Receivership: The last resort – the rise and fall of IVDesk

Key takeaways

• The owners lost their investment.
• The employees and customers were protected.

Lessons learned

• Avoid conflict with your business partner 
• Use secured debt 
• Talk through business decisions with friends and colleagues

A business succession and transition (BST) case study

Storyteller: Small business co-founder and seller
Business location: Metro
Industry: Information technology

On this page

• Introduction
• The birth of IVDesk
• The introduction of outside investors
• The first cracks
• The final sinking of the ship
• The last option: Receivership
• Advice
   

Introduction

This case study follows the rise and fall of IVDesk, a tech company founded by Jim Polakowski and his colleague when an intriguing opportunity presented itself. The two lacked business experience, but they had a passion for tech and a vision for an untapped market. What began in 2001 as a leap of faith by two programmers grew into a multi-million-dollar operation serving hundreds of small and mid-sized businesses across the country. However, IVDesk's story does not end the way they planned. Instead, it illustrates how rapid expansion, complex financing structures, and misaligned leadership incentives can quietly destabilize an otherwise strong business foundation. Ultimately, Jim's experience shows how business transitions are often shaped less by one dramatic turning point but rather a gradual accumulation of decisions — some made in optimism, others made in exhaustion — until the only option left is to protect what Markers most.

The birth of IVDesk

When Jim Polakowski graduated from the University of Minnesota in 1979 with a degree in computer science, he didn't think he would start his own business someday. After graduation, he got a job in programming, and he chugged away in the industry for the next 20 years. However, things would change in 2001, when Jim would find himself presented with an opportunity that he could not refuse.

One of Jim's former clients came to him with a problem. The company had all their desktops hosted at a data center, but the costs were becoming unsustainably high. They needed a more affordable solution, and they thought Jim could help. Jim and his colleague saw an opportunity. They were both programmers, and they thought maybe this was their chance to get into the business themselves. The company decided to give Jim and his friend a shot, even though they had no experience hosting a data center or running a business. However, Jim and his friend were all in, and now, they had their first client. And so, IVDesk (which stands for Internet Virtual Desktop) was born.

“This is probably not the best way to start a business, because we didn't know much about the technology at all.” 
- Jim

Jim and his new business partner had two decades of experience in the programming industry, but now they were entering a whole new realm. Starting their own computer software company was not just about programming, it required building several layers of infrastructure that were unfamiliar to them. Not only did they have to build the software, but they also had to purchase the equipment, run the servers, and account for countless new fixed costs. Still, for Jim and his partner, this wasn't enough to scare them away. They were two smart guys, they figured, and surely they could work out these problems.

“We ended up sinking a lot of money into starting a business that we did not do any planning for at all, just because we thought it would be cool.” 
- Jim

In its first year, IVDesk made about $20,000. They started off working with just one customer and worked out the kinks as they went along. As the company started to gain its footing, Jim brought on a sales employee to attract more business. Slowly, the business started to grow. The company gradually added more customers during the next five years, and Jim finally started to feel like they were getting paid a good amount. Jim says he wouldn't suggest this as the best way to do it, but realistically, it's how most people do. A lot of the time, people just get an idea and go for it, figuring out how to run a business along the way. And that's just what Jim did. By year four, he had added a third employee. By year six, he added two more. As the years went by, Jim and his partner started to really understand and improve the product, and the customers were loving it. And the business continued to grow because of it.

By year 10, Jim was realizing the difficulties that came with constant growth. Frankly, it was expensive to grow. IVDesk had to buy costly new equipment to put in a data center each time they grew, meaning there was a massive upfront cost each time they gained a new customer. By this point, the company was serving more than 80 customers, and the growth was not stopping there. Their clients were small- to mid-sized businesses of all types, but their specialty was accounting firms. Because they operated out of the cloud, they could serve firms all over the country. News of their company traveled by word of mouth from firm to firm, and soon, IVDesk was getting calls from across the country seeking their services.

The introduction of outside investors

By 2018, IVDesk was pulling in $2 million dollars in annual revenue, but the cost of their rapid growth was pushing them to the edge. They needed capital, and they needed it upfront before they were able to bring in income from new customers. Desperate for a solution, Jim and his partner came across two guys who seemed to have one. The two advisors approached Jim and his partner with an idea: they would help IVDesk go public. Jim figured IVDesk was far too small for that, but the advisors assured him that they weren't. Going public would give Jim and his partner the opportunity to bring in outside investors to finance the cost of bringing in new customers. For the next three months, Jim and his partner met with the advisors to work out the details. Jim was skeptical, but his partner was all for it.

