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Monday, July 25, 2005 - Page updated at 12:00 AM

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Midsize companies beginning to mature

Seattle Times technology reporter

For Nicholas Tiliacos, relocating Par3 Communications' headquarters was a rite of passage.

Until recently, the 130-employee company was in a former Italian restaurant in Pioneer Square. Employees sat in the kitchen amid stainless-steel countertops and terra-cotta tiles. The company, which develops software to help businesses and customers communicate, now occupies two floors of the Exchange Building in downtown Seattle, a sophisticated location twice the size, with room to grow.

"We have come to the point in our development where customers expect us to be in a different setting," said Tiliacos, Par3's chief executive.

As Par3 steps into the next stage in its life cycle, it seems the broader Seattle technology community is undergoing a similar transformation. Now that the toughest times are past, a group of midsize privately held technology companies is emerging.

The companies have several traits in common: They have hit or blown past the 100-employee mark; have significant plans for growth; and say they are either profitable or have plenty of capital at their disposal to fund operations.

If you use a common rule of thumb, these companies also have significant revenues. For a software company to be profitable, the thinking is it must make $250,000 a year for each employee. That would mean a 100-person company generates about $25 million a year in revenue.

The breadth of these companies is striking and quickly starts to fill in the gap between Seattle's startups and its giants, Microsoft, Amazon.com and RealNetworks.

Some of the companies on the list include Par3, 180solutions, Isilon Systems, Speakeasy, Qpass, GMI, Dexterra, Print Inc., ShareBuilder and RadioFrame.

Kevin Cable, executive vice president of Cascadia Capital, an investment bank, said these companies have a number of options because they are doing well. They can continue to build, raise money privately, be acquired or go public.

"That's a dynamic these companies are going to encounter over the next some number of months," Cable said. "They are strong enough to go public, but it is a question that they will ask."

Attracting capital

For now, as these companies grow even more, they collectively are attracting more capital.

In fact, venture-capital investing in privately held companies increased both nationally and locally in the second quarter, hitting the highest level in the past year, according to Ernst & Young and VentureOne Venture Capital Report being released today.

Contributing to the increase nationally was a 9 percent jump in later-stage deals — the emerging companies in this growing class.

In total, 524 companies in the U.S. raised $5.4 billion in the second quarter compared with the previous quarter, when 488 companies raised $4.7 billion. In Washington state, 26 companies raised $232 million in the second quarter, compared with the previous quarter, when 17 companies raised $106 million.

A recent unscientific survey conducted by the Northwest Entrepreneur Network gives credence to the idea that startups are beginning to mature in the Seattle area.

Among the 462 companies that responded, hiring was their No. 1 priority. About 12 percent said they had 100 or more employees.

The network's executive director, Connie Bourassa-Shaw, was surprised by the number of companies with such large work forces, especially since her organization typically serves small startups.

"I think that is positive," she said. "There's a nice big crop of companies — whether they have something to them or not, I can't say."

Elements in place

Bill McAleer, managing director at Voyager Capital in Seattle, said this later-stage phenomenon is a product of the past few years.

Companies cut back on spending, tweaked their products to fill a need and hired experienced management teams. With all that in place, and technology spending on the rise again, there's strong resurgence.

"It does show that's Seattle is growing up," McAleer said. "I would say definitely that the business model is being better thought through than ones seen five years ago."

Here are some of stories of emerging companies from the Seattle area:

Par3 Communications

Par3 has seen dramatic growth in the past couple of years. Today it is profitable and has 80 customers and 130 employees.

Par3 builds software that helps companies communicate with customers. Airlines, for instance, can use Par3's system to alert individual passengers by phone, e-mail or text message that their flight has been delayed or they've been upgraded to first class.

"We've hit our numbers consistently from the start and we've exceeded our plan for the last two to three years," CEO Tiliacos said. "We are actually more above plan than we've ever been."

Tiliacos said the company is in no rush to go public because it doesn't need capital to fund the business.

"As you can tell from the ability to invest heavily and remain profitable, there's no compelling need to have an IPO exit strategy," he said.

