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Harmony Information Systems Inc. turned to outside investors for the second time in a year, landing $28 million in equity and debt to support an acquisition and continued aggressive expansion of software sales to government and nonprofit providers of health and human services. The nine-year-old company turned to previous investors JMI Equity of Baltimore and Updata Partners of Reston, Va., to lead the round, with support from new investors Orix Venture Finance of Dallas and Comerica Bank of Detroit. The Reston-based company did not detail terms of the new funding, but Harmony founder and CEO Tonya Harmon said the majority of the new money is equity, and funds will go toward acquiring Burlington, Vt.-based Synergy Software Technologies Inc., as well as to general expansion capital. Harmon said