January 4, 2006

Why UserFriendly went private again

Author: Bruce Byfield

For many in the computer industry, the UserFriendly comic strip is the first Web page they open in the morning. However, only its most loyal readers are aware that, over the past five years, the company behind the cartoon has wandered into the public equity market, only to return to the status of a private company. Recently, I talked about this journey with JD Frazer, the creator of the strip, and David Barton, vice president of UserFriendly.org. Their account is a practical lesson in the difficulties involved in such business maneuvers -- to say nothing of a testimony to their collective ability to keep their business, ethics, and audience intact.

Frazer and Barton met while working at Mindlink, an early Internet service provider in the Lower Mainland of British Columbia, Canada. When Mindlink was taken over, both moved to Parasun, another local company. After tossing about ideas for their own business venture, including game development, in 1997, they started the UserFriendly comic strip, together with Barry Carlson. From the start, Frazer provided most of the creative content. Initially working on the technical side, Barton soon became responsible for the business side of the company.

By 2000, UserFriendly was thriving and ready to expand. "We were going to be a full-fledged media firm," Barton remembers. "We weren't interested in doing contract work for other companies. We were more interested in taking the creative talent we had within the company and using it." An animated version of the cartoon and a sitcom were among some of the ideas discussed.

Going public

2000 was also the height of the dot-com craze. As a well-known company, UserFriendly received several offers either to buy the company or to help it go public. In the end, it chose to go public with the help of Vast Capital Pool, a program that existed then on the TSX Venture Exchange, a Toronto-based exchange specializing in startups.

Rather than doing an initial public offering (IPO), UserFriendly chose to do a reverse takeover (RTO) of an existing public shell company designed for the purpose. According to Barton, UserFriendly made this choice because "it had more to offer than money." By choosing to do an RTO, UserFriendly gained the advice of business executives with "a lot of years of experience in various industries" who could help to guide the company's expansion.

Another consideration was to give the UserFriendly communities -- the Ufies-- a chance to buy into the company. When Frazer raised the idea on the Ufie forums and IRC channel, he says, "the response was overwhelmingly positive."

In practice, though, the idea of community participation proved impractical. Because UserFriendly was listed on a Canadian exchange, non-Canadians found buying shares next to impossible. They "were just incensed," Frazer recalls, "that they had to go through about 30 hoops just to buy a single share. A lot of them just wanted to buy one, 10, or maybe 100 shares. And it was just so difficult for them. For most of them, it just ended up being something they'd rather not do."

The difficulties with the community aside, the process of becoming a publicly traded company ground slowly on through nine or 10 months. As "onerous" as the process was, Fraser says, "an RTO is far less paperwork than an IPO."

UserFriendly closed the deal with Vast Capital Pool in January 2001. In March 2001, it opened on the TSX under the trading symbol UFM, at an initial price of 50 cents per share. Over the next two years, the stock would sell at a high of 65 cents. It would average between 20 and 30 cents, sometimes dipping to a penny or less.

"On paper," Frazer says. "It looked pretty good. We had good revenues coming in." The plan was to develop new revenue sources, and eventually move from the TSX to the more established Toronto Stock Exchange. And, when UserFriendly began the process of going public in the late spring of 2000, the plan looked as though it had a strong chance of succeeding.

The return

Unfortunately, by the time UserFriendly began to trade, the dot-com collapse was already under way. This change affected UserFriendly in two main ways.

First, in anticipation of expansion, the company had grown from less than 10 employees to almost 40. "We were taking on fixed costs," Barton says, and "hiring staff faster than revenue would really warrant. In retrospect, we shouldn't have taken on that much."

Second, many of UserFriendly Media's immediate sources of income were disappearing as the collapse accelerated. 2001 was also the year that banner ad revenues took a dramatic drop. Moreover, most of the company's clients were dot-coms themselves, and started to disappear -- especially after the September 11 terrorists attacks. Barton describes the attacks as "an exclamation mark" added to the company's existing troubles, since many of its clients were American. "We hadn't got to the point where we had other revenue streams to rely on," Barton says. "We were ramping them up," Frazer adds, "but they weren't ready."

