FiscalNote Inc. CEO and co-founder Tim Hwang was worried about facing a potential cash crunch in early 2019.
He described FiscalNote's slowing growth and "the mire of CQ Roll Call's historical financials of declining growth" in a Nov. 30, 2018, email that he sent to senior leadership at the D.C. tech company and was obtained by the Washington Business Journal. So, Hwang proposed an audacious goal in that email, just a few months after FiscalNote had closed on its $180 million acquisition of CQ Roll Call from The Economist Group: Raise $175 million in new equity capital for the company — $100 million in growth funding and $75 million to provide exits for existing investors at a $300 million to $400 million valuation.
Then raise an additional $500 million in debt and another $500 million in equity through a future initial public offering or yet another round of growth funding, Hwang added in that email.
To pull that off would require efficient sales, customer retention and quick wins to cross-sell products across the FiscalNote and CQ Roll Call platforms, Hwang said in the email. FiscalNote, whose issues management software helps clients track and take actions on laws and regulations, now had access to CQ Roll Call's customer base, and Hwang wrote that FiscalNote needed to show it could land $200,000 to $500,000 worth of new product sales even as it raised new funding.
Hwang’s goal was to convince investors the company could reach at least $500 million in annual revenue, according to the email — it had yet to crack $100 million at that point. He also wrote that FiscalNote could grow further through a "tuck-in acquisition" in an adjacent data market or a publishing joint venture that he said he had been discussing with publishers such as Fortune, Forbes and Billboard.
The message? Time was of the essence.
"There is a strong sense of urgency as we only have about 4 months to pull this entire thing off (3.5 if you take out the December holidays) and so I ask that we move expeditiously and quickly to make this happen," Hwang wrote in the email. "In that sense, every day counts for us to achieve these quick wins. If we stay aligned and collaboratively on this, I am confident that we will be able to pull this off."
They didn't — at least not that full fundraising goal. This past November, one year after that email, FiscalNote closed on a previously unreported $92 million in funding from convertible notes, Hwang confirmed in a recent interview.
While Hwang said the company essentially raised what it set out to, albeit later than intended, sources and documents indicate how FiscalNote's rapid expansion and efforts to position itself for an IPO also led to some struggles last year. Several sources I spoke with for this story, who spoke on condition of anonymity because they were not authorized to speak for the company, stressed that FiscalNote’s core concept was and continues to be a strong product idea. But the 18 months following the company's consummation of CQ Roll Call left its main products lying fallow, without substantial development or sufficient focus as Hwang pursued more acquisitions to grow FiscalNote's top-line revenue, according to these sources.
Hwang refutes that assessment. He said FiscalNote has invested in its core product line, reached 450 employees and has a full plate for 2020 in terms of growth and hiring. And he stressed that in the recent $92 million round, "the vast majority" of existing investors declined to take buyout offers for their shares, opting instead to hold onto them. Any questions around financial struggles, he said, doesn’t represent the company that he knows.
“We are going to be profitable this year,” he said. “We are growing pretty aggressively.”
Challenging year
By early 2019, months after Hwang's initial email, FiscalNote ran into difficulties paying some vendors, according to several sources familiar with the situation.
The company was also hit with tax liens — about five from Washington state and two from New York, totaling roughly $44,760 in all — though they were subsequently paid, according to court records associated with those liens.
A recent Experian ProfilePlus Report on FiscalNote obtained by the Washington Business Journal provided a rating for the company's likelihood of serious credit delinquencies within the next 12 months, using a combination of public filings, recently active commercial accounts and delinquency rates. In late 2019, the report scored FiscalNote as nine out of 100, with one being at highest risk and 100 at the lowest risk of delinquent payments.
Hwang attributed the delays in payments to FiscalNote building out a new accounting and reporting system after its acquisition of CQ Roll Call and properly accounting for thousands of vendor payments across the company. He said it's normal for companies to work through these issues after sizable acquisitions.
He said the company was also working to shift its corporate structure from FiscalNote Inc. to a holding company, called FiscalNote Holdings Inc., which he said added to the payment issues.
