(EDITOR’S NOTE: This is the first 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
An entrepreneur or investor in a start-up knows the path from the beginning to an exit is anything but linear in most cases, and the roadway is frequently littered with carcasses of companies that don’t make it to a successful end.
That’s why Grady Vanderhoofven, Co-Founder and Assistant Fund Manager of the Southern Appalachian Fund, wanted to tell the story of Tricycle Inc., a company that overcame some serious challenges to have a successful exit late last year. The announcement brought a more than 13-year relationship between the start-up and SAF to a conclusion.
Founded in Chattanooga in the early part of this century, Tricycle was acquired in October by Shaw Industries Group Inc., the world’s second biggest floorcovering company. The deal made great strategic sense in light of Tricycle’s focus – providing digital carpet samples for the commercial carpet market.
“We met the founders – two from the U.K. and two from Chattanooga – in 2003,” Vanderhoofven told us in a recent interview. About a year later, SAF invested and remained intimately involved through the ups and downs until the acquisition by the Berkshire Hathaway Inc. portfolio company. Vanderhoofven was Chairman of the Tricycle Board of Directors from 2011 through the date of acquisition, and his partner Ray Moncrief was Chairman of the Board of Directors prior to 2011.
“We engaged Bob Wilson and the CEG at the outset, immediately after we had performed our initial due diligence on Tricycle,” Vanderhoofven said, referring to the Center for Entrepreneurial Growth that was a part of the old Technology 2020 organization.
“At the beginning, the opportunity was based on the collaboration and potential synergy of three different companies, two of which were in the United Kingdom and one of which was in Chattanooga,” Vanderhoofven explained. “Structurally, the collection of entities was unwieldy and not investable, but the market and technology opportunity were compelling. We developed a plan to structure and align the companies as a parent with subsidiaries, and we engaged Bob and the CEG to execute that plan.”
One of the tools in the SAF arsenal was operational assistance dollars, 50 percent of which were raised from contributions by organizations such as the Community Reuse Organization of East Tennessee, Appalachian Regional Commission, and TVA, and the other half that came through a grant from the U.S. Small Business Administration. Those funds enabled SAF to align its investment decisions with operational assistance to ensure a better outcome.
“The operational assistance funds made it possible to mold Tricycle into an investable structure, before we deployed investor capital to grow the company and increase shareholder value,” Vanderhoofven said. “That’s the way SAF was to operate . . . find early-stage investment opportunities in low income areas of southern Appalachia and use the operational assistance money as necessary to augment and supplement investment capital.”
He estimated that Tricycle received more than $200,000 in technical assistance from SAF, both from the CEG and from numerous other providers.
The company had raised some funding from angels prior to SAF’s initial investment in 2004, but SAF was the company’s first institutional investor. SAF helped the company attract more investment over time, and Tricycle’s reputation, revenue, and payroll grew.
The company grew to more than $5 million in revenues annually, but had operational challenges,” Vanderhoofven explained. “Visionaries are not always great operators of transformative businesses.”
NEXT: Needed changes came to a head in 2011.