IVCA Profile Q&A: Bill Conroy, President & CEO of Initiate Systems And Armando Pauker, General Partner of Apex Venture Partners

IVCA Profile Q&A: Bill Conroy, President & CEO of Initiate Systems And Armando Pauker, General Partner of Apex Venture Partners

November 24, 2010

CHICAGO - “This 2010 IVCA Venture Capital Portfolio Company of the Year recognizes a very successful Venture Capital-backed company. The Venture Capital recipient for 2010 is Initiate Systems and one of Initiate's Venture Capital partners was Apex Venture Partners. Mr. Pauker will present the award to Mr. Conroy at the IVCA 2010 Awards Dinner on December 6th.

IVCA: Mr. Conroy, congratulations on being recognized as the IVCA Venture Capital Portfolio Company of the Year. What are you most proud of regarding the growth and success of your company?

Conroy: I am most proud of our employees. I believe our success is a result of hiring, motivating and retaining incredibly talented and good people. As leaders, we nurtured a culture of innovation and teamwork - “ we set expectations and focused on results every quarter. In the recent tough economy, we were able to maintain profitability and high growth rates because we lived by our cultures and values. I am very proud of how we managed through the rough times and that we were able to continue to hire exceptional people without having to consider a lay-off of personnel.

When we first began, the market for customer data management and integration was not as - ˜hot' as it is today. All along, we had stakeholders who believed in us. This gave us great choices in terms of exit. We were proceeding with Goldman Sachs on an IPO path at the same time we were considering acquisition options. Now we are a part of IBM. This gives our employees great opportunities to grow their careers and our customers can feel safe that their investment in Initiate will continue to give them great returns.

IVCA: Mr. Pauker, you are representing the investor group that funded Initiate Systems and are presenting the Venture Capital Portfolio Company of the Year to the company. What makes Initiate Systems the company of the year?

Pauker: Initiate Systems is a great success story. Upon the all-cash sale to IBM, the company had over 350 employees, was profitable, and was on a revenue run rate greater than $100 million. The company had a global presence and was the undisputed leader in its sector across verticals such as healthcare, federal & public sector, and financial services. Going public was the next logical step.

IVCA: What initially interested you in Initiate Systems? What were the fundamental characteristics of Initiate that made it a company worthy to invest in?

Pauker: We came into the deal in the company's first institutional round in 2002. At that time the company had a working product installed at a number of customers. The founders, Ron and Jeff Galowich, had done an excellent job in bootstrapping the company with support from local angels. They were able to clearly articulate, and provide customer proof points, that they had a terrific product that customers were willing to pay for in a quickly growing market.

IVCA: Mr. Conroy, what aspect of your business plan do you feel was most attractive to investors and how did you emphasize it once you sought funding?

Conroy: We chose to focus on a market niche on which, at the time, few others were focused- “ the increasingly challenging problems of data management and data integration. Our early investors thought that mastering data would evolve into a big market and they were right. Our early start allowed us to hold a leadership ranking with top industry analysts and our products became a - ˜gold' standard.

We also focused early on the Healthcare and Intelligence markets. Our investors thought these would be growth markets that were largely recession proof and again they were correct. Now that Healthcare Reform is a focus area not only in the US but around the world, many software companies wanted to invest heavily in this growth sector. With our financial results, compelling technology, and marquee customers in healthcare and other sectors, we became a desirable acquisition or IPO candidate.

IVCA: Mr. Pauker, in the process of making an investment in a company such as Initiate, what generally happens immediately after the company is funded, what data besides the bottom line is usually relevant to an investor firm or group?

Pauker: After the investment, the key activity for investors is to make sure that the right leadership is in place to fully achieve the company's potential. To that end, we were fortunate to have Bill Conroy join the company as CEO a few months after we closed the round in 2002. Bill filled out the management team and drove the company to excel and grow. The other thing we, the investor group, watched closely was the company capitalization. We always wanted to make sure the company had sufficient capital to sustain its steep growth rate.

IVCA: Mr. Conroy, how will your company most interact with the current healthcare reform act? How will this save money overall in the medical data system?

