As a venture capitalist, it pays to be flexible when considering how to maximize your investment in a high-tech company. Since the tech correction, many of the venture capital firms that backed Canada's tech companies have struggled to recapture the full value of their investments. What happens when you invest in a promising technology that just can't make the leap to the next level? Exits from technology investments — even successful ones — can be challenging.

Consider the case of Kaval Wireless, a privately owned tech company based in Markham, Ontario. Kaval provides in-building wireless solutions. Its technology enables wireless coverage within buildings, tunnels and underground facilities — anywhere cellular, paging and two-way radio connections are fragile. Incorporated in 1986, the company was backed by over $30 million in venture funding from several investors.

The situation: A capital challenge for a wireless company
Despite having some high-profile customers — among them AOL, the U.S. Defense Department, Canadian Pacific Railway and the Greater Toronto Airports Authority - Kaval's revenues grew but began to plateau. In 2003, Kaval's investors turned to Michael Badham, a Deloitte Financial Advisory partner, to discuss methods of raising capital and strategies to grow the business. From that discussion, Richard Lee and Aleksandar Ciric of the Consulting group helped Kaval clearly understand its growth opportunities and build a path to define its addressable market and go-to-market strategies.

Badham maintained an ongoing relationship with Kaval's management, which led to a 2004 strategy meeting with Deloitte. The company's top-line growth had stalled, and it needed to pursue a strategic transaction to maximize value. But Kaval was not sure what that transaction would be: an IPO to fund acquisitions, or a merger with another wireless company.

After a review of Kaval's financial condition and future earning projections, it became apparent that Kaval could be taken to the next level by a strategic investor. Andrew Verdasca of Deloitte's corporate finance group joined Badham to work on marketing the company. Together, they approached several U.S.-based buyers to assess the level of interest in the market. They looked at strategic companies and came up with a list of 20 potential buyers — 17 American and three Canadian.

The solution: Finding a strategic match and a U.S. buyer for Kaval
"In the U.S., there are detailed compliance rules and regulations that require you to be a U.S.-based broker-dealer firm registered with the Securities and Exchange Commission," explains Verdasca. As a result, Badham and Verdasca worked closely with their U.S. associates. David Clark, director of corporate finance in Deloitte's New York office, was instrumental in making sure that Verdasca and Badham were compliant with SEC regulations. Clark also had a home field advantage. "He knew some of the potential buyers, and he felt Kaval would be best matched with a larger U.S.-based company," says Verdasca.

At the top of the list was Powerwave, a California-based supplier of solutions for wireless communications networks. Clark made the introductions, and Deloitte presented Kaval to Powerwave's management. Over the next few months, Powerwave's executive team travelled to Kaval headquarters to inspect the facilities. Powerwave recognized that Kaval's in-building wireless technologies could enhance its product offerings.

After an intense round of negotiations, Verdasca and Badham drew up a proposal for Powerwave. Next they turned to Kaval's private investors. "We put together a letter of intent and the preferred shareholders accepted the offer," says Verdasca. The pricing they got for Kaval was reasonable and the structure maximized the overall transaction value. Badham believes the investors were pleased. "Kaval is an important part of Powerwave's global growth strategy. Kaval's business began in Canada and the transaction helped them grow it globally," says Badham.

"Overall, both sides won something," says Verdasca. Powerwave acquired a company that complements its own end-to-end wireless communications solutions. Kaval Wireless got a buyer that would help it succeed financially and technically. And Kaval's investors were able to keep much of their investment. "In terms of comparable companies, the pricing we got for Kaval was very good," says Verdasca.

Deloitte's approach: Develop the best growth strategy, and then explore all the options  — even the tough ones
Technology companies, and the venture capitalists that invest in them, require unique solutions when growing their business to the next level. In Kaval's case, the situation was complicated by the tech correction, after which capital for technology companies dried up. When Kaval first asked Deloitte for help, it was to raise capital on the public markets. By the end, it had changed from a public offering to a sale transaction. "Sometimes the solution may not be obvious, so you have to be flexible and creative," says Verdasca. "With this kind of complexity, the Kaval transaction required us to use our global network to find the right buyer."

Having support from the company's investors was instrumental. "It helped that Kaval's many shareholders were prepared to investigate different options and were open to our advice," says Verdasca. One of Kaval's backers, Jeff Park — a Senior Vice President with Covington Capital and member of Kaval's board — says that he's pleased with the outcome. "We were trying to pursue a timely transaction and Deloitte gave us the confidence that they could effectively manage it during a critical point in the company's history," says Park. "It was a highly successful process from our perspective."

Not all investments achieve their original growth plans. In today's marketplace, it's often difficult to find the right strategic buyers for companies whose growth plans have stalled. Working with Deloitte's Consulting practice to identify the addressable markets, and the Corporate Finance group to find the right investor, can help venture capitalists exit their investments successfully.

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