Interview with Andrew Savadelis
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio interview between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and finance executive, Andrew Savadelis, CFO of AE Polysicilicon Corporation.
Visit www.CFOstudio.com to read about this interview and to watch the entire video interview.
Zezas: Hi, this is Andrew Zezas, President and CEO of New Jersey based Real Estate Strategies Corporation, coming to you today as part of the Financial Executive Thought Leader Series here at CFO Studio. Please visit us at www.CFOstudio.com. We’re here today with financial executive, Andrew Savadelis. Andrew’s depth of experience ranges from biotechnology to technology companies with an orientation towards turnaround and commercialization stage companies. Andrew, thanks for being here today.
Savadelis: Andy, it’s a pleasure. Thank you.
Zezas: I appreciate you joining us on CFO Studio. There’s a lot of great stuff going on in the world today. A lot of exciting dynamics in the finance world and you and I know each other for a long time. And, I know you’re one who’s not shy about his opinions. I am looking forward to your thoughts and guidance that you’ll offer to our viewers.
Savadelis: My pleasure.
Zezas: Well, why don’t we jump right in. Let’s talk about bank financing, first of all, both traditional bank financing and government financing. The companies that you’ve been with, you’ve been involved with both [traditional bank financing and government financing]. Talk to me a little bit about the difference between the two, the pros and cons, and the good, the bad, and the ugly.
Savadelis: Sure. Well, it greatly depends on what stage company you have. For example, a turnaround situation company that has revenues, actually has a shot with traditional bank financing. It’s the type of thing where the bank is there when you actually don’t need them. But, in a turnaround situation, since you probably have some revenues, what you have to do is convince the bank that you’re on the path to profitability and you have revenues to loan against. For example, receivable financing. It’s still very difficult and the main reason, actually, why you might want to do that in that type of situation, is that it gives you credibility that a major bank has come in, has done their due diligence, and have given you credibility as a company going forward that you’re not going to go under or that you’re not going chapter 11. I had a case, a turnaround in a biotech company, we were burning 60 million dollars a year on 70 million revenue, a market cap with less than 20 million dollars. Everybody thought the company was going under. Within the first quarter, we had sold off a business that was burning 5 million dollars and started the company towards a path of profitability or at least getting there. We then obtained the bank financing. We basically obtained a 10 million dollar loan, a revolver loan. And, what that told the market was “ok, here’s a bank, they’ve done their homework”. They believe that this company has a future going forward. At the end of the story, basically less than a year later, we had turned the company around, got the burn down to less than 2 million dollars, and market cap left over to 140 million dollars. Part of that was because we had the credibility from the bank. Now, let’s go to government financing. I’ve been working with a company recently, where we’re building a high-tech chemical company. It’s a green energy company and there’s two things that the government is looking for. This case is the department of energy loan guarantee program. There’s a 10 billion dollar program.
Zezas: 10 billion, wow!
Savadelis: 10 billion dollar program. We won a 250 million dollar loan guarantee that we are now due diligence with.
Zezas: Nice job!
Savadelis: It’s been very interesting, to say the least. But, here’s what the government is looking for. They act as a bank in terms of making sure everything is in place. So, they’re doing their due diligence and whatnot in both technology and the word with all the company and our markets. Although, we don’t have revenue yet. But, they’re still willing to lend us because why… it falls within a major program within the government: green energy. This is a company that’s going to be making products for the solar industry. That’s number 1, and number 2, more importantly, create jobs. In this environment, the government wants companies who are creating jobs. So, they’re willing to work with a company that doesn’t have revenues, but has a promise of revenues. But, they want to make sure their technology works. So, there’s a lot of due diligence there and we’re creating jobs, which we have been doing.
Zezas: So, they’re acting kind of with the mentality of a bank, but they have other objectives beyond that of just a mere bank.
Savadelis: They have a policy agenda. We have fallen within that major policy agenda. So, we got beyond that perspective and that actually took a lot of political wrangling. We actually got Governor Rendell, both of our U.S. senators to write letters and actually make Governer Rendell to make a phone call to secretary, DOE secretary Chu on our behalf.
Savadelis: So, that helped us win that DOE loan guarantee, at least to get into the program.
Zezas: Sounds like you had credibility even before you got the loan.
