In a salutary warning of the risks of investing time or money in a cloud startup, ordinary shareholders in document collaboration platform Huddle are to be left with just $100 each after a new owner acquires the company.
A letter sent to shareholders this week reveals that San Francisco-based private equity firm Turn/River is acquiring the company’s shares, but only a select band of preferred shareholders will receive a payout. A recipient shared the letter with Business Insider, which broke news of the deal at an estimated $89 million value.
Huddle has made no comment beyond confirming to Business Insider that the letter is genuine. A Huddle spokesperson told diginomica the company plans to make an official statement next week.
The change of ownership is unlikely to affect customers. In a draft blog post prepared at the weekend and published yesterday by Business Insider, CEO Morten Brøgger writes:
We believe Turn River is the perfect home for Huddle as we look to accelerate this growth, scale our business, and continue to service our existing clients with the industry’s most secure document collaboration solution.
This is in line with the strategy to focus on document collaboration and find new networked enterprise customers outlined in interviews with diginomica last month by COO Rasmus Holst and VP of Marketing Tim Deluca-Smith. The company has a core customer base in government and professional advisory firms, and is a G-Cloud supplier.
Retrenchment from high growth
Huddle has been through a period of retrenchment since the founding management of Alastair Mitchell and Andy McLoughlin handed over the reins to Brøgger, who spoke to diginomica on becoming CEO in January 2015. The company had previously been on a high-growth trajectory, raising more than $90 million in venture and private equity funding, and with aspirations to build a billion-dollar business. Its ambitions are now more modest, as Holst told us last month:
We have done a number of exercises to bring the company to a place where it will be cashflow positive this year, so that we can decide our own fate.
We could have continued the growth, just thrown money at it and say we will grow our way out of this. This was not the approach we’ve taken. We’ve taken the approach of saying, we want to balance expenses and revenues.
It’s still a low double-digit growth that’s come out of it.
According to its website, Turn/River “provides capital uniquely tailored to help bootstrapped, growing, technology companies and their founders achieve their goals.” The private equity firm specializes in funding web-based businesses that use a lean digital operating model to build profitable growth.
It’s common practice among tech startups to issue preference shares to certain investors — often it’s a prerequisite of receiving venture funding. This class of shareholding offers extra protection to the investor by stipulating a value at which the shares should be sold. If a sale takes place at a lower value, then preference shares have first call on the remaining capital — hence the name — leaving ordinary shareholders out of pocket. Founders, employees and seed investors are often the ones left holding ordinary shares.
Preferred shareholders at Huddle include venture capital investors Matrix Partners, Eden Ventures and Dag Ventures, along with WebEx founder Subrah Iyar. The $100 given to ordinary shareholders as a goodwill gesture is coming out of money earmarked for preferred investors.
Huddle crossed swords with Business Insider earlier this year when it picked up a Computer Weekly story built on a note in its statutory accounts, which disclosed a bank covenant that stipulated it should raise $5 million in new equity by the end of April this year, or else find a buyer. The accounts were filed in March, six weeks before the deadline expired.
Ordinary shareholders at Huddle will doubtless be feeling peeved at receiving such a small sum, even though they must surely have realized some time ago that their shareholding was at risk. The story is a salutary reminder that the bulk of wealth generated by tech startups goes into the pockets of venture investors, and it is an exception rather than the rule when ordinary shareholders do well.
Clearly there is enough discontent for someone to have ensured this story leaked out earlier than management intended. But assuming the deal is completed as outlined, then it appears to put Huddle on a sound footing to execute on its business strategy. We’ll keep readers updated as we find out more.
Image credit - via Huddle