Five Questions for Kemp on Raising VC as a Mature Company

1/31/12Follow @arleneweintraub

When Long Island, NY-based Kemp Technologies revealed on its blog on January 24 that it had raised $16 million in venture capital, it might have been easy to overlook the funding as just another sign of the latest tech boom. But this was no ordinary funding: Kemp is an 11-year-old company with revenues and profits that’s entering the venture capital market for the first time. The company, which makes equipment to help small and medium-sized businesses manage traffic on their computer servers, was funded by Edison Ventures, with participation from Kennet Partners, and Orix.

Why did Kemp’s founders jump into the VC game now when their company was fully self-sustaining and on a fast growth path? Peter Melerud, Kemp’s co-founder and executive vice president of product management, got on the phone recently with Xconomy to explain the reasoning behind the funding round and to provide insight to other business owners who are weighing an entry into the VC game.

Xconomy: As a profitable, self-sustaining company, why did you feel you needed to raise venture capital?
Peter Melerud: We started the company in 2000, and in 2003 we launched our very first product. Our revenues and profitability started to happen not too long after the time we launched our first product. We were able to quickly start re-using the profits for seeding growth. But obviously it was slow and deliberate, with an eye towards the bottom line, because we were self-funded.

Over the past three years, we experienced dramatic growth. In 2011 we saw 116 percent growth in revenues and we have 8,000 deployments worldwide. We realized that in order to take advantage of that growth and keep up with it, we needed to aggressively step up every area of the company, from R&D to tech support, to marketing and sales. To do that, we realized, we needed external funding.

X: What made you optimistic it was a good time to raise capital?
PM: The relative environment for VCs and fundings didn’t really have a big impact on our decision. We are a New York-based company—not a Silicon Valley-based company. Even though there was VC activity happening in this area, we were a little off the beaten track. We got engaged in the process with the current investors a pretty long time ago—almost a year and a half ago. It was definitely a getting-to-know-you process between us and the investors. We needed to be comfortable that we were really going to be working with good partners, not just VCs.

X: What will your group of VCs bring to the table, beyond the money, of course?
PM: Our roots are in product R&D and marketing. That’s what our expertise is. What the investors bring to us is more of a strategic growth-management capability that we’ll certainly be able to leverage.

We’re planning significant international growth. In the past, we relied on developing a channel network internationally. In 2010, we established a subsidiary in Ireland. We’re definitely looking to staff that up, but also to expand into other European territories, perhaps Central and Eastern Europe. We’re also going to be growing our support infrastructure. Support is a very key element of our business model—we don’t outsource it. We have to grow support capabilities internally, and we can do that more aggressively now. We’re going to be increasing our marketing and sales capabilities, too.

X: The poor IPO market makes exit strategies difficult, but now that you have VCs on board, it’s something you have to think about. How are you looking at the exit strategy at this point?
PM: Looking forward, we see our technology as becoming more and more core to a lot of other parallel areas, certainly in the cloud space. Being in the position to take advantage of those opportunities as they come up makes sense.

Looking at potential exits, I think there’s a broader set of options than just an IPO. It’s not something that we’re looking at short term though. It’s more of a three-to-five year plan. How will the market look at that stage? No one has a crystal ball, but certainly everybody thinks it can only get better.

X: What advice would you pass along to other late-stage companies thinking about raising venture capital for the first time?
PM: My first suggestion is to be clear with yourself as to why you’re doing it. There are lots of reasons to bring VCs in, so you need to understand the market, the opportunity, and where you fit within your space. How will the additional capital help the organization grow, assuming growth is driving the decision? Having that clarity is very important.

Also you have to match yourself to the right investor. Investors can vary dramatically based on their investment criteria. Make sure there’s a match, and make sure there is a match in personalities, as well. An investor is someone you’ll work very closely with, so you need to be sure that’s something you can do. Hopefully the two of you together will make a much stronger entity.

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