Following the recent sale of his business, Andrew Patterson talks to Zeacom founder Miles Valentine about the software industry, the decision to sell and why the NZ capital markets were a second-best option for the business

By Andrew Patterson

Zeacom is one of those businesses that ticks all the boxes when it comes to innovation, technology and the creation of high value jobs.

From humble beginnings in NZ eventually expanding significantly into North America, it has grown to become a leading provider of software for contact centres [better known as call centres] globally, but particularly in the US.

Founded in 1994 by technology entrepreneur Miles Valentine, the business was sold last year to Canadian software company Enghouse for a reported $40.6m (US$30.6 million.)

Based in Auckland and the US., Zeacom provides a range of services including business process automation software via a global network of sales channels and vendor partners.

Revenue last year totalled almost $40 million and the company employs 180 staff in NZ and offshore.

Company formation

Miles Valentine says, like most things in business, it was all about the timing when he initially decided to form Zeacom.

“When I sold my first business which specialised in phone switchboards or PABXs as they were known then, I had a restraint of trade on some aspects of what I had done, particularly in software, but call centres were outside that restraint."

”We knew there was a real need because we had been selling the phone systems and there was a growing subset of businesses for whom the phone systems at the time were increasingly proving to be inadequate for their needs.”

“So through a series of events, call it fate maybe, we found a developer who I had sold a phone system to previously who was happy to be acquired and that was really the start of Zeacom."

While call centres today are standard for most large organisations requiring a customer interface, in 1994 they were only just coming into existence presenting Valentine with a unique window of opportunity to jump on a wave that would eventually sweep the world.

“Our first sale was to Tech Pacific our second to PC Direct and the third was to a shipping company all of whom embraced the idea of having a specialist help desk. “Back then the system they had was simply distributing calls on the basis of who had been off the phone the longest.

“By comparison, what we offered was a much more efficient call management system that included a detailed reporting system, which obviously had a lot of appeal in terms of being able to analyse the calling data it provided.

“However, I have to say for the first six months the whole system didn’t work very well at all and we had significant teething problems but the customers were all very tolerant about it as I suspect they knew there would be a few issues getting the whole system bedded in.”

“The other issue our customers faced was that call centres were very costly business units to run. You had lots of people sitting round waiting for the phone to ring and so they realised very early that you needed to be much more efficient in the way you managed people which was exactly what our software offered.”

Business model

Zeacom was able to build a common platform with a user friendly interface where customers were able to suggest enhancements and new features which were invariably included in future upgrades.

By the time the business was sold last year, the company had between 3,500 and 4,000 customers globally using its system.

“What was different about what we offered was that the software sat outside of the telephone platform and effectively welded the smart features it offered to the phone system itself.”

“The big issue we faced at the time was that most telephony managers weren’t used to paying maintenance fees for software so that involved some education during the transition process.”

Almost 20 years on and the operating environment is very different.

“The telephony manager is a relic of the past and these days corporate phone systems all sit within IT while the actual technology itself has completely changed particularly now Microsoft has entered the space [as a result of its purchase of  Skype in 2011.] It has the potential to be a very disruptive acquisition for the whole sector.

“Many of the big players who previously dominated the phone system space have now exited, including Ericsson and Nortel. The telephony business is undergoing an enormous amount of change which is really just a continuation of a process that started a decade ago.”

Speed of Growth

While the significant growth in the number of contact centres globally allowed the company to accelerate its own expansion, Valentine points out that the market does have its limitations.

“What we didn’t realise initially is that contact centres are actually quite hard [business units] and I mean that in a good way because they have quite high barriers to entry, but they’re also difficult to scale. To sell to tens of thousands of contact centres you need a lot of expertise.

“It was one of the reasons that ultimately led us to sell the business because we reasoned that the scale wasn’t really there and scale could only really be achieved by aggregating with a bigger contact centre company.”

Decision to Sell

So had the company reached a logical point in its evolution that a sale was inevitable?

“That was one aspect of it, but there was also the fact that when companies are established with venture capital, which we had with the likes of ACC, who were actually our largest single shareholder, and AMP Capital, along with a couple of other smaller VCs (venture capital companies) at some point they are going to want to exit and you are going to have to sell. That’s how they get their money out – that’s the business model."