“They said that in two years after they came, we'd all be on the beach retired.” 
- Jim

Jim was wary of the advisors' optimism. The two seemed to be selling them a fantasy, and Jim knew it was unlikely to work out that way. His partner, on the other hand, ate that fantasy up. Ultimately, Jim and his partner had to make the decision together, so Jim set aside his doubts and went for it. At first, everything seemed to work out just as promised. The advisors brought in investors who raised more than $2 million, giving the company the jumpstart it needed to expand and update its equipment. A year later, the advisors brought in another $4 million from private investors, and the company was able to grow faster than ever before. Soon, IVDesk was serving more than 200 customers, some of whom were large companies themselves. And with an influx of investment and a staff of over 30, IVDesk was finally equipped to take them on.

The first cracks

Of the two advisors, one focused on sales, and the other focused on accounting. Together, they created a series of models for IVDesk that determined how much the business would have to charge in order to make money. However, things didn't always work out the way they planned.

“It worked fine in his model, but it didn't work fine in the real world.” 
- Jim

To make money, IVDesk had to charge a higher amount for its services. However, the amount was one that many customers were not willing to pay. Ultimately, they scared away a lot of potential customers, and the growth of their business began to dampen. The advisors also brought on four new people — executives — who were supposed to manage the business. But to Jim, the four of them mostly sat around in meetings with themselves and came up with ideas that never worked. In Jim's eyes, they didn't understand the details of the business like he and his partner did. They were completely disconnected, and they didn't spend time getting to know the ins and outs of the business or their services. Because of that, their ideas were completely isolated from the reality that IVDesk was facing, and they were bound to be unsuccessful.

The cracks began to form, but the advisors continued to assure investors that they were getting in on something great. They made the same grandiose promises they had made to Jim and his partner just a few years prior. They told them that cloud computing was the next big thing, that their returns would soar, and that they too could retire on the beach in a year. But just like Jim and his partner were beginning to find out, these promises were empty. They promised investors that IVDesk would have a growth of 48%, so when it was only 25%, the investors began to have doubts. They never saw the kind of returns they were promised, so they stopped putting their money in. Soon, the money dried up completely.

“When they say things like, 'You'll be retired on the beach in a year,' and after a year, you're not. Then you know they're making it up.” 
- Jim

IVDesk had to spend a lot of money in order to make money, so when the investors dried up, they were in big trouble. Without investment coming in, they were spending more than they were making, and running in the red every month. In order to stay afloat, they had to start cutting expenses, but there wasn't much they could do. In many ways, it felt like they were too far gone. Jim and his partner had left a lot of the financial decisions to the two advisors they brought on, so they could focus on managing the tech side. While Jim and his partner were busy running the business, the advisors were in charge of sales and attracting investors. Looking back, Jim feels like he was keeping his head in the sand. One of his biggest regrets was not being more integrated with them. Maybe then he would have been able to see where they were going wrong.

“In retrospect, we had to focus more on how the business was running and growing than we did.” 
- Jim

The final sinking of the ship

Jim often had his suspicions the advisors were not making good decisions for the company. Time and time again, a critical decision would come up, and the advisors would make a judgement call that Jim didn't necessarily agree with. But at the end of the day, he had his job, and he was busy. He was working nearly 60 hours a week running the company, so he didn't feel like he had the time or the energy to push back against them.

“When you're working as hard as you can, you just feel like you don't have time to investigate other things.” 
- Jim

Jim realized that he needed to allocate a certain amount of time every week to look at how to run the business. He had dedicated so much of his focus to the product and the service that the financial side had slipped out from under him. He had left a lot of the decision making to the advisors and high-level consultants, but ultimately, they didn't know the business like Jim did. They made statements about the mission of the company, but in the end, they were empty. They were not what the business needed to be successful. Jim realized the company was in real trouble. If they couldn't cut expenses, they would not be able to operate much longer. The technology was expensive, but they couldn't just cut their spending on it — the whole business was built on it. Jim saw the writing on the wall. They were not bringing in enough money to keep growing. Even though they were now yielding more than $4 million a year in annual revenue, it wasn't enough. Maintaining this growth and the company was expensive, and they just weren't bringing in the money needed to keep it going.

