Per Ljung was about to ask a roomful of strangers for a million dollars, and he was pretty nervous. "The first few minutes are the hardest," said the tall Swede, who was seeking funds for his San Francisco-based startup, Coyote Systems.
Ljung had his work cut out for him. His audience on a recent, rainy evening consisted of about 80 members of the Band of Angels, an investment club that meets once a month at the Los Altos (Calif.) Country Club. In the era of the Internet, with fortunes being made in the online world, Ljung would be the only supplicant that night who was not representing a dot-com. Coyote Systems makes interconnect extraction tools for electronic design automation.
"It's tough on non-Internet-related companies," sympathized Hans Severiens, who founded Band of Angels about five years ago. Investors today are making billions almost overnight from dot-coms that have virtually no revenue. Although Coyote Systems has solid proprietary tools and a growing customer base, it's only expected to have a valuation of around $50 million by 2004, based on projected revenue of $20 million, Severiens said.
What's more, Band of Angels is no collection of wide-eyed neophytes. Most are grizzled veterans of the technology wars, ready to pick apart any weakness in a presentation. "There's blood on the floor some nights," is how one member once described it. Among those scheduled to attend that evening were Joe Costello, Ben Rosen, Jack Carsten, Bob Swanson, Federico Faggin, Jim Diller, and Papken der Torossian, although not all of them showed up.
The evening's first presentation was made by Peter Levy, chief executive of Vyou.com. As the Angels dug into their spinach salad, Levy demonstrated his company's software, which can protect a Web site's content from being copied or printed without permission. After asking for $2.5 million, he quickly departed.
Then Ljung got his 20 minutes. He began by pointing out a major difference between Coyote and some other applicants: "We have revenues, and we're profitable." In fact, six companies have approached Coyote with acquisition offers, Ljung said, but he wants to grow the company before accepting a buyout. Coyote has a valuation today of just $5 million, and he figures the company will be worth 10 times that amount in a few years.
As the stuffed chicken was served, Ljung launched his pitch. Interconnect-related delays now dominate IC design, he tells the group, showing a slide of a chip layout. Signal delay and crosstalk problems are becoming so bad that chips are arriving late to market and, when they get there, are proving much slower than designed.
"Existing tools out there don't work, which is good for us," Ljung said. Available interconnect extractors suffer either from poor accuracy or low speed. What Coyote offers the market is a high-speed, high-accuracy 3-D extractor.
Coyote got its start in 1996, funded by a $3 million contract from the Defense Advanced Research Projects Agency, which needed a fast and easy-to-use 3-D CAD tool for microelectromechanical systems. From that evolved Coyote's current set of five IC tools, which sell from $45,000 to $100,000 per seat. The tools are 20 to 500 times faster than other field solvers, Ljung claimed, "and we're as fast as some pattern matchers."
He told the Angels that Cadence, Monterey Designs, Ansoft, Microcosm and MemsCap had offered to buy the company but that all had been turned down. Customers include Analog Devices, Infineon and Monterey Designs, he said.
The requested $1 million is earmarked for hiring a sales and marketing team and for launching a sales campaign. Ljung disclosed that Coyote had revenue of just over $1 million in 1999, with net income of $88,000. Those figures should improve considerably this year, he said: Motorola had requested a site license worth over $1 million, although the order hadn't been nailed down quite yet.
Summing up, Ljung said an investment would be low-risk, given that Coyote had received several merger offers of over $5 million in the past two years, and multiples of 5x to 10x are common in the EDA industry. Angels interested in investing were invited to attend a follow-up luncheon the following week. Then the floor was opened to questions.
One member of the audience asked whether Ljung, who's a technologist with a PhD, would give up the CEO position after funding. "I'd gladly step down," he responded. "We had another CEO, but he didn't work out." That person had been hired from Cadence and didn't handle the transition to a small startup well, Ljung said.
