BlueTech Forum 2011 - Interview with James Thompson - CFO Halosource

So I'm here with James Thompson, your CFO, right, with HaloSource, a company that went public not too long ago. And we're going to have a little conversation about you and the success of the company and how you did it. And as a role model here, so represented on stage is a multinational conglomerate. And I'm not talking about ge, we're talking about his company and we're going to find out how he did it. So maybe can you just first start off and just give everybody just a quick elevator speech on your company.

Thank you for having me today. I think I'm somewhat humbled by the title role model because it has not been always straight and at the speed and velocity that we'd like. But we have gone from being an angel backed company through many rounds of venture out of capital along to being a public company. So to that extent I'm happy to offer up our experiences. Our company is a company in Seattle. It's a water technology company. We're in three categories. Drinking water, environmental water, recreational water. We are a publicly listed company on AIM in London. We have a business here in North America and also a business in India, China and just getting started.

So give us a timeline. When did you guys get started and what are some of the key milestones along the way to where you're at today?

You know, I don't think we go back as far as 26 years, but it certainly feels that way. We really got started in 2002, but it was a merger of two companies. One was a natural polymer chemistry and one was a synthetic polymer chemistry. And that was really one of the seminal events of, of how the company came to be. We from there financed the company with a number of rounds of angel financing, venture capital, corporate venture capital, sovereign wealth funds. You know, the list goes on. And then we did the IPO in October. A couple of the other moments as far as sort of part of the story is the technology itself is the first to be approved by US epa. We got that about a year and a half ago of its kind. We just recently in the last month got approval at the China Ministry of Health. And if any of you have tried to get your regulatory approvals in China, it's just as difficult, if not more difficult than the US So be prepared to be patient. At the commercial level, we have some of the world's foremost players in the drinking water business, including companies like Eureka, Forbes in India, Bajaj in India. These are big appliance manufacturers. And so clearly for us, not only was the Technology interesting to our investor base along the way, but also the regulatory approvals and the commercial success. So you have to put all those three things together in order to continue to fund the growth that we've been able to do.

We were talking before, and you talked about funding the growth. You called it the oxygen for the business, actually. So that oxygen, that capital. When did you get funding and then when did you go public?

We got funding from the very beginning. I mean, you sort of go through the various phases, through the various parts of the cycle. And again, it's angels at formation. It's sort of local VCs, institutional VCs, all the way up to October, where we did the ipo. So it's important when you finance the company is you try to time. Because I came out of the venture world. I was with a venture capital firm that was an investor in the company for six years prior to joining as a cfo. So I've been on both sides of the table. I've also spent some time on the investment management side. So I understood in the roadshow who was on the other side of the table. As we went from investor to investor to investor, it was endless.

So as cfo, though, right, you had a huge role in managing the capital. And sometimes, you know, I'm sure there was times it was a little bit lean and you're able to bring some in. Can you just talk about your role as cfo? Managing the capital for the business, what role you played in helping make sure you always had that Runway and managing the activities of the business. Business to make sure you never ran out and, you know, raising when you needed to raise.

Yeah, I think, I mean, ultimately you walk around with your business plan and the business plan changes and you've got the strategic direction and then you got the tactical plays along the way. And that doesn't change whether you're whatever member of the leadership team you are, whatever function you're responsible for. I think it's fair to say that Jon Castle, who's the CEO of this company, is the kind of guy that you'd walk through walls for and he would be able to offer his perspective. But as the cfo, your role is to make sure that you stick to the business plan or if you pivot from the business plan, that it makes sense to pivot. And then also, you never run out of capital. And there were some very lean moments along the way. But I can't stress how important it is to have very strong investors bring on the strongest investors you can. I see Phil Giesler, who is from Unilever Technology Ventures, was an investor in our company. And I'm proud to say that not only did he sign the front of the check, but he signed the back of the check, which is a unique aspect as an entrepreneur, let alone a water technology entrepreneur. So I think it's really important to have the right set of investors that if you slip and fall, and invariably it's not always a smooth road, if you slip and fall, they're there to support and they're also important for subsequent rounds of financing where you're bringing in new investors.

So I called you jokingly a little bit of conglomerate, but I mean, let's think about that. What you just talked about, managing the capital for your company, making sure that you're focused. And you know, a lot of startup companies, a lot of what they do is they have to keep focus and bring some mark. But you, you folks have some different points, product lines you've got. We broke the rule, definitely, but let's talk about that because it's unique and it worked for you, obviously worked for you. And this is decisions people going through. But you've got very nice, elegant, simple water treatment for drinking, like for home, you know, individual, your family type drinking. You've got these, these type of polymers that can be very good for stormwater treatment or pools and aquariums. And then you've got these wipes for like cleaning surfaces. And those are like stormwater chemicals wipes for cleaning surfaces, home drinking water. That's not really a lot of focus. And your job as CFO was hey, let's go everywhere, right? No, I'm sure not. So how did you, how did you manage? And obviously it's successful where you're at. How did you manage as a company? And then you also as cfo, how did you manage your focus and business, deciding where to go, what not to.

