The Conclusion of the Zultys Saga – For Now

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The Conclusion of the Zultys Saga – For Now

Here is part of my Internet Telephony Magazine Publisher's Outlook December 2006. It is is in addition to Cisco Systems Rockets Ahead, Beats all Estimates which was posted earlier today: 
 
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A few months back, TMC’s Greg Galitzine broke the story on his blog that Zultys had ceased day-to-day operations. From there I wrote about the company closing down on my blog and later updated the story when Zultys founder Iain Milnes told me the shut down was temporary. A few days later Iain told me and I reported that Zultys was back up and running.
 
It turns out that if the company was indeed back up and running this was only the case for a short while and a bankruptcy filing took place shortly thereafter with a bankruptcy auction in the works for the future. While this situation took place TMCnet and I reported on the happenings. Out of the blue I received a phone call from a Zultys reseller who told me how big his sales pipeline was and moreover how big the pipeline of other resellers was. He had nothing but amazingly positive comments to share.
 
I shared the comments of this reseller who requested anonymity under a blog entry titled Zultys Reseller Update. It was at this point the fireworks began. Dozens of commenters were either supportive of Zultys or berated Zultys and even me for having the nerve to write what a reseller told me. Well the reseller was insulted so many times in the blog comments he decided to divulge his identity and from there more people joined in on the dialogue. I received many calls and e-mails about this single entry and it blew me away that a single blog entry became the general source for the Zultys community to get its moment by moment information on the happenings of the bankruptcy proceedings.
 
The comments on the blog started to wind down once the announcement was made that Pivot a company supported by Telrad Connegy, an Israeli-based PBX manufacturer with a 50-year involvement in the global telecom arena had purchased the Zultys assets and hired many of their engineers.
 
About a week or so after the auction I received an e-mail from Iain Milnes who told me he wanted to talk about the real facts regarding the ordeal and he went on to say a tremendous amount of misinformation had been spread. He wasn’t able to discuss any of this until we spoke recently.
 
I had an hour-long conversation with Milnes for over an hour and what emerged is quite interesting. He started off by saying he believes the new management is acting very stupidly as they are closing down sales offices throughout the world. Many Zultys resellers around the world have complained to Zultys that they have not been contacted. Iain went onto explain there are eight times more people in China and India than there is in the US. He spent years building up sales and partnerships in these areas and now the new Zultys/Pivot management has destroyed it all in four days.
 
Milnes went on to say that 60% of the company’s business was international and there were offices in Bangalore, China and throughout the world. As Iain went onto say at Zultys they were shooting for the stars and the goal was to make the company an international force in a short amount of time. Many Zultys customers were international as well so they required their communications partner to be the same.
 
Iain mentioned the international customers will not be happy with service and support going forward but they love the product.
 
Iain and I discussed the fact that an argument can be made the company is where it is because of a failed strategy that needs to be changed. To this he replied the new management seems to think you should grow domestically and then expand overseas. He sees this as a flawed strategy as you aren’t able to sell multinationals in this manner and now the channels are already built. Office in UK and Australia are deserted and China is winding down and relinquishing their lease.
 
Iain reiterated the point that even if you think international expansion was a flawed investment, Now it has been made. “Homologation in China took 2 years,” he said emphatically. It has been made and done and now the office had big orders from major institutions and was profitable. As he said, “Even if you say Milnes did a bad job with international expansion, not retaining it is a more stupid mistake.” In his opinion the company doesn’t understand why the company has failed. He believes if you are in the PBX space and aren’t in China and other parts of the world today you can never break into these markets.
 
So why did the company fail? As Iain tells it, Zultys started with a strategy of making the company hundreds of millions of dollars. He says he didn’t think they could put Cisco or Avaya out but they thought they could be in the top 3 or 5. He mentioned Zultys was number 3 this summer in PBX sales.
 
After investing $67 million dollars of his own money into the company Iain decided to seek a round of funding in the fourth quarter of last year. In the first quarter and second of this year they had more orders than they could deliver. He needed money to put into building product to fulfill expansion. They spoke to 5 investment bankers. Citigroup courted them and got the business as they thought there were good fundamentals, distribution, and the press and analysts were talking highly about the company.
 
