Investing in a dot.com/SaaS business: a history

In the late 1990s and into the first year or so of the 21st century, the dot.com boom say billions invested in new online ventures across great swathes of industry and commerce. The global architectural, engineering and construction (AEC) industry was no different. Millions were pumped into new start-ups by venture capitalists, business angels and other investors hopeful that their funding would yield huge profits as the start-ups became successful online businesses delivering services and products to the AEC industry. Of course, as we now know, the ‘dot.com bubble’ burst, thousands of ventures crashed and burned, and numerous mergers and acquisitions took place as entrepreneurs and investors attempted to keep their companies afloat.

In the AEC sector, various would-be trading hubs and information portals flopped, but a hard core of construction collaboration providers proved more viable. Some required more investment than others and even successfully raised several rounds of further funding. I sometimes wonder if success in initial fund-raising exercises inflated investor expectations about their ventures’ potential, leading them (and other, later investors) to continue to pump money into what turned out to be loss-making businesses in the hope that they might, one day, get a return on their investment.

For example, I think the history of BuildOnline/Citadon/CTSpace shows that the survival of the business up to its acquisition by Sword Soft was fuelled by the continued willingness of investors to pump money into BuildOnline and the various companies that, through numerous mergers and acquisitions, were absorbed into the business. Building on my earlier post, I thought it might be interesting to tot up the figures, and look at some of the investors.

Citadon backers

Let’s look at the US operation first. Founded in 1997, BluelineOnline secured $10m third round funding in August 1999. E-bricks.com was founded in November 1998 and the following July secured $3m funding, before merging with BluelineOnline six months later to form Cephren, which secured a chunky $41.5m injection of funds. Parallel to this, Bidcom, established in 1998, raised $63m in three rounds up to January 2000, and then in June that year, acquired Cubus Corporation, a business which had raised a more modest $3m in 1999. In late 2000, Cephren and Bidcom merged to form Citadon, raising $14m then (and laying off around 100 people), another $19m infusion in October 2001, and $15m more in September 2003. Overall the sums invested in the US businesses total over $168.5 million (c. £84m, or €120m).

Google searches for shareholders in Citadon suggested the following:

• Bechtel
• Fluor Daniel
• GE Capital
• Hines
• Internet Capital Group
• Insight Venture Partners, New York
• Oracle Venture Fund
• Partech International
• Warburg Pincus

Cephren backers in January 2000’s mezzanine funding round were led by GE Equity Investments, GE Power Systems, Goldman Sachs and Grupo Picking Pack (GPP), and included original investors including Telos Venture Partners, Bay Partners, Montreux Equity Partners, RWI Group, and Donald L. Lucas.

Prior to its merger with Cephren to form Citadon, Bidcom shareholders included UK AEC businesses Carillion, Wates Group, and EC Harris and the management services group KPMG Consulting.

BuildOnline backers

The figures invested in the European operations are equally impressive (or depressing, depending on your point of view). Founded in Ireland in 1998, BuildOnline says, in a May 2002 news release, that it raised £34 million (€55m) from seven investors, with £17 million of these funds were raised between 2001 and 2002. In April 2001 it picked up the pieces of iScraper Germany, an Israel-based business which went bankrupt despite raising €40m in two rounds of funding (my employer BIW Technologies took on iScraper’s UK interests). Meanwhile, Bilfinger Berger and Strabag had invested heavily in Congate AG, while Nemetschek had founded MyBau AG; the two ventures merged in January 2001, having been backed, I believe, to the tune of around €30m. In May 2002, BuildOnline announced it would combine its German operations with MyBau, in a deal which also saw Bilfinger Berger and Strabag invest £2.2m (€3.6m) in cash to become minority shareholders in BuildOnline. If we discount half of the iScraper money, the combined UK and European operation still absorbed investments totalling over €108.6m (c. £76m, or $152m).

Up to 31 December 2005, BuildOnline (Holdings) Ltd had accumulated – through half a dozen rounds of fund-raising – a shareholder list that included well-known financial institutions, venture capitalists and a few construction businesses:

• Balfour Beatty plc, London
• BancBoston Investments, Boston, USA
• Bilfinger Berger AG
• Bridge Street Special Opportunities Fund 2000, London
• Delta Nominees, Dublin
• Donaldson Lufkin & Jenrette Securities Corporation
• ETF Investments, Amsterdam
• European Venture Partners, Jersey
• Goldman Sachs Group Inc, New York (as noted, a previous Cephren investor)
• Global Retail Partners Funding Inc, Los Angeles (plus five other GRP funds in Los Angeles and New York)
• GS Private Equity Partners (plus two other funds), London
• Paul Hanley of Co Roscommon, Ireland
• Brian Moran, of Dublin
• Nemetschek AG
• David Palmer, of Dublin
• Sal Oppenheim Jr
• SocGen Nominees (UK) Ltd, London
• Stone Street, London (two funds)
• Strabag AG

CTSPace funding takes total over £160m

On 13 December 2006, Citadon and BuildOnline announced they were merging to form a business trading as CTSpace, but this was not the end of the investments: a week later CTSpace announced that it had raised another $5.3m (c. £2.65m, or €3.8m), in an investment round led by GRP and Insight Venture Partners.

Add this to the figures associated with the previous two arms of the business, and – excluding any investments in the past 14 months – CTSpace, in its various guises, burned its way through a colossal sum somewhere in excess of £162m (c. $325m or €232m).

The scale of the losses sustained by investors is not difficult to imagine. Assuming my $13m figure is accurate, it appears Sword acquired a business for less than 4% of the total sums previously invested in it, so I suspect only a small handful of investors ever got even a token return on their investments.

Who’s to blame? Well, one must look to the people given executive responsibility for running the various businesses. In the case of Citadon and its predecessors, the list of CEOs includes Jas Dhillon (BluelineOnline and Cephren CEO), Daryl Magana (one-time Bidcom CEO), Doug Sabella (Citadon CEO 2000- Feb 2001), Rob Majteles (2001 interim), Bernard Fried (Feb 2001- November 2003), Tom Dengenis (CEO Bidcom UK 2000-2002) and Howard Koenig. In the case of BuildOnline, the list is much, much shorter: it mainly concerns Mark Suster.

Suster entered the BuildOnline story in November 1999, having been recruited as CEO by BuildOnline founder Brian Moran from Andersen Consulting/Accenture (see FT stories here and here). However, having burned through millions of pounds of funding, by 2006, he was already working on his exit strategy, leaving BuildOnline in November that year, having established another collaboration software business, Koral (see post) – now part of Salesforce.com – before leaving and becoming a partner at GRP (erstwhile backer of BuildOnline) in the summer of 2007.

Not all dot.com doom

As a final note, I should point out that other AEC dot.com ventures rose to market leadership positions without commanding such huge investments (and losses). BIW, formed soon after BuildOnline, raised just £9m, soon overtook BuildOnline in the UK and is today a fast-growing and increasingly profitable leader in the international AEC collaboration space. An honourable mention also to another UK competitor, 4Projects, which grew organically up to the point it achieved a private equity-backed MBO last summer.