It took Traffic Station Inc. Chairman and Chief Executive Geoff Halstead a good two years before he could persuade a venture capital firm to invest in his company.
The problem? It wasn’t really his company or at least he didn’t own enough for many venture capital firms’ comfort.
“We were unusual in that we were originally a joint venture between two established companies,” said Halstead. “Because of this ownership structure, we were going to require more heavy lifting from a venture capital firm than other companies might have.”
Traffic Station provides real-time traffic information to commuters and businesses in 20 metropolitan areas in the United States. This information is available on the TrafficStation.com Web site, but users also can get customized traffic reports via their mobile telephones, pagers, and handheld computers.
In addition, partnerships have been established with so-called portal sites on the Internet, such as those run by Microsoft, Alta Vista, and Infoseek/Go Network. These portals include Traffic Station’s information on their Web sites.
The company was originally set up as limited liability partnership between software company Alpha Base Interactive Inc. and new-media company D:ablo Production Studios LLC, both based in Los Angeles.
Although this arrangement provided the startup with the financial backing to start operations in fall 1997, it also proved to be a serious obstacle to attracting venture capital.
“We looked at the company about a year before Zone Ventures funded them,” said Paul Nadel, president of East/West Capital Associates. “The unorthodox ownership structure was one of the main reasons we did not invest in them at the time. The business model was also still too much a business-to-consumer model back then, and the business was a little young anyway.”
Under the old ownership structure, the management team at Traffic Station did not have enough equity. The owners were a group of six founders of Alpha Base and D:ablo Productions, and Halstead, as one of the six, had a relatively small share in Traffic Station.
When Halstead connected with Zone Ventures last summer, the venture capital firm liked the business plan and the management team, but would only agree to invest in Traffic Station if the ownership structure were overhauled.
“We wanted to transfer a large part of the original founders’ share in the company to the CEO and the CTO (chief technology officer),” said Darius Sankey, a partner with Zone Ventures. “The basic assumption is that you want the management team to be committed to the company and to have a substantial financial investment in it. We look for at least a 10 percent share for the CEO at this stage, because it gets diluted over the next rounds of financing. Halstead had only a 2 or 3 percent share at the time, and that was not enough for us.”
It required lengthy negotiations to persuade the original owners to make the financial sacrifices that were required to secure the investment by Zone Ventures. In the end, only three of the six original founders stayed with Traffic Station, while the other three went back to Alpha Base and D:ablo Productions.
“It was a difficult process,” said Halstead. “The founders who left had earned their equity in the company and they needed to be convinced that this was the best thing for the company. Zone Ventures held a firm line on this issue, because they know how important it is for a startup to be structured properly.”
Weeks after the company had finalized the reorganization and the deal with Zone Ventures was on track to be completed, Halstead went back to East/West Capital and secured additional financing.
“The company came back to us and said they had solved the issues that we had raised previously,” said Nadel. “They had dealt with the ownership situation, their business model was now a more business-to-business play, and the market was coming around for their product. Halstead had pulled this thing off.”
In the end, Halstead landed $3.5 million in a first round of financing from Zone Ventures and East/West Capital.
