iLinc Communications, Inc (ILC)

[thepennyking]

Why EDT might become a turnaround play....The epidemic of struggling venture-backed companies appears to be spawning its own growth industry.

A number of companies have launched in recent months with the goal of aiding these struggling firms. The latest to get into the act is Recognition Group (http://www.recognitiongroup.net), a restructuring, reorganization and turnaround specialist that recently formed two new entities aimed at venture-backed companies: Recognition Management, an interim and crisis management services business, and the Second Frontier Capital Fund, a venture capital fund focused on out-of-favor and distressed technology investing.

"Industry analysts project that between 60 and 80 percent of venture-backed companies will need professional turnaround or wind-down assistance in the next twelve months," claims Juan-Carlos Garcia, co-founder and managing director of Recognition Group and head of the Second Frontier Capital Fund. The fund "will take an opportunistic approach to investing in out-of-favor or struggling companies that need an infusion of capital," Garcia said, and "will leverage Recognition Group's capabilities to provide the guidance, expertise and continuation capital necessary to navigate through uncharted, critical situations."

Recognition Management is led by Kaleil Isaza Tuzman, former co-founder and CEO of govWorks, and Jonathan Agus, a turnaround and workout specialist with experience in the high tech sector, as well as the retail and manufacturing industries. Under the direction and management of Garcia, a former investment banking executive with Banco Santander Central Hispano (now called BSCH) and managing partner at Suala Capital Fund, Recognition Group will raise at least $30 million for the distressed technology turnaround fund. The initial focus of the fund will be on e-government, e-finance and payment-related technology companies. The Second Frontier Capital Fund has been capitalized by an initial $15 million investment line from an unnamed European financial group and will begin additional fund-raising immediately.

Fueling the rise of these turnaround companies is a shortage of managers and directors who have successfully navigated companies through an economic downturn. After all, it's been a decade since the U.S. was officially in a recession.

"In today's technology marketplace, neither the day-to-day management nor boards-of-directors of many portfolio companies have experience in dealing with a broad economic downturn," said Bill Sahlman, co-chair of the Entrepreneurship and Service Management Unit at the Harvard Business School. "In crisis situations, companies need counselors with a mix of direct experience, emotional distance and a specific set of skills that can help move a company down the path to profitability or to an honorable discharge of assets to protect investors."

Some of these firms are taking a riskier approach to rescuing struggling companies. ibasecamp (http://www.ibasecamp.com), for example, is willing to work with struggling dot-coms in exchange for equity. Advise4Stock (http://www.advise4stock.com) also works with companies in exchange for equity, but that company's focus is more on early stage start-ups seeking funding. The challenge for these companies is to make sure that the companies they take on have a good chance of succeeding.

ibasecamp's focus is turnaround plays, and it may not be as crazy as it seems. Trident Capital recently announced that some of its new $725 million fund will be invested in public companies that need cash but are operating close to break-even. Trident has identified 175 companies that are trading below fair value, and has found the valuations of some public companies to be more compelling than private company valuations. Given that the IPO craze of the last couple of years essentially turned the public markets into venture capitalists, placing investors who dared in the role of deciding which companies would win the Internet race, it seems fitting that VCs are now finding some of their most compelling opportunities among those publicly traded companies.


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