Do and all that? We've mostly the first rule is the engineers and the scientists rule the world. Right?

That was the finance guys.

But I think it's fair to say that our business has been a collection of water technology businesses. There's a diversification component to all of this as well, which is diversified by geography, by product type. And that's been really attractive not only to us as managers, but also to the, to the other stakeholders involved. So there is two sides to that coin. I think it's also fair to say that we have deployed a lion's share of our capital to chase the drinking water business. It's the market that's the biggest. It's the one with the biggest growth rate. It's where we believe returns on capital will be greatest. And that's true. It's also important to point out that we're operating that business in markets that are growing at 30 to 40% a year. And so the end markets are very attractive. It's the emerging middle class in India, China. This is technology that is going in at the low end. These are $40 units that are sold into that emerging middle class. And so for us, most of our capital has been deployed in the drinking water business and the other businesses have contributed along the way.

So when we were talking before, just more privately, you mentioned that, that you had like a stage gate process for figuring out, hey, should we go down this path, this new product development path. So rational decision making, do you want to pick maybe, I don't know, the wipes or stormwater, some area you went down as a business, you consciously said, should we do it or not? And you as a cfo, like, are we going to spend money? Does it make sense or not? You want to help, you know, in.

Your thinking and sure, sure. I think for, for all companies like ours, you get into certain commercial activities that start to lead to something and you say to yourself, well, what's the capital required to get you there? And let's take for instance, our antimicrobial coatings business. That's an out licensing business. So we sit back and collect a royalty. It's very, very profitable. So on its own, it's very. Not capital intensive. It's a technology out licensing deal that involves Clorox and others. And so for us, we're looking at where do we deploy the capital that generates the greatest return? And clearly the drinking water business was where most of the capital has been.

Okay, so let's. That's great understanding of the product lines. Let's talk about this. The drinking water business. It's not often that startup companies decide to go way across the other side of the world, you know, to open up their markets. Like in Israel. I know they say let's make themselves in Hebrew, right? Let's do everything right here and figure it out ourselves before we go global with it. But you folks, how did you get drawn to the developing world? I'm sure you would have much rather had a huge market in your backyard develop up. How did it happen that you got drawn to the developing world and then for you guys as a business say, you probably resisted it for a while, but then said, okay, yep, if we're Gonna do it, we gotta do it and we know that what we gotta get into it. How did you make that decision? How did that all come about?

I think for us, we had a team that was very comfortable in the developing world. They had built businesses in the developing world. CEO, CEO, EVP of Operations, cto. These are all guys that are multinational guys. These are not us centric folks. So that was an important attribute. The second is the technology, quite frankly, was much more applicable outside the U.S. than inside the U.S. so for us, from the very beginning, we knew that we were going to be solving a problem in the emerging world where you have specific industry attributes that are best suited for the technology. And we had partners coming to us and saying, please come now. A lot of them wanted to license the technology and we'd sit back in Seattle and collect a royalty. And that really wasn't attractive to us. We wanted to control the technology, we wanted to be manufacturers and we wanted to control the ip. And so we did. We started out in India five years ago in a former wedding chapel. Very cheap, low footprint approach. But we got it scaled up and we got it proven with India's largest point of use drinking water device manufacturer, Eureka Ford. And then we built our plant and now we've just doubled the capacity of our plant. So we took a methodical approach. And again, as the cfo, you're constantly asking the questions about capital deployment and capital returns and that's really a cornerstone of the stage gate process.

So you guys are open minded globally, but then key partners both channel to market and then supply chain partners as well.

We think about partnerships both forward and backward. So the key partners to us are the partners that have the trusted brands. Whatever market they're in, they gotta have the trusted brands. Because we're a small company, we're not gonna build our own trusted brand, especially in places like India, China and Brazil. Also on the back end, we also think about our ip, for instance, and how we manage that ip. And, and while we have patent protection around the world, your supply chain is also a very important part of how you protect your IP and the mode around your business. So partnerships are critical both backwards and forwards.

It's a good point because people talk about IP and what's the first word that comes in the mind? Actually maybe the only word that comes in the mind. Somebody says, what's your ip? They mean what's your patent portfolio? Right. IP is intellectual property. It's more than just patent portfolio. But you folks have a rich patent portfolio, right? Yes, and I Guess we're going to talk about this later this afternoon. Some other folks are. But how important is it having that rich patent portfolio as part of your IP strategy?