Speakeasy

Founded in 1994, Speakeasy evolved into an Internet service provider primarily for residential customers. Two years ago, it started focusing on the business market and has increased the number of business users from 1,200 to 14,000.

CEO Bruce Chatterley said the company raised $27 million last year to start the next phase of growth and "it's working."

Since July 2004, the company has hired 42 employees for a total of 228.

The company is moving from about 24,000 square feet divided between two offices in Belltown to about 25,000 square feet of space in a single building on Western Avenue in Seattle. It has the option to add 5,000 square feet if needed.

Chatterley said Speakeasy is close to breaking even with nearly $70 million in revenue expected this year and $100 million next year.

"When you've made a business profitable, you can do whatever you want. You can continue to run the business, partner up or go public," he said. "If you run the business as a stand-alone entity for high growth and profitability, everything else takes care of itself."

GMI

Rob Monster founded GMI in 1999 to create a better way for companies to do market research by conducting polls over the Internet around the world.

Today, the Mercer Island-based company has 140 employees domestically and 170 offshore.

"We are growing like wildfire," Monster said. "We are seeing 160 percent revenue growth year over year."

He said the company expects to have $33 million this year in sales and, because it is profitable and debt-free, has yet to touch the $13 million it raised in venture capital this year.

"I think why you are seeing a breakout of 100-employee-plus companies is because the nuclear winter of 2001 is over and now companies are being presented with a bounty of cash from banks or venture capitalists," he said.

For Monster, the goal is to take GMI public late next year.

180solutions

Founded in 1999 with 18 employees in its early days, the company was forced to cut back to six after the economy tanked in 2002.

Times have changed for the provider of online advertising and marketing services. Today, its Bellevue headquarters are so large it has Segway scooters to shuttle its 250 employees around its 70,000-square-foot office space, said Daniel Todd, president and co-founder. "For a year and a half, we were hiring one new employee every two business days," Todd said.

As for the company's next move?

Todd says a public offering is not necessarily the only option.

"You see private equity rounds as big as IPOs, and because of the requirements with Sarbanes Oxley, there's not a rush to have an IPO anymore."

Qpass

Chase Franklin, founder and chief executive of Qpass, which helps wireless companies manage data sales, said the Seattle company is seeing tremendous growth, but that it is all a matter of perspective.

Founded in mid-1997, Franklin said he remembers his investors telling him that it will take five years to go public. Eight years later, the 300-employee company is still private.

"It's somewhat ironic. We are still cranking away," he said.

But an exit strategy might finally be around the corner. Franklin said Qpass will have taken care of all of its requirements for going public in the next quarter or two, but whether it does go public, he doesn't know.

"If you have a strong business that is growing as rapidly as Qpass, you have nothing but great choices in front of you," he said.

Print Inc .

The Kirkland-based company was founded in 1999 and develops corporate printing systems to handle everything from digital storage to copying and scanning and document flow.

In the past six years, Print has grown to 300 employees in 13 field sales offices, said spokeswoman Karyl Hansen.

It has raised $12.4 million in venture capital and last year had $50 million in revenues, a 27 percent increase over 2003.

"We capitalized on trends that are part of the economic downturn," Hansen said. "Companies that are trying to cut costs and improve productivity want to outsource things that are not their core competencies. Our timing is impeccable."

Dexterra

Bothell-based Dexterra, which builds software that allows companies to work from mobile devices in the field, has raised $35 million in three rounds, including $11 million recently.

Rob Loughan, Dexterra's chief executive, said its growth is due to great timing. Last year, its technology coincided with the development of mobile devices and mobile networks.

This year, companies have been willing to set money aside in their budgets for the software.

"Now there are real budgets," Loughan said.

Dexterra has 110 employees and has recorded 50 to 70 percent quarterly sequential revenue growth, he said. But for now, he's not ready to predict the future.

"I don't have an exit strategy," he said. "They are for companies ready to pull the plug."

Tricia Duryee: 206-464-3283

Copyright © 2005 The Seattle Times Company

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