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    Shannon Henry's The Download Live
    Discussion With Christopher R. McCleary of USinternetworking

    Thursday, July 8, 1999 at 1 p.m.

    Shannon Henry Welcome to The Download Live. I'm your host, Shannon Henry. My guest today was Christopher R. McCleary, CEO of USinternetworking and former CEO of Digex, Inc.

    Christopher R. McCleary USinternetworking is an "ASP," or Application Service Provider, delivering data processing services to client companies via what amounts to Internet time-sharing. It buys costly programs, then relicenses them to small businesses that couldn't afford such software on their own.

    Before launching USi, Mr. McCleary was Chairman and Chief Executive Officer of Digex, Inc. Digex is a national Internet carrier and early pioneer in the development and implementation of complex web site management, recognized in 1997 under Mr. McCleary's stewardship as the number-one fastest growing technology company in the Washington, DC area.

    USinternetworking is the second IPO for McCleary, who took Digex Inc. public in October 1996 at $10 a share and sold the company nine months later for $13 a share.



    Transcript Follows
    (edited for space)

    Shannon Henry: Hi Chris. Welcome to the discussion. Could you start by telling us exactly what USinternetworking does? How did you come up with the idea?

    Christopher McCleary: The idea for USi was somewhat simple. There is today the absence of a single provider that will shoulder the responsibility for the networking elements as well as the software integration and operation for midmarket businesses. Therefore, the USi business plan was really created with the client requirement first, and then we built a network and secured our software partner agreements. To date, the response has been very favorable from early clients and our current prospects.


    Shannon Henry: Why did you base USinternetworking in Annapolis? It's not exactly the technology hub of Washington.

    Christopher McCleary: As you know Annapolis is exactly the same distance from the White House as it is from Reston Virginia except going East and the quality of life, and availability of IT workers is very good.


    Rockville, MD: Mr. McCleary--
    My partner and I have just completed a business plan, verified several of our key operating concepts, and secured an accountant and attorney. As for customers and financing, we want to avoid shoestringing and VCs. That is, we're interested in raising seed capital from strategic corporate partners who also would commit to being our customers, and ultimate benefactors of an IPO. Is this process common and would we do well to try to approach them by courting an underwriter first?

    Christopher McCleary: USi is the first company created exclusively to develop application service provider businesses. We provide businesses with a complete integrated solution for the use of packaged application software, all integration and implementation, all computing hardware, managed and supported in our global network data center priced at a flat monthly fee.


    Washington, DC: What should the revenue model for a start-up look like before they decide to go public? I know companies like Amazon.com have hot stock but still haven't made a profit. Should start-ups be making money before IPO?

    Christopher McCleary: Accessing public equity markets as a wide variety of types of companies in various stages of their development. Companies with low revenues or that are unprofitable at the time of their IPO, tend to be deemed high growth or in a new innovative industry segment.


    McGaheysville ,Va: How can a company with great internet product development but no real business stream or income yet, prepare itself for public offering? How much concern for accounting methods and business plans etc.?

    Christopher McCleary: This is why a business plan, solid management and very clean financial reporting are absolutely essential in planning an initial public offering.


    Alexandria,VA: How feasible is it to grow a successful company WITHOUT VC or Angel capital? My business partner and I have a growing web development studio with some very high profile clients, which we have built up solely with our own finances and earnings. So far it's just the two of us, but I don't know how feasible it is to "save up" our earnings for better office space, a couple employees, etc. Certainly there are successful companies that have financed their own growth without outside help--any suggestions or advice?

    Thanks!

    Christopher McCleary: VC is not needed for a successful IPO, however IPO companies usually hold the promise for very high growth. I would contact your accountant or an investment banker at FBR or Legg Mason for assistance at this stage of your development.


    Gaithersburg, MD: In your first IPO experience what were some of the things that completely caught you off guard? Additionally, what were some the deal-breakers that somehow worked themselves out when pursuing the IPO

    Christopher McCleary: It is an art — not a science — and each underwriter has very different views of the requirements. With regard to problems: every day the process creates a new problem requiring creative solutions.


