Tiara laid out an ambitious business plan when it approached investors for its first venture capital round in 1997. Investors were so giddy that at one point they valued the San Jose, Calif.-based startup at $200 million.
Slowly reality set in. After spending four years in the lab and burning through $59 million of venture capital, Tiara’s founders still had ambition, but little in the way of actual results. Their board was peeved and decided to oust the founding management team in April 2001. The directors started circulating a term sheet to new investors, hoping that one of them would recapitalize the company and jumpstart its operations, but it wasn’t an easy sell. Thirteen long months later the hard work paid off. Tiara, renamed Tasman Networks, received $20 million in a recap round.
Sure, Tasman’s post-money valuation got reduced by about $164 million, but it was back in business. Over the next two years, turnaround CEO Paul Smith produced enough positive results that new investors came back to the table in mid-May, putting another $14.4 million into the 7-year-old company.
Tasman isn’t out of the woods, but other floundering tech companies can only hope to reproduce its success to date. While the number of startups that get recapitalized appears to be waning, the phenomenon of reinvigorating old tech companies with new cash and management is still very much part of the venture business.
Every other week or so there is a funding release that cryptically refers to a recap round as a Series “A-1,” if it mentions the word “recapitalization” at all. Publicists don’t like to bring attention to recaps because they are washout rounds for a company’s founding investors. If they want new money the company’s founding investors have to agree to convert their preferred stock to common stock, erase their liquidation preferences and even re-up their investment on the new investor’s terms to hold on to any preferred equity at all.
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