Startup.com: The Sequel

13-Oct-2010

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CPA/entrepreneur







Startup.com: The Sequel
Christopher Steiner, 10.25.10, 12:00 AM ET

Startup.com,a documentary released in 2001, tracked the rise and fall of GovWorks, creator of websites allowing governments to transact business with constituents looking to pay parking tickets and file building permits. Kaleil Isaza Tuzman, who founded GovWorks at age 27, became a symbol of the era’s hubris and greed. On Christmas Day in 2000, with the end plainly at hand, he got a call from one of the company’s big investors, a troupe that included Henry Kravis, cofounder of private equity stalwart Kohlberg Kravis Roberts, and Maynard Jackson, former mayor of Atlanta.

“I made a mistake with you,” the investor said. “I usually don’t invest in people who haven’t failed before.”

Tuzman’s sequel is shaping up. In the last eight years he has captained the rescue or launch of five companies, and is now the chief executive of KIT Digital, $83 million (sales) maker of Web-video software, worth a recent $250 million on the Nasdaq. “I had to prove I wasn’t a failure,” says Tuzman. “GovWorks affects every decision I make every day.”

The son of a sociologist from Colombia and a Jewish mother, Tuzman covered four years at Harvard through scholarships and by hawking hats and T-shirts bearing the logos of nearby companies. After college Tuzman spent five years logging long weeks as an investment analyst at Goldman Sachs in New York. In early 1998 he came across a two-year-old parking ticket in his closet. Inspired, he launched GovWorks later that year. Over the next 28 months Tuzman would blow through $20 million in equity and $35 million in debt before orchestrating a sale for $12 million to First Data Corp.

Tuzman knew he had plenty of company in the tech bust. He also had personally guaranteed $1.8 million of GovWork’s debt and had but a year to repay it. So he became a salvage man for hire.

Tuzman’s first taker was Grey Advertising, owner of KPE, a struggling builder of websites and online games. Grey asked Tuzman to put up $100,000 of his own money (all he had), made him chief executive and gave him 75% of any sale proceeds. KPE labored under a crushing lease on a 40,000-square-foot office building in Los Angeles, and the landlord refused to bend on terms. Baseball bat in hand, Tuzman said he would destroy KPE’s offices and any capital improvements KPE had made unless the landlord allowed him to buy out the leases. “I can play hardball,” says Tuzman. The landlord agreed, and Tuzman sold stock KPE had in various Internet companies to make the payment. Six months later he had slashed payroll by two-thirds and focused on a handful of marquee clients. A month after that, Tuzman sold KPE for “more than $10 million” (he won’t specify further) to Agency.com, an interactive marketing firm.

Other salvage operations included Shock Market, a commodity trading platform acquired by E-Trade; MagicBeanStalk, an engineer-recruiting firm; and Centers for Medical Innovation, which hunted for plant-derived cures to chronic illnesses. By 2004 KCP Capital, Tuzman’s holding company, had turned around or restructured 15 companies, mainly tech-bust refugees, collectively saddled at one point with roughly $180 million in debt. From this heap Tuzman’s group managed to squeeze $55 million for shareholders.

In late 2004 Tuzman tried to take over Versa Systems, a Toronto firm that made database software for processing government regulatory filings. Management thwarted him, but during his ten months in Canada Tuzman struck up a friendship with board member Scott Patterson, an early investor in JumpTV, a startup that wrote software enabling television broadcasting on the Web.

JumpTV, then with three employees, needed a leader. Tuzman bought a controlling stake and looked for new sources of revenue. He found one selling subscriptions to TV over the Web that allowed, say, Thais in Chicago to watch shows aired in Thailand. Two years later JumpTV employed 220 people, sold access to 300-plus broadcasters around the globe and went public on stock exchanges in London and Toronto. At the stock’s peak, in 2007, Tuzman’s 8% share was worth $40 million.

When Tuzman saw the industry shifting toward free video on demand, delivered by the likes of Hulu.com, he tried to convince JumpTV’s board to buy Roo Group, in New York City. Roo wrote software that managed Internet video distribution. The board balked, and Tuzman left. When his noncompete clause expired in December 2007, he bought 60% of Roo and proceeded to gut the staff and replace it with 40 colleagues from JumpTV. He also moved Roo’s working hub to Prague, where good engineers came 50% cheaper than those in Silicon Valley. (Roo’s legal headquarters sit in Delaware.)

As online video took off, so did Roo, which Tuzman renamed KIT Digital, after his initials. KIT went public in 2009 on the Nasdaq, raising $32 million, and has been on an acquisition binge ever since. Recent grabs: Multicast Media, an Atlanta company that manages online video platforms for large corporations; Accela Communications, maker of marketing videos for health care and IT companies, in Boston; and Megahertz, an English company that builds broadcast trucks, high-definition broadcast studios and video servers. KIT Digital now owns 25% of a $500 million market for Internet video-management software, a market growing 40% a year. Clients include McDonald’s, FedEx, Google and Fidelity. “Companies’ video assets are incredibly important, and most firms feel they’re entrusting their baby to the software system they choose,” says Sasa Zorovic, senior analyst at Janney Montgomery Scott.

“Our goal is to become the SAP of video,” crows Tuzman. Beats paying a parking ticket.


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