Venture Wire
March 29, 2001Recognition Group Sails to the Rescue
By VentureWire Staff Reporters
3/30/2001
There's a new Coast Guard out to rescue dot-coms foundering on the sandbars of irrational exuberance. Or at least help them sink gracefully. Recognition Group [now known as Recognition Group] launched this week to provide turnaround and wind-down services for "distressed and out-of-favor" companies in the high-tech sector, taking equity in startups the firm believes it can offer new life, and cash compensation in lost-cause cases where the startups are better off shutting down. Seventy to eighty percent of its client companies will fall into the latter category, Juan-Carlos Garcia, one of Recognition's founders, told VentureWire.
The firm's business is divided into a services arm, Recognition Management, and Second Frontier Capital Fund, a $30 million fund that will back six to ten firms Recognition Group considers worth salvaging. With six full-time professionals and four employees hired on a project basis, Recognition plans to have no more than three to four clients at a time and will typically provide assistance for three to four months. It currently has four clients. "VCs don't have time nor are they paid for closing companies," said Mr. Garcia, a founder and managing partner at Madrid-based Suala Capital Fund who will lead and manage Second Frontier's investments. He said the firm has begun talks with venture firms based on the East coast that are considering hiring Recognition Group as their restructuring arm so they can devote their attention to portfolio companies that are in better shape. Mr. Garcia did not disclose the firm's fees nor the amount of equity it will take in turnaround situations, but said, "Our potential clients are struggling tech companies that are obviously cash-constrained, and we don't want to strangle them." Recognition may initially charge only enough to cover its costs, but will "try to make it up in the upside" or equity component of the deal, he said.
Recognition Management will provide such advisory and interim management services, such as technical and operational audits, cost reduction, wind-down analyses, asset sales, distressed M&A and out-of-court restructurings. Partners from two venture capital firms and an entrepreneur whose company is a Recognition client said they believe there is a role for such services. In light of current market conditions, "it sounds like a good response to what's going on," said Michael Donoghue, partner of Spring Capital Partners in Baltimore. Deborah Farrington, founder and co-chairman of StarVest Management, said her firm would consider using services like those Recognition Group offers if it felt a company could stay alive and be helped by remedial action. "Problem companies can suck not just 100% of your time, but 150% of it," she said.
The CEO of a San Francisco-based technology startup, who declined to be identified, said his company decided to bring in Recognition's Kaleil Isaza Tuzman, former CEO of the now-defunct govWorks, to act as a third-party mediator between its management and investors. The company's founders and shareholders had very different positions on how to address the company's difficulties, which included depleting cash reserves and a bleak outlook for additional funding, the CEO said. "In a distressed situation with cash going out the door, if you wait three months to make a decision, the value of the company is a lot less," the CEO said. He said he was more willing to trust Mr. Tuzman's advice, because of Mr. Tuzman's personal experience as an entrepreneur in a floundering company. Recognition convinced the CEO to step down and let an interim CEO take the reins, and also advised layoffs. The company's fate is not yet assured but the CEO said he was satisfied with the resolution the company's management and shareholders had reached. "The goal is to preserve the value of the company and increase shareholder value in the long term," he said. As an entrepreneur, he said, it had been emotionally difficult to address realistically his company's problems. But, "you need to suck it up and realize what's happening. You don't want to be the person who brings the burning ship down."
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