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Brainstorm : Registering for Cash Online startup Grocery Shopping Network had a tall order when it came to financing. Could Houlihan Smith’s Richard Houlihan and his team deliver? By: Scott EdenNovember/December 2007 , Page 60 A dot-com involved in the grocery business in 2007 doesn’t seem an obvious candidate for venture financing — or financing of any kind. But strong relationships have a way of clearing obstacles, and such was the case with the unlikely journey of Grocery Shopping Network, engineered by well-connected banker Richard Houlihan. GSN, a little-known online startup tucked away in Minneapolis, turns grocery-store Web sites into virtual cash registers by licensing custom software that connects grocers with their shoppers — customers can create shopping lists, clip recipes and find coupons based on what items they plan to purchase. GSN, which makes money from advertising as well as from the software license, had been self-funding, on a shoestring, for a decade. By early 2006, GSN chairman Richard Andolshek was thinking about how to raise outside money. He had a shopping list for his ideal backer: blue-chip, satisfied with a minority stake and willing to subordinate the equity behind the company’s debt. A tall order, especially in a sector that saw spectacular flameouts during the original dot-com bubble. That’s when he received a fortuitous call from his longtime friend Houlihan, the founder of Chicago-based boutique bank Houlihan Smith & Co. By the end of the conversation, Houlihan was sold: “If you have what I think you have,” Andolshek recalls him saying, “I’ll put my name on it, and I’ll walk you any place you want to go.” Houlihan, 68, and Andolshek, 55, have been acquainted since the mid-1980s, when both sat on the board of Otra Securities, an off–Wall Street clearing house that was long ago merged-and-morphed out of existence. At the time, Houlihan had just finished refurbishing Solitude, a rundown ski resort outside Salt Lake City, which he had bought a few years earlier when he was, in his words, “on sabbatical” from Houlihan Lokey Howard & Zukin, the Los Angeles–based investment-banking and advisory boutique he had cofounded in 1970. (Houlihan Lokey was sold in 2005 for $500 million to Japanese financial giant Orix Corporation.) Andolshek, for his part, was a serial entrepreneur who had started out in his early twenties as the proprietor of a liquor store, a grocery store and a restaurant in Minnesota, but he had since established a sporting-goods chain that he built into a national stalwart. Now the two old friends had reunited 20 years later to address a problem: How do you raise money for ideas — and on terms — that, no matter how valid, seem seven years late? Before making any promises, Houlihan wanted to run the GSN idea past one of his managing directors, Robert Susskind, the resident high-tech expert at Houlihan Smith. Susskind, a Silicon Valley executive-turned-financier, had been a key player in the development of the wireless technology that would be used in Palm VII. GSN quickly won Susskind’s approval, but it took some eight months to get through checkout. At issue was the post-bubble stigma that still tars dot-com startups, not to mention a trend that has made it more difficult for early-stage companies to find that prototypical angel investor. “A lot of venture capitalists these days have become, for lack of a better word, leveraged-buyout artists,” Houlihan says. “Instead of just doing true venture-capital deals, they’re tending to do deals with going concerns and companies where the risk has been moderated.” GSN’s target industry was also an issue. “The grocery sector is typically pretty traditional,” Andolshek says. “They’re slow to make any big changes, and slower to adopt new methodologies than many industries, because they’ve been so successful with what’s worked in the past. As a result, not a lot [of investors] were flocking to this space.” Houlihan knew he needed to get Andolshek an investor with credibility, and he knew exactly where to shop for one. His colleague Susskind had a good relationship with Neil Wolff, the general counsel at Vantage Point Venture Partners, a VC firm based in San Bruno, California, with about $4 billion under management. One of Vantage Point’s managing directors was David Carlick, the well-regarded entrepreneur and Internet-media visionary who had helped found DoubleClick in the mid-’90s and was chairman of Intermix Media, whose predecessor company created MySpace. Once Carlick saw the deal, Houlihan says, “Vantage became very interested, and that’s how we got our foot in the door.” To keep Vantage honest, Houlihan tapped his Rolodex and negotiated still better term sheets with a high-net-worth family office — a Midwestern fund whose identity neither Houlihan nor Andolshek will disclose (other than to say that the family, as Andolshek puts it, is “associated with a very successful retail company”). Though something of a stalking horse, the interest was genuine — the family so desired the investment in GSN that, according to Andolshek, they were “extremely unhappy” that GSN ended up turning them down. Demonstrating his well-honed dealmaking savvy, Houlihan — who is affectionately called “Houli” by his friends — then pulled the ultimate tactical maneuver: He became a stalking horse of sorts himself. While bids were being made, he decided to open up his own checkbook, offering to co-invest with either of the two bidders — to the tune of low seven figures. “It was highly unusual for me to participate with a stalking horse,” Houlihan admits, “but it was my way of demonstrating to everybody that this was a very, very interesting deal. I actually would have invested. I wasn’t playing around.” Vantage Point decided in the end to invest $7 million, taking an equity position, and allow GSN’s original shareholders, about 50 all told, to maintain their majority stake. But the coup de grâce was that Carlick agreed to join GSN’s board and take an active role advising the company. “That was one of the conditions we insisted on,” Andolshek says. “His knowledge of and involvement with our company is more valuable currency than their cash investment.” Indeed, one of the other bids provided a bit more money for a bit less equity, “There’s smart money and there’s dumb money, and we wanted to get the smartest money available for our sector,” Andolshek says. Having a smart banker helped.
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