PART 2: Vanderhoofven remembers Tricycle’s darkest times that led to successful exit
(EDITOR’S NOTE: This is the final article in a two-part series examining a recent successful exit for a Chattanooga-based start-up that was one of the portfolio companies of the Southern Appalachian Fund.)
By Tom Ballard, Chief Alliance Officer, PYA
The challenges at Tricycle Inc. came to a head in 2011 because the company was, in Grady Vanderhoofven’s words, “hemorrhaging money to the point it was almost insolvent.”
The start-up was more than $1 million in debt and lacked cash flow to pay its bills. A plan to sell the company at a total loss to equity investors and a partial loss to creditors was approved by a majority of the board of directors but then rejected by a slim margin when it was presented to the shareholders. There was a lack of alignment, at that time, among the board of directors and between the board and management.
The Southern Appalachian Fund, of which Vanderhoofven was Co-Founder and Assistant Fund Manager, led an initiative, supported by a majority of shareholders, to restructure and refocus the company. A key part of the plan was a change in leadership. Aern Hetem, who joined Tricycle after its founding, was elevated to the top position. With Hetem at the helm, SAF negotiated a 90-day standstill grace period with the company’s primary lender, to allow some time to start a turnaround that had a chance of being successful.
Hetem told us in an interview that branding and marketing were key areas of emphasis in the early days of the company that he joined in 2007. “We were almost a hip and cool design shop coming up with new ways to sell carpet,” he said.
As is the case in many such pivots, there was a significant staff reduction – 50 percent to be exact. Instead of pursuing many opportunities, Tricycle focused on a few top priorities.
“Our focus shifted to the nuts and bolts,” Hetem explained. “We need to pump-out more samples. We did whatever it took to rescue the company.” Fortunately for Tricycle, Hetem describes himself as a “rollercoaster guy rather than a straight road driver.” With a much tighter focus and a lot of hard work, things turned around.
“The company returned to profitability in about six months and paid-off its debt in about three years,” Vanderhoofven said. “Tricycle also began hiring staff, moved to better space, started paying dividends to investors, and closed the U.K. subsidiary.” The company still has a few employees in the UK and in Europe, but they now are employees of the U.S. company.
With its business much more stable and an expansion of the company’s value proposition, Tricycle began to become a potential target for acquirers. The board of directors engaged a series of consultants and contractors to provide input regarding how best to position the company to maximize value at the point of exit, to help identify potential acquirers, and to raise the company’s visibility in the broader market.
“We had a couple of unsolicited tire kickers who made low ball, crappy offers,” Vanderhoofven said. There was also one very reasonable offer about a year ago that fell apart. As Tricycle management talked with Shaw Industries about future needs that the flooring company had, those discussions eventually turned toward an acquisition.
Vanderhoofven said that Shaw Industries did its due diligence and made an offer that was more attractive than the one that fell apart a year earlier.
For the acquiring firm, it was a solid business decision.
“Tricycle had become a very important element of our commercial business,” Ken Jackson, Shaw Chief Financial Officer, told us. “Tricycle is able to generate images of carpet samples in the early part of the design stage that are very well-received by the design community. This unique capability has helped Tricycle’s entire customer base make fewer ‘real’ samples as the digital images are incredibly realistic. This has saved the commercial carpet industry literally millions over the years in actual sample costs.”
The acquisition was also good for the investors.
“All of them made money . . . multiple times what they invested in the company,” Vanderhoofven said, adding, “It’s like a triple in a world of singles, doubles, triples and homeruns.” Tricycle’s investor roster included institutional and individual investors, primarily in Tennessee (Knoxville, Chattanooga, and Nashville), with some participation from the Atlanta investment community.
The acquisition of Tricycle is the sixth exit for SAF. The only true start-up remaining in the SAF portfolio is, ironically enough, Smart Furniture, another Chattanooga company. SAF also holds equity in the company that acquired Expedeon, Ltd., the company that merged with Protein Discovery, a Knoxville start-up, in early 2012.
“It was a wild ride,” Vanderhoofven says. In the end, it was a successful ride, and that’s what we need to see in greater numbers.