SciQuest: A turnaround story

RESEARCH TRIANGLE-Steve Wiehe took the helm as CEO of SciQuest in February 2001 when the public company’s market cap had fallen precipitously from $2 billion to $20 million. Today, as a private company, SciQuest expects record sales growth, $23 million in revenue this year, and has $102 million in contracted revenue backlog. It’s a real turnaround story.

Founded by four entrepreneurs in 1996, the original vision for the company was to create a business-to-business exchange for laboratory supplies.

It was widely seen as one of the bright young up and coming dot com companies and received a lot of national press. The company raised a number of rounds of venture capital then went public in 2000, which in hindsight may not have been the wisest course to follow.

Business to business exchanges looked hot during the dot com boom years, but the model failed to work for many companies in spaces such as building supplies and other industry sectors. SciQuest encountered competition from entrenched industry distributors who tied suppliers to agreements that prevented them from working with SciQuest.

Without suppliers, it couldn’t get customers.

Turnaround sticker shock

SciQuest had about $64 million in transaction volume in 2000 but only a 2 percent gross margin, which is not a lot of money. Its suppliers required payment in 30 days, but SciQuest’s customers paid in 90 days. “In some ways, SciQuest was a bank,” says Wiehe.

Turnaround stories often come with sticker shock, and many people recall the massive layoffs SciQuest underwent after Wiehe, who was brought in to fix the company or close it, took over. The company had 500 employees and burned through $25 million a quarter.

By the end of 2001, SciQuest was down to 100 employees. The layoffs were necessary to keep SciQuest from running out of cash. But it took more than trimming the workforce to save SciQuest.

Wiehe brought in Jamie Duke as a consultant and later chief operating officer. “What he and I started to do,” says Wiehe, “was take the business and break it down into its basic elements, a bunch of different businesses.”

A problem we could solve”

What Wiehe and Duke saw back in 2001, was an unexploited aspect of the business that had considerable potential, helping the large pharmaceutical companies, universities and other SciQuest clients realize “spend savings” through single-source electronic purchases. “We saw that as a problem we could solve,” says Wiehe.

Essentially, a company can save up to 20 percent of what it spends to process purchases via the system SciQuest created. “If we don’t exist,” explains Wiehe, “Every large organization has to connect to every supplier. GlaxoSmithKline would need a connection to Dell, to Staples.”

A diagram of any one large company’s connections “would be a whole lot of lines,” says Wiehe. “It’s expensive and difficult to maintain.” It involves problems such as dealing with catalog and prices changes, which a company such as Stables does quarterly.

That can result in supply delays because purchasers use the wrong payment information. Suppliers even have different names for the same thing. Staples calls a pen a pen, but Office Depot labels it a writing instrument, for instance.

SciQuest, Wiehe says, “Sits in the middle like the Post Office. There is one connection from us to GlaxoSmithKline and one into us from each supplier.” That gives a supplier such as Office Depot an incentive to invest in connecting to SciQuest, because they connect to 100 customers over night.

“By the end of 2002, we were starting to see real traction,” says Wiehe, “and we looked for other synergistic markets.” The company bought San Francisco-based Higher Markets, which worked with universities, that year. It had raised $18 million in venture backing and spent $17 million “seeding the market,” says Wiehe.

“We had a real business”

By 2003, Wiehe says, “It became obvious we had a real business. But we were public. We had a mismatch between shareholders and the business. We didn’t have certainty when we would have profits and shareholders wanted to know.

“It was costing us $2.5 million a year to be a public company (to meet Securities and Exchange Commission reporting and other regulations). But we had no benefit from being public.

“The market was depressed. We couldn’t raise money, shares were depressed. And if we wanted to acquire a company, it didn’t want stock.”

So, in a move that’s become more and more common since the Sarbanes Oxley bill made public company reporting and oversight requirements even more stringent, SciQuest went private.

Tomorrow: “Going Private,”Part two of the SciQuest turnaround story.

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Copyright 2007 TechJournal South