Conroy: Improving individual and population health through data management and information sharing is an essential part of healthcare reform. Health information sharing is also key to controlling costs and driving greater value for the dollars spent. Initiate makes sure that when information is shared, as an example for a specific patient, that the patient's records are matched or linked correctly. This avoids errors that can injure patients, promote fraud, or frustrate patients as they look for new healthcare coverage.

As an example, State insurance exchanges will need to manage large volumes of data to facilitate patients, who are newly eligible for healthcare, in finding health insurance plans. Our solutions, Initiate PatientTM and Initiate ProviderTM are part of this solution. Data will change over time as participants enroll and de-enroll. Our technology makes sure that a complete, accurate view remains even with this dynamic data. Also, Accountable Care Orgs [ACOs] will only succeed if they understand who their member patient and providers are, and their data can be linked and tracked. Master Person Identification [MPI], which is the purpose of Initiate Patient and Initiate Provider, will be fundamental to this mission.

The adoption rate of electronic medical records by physicians will depend heavily on if they trust the electronic systems. Initiate makes sure that they look at the right information for the right patient. This will go a long way in building physician trust. Initiate Exchange offers a cost effective or cloud based solution for connecting physician practices to hospitals and other providers in their healthcare community. Initiate solutions are part of the health information exchange solutions that will help health providers meet requirements for meaningful use of data.

IVCA: Initiate Systems took a very complex problem in the marketplace and turned it into a workable product solution. What was the key to implementing the solution and how did you first approach it?

Conroy: We approached the market with a - ˜black box' offering that although complex, our customers did not have to fiddle with it. Our products could be updated via standard releases yet we customized or tuned our offering for use by each of our clients. As a result we were able to help our clients achieve great accuracy and performance when looking for a complete view of their customers, patients, or suspects without them having to spend time tuning and maintaining the system. Although we did the tuning, we were able to implement the software at a fraction of the cost of our competitors and in a fraction of the time.

IVCA: Mr. Pauker, what changes do you see in the venture capital industry? How do you think these changes will effect the overall industry?

Pauker: The challenging economic environment has made it more difficult to get Initiate-sized exits. As a result, venture funds are attracting less capital and getting smaller. Venture capital will become even more selective going forward. Companies will be forced to be more capital efficient and resourceful.

IVCA: A question for both of you: How important is the IVCA for the venture capital community? How does recognition from the association help promote the overall industry?

Conroy: Venture money feeds innovation. The IVCA promotes and supports stories like Initiate, they foster innovation in the Midwest. We benefitted because Apex Partners, based in Illinois, believed in Initiate, which also is Illinois based, and backed us with not only funding but sound advice. We are proud to accept this award and by promoting our success I hope we will encourage the IVCA, the local venture community and local entrepreneurs to continue to believe in the Midwest as a region in which you can grow a successful software company.

Pauker: The IVCA is important in maintaining the visibility of the industry within the larger legislative and corporate communities. Venture is an important engine for finding and promoting high growth industries that create new, interesting jobs.

IVCA: Finally, how important is your Midwest and Illinois location in making Initiate Systems the success that it is? For Mr. Pauker, how important to Illinois and the Midwest are companies like Initiate for the growth of the area economy?

Conroy: The Midwest is rich with world class universities, research centers and innovators. We kept our share of this talent working in the Midwest by having them work for Initiate. The same culture that makes the Midwest a great place to live was the culture we tried to run the company by. We were aggressive but realistic and treated our employees and customers the way we wanted to be treated. So, we found great talent in the Midwest and a culture that both our employees and customers found very appealing. It was not unusual for a customer to compliment us by saying - ˜they have a great Midwest culture.' We were told by so many that the Midwest was the wrong environment to establish a successful software company in...we proved them wrong.

Pauker: Companies like Initiate are supremely vital to the area economy on several levels. The most obvious is the number of new jobs created by a high growth enterprise. Besides direct employment at the company, many ancillary jobs are supported at a broad range of service providers from law and accounting to banking and food services.

The next level is the further proof that large, successful companies can be built in Chicago and the Midwest. This helps attract capital to the area. Envestnet [N: ENV], one of our other portfolio companies, went public this year - “ they are another example. Lastly, successful companies teach their people how to succeed. This knowledge can be passed on to future area start-ups.