A private equity player in the United States has made one of the biggest bets yet on the Internet, with a $160-million investment in a little-known new-media firm in Ontario's Waterloo region.
American Capital Strategies Ltd. wants to build an online media powerhouse through the minority equity stake it acquired this week in Geosign Group of Companies, a firm in Guelph. Geosign has quietly built a network of 180 websites offering consumers information on topics ranging from bed linen and fitness to insurance and cosmetic surgery.
"This is the largest single private equity deal in Canada, in the Internet space, in the last four years," said Iain Klugman, president of Communitech, an industry group representing tech companies in the region.
In the United States, he added, the deal is second only to a $200-million (U.S.) private equity placement received by Vonage Holdings Corp., an Internet telephone company, in May 2005.
Geosign has built technology that drives traffic to its sites through premium placement in search engine results, and lets advertisers monitor how well that traffic is being converted into transactions. Sales last year topped $100-million, said Ted Hastings, who joined the firm as president in January.
Growth has been explosive, with the firm expanding from just a handful of employees a few years ago to 230 today. By the end of the year, Geosign expects to employ more than 300, he said.
The company had a host of attractive offers from private equity firms in January and settled on a partnership with American Capital because of its deep pockets and extensive contacts, Mr. Hastings said.
The publicly traded buyout firm has already brought between 20 and 30 high-quality acquisition opportunities to Geosign, he added.
"It was a very competitive process," Virginia Turezyn, managing director of American Capital and co-head of its technology group, said of the bidding process for Geosign's first outside round of financing. "It was a highly sought after property by everyone."
Neither party would disclose the size of American Capital's stake, but Ms. Turezyn described it as a "significant minority" position.
Geosign was founded in 2000 by a media-shy serial entrepreneur named Tim Nye, who remains the majority shareholder and serves as chairman. Mr. Nye, who declined through a spokesman to be interviewed, started Geosign with a single website called Home Plan Info, which provides consumer information on house plans.
Through Home Plan, Mr. Nye developed software to optimize his site's ranking on search results, landing near the top of popular search engines, including those of Google Inc. and Yahoo Inc. When Home Plan began generating good advertising, Mr. Nye took his formula and multiplied it with dozens of new sites, Mr. Hastings said.
Mr. Nye is a self-professed recluse and an aggressive entrepreneur, and it took more than a year to gain his confidence, said Mike Rosso, head of private placements at RBC Dominion Securities Inc., which brokered the deal.
It's a unique transaction not only for its size, he said, but also for the ownership structure, which leaves Mr. Nye with the majority stake, and the firm's leading technology and relationships with both Google and Yahoo.
For the investors, the real value of Geosign is not in the content on the sites. "It's the automated systems around [the content]," Ms. Turezyn said. The technology means the firm can grow rapidly without adding extensively to its costs.
People involved with the technology industry in the Waterloo region said the size of the deal signals better times ahead for other local startups.
"Geosign is indicative that we're going to see a lot more companies going for the max," said Randall Howard, general partner at Verdexus, a venture capitalist specializing is software firms. "There's a lot more of these new media startups going on than most know about. This is just the tip of the iceberg."