Savadelis: Well, it took a lot of… there was a lot of behind the scenes going on with the company. Even before I got there and when I got there as well. So, that’s probably the main difference is that the government will still want their money back. There are a lot of issues there, but they put that within the policy of…within the major policies of what the government wants.
Zezas: So, they have a multiple agenda.
Savadelis: That is correct.
Zezas: So, let’s stay on financing for a moment. Let’s take it to a different level. Let’s talk about venture capital vs. strategic investors. Talk to me about the drivers that both the VCs vs. the strategic investors look at when they’re considering loaning or coming involved with an investment.
Savadelis: Sure. Now, it’s a great question because there are differences in how each approaches it. If you’re in a company, this is more oriented towards companies that are in the commercialization stage for example.
Zezas: As compared to a turnaround.
Savadelis: As compared to a turnaround or even, let’s say, a startup. The VCs basically look at the company, they look at two things. First and foremost in their minds is, is it a management team they can believe in? So, you have to have both a CEO, a CFO, an [Operations] guy or tech that they actually believe can get the job done and move the company forward.
Zezas: So, not just a product or an idea. It’s not just the company, it’s the team.
Savadelis: Actually, that’s almost secondary to a VC. They obviously want…Different VCs have different perspectives. There’s VCs who do biotechs, there’s VCs who do techs, some do both. Yes, they want to know that there’s a product there or potential product, and that there’s a market. But, that is secondary to the team being in place. That’s number one. And, the second part is that their endgame is different. The big part is that they want within three to five years. They want to know that there’s an exit strategy. Usually, that’s an IPO or sign of the company of some sort. Now, let’s contrast that to a strategic investor. A strategic investor has a little different perspective. They’re probably more after the technology in the markets, and care less about the management team. And in some cases, they’ll end up replacing part of the management team to get to their endgame. Their endgame is less likely to be to sell the company or an IPO of the company, assuming you’re private. And, their endgame is to try and negotiate and get as much of the IP or an industrial agreement or both out of the company. That way they get either supply. It could be anything. It could be supply agreements. All sorts of things that they can extract from the company and give them a competitive advantage against their competitors. So, they’re putting an equity stake in and they’re hoping you’re going to do well on the equity side as well as the business. But, they’re also extracting other things that a VC would not necessarily be interested in.
Zezas: That sounds like the strategic investor is probably in it for a longer term than the VC typically.
Savadelis: That is right. Well, there are a couple of instances there. Although in this environment, I’ve seen differently where both VCs, VCs usually want more of the business, they want more of the equity. In this environment, particularly if you’re in a company that needs the cash, this is always the issue. If you’re cash poor, you have a much harder time to bargain with either a VC or strategic. Usually a strategic [partner] has been willing to come in for less of an equity stake either in evaluation or in terms of actual percentage of a company. I’m seeing less of that. I’m seeing them being very aggressive. As a matter of fact, we recently had a deal with a bit of a down round even though the company was pretty well capitalized from other current investors. We had over 100 million dollars of equity in the business and brought a strategic [partner] in and who basically beat us up pretty well.
Savadelis: But, in the long run, if you need the cash and want to grow the business, you have to look beyond the current issue as to what is your long-term strategy. In this case, it is a combination. You need the cash, in our case, to complete the high-tech chemical plant and get it up and running. We were in hot testing and whatnot. And, [we needed] there clout to help us in the marketplace to a certain extent. What they wanted was the technology because our technology was unique and would allow us to produce at a third less cost at anybody else in the world. So they want the IP, the know-how, and the marketability to go and basically replicate plans possibly in the future of which we get a piece.
Savadelis: But, those negotiations ended up being over seven months.
Zezas: Wow, so there’s an awful lot for us to think about when we’re doing financing. Strategic investors to VCs to bank or government financing.
Savadelis: And more importantly, you have to know what their mindset is; how to approach and position the company to get the best deal.
Zezas: Wow, Andrew I want to tell you, we can go on for hours like this. We’re about out of time. I want to thank you very much for some great insight into financing. We really appreciate you being here in the CFO Studio. And, I want to thank you for watching us at the CFO Studio. This is Andrew Zezas, saying have a great day.
Copyright Real Estate Strategies Corporation 2010. All Rights Reserved.