    Shannon Henry: Was it back in August that you were originally planning a public offering, then pulled back because the market had slumped so much? Tell us how you timed the IPO. Why so early in the life of the company?

    Christopher McCleary: We attempted a debt offering with Alex Brown, but you are right. The market dictated that we hold off and we closed another equity venture round instead. Then we waited for the public equity market to be receptive to company IPOs, which occurred very quickly early this year.


    Alex VA: When moving forward on an idea to create a business on line - who's market is relatively small - albeit a proven market... what suggestions or cautions would you have?

    Christopher McCleary: In developing a niche on-line business, one essential factor is the experience and commitment of the founders to that particular marketplace to assure success.


    Wash DC: What are some of the changes in technology coming up that will change internet business?

    Christopher McCleary: Here are a few I can think of
       1. speech to text conversion
       2. trading portals
       3. wireless computing devices
       4. agents who manage all forms of communications


    Reston, Virginia: Beyond the current "if it deals with the Internet, it must be worth investing in" mentality, what criteria do you think is necessary for companies to successfully go public?

    Christopher McCleary: An investment banker must be convinced that your company can be successful raising public equity. A major criteria are as follows: management, high growth, noteworthy current investors, committed employee faith and strong business partners


    Silver Spring, MD: What was your reaction-response to the article on you and USI done by hoodwinked.com?

    Christopher McCleary: Must have had a bad hair day


    Chevy Chase: What does the SEC or investment banks look for to take a internet company public? In other words, what is the "criteria" that has to be met? Revenue, profit, etc.?

    Christopher McCleary: As I replied earlier, investment bankers and the SEC have primary criteria that include audited financial statements, an investment banker willing to underwrite the offering, legal due diligence on all contractual obligations of the company as well as strong management and, of course, market conditions.


    Washington, DC: What are the most important characteristics of a CEO at the helm of a company making the trek from start-up to IPO?

    Christopher McCleary: Probably the most important issue is the development of a strong dedicated team that is able to pursue a goal during very turbulent and in some cases uncertain business conditions. And — equally as important — a start-up CEO should be able to build trust with many different constituencies including private investors, business partners, early customers, and through public investors.


    Washington, DC: How does USi plan to compete with the ever-increasing world of ASP's? How has USi succeeded thus far?

    Christopher McCleary: We expect and had planned for the emergence of several strong competitors. We believe our laser like focus on being a dedicated ASP is the single most important competitive advantage.


    Reston, VA: When trying to take a small company public, is it best to try and sell it to a larger company and then have the IPO. I noticed that a lot of smaller companies are being bought by bigger ones and then they companies are going public.

    Christopher McCleary: It is a very attractive option for some companies to merge with a larger company — hence the ability for the new entity to access the public marketplace.


    Kensington, MD. : Mr. McLeary,

    It seems a lot of people are under the illusion that an IPO "just happens", could you briefly explain the process and why senior executives, such as yourself, spend a good portion of the year, prior to the IPO, lining up institutional investors?

    Christopher McCleary: Although the activity around the IPO process is always quite visible, the IPO itself is really a means to the end to secure a good source of financing. Prior to the IPO road show, private companies really do not elicit investments from investors, but spend much time convincing venture and private investors to take the early and riskiest investment prior to the IPO.


    Washington,DC: Where can Minority Business owners go to start the process of understanding how to take their companies public?

    What books do you recommend and what federal agencies are available to help?

    Christopher McCleary: For any company — whether minority owned or otherwise — the single best place to start is usually the company's CPA. In addition, local investment banks like FBR and Legg Mason are also excellent sources of early planning information. I personally know of no federal agencies that assist the IPO process, but there may be some assistance available at the SCC.


    Shannon Henry: That's it for today. Thanks for joining us, see you in two weeks.



    © Copyright 1999 The Washington Post Company

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