“We had a lot more customers, and on the surface, doing really well. But a lot of getting new customers is paying for them in some way or another.” 
- Jim

The list of expenses that confronted IVDesk felt never ending. They had to pay for marketing and sales staff — and that was just to get new customers in the door. Once they had the new customers, they had to lease all new equipment in the data centers. With lease payments and salaries piling onto their monthly expenses, they were spending far more than they were making. Month by month, their reserve was rapidly depleting. In order to stay afloat, the company turned to a last resort: high interest loans. Jim realized that these kinds of loans were a bad sign, and ultimately, they were only prolonging the inevitable. The other shoe had to drop.

“Even though I was the founder of the company, I didn't put my foot down until it was already too late.” 
- Jim

As the company headed toward a downward spiral, Jim began searching for other options. He didn't come out and say that IVDesk was looking for an acquisition, but he began to test the waters behind the scenes. He wanted to know if there was a way out of this where all his hard work would not go to waste. Eventually, they received two offers to buy the company.

“We saw that as a way that [ … ] we wouldn't end up with nothing, which is what happened in the end.” 
- Jim

While Jim and his partner wanted to go through with a sale, the two advisors would not let them. In fact, the advisors told Jim they would see him in court if they did. The problem was, the advisors had sold a chunk of shares in the company to investors, and the sales price of the offer to buy out IVDesk was below the price the investors had paid. If Jim sold the company, the investors would not make their money back, and the advisors could not let that happen. For Jim and his partner, this offer was the only way out where they would see any money, and they didn't want to let that go. However, the advisors told them that they had to grow the company before they could sell it, ensuring the investors made their money back. But growing the company was impossible without more money, and no investor was willing to put their money into a sinking ship. Essentially, the company was left at a standstill. Technically, Jim and his partner had the power to make decisions for the company, considering they combined held well over 50 percent of the stock. However, the two advisors held a legal suit over their heads, and if things did not go their way, Jim and his partner could find themselves in a legal battle that would cost them far more money than they could possibly afford. Eventually, the buyers heard word that some people on the board did not want the company to be sold, so they lost interest. The company didn't have many options left.

The last option: Receivership

There are two options when a company is faced with this situation: bankruptcy and receivership. Before this, Jim had never heard of receivership. Essentially, he learned, receivership is like bankruptcy but much less expensive. Further, receivership gives you the opportunity to protect the staff and the customers. Through this process, Jim would sell the assets of the company to another company for a price they were willing to pay. The purchasing company would receive all of IVDesk's equipment, staff, customers, and everything else they needed to keep running the business. They found a company that was willing to pay them $1.5 million dollars for IVDesk's assets, a small dent in their debt of nearly $5 million dollars.

After IVDesk received the payment, there was a prioritized list of who got paid first. For instance, if they didn't pay off their debt on equipment, they would lose it altogether. Before any of the money could be allocated to shareholders, they had to pay off this debt first. However, there was also a prioritized list of shareholders that determined the order in which they would receive their payouts. Over the years, Jim had put a lot of money into the company. What he didn't realize, however, was that there was a method to writing these loans to ensure he would get paid first. The outside investors knew exactly how to write their loans to make sure they were prioritized when the time came. Unlike Jim, their debt was secured. Ultimately, out of the $1.5 million dollars paid, Jim didn't receive a dime.

With so much money lost, the main things Jim cared about were his staff and his customers. While his partner had already left by this point, Jim wanted to see this through. The purchasing company agreed to keep the staff of IVDesk on for three months, including Jim, so that they could spend that time looking for other jobs. Jim stayed on, but for those three months, they didn't ask him to do a thing.

Advice

Avoid conflict with your business partner

Jim knows that it's a story as old as time: two guys start a tech company together, and then the business fails because the two butt heads. Jim and his partner didn't want this to happen, so they decided to get paid the same no matter what in order to minimize disagreements. To this day, Jim sees this as one of the best things he ever did for his company.

Use secured debt

Jim ultimately walked away from this company without any of the money he put into it, and it continues to be one of his greatest regrets. If he had loaned the company money with secured debt, things might have turned out differently. After enduring the receivership, Jim's biggest advice to other business owners is to loan to the business using secured debts to minimize risk.

Talk through business decisions with friends and colleagues

One of Jim's biggest regrets is going into business with the two advisors who promised to attract lots of investment. To Jim, this was the turning point that ultimately drove the business into the ground. In retrospect, he wishes he talked through this decision with a couple of friends, and maybe they would have warned him against it.