ActiveRF Case Study - Incentive

Pilgrim Beart set up ActiveRF in 1998. The company was working to develop core software technology for miniature, low-power and low-cost local radio-frequency devices. The key value proposition lay in having a system that could determine the location or position of assets and people in a wide range of operating and business environments. Individual assets were tagged, and their position sensed through nodes reporting back to a central software server. All this was delivered in real time, and had a number of potential markets, including the detection of supermarket theft.

ActiveRF went into administration in 2003, after which Gatekeeper Systems LLC acquired its assets. The company was relatively unfocussed at an early stage while trying to find applications for its technology, but this lack of focus continued for too long. Once the company eventually had a customer, it was too late. Too much cash had been burned and not enough progress made. ActiveRF’s investors refused to continue to finance operations and the company simply ran out of cash.

Pilgrim Beart has since gone on to found Antenova, a company that is experiencing far more success.

ActiveRF saw a number of funding rounds, and at each round the balance of power shifted among the equity holders of the company.

• In the first round, the founders and angels held ordinary shares and made up the board. Employees held options in the company.
• In the second round, venture capitalists came in and held preference shares in the company. Along with the founders they made up the board. This pushed the angel investors off the board and cut the flow of information to them. Effectively the angels became outsiders and passive.
• A new CEO was brought in to manage the company. Along with the venture capitalists they made up the new board. This cut the founders out of top-level decision-making.
• In the final round, the investors took a risk funding the company with a further round, but at a very low valuation. This effectively wiped out the ordinary shareholders through the effects of dilution.
• Finally the company went into administration and the assets were acquired by Gatekeeper Systems.
  
  

  Key Lessons on Incentives

• It is important to realise that the founders may not be the people to take the company forward in the long term. Their abilities may be more creative, generating ideas rather than implementing them. In the case of ActiveRF this left the company unfocussed.
• Venture capitalists will take a long hard look at the founders’ ability to execute the company’s plan. At ActiveRF, a new CEO was brought in, but perhaps too late.
• Issues will arise where equity holdings are diluted to almost nil, or wiped out, or where preference shares are too onerous. When stakeholder groups – the founders, the angels, the VCs, and the management - within the company are aligned, the chances of success are far greater and less friction arises.
• The board of such a company is difficult to build and will see a number of phases within its lifetime. It is however key to ensure that the board remains balanced, able to represent the different stakeholders, effective and aligned with the goals of stakeholders within the company.
• No single factor ever accounts for the failure of a business, but incentives and the alignment of stakeholder groups help underpin the company’s fabric. Related Lessons
• Founders often have vision, but to be successful, management teams must be able to execute that vision.
• Start-ups need to be focussed where appropriate. ActiveRF went after too many types of customer at once and for too long. The company lacked the focus to become a success, even though it had a good technology.
• While the company had Tesco as a customer in its final days, by then the investors felt over exposed and refused to fund ActiveRF any further.
• With large corporate customers such as Tesco, there are issues to overcome, such as internal inertia. ActiveRF found the sales cycle with a customer such as this took much longer than expected.