Everyone figured it would take only a few months to get the dollars they needed to keep going and to continue their expansion. Citigroup wanted to be part of the IPO which everyone believed would be a few years away. The investment bank spoke to 97 investors on their behalf and at the end they had one investor. Verbal terms were then agreed upon a few days later when they expected a term sheet they instead received a rejection.
 
According to Milnes, “There was no plan B and that was the problem.” They never thought they would fail. They seemed to sincerely believe they would get the money and that others would see the value in what they created and did.
 
In addition the company had spent money manufacturing overseas but the products never ramped up enough to make it an intelligent investment. In other words for the amount of product sold it would have been cheaper to make them in the US. Iain seems to have toyed with the idea of laying off the engineering team to save money in order to get them through the tough times but this didn’t seem like a wise idea while the company was seeking investors.
 
  • Iain went on to recount the reasons for failure. The list reads as follows and seemed more like a confession than an interview.
  • They should have been selling more
  • They should have worked out why they were having the problems they were
  • He understands it now
  • He was the head of the company and it was a team effort
  • They didn’t market as well as they could have
  • They didn’t engineer fast enough
  • They made lots of mistakes
  • The guy on top – him – did not really how to take this through with a plan b
  • They should have planned more carefully
 
Iain believes if the company had $10 million and working capital Zultys could have been a great company. He will go to his grave wondering why no one wanted to invest in Zultys he says and he thinks perhaps PBXs have been around 100 years and are not sexy.
 
Milnes went on to talk about all the international success Zultys experienced and how resellers are now sad they have to go to more complicated systems from the competition.
 
He doesn’t think the software engineers have a clue how to run accompany. He did point out he started out [on his own] 20 years ago and wouldn’t deny the opportunity to anyone. The challenge as he sees it is picking up a living breathing organism. “They are out of their depths,” he said. He went on to say “They Have no clue how to run a company or what is required to sell, service and support a product.” In addition he feels a few of them have stabbed him in the back. He mentioned that some people currently at Zultys feel the same way and many of these people are looking for other jobs while collecting a paycheck at the company.
 
Iain went on to say he is sorry to the suppliers, resellers, customers and employees. He is very sorry for causing so much havoc. He knows he affected lives of employees. He made a mistake and he thinks he knows what he did wrong and what he would do right in the future
 
I asked Iain what is next for him and he said he will be forming a new company. He doesn’t know what it is going to do but Milnes said, “I think I know a bit about communications and running accompany.” He said Lots of people have come to him and want to work for him. He is still looking for ideas so if you have any Iain asked you let me know and I will forward them to him.
 
I have known Iain for about a decade. The last company he worked at was called Zarak and it used to make testing products. One of these product lines was called abacus. The company was purchased a number of years back by Spirent and I mentioned to him that Spirent is still selling the Abacus product. At this point he told me that China sales in mushroomed after Spirent purchased Zarak.
 
He recently went to dinner with a former salesperson for Spirent who told him in China they love the Abacus product. He was hoping to achieve this with Zultys products. Zultys was into some pretty big accounts. He thinks they could have been very dominant in another 5 years
 
Iain said, “The loss of international emphasis is the gain of other companies who can capitalize on it.” He went on to say he was working so hard and putting in the money. He said he should have stood back and looked at he market. He believes he should have hired a good CFO one year ago and this wouldn’t have helped. He mentioned he wasn’t looking at the numbers
 
Iain summed it up by sawing he saw the success but did not see the need for cash until it was too late. They wanted to believe they would be successful in raising it. He did not keep the eye on long term cash flow. That was the fundamental problem in his opinion. Iain went on to say they could have sold more, had better engineers, marketers and sales people. He reiterated it was team effort. He asked, “Why was Zarak so successful?” He said they had excellence in everything they did. He felt they needed more excellence in Zultys. He summarized by saying he blew it and he is terribly sorry – to everyone.
 
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