Another Angel suggested that Ljung reconsider his plan to wait a few years before selling out to one of the broad-based EDA companies: "These guys might swamp you." Severiens, who had sponsored Coyote's appearance before the Angels, responded that the strategy is to sell Coyote to one of the companies, "but not today."
While Internet-related companies YesVideo and Intralect made their pitches, Ljung got to eat his dinner and wonder how his presentation had gone over. After the event broke up, the response was encouraging: Although several Angels came over and urged him to sell out right away, a few others passed him their business cards with offers on the back. "Would like to invest $50k, but can't make the lunch," read one.
Ljung later confided that $200,000 in offers came in after the dinner meeting. "Wow, this is a crazy place," he said, his eyes glowing.
A week later, a dozen potential investors attended the luncheon, where Ljung went into more detail about the technology and introduced chief technologist Martin Bachtold. Ljung said that Coyote's tools have received positive evaluations from Intel, Avanti, Hewlett-Packard, Agilent and Mentor and that Coyote has "had discussions with Synopsys to augment their Arcadia tools."
He claimed that Coyote has a two- to three-year head start on the competition. Only 20 people in the world know how to create the technology, he said, and four of them work at Coyote. "Aren't you a little vulnerable to having the competition steal your people?" asked one attendee. Ljung responded that stock options and employment contracts should prevent mass defections; the key employees together own 20 percent of the stock, and he owns the remaining 80 percent.
One attendee asked for the name of the person who had evaluated the tool at Avanti so that he could do more due diligence; Ljung provided the name and promised a phone number. Questions then poured in on a range of subjects: Coyote's patent position (patents are pending), whether Ljung would stay with Coyote for the duration ("I'm not going to Tahiti tomorrow") and why the company is based in San Francisco instead of Silicon Valley (lifestyle issues, cheaper rent).
The sharpest questioning, though, centered on the amount of money Coyote sought to raise. "I think you're way off on that million bucks," said Jack Balletto, who founded VLSI Technology and is managing member of Sunrise Capital Fund 1 in Los Gatos. Ljung had budgeted $250,000 to hire two marketing managers, a figure Balletto thought woefully inadequate: "The average EDA sales guy is knocking down $400k a year. It's unbelievable," he said.
Balletto suggested raising $2 million. "I think there's enough interest in the group to go above $1 million," said Severiens.
After the lunch meeting, some remained cautious: "It's a good niche, but there's no ability to build a long-term company, so if you miss the window there can be a problem," said Robert Spencer, who heads The Spencer Group (Los Altos Hills) and is on the Actel Corp. board.
But at least two attendees liked the deal. "Put me down for $50,000," said one.
That set the tone for the next several weeks, as more Angels flocked to invest in Coyote. By mid-March, commitments totaled $1.8 million, putting Ljung in the catbird seat. "We are trying to figure out exactly how much to take from them," he said. "They're offering more than we're asking."
Severiens figured that Coyote would take about $1.5 million to pay for the first year's marketing campaign, including opening an office in Silicon Valley (annual rent: $40,000 to $50,000) and hiring a pair of experienced marketing managers. That means some Angels probably won't get to invest in Coyote in this round.
Severiens now believes Coyote's non-dot-com status was a boon rather than a bane. "Members of my group are more in their late 40s, 50s and 60s, and don't really understand the dot-com business that well. They're more comfortable with something traditional like this."
In the case of Coyote, it helped that the due diligence checked out, and Ljung made a good impression on the group. "That's not to say it's a slam dunk," Severiens said. "They're not the only one in the marketplace, and other people are taking different approaches. But our people seemed to think the technology was excellent, and there's a chance to capture a piece of the market."
All that remained was to prepare and sign the legal documents. Normally that's routine, but the red-hot Silicon Valley economy complicates even simple transactions: Ljung's lawyer was busy working on an IPO for another client and wouldn't be free until the end of March.
"We'll need to find another lawyer, which isn't easy, or else wait for him to finish his IPO work," Severiens sighed.