Through these troubles, the readership for the strip remained loyal. Nor, Frazer emphasizes, was the company ever in immediate danger of going under. Since the company is essentially Frazer and Barton, "the only danger was having to lay people off" -- a danger that became a reality by 2003.

Similarly, contrary to rumors, Frazer was never in danger of losing control of the strip. "One of the agreements I had," Frazer says, "was that I had complete editorial control. I could have said anything -- and I did. And that was very important to me -- to all of us -- because ethics are a big deal to us."

Still, another ethics problem loomed for the company. "We came to realize," Frazer says, "That we were going to be hard-pressed to deliver that media company that the shareholders had bought into. We weren't going to deliver a win for them."

In short, both pragmatism and ethics agreed -- it was time for UserFriendly to go private again. "There were some less savory options that we could have taken," Frazer says, "but both David and I knew that we had to wake up with ourselves the next morning. On the ethical side, it [would just make] things so much better for the shareholders."

And back again

Barton says that taking a public company private requires only slightly less work than going public in the first place. "I was fortunate that I wasn't heavily involved with that," Frazer says. "There was a good amount of paper, and I saw David's stress level, and I'd go, 'Wow!'"

Fortunately, the fact that UserFriendly had done an RTO rather than an IPO made going private easier. Although UserFriendly had not made investors any money, neither had it made shares in the shell undesirable in any way. In other words, shares in the shell were still a marketable commodity. "The hardest part is finding a deal," Frazer says. "Once you have someone who wants the shell, it's done."

In the end, Barton says, everyone benefited from UserFriendly going private again. Since shareholders in the shell are investing in the expertise of the shell's management rather than in a specific business, the fact that UserFriendly became private again meant little to them. If they chose, they could still sell their shares on the open market. Otherwise, they were getting what Barton calls "another kick at the can," exchanging their investment in a media company that was not going to materialize for another company that would give them another --perhaps better -- chance of a return on their investment.

"The feedback I had," Frazer remembers, "Was that we had done a good thing, and let them have another roll of the die." The shell, now known as UFM Ventures, Ltd., is now a mining company, and continues to be listed on the TSX Venture Exchange.

As for Ufies, support for the strip had always been more important to them than investment. Frazer remembers nothing but support from the community for taking the company private. In general, "They're still pretty happy with their piece of art on the wall," he says -- a reference to the original cartoons on the stock certificate.

Private again

Looking back, both Barton and Fraser remain convinced that going private again was the right thing to do. "Well, look at the practicalities of it," Frazer says, ticking them off. "We don't have a regulatory body to report to. We don't have to pay for an audited financial statement. There's all this overhead that we don't have to worry about. Because, as I'm sure you're aware, when you're public, you have the public company and you have the operating company. We don't have the resources to run both. We didn't want to be distracted by all of that."

Currently, UserFriendly.org consists of Frazer, Barton, and about half a dozen contractors, all working from home. Both Frazer and Barton are also involved in Condition30, a startup developing music-generating software, and Quantum Charm Publishing, which is developing a game and is technically UserFriendly's parent company. UserFriendly.org itself is profitable again, and, looking around at the improved business market, cautiously mulling the idea of expanding again. "We're not sure where that's going lead yet," Barton says.

Even going public again remains a possibility. However, Fraser emphasizes, "The conditions have to be right. We're going to do all our due diligence. [Potential partners] are going to have to meet the requirements for us. We need to feel very comfortable with the people we work with."

Asked to give advice to executives of other companies considering going public, Frazer says immediately, "Don't do it just for the money. If there's a lesson I learned over the last nine years, it's that you have to do it for something other than that. If you're going to do it just for the money, go out and start a network of hotdog stands or something. You have far less ethics to worry about.

"As for going private," Frazer continues, "You do it if it's right. In our case, it was a no-brainer, really, because it was such a burden to have public company requirement on our shoulders. There's very few shoulders to go around in our current incarnation, so giving the shareholders another chance -- it was just black and white. There's no doubt about it. It was the best thing to do."

"The bottom line for JD and me," Barton says, "Is that JD can hit his stride and maintain his creativity and his audience. Those two things have given us the chance to try various things, and we still have a business that we can try to continue to grow. But, without those things, there is no business."

Bruce Byfield is a course designer and instructor, and a computer journalist who writes regularly for NewsForge.


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