“So it’s either going to be an exit and a sale or a listing on the NZX. But frankly, in the NZ market a listing is a hard option, particularly for a software company."

“The real issue for us was that the shareholders had been involved for a very long time, in some cases almost 10 years, which for VCs is a long period so there were a whole bunch of reasons in the end for the decision to sell.

The success of listed software company’s such as Xero and Diligent would suggest investors do have an appetite for risk but Miles Valentine says the local sharebroking community are part of the problem when it comes to understanding how to analyse and value software companies for a listing.

“The issue with Xero is that the fundamentals of the company don’t validate the enormously good share price they’ve achieved. Rod [Drury] has done an outstanding job of getting that aspect of the business to where it’s currently at. But he listed pre-revenue and unfortunately by the time the listing option came around for us we had a revenue history, so there’s a lot more to analyse and look at.”

“So if you’re going to list you either want to do it when you’re tiny or when you’ve really got a solid track record of earnings. So to that extent Xero have been a fairly unique case and of course Rod, with his background and his credibility, he’s been able to pull it off.”

“However, in saying that, when we did take it to the brokers they said when you chop the business back to the fundamentals and you’re making only this amount of money with a growth rate of 30%, then it’s not really that exciting.”

As others have pointed out at various times previously, including most recently NZX CEO Tim Bennett, the issue comes back to having analysts who are sufficiently experienced to provide coverage of these growth sectors, particularly in the tech space and right now the sector remains too small for this to occur.

When it comes to that other thorny issue of taxpayer subsidies being given to growth companies such as Zeacom, only to see them subsequently sold to offshore entities, Valentine says the idea floated last year by investor Selwyn Pellett for the Government, on behalf of taxpayers, to take a convertible note option, is potentially problematic.

“A convertible note as a tool or a mechanism changes the capital dynamics of any business. In just about every shareholder structure that would be a much more difficult decision because you’re effectively bringing a shareholder on board, depending on the terms of the conversion.

“It’s certainly one way to do it, but if you are going to go down that path then you need to give it very careful consideration because you really do change the dynamic between a grant that can help [a company] grow and the ownership. When we got ours we very consciously went out and hired six developers and in turn, that enabled us to accelerate our growth and invest in the development of the product.”

“We would have analysed it a lot more closely if that was the case because we had looked at grants previously and they were just too cumbersome with too many strings attached.”

“So I think it’s a bit too simplistic to say that a convertible note option is the way to resolve the issue.”

Capital markets

The debate about whether there are actually sufficient capital raising options in NZ for growth companies such as Zeacom is always a point of contention. Valentine says it’s the mid-tier sector where the problem is most acute.

“We still have a definite shortage of capital options for companies at the mid and late stage of their growth cycle. We’ve certainly addressed the early stage issue in recent years with a lot more angel and seed money around. But it’s when you get past that we still have an issue."

“A company I met with just recently has done very well raising a million dollars but they really need three and probably five million and they’re just not going to find that sort of capital in NZ. If they’re serious they’re probably going to have to migrate their corporate structure to America to increase their chances of being successful.

“So capital is really still the biggest issue we face. We have the expertise, we have the ideas, we’re willing to travel and we’re willing to enter new markets but in the end we’ve got to be able to actually fund that willingness locally.”

Reflecting on his 18 years at the helm of Zeacom, seven of which were spent based in the United States, Valentine has no hesitation identifying what has given him the greatest satisfaction.

“The success we achieved in the U.S. was definitely the high point for me. It was by far our biggest challenge. It’s a difficult and expensive market to get into and if we hadn’t been well funded – and God bless AMP at the time – I doubt we would have actually survived in the U.S. which ended up accounting for 50% of our revenue.”

As Valentine contemplates life after Zeacom, including his first summer in almost two decades as a free agent, he’s adamant about one thing.

“I’m not going to start another software company. Software is actually a lot harder than it looks. I’ll definitely be up for giving out free advice to some young start-ups and contemplating my next move but right now I’m just enjoying working with some other young entrepeneurs and watching as they take their first steps.”

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