The State of Safeguard: Where We’ve Been and Where We’re Going
Posted by | January 18, 2013
During my nearly five years at Safeguard, I’ve worked closely with my predecessor, Peter Boni, and the current management team to define our strategy and develop plans to achieve our objective to build value for our shareholders.
Over the past several months since the board asked me to become President and CEO, I have spent considerable time talking with the team, taking inventory of our resources, assessing the industry environment, and formulating my plans and strategies to lead Safeguard into the future.
At the Needham Growth Conference yesterday, in a presentation broadly disseminated to the investment community, I took the opportunity to formally articulate my vision for Safeguard and the path I intend to follow to achieve our objectives.
Due to the success Safeguard’s current management team has achieved during my tenure, I truly believe our business model is building tremendous value for our shareholders. Cash-on-cash returns doubled on $110 million in initial capital deployed into partner companies that we’ve sold or written off since 2006. Those returns place us in the top echelon amongst comparable venture and private equity funds in light of the Great Recession.
It is for these reasons that I believe our strategy going forward is to build upon our proven model by concentrating more of our resources on the tactics and activities that have been most successful over the years.
Despite the tremendous success we have achieved building value in our partner companies, it seems that investors are getting tripped up by the black and white accounting that obscures how all of that partner company value aggregates within Safeguard. Whether it’s the right methodology or not, investors feel much more comfortable valuing companies based on traditional operating metrics.
Fortunately, our evergreen, self-funding strategy envisions a growing pool of capital, with proceeds from a steady flow of well-timed exits used for new deployments. As we continue to grow, we expect to reach a ‘steady state’ of regular exits, which will deliver the operating performance that investors crave. We’ve continually moved closer to this objective, as we incubate companies across the various stages of development in which we deploy capital, ultimately aiming to have these companies acquired by strategic buyers that can integrate them into their existing businesses.
To help accelerate the realization of our strategy, one of the goals I have outlined is to increase the number of partner companies from 18, which we have today, to something close to 25-30 partner companies over the next year. This larger stable of companies supports our evergreen strategy — more partner companies improves our ability to manage the timing of exits while still targeting (and hopefully achieving) an aggregate cash-on-cash return at minimum of 2x cost.
In addition, we’ve looked at our most successful partner companies to identify ‘best practices’ we can employ to improve performance. As a result, we’ll be more disciplined in making initial capital deployments in the amounts for which we have realized the greatest returns. What does that mean? We’ll focus on initial deployments in the $5 million to $15 million range, which has demonstrated to be the real sweet spot for Safeguard. Deployments of this size typically allow for any potential add-on fundings of another $5 million to $10 million, providing us with the ability to have appropriate board representation, and offering us the opportunity to exercise the degree of control that has generally led to exits that exceed our return thresholds.
I intend to support the focus of our talented management team. We’ll continue to find our best opportunities in the sectors of the healthcare and technology industries in which we have the greatest domain expertise: on the healthcare side, this includes medtech (diagnostics and devices), healthtech (aka healthcareIT), and specialty pharmaceuticals; and on the technology side financial technology, digital media and Enterprise 3.0.
The Great Recession created challenges for many firms in our industry. As a result, firms have gone out of business, abandoned their core focus, or scaled back. Over the same period, Safeguard partner company aggregate revenues have risen from $31.5 million in 2007 to an expected $185 million to $190 million in 2012. It’s my intention to build on this legacy of outstanding performance to drive additional value for our shareholders.
This is a great time for Safeguard, and I am privileged and excited by the opportunity to lead our dynamic organization forward.
