its complete global reach, taking the company public may just as likely be done outside the US. We are constantly being approached by various investors from all corners of the world.
Another important issue about any exit, ERI or not, is the question of ownership. The question is therefore at what stage in the current evolution of ERI, are today’s owners no longer the right owners. Given the rapid growth of ERI, this is a constant issue. The moment you realize that current owners are holding back the development and growth of ERI, it is time to think about the right exit either partially or totally. So far I believe we have proven to be the right owners for ERI, but none of us can tell about tomorrow.
SM: Well, HP, this has been an absolute pleasure to share and relive your journey with ERI. I personally learned a lot!