You know, my chief technology officer will have a different opinion because he probably doesn't write the checks every month for lawyers, but CFO does. I would say that obviously people patent protection is critical. It's what protects you. It probably also leads to a slightly higher valuation on the takeout, if there's a takeout that ever comes. But for us in building a great company, we think about the mode around our business, whether it's brands or whether it's regulatory. Regulatory is critical and creates a huge barrier to entry in the business. Patents by themselves, especially in the emerging world world, aren't quite. You shouldn't completely hang your hat on them, as many people know. But there's a variety of aspects to your business that are the moat.

I think that's a really neat point because people ask about IP and you talk to startups and talk about their ip, they mean patents. But maybe instead of having that slide called ip, it should be here's the moats around our business or here's why other people ain't going to be able to do what we do. And one of those is going to be probably about their past. But it's going to be some of these other things that you mentioned as well that's very strong, very, very interesting.

I think the supply chain also is one that probably isn't as appreciated enough. And somebody was talking about costs and what are your costs. And if you think about logistics as a part of your cogs, one of the things in China that you have to be concerned about is obviously people copying. And you have to be very careful about how you, you manage that supply chain. You do things that aren't particularly efficient, you relabel, you've got to be very careful. You've got to be pretty coy about how you go about doing that. But that definitely is a very important part of that moat.

Let's go back to James, the man you mentioned that you were first involved with HaloSource as an investor, right. And then you went over to the company Ly. Why did you do that? Was it because the investment company was saying, hey, these guys really need a cfo and we picked you, you got to go and you're going, I don't think so. They said yes, you must. Or was it like, hey, this is really a great career, guys.

That's a big shift. I think from my perspective, I'M probably in the water technology arena for many of the same reasons everybody else in the room is. It's a very big problem and there are lots of unique solutions and it's going to be very big in the coming years. And so I was always attracted to this unique little technology company and the approach in which it took to solve a problem that is very big. And so for me, I also wanted to actually get in the game as a venture investor. As a corporate finance person, you're always on the sidelines helping companies. But I actually wanted to spend in a company building a company. And I will say it's the venture business by no means is not an easy business. That is a very difficult business. But being in a company, I think it's very rewarding to build a business and we've certainly done that.

So did your personal. I'm sure it did. But how did your relationship with Alexander Hutton, your firm you worked with before, how did that change and did you, or was it pretty much you dealt with.

We always had, we always had very supportive investors and so it was never an acrimonious situation. Thankfully, it doesn't always work that way, but we've been pretty good.

So let's talk about you guys going public and congratulations on that. You've got a pretty good market cap. How did all that come about? Everybody would love to go public and maybe as a follow up question, I'll also ask, is it only Rosie being public? Is, is there any downside at all to it? But first off, take us through, you know, going public, how that all came together.

You know, we had, I've not raised a lot. We raised about $60 million of private capital for the business between 2004-2009 and about half of that was raised in London because of the emerging markets aspect. We had investors like Unilever and others that were more global in nature. And so Masdar Clean Tech Fund was another investor. Orgo out of Beijing was another investor. So we've had to get on a lot of airplanes to raise capital for this business, which is okay because I think they better understood, in my opinion, they better understood the problems we were trying to solve in the big market we were chasing. As far as going public. We always looked at AIM as an alternative. You know, as a CFO of a company, you're supposed to raise capital to fund a business plan at the lowest cost possible. And that's one of your jobs. And I always appreciated the nexus that London provided for the water category, whether it's the SRI funds and the water funds and the clean tech funds and even the long only mutual funds that like the water category. So I actually think that globally there's a great opportunity for water technology companies to fund themselves as much as there are here in the U.S. but for us, going public was a financing event to help continue to grow the business. And I will tell you that as I sit here and answer these questions, I keep thinking to myself, what can I disclose? What can I disclose? So how much fun is it? That's not quite as much fun as being public.

You gotta be a little more careful. So how about three growth opportunities, which means mistakes in the old way of saying it, I mean three things that you, you folks are think, three things to watch out for. Three areas of advice. What do you think?

You know, I think, I think, I think this is probably trite to say, but it's never as bad as you think it is, it's never as good as you think it is, which is just generally true about entrepreneurship. But I think with respect to how we built our business, I think.

Thinking.

About the regulatory aspects of the business, how long it takes to get that regulatory approval, how important it is to partners to get regulatory approval, it's the state stamp, it's sort of the gold seal of approval. If you want to do partnerships, that's really important and I think just the staying power and being in it long enough, doing all the right things, but you're going to make some mistakes along the way. So I think that ultimately Halisource may have come out and gone through this journey, but this journey continues and we continue to try to solve the problems many folks are to trying, trying to solve in this room. But it does take a lot of time. It takes a lot of capital.

There you go. James Thompson CFO of HaloSource.