The company also struggled to retain a few high-profile customers in the first half of 2019, according to internal retention documents obtained by the Washington Business Journal. That included UPS (NYSE: UPS), which thought "they were buying a fully baked solution," according to FiscalNote's assessment in the internal document. The local company attributed UPS' $122,000 contraction in business to "misaligned expectations," according to the document. An initial $67,000 purchase by Las Vegas Sands was also not renewedafter the client "never engaged or used product after signing the contract," according to FiscalNote's descriptions in the document.
AT&T Inc. (NYSE: T) dropped FiscalNote's service after a one-year limited trial for net neutrality issues, according to the internal document. McDonald's Corp. (NYSE: MCD) used the platform only but with no data, and it ultimately pulled out of the product, resulting in a $243,000 churn, the FiscalNote document said.
Hwang pushed back against the idea that there was any broad dissatisfaction with the product, citing 800 new customers added in the last 12 months, for more than 5,000 customers total, including Facebook Inc. (NASDAQ: FB), Fannie Mae, Starbucks (NASDAQ: SBUX), the FBI and the Defense Department. He said the company has achieved a 98% customer retention rate.
“You are always going to get some level of churn in a software company,” Hwang said. “These customers, in many cases, are paying up to a million dollars or so.”
Company priorities
After what one source described as a "chaotic" spring of 2019, Hwang continued to work on another potential acquisition over the summer of 2019 that would have added tens of millions of additional revenue to the company, according to two sources with knowledge of the matter.
During that time, there were also informal discussions within the company of selling off one of its 2017 acquisitions, VoterVoice, a small but growing portion of the company to help boost its long-term finances, sources said.
At the same time, they said, Hwang pursued his repeated goal of building a fast-growing, IPO-ready company within a few years. FiscalNote went so far as to describe its recent $92 million debt round to investors as a "pre-IPO" round, the last it would need before a public offering, according to a source that participated in the round.
The sources said those actions came at the expense of investing in FiscalNote's core products, which they said still held great potential.
However, Hwang said FiscalNote has invested heavily in its main products — "close to $20 million" in the last year on research and development. He said it's also made key hires, including bringing on a former Thompson Reuters executive as a vice president who rose to chief product officer by last March.
He said the company is always looking at potential M&A opportunities and evaluating options for growth and efficiency, but there was never any "serious effort" in place, such as hiring a bank, to sell VoterVoice. Any claims to the contrary, he said, are false.
“We are always evaluating different acquisitions, but it doesn’t mean we change our core R&D strategy,” Hwang said.
FiscalNote's vision
Hwang has shown an ability over the years to strike mighty deals on behalf of FiscalNote.
For its $180 million purchase of CQ Roll Call, the small but growing tech company swallowed a major legacy media player without putting in any cash of its own. S&P Global, which owns a stake in the combined entity, put in $23 million, while debt financing covered the rest, according to sources familiar with the deal terms.
That deal, in turn, quintupled FiscalNote's base revenue. At the time of the acquisition, FiscalNote was slated to bring in $10.9 million in revenue for fiscal 2018, while CQ Roll Call was projected to bring in $52.8 million, according to company revenue breakdowns and projections obtained by the Washington Business Journal. Another company that FiscalNote had acquired in early 2018, Shungham, was projected to bring in $1.3 million in fiscal 2018 revenue, and VoterVoice was forecast to bring in $4.1 million. In all, FiscalNote's total fiscal 2018 revenue projections at the time were $69.1 million.
Now, Hwang said the company is on track to bring in $100 million in 2020 revenue and turn a profit — CQ Roll Call was profitable at the time of its acquisition. He said the company is “growing aggressively” and adding new projects and is financially healthy.
Though, it still faces challenges ahead. The company is now approaching a time of the year when CQ Roll Call's renewals begin to slow, according to one source familiar with its sales cycle. The media division brings in most of its revenue from the beginning of the new governmental fiscal year, which starts Oct. 1, through the following Jan. 1, only to hit a slowdown, which could curb future cash flow at FiscalNote, according to the source.
Hwang said the company is reducing spending on some of its contracts “to make sure we are being efficient in terms of our dollars” and to reduce duplications between CQ and other portions of FiscalNote.
But when asked repeatedly whether the company was planning any layoffs or workforce reductions, Hwang would not comment. When pressed, he would say only that different planning efforts were always underway at the company, declining to specify those further.
“At the current moment, we are not commenting on any personnel decisions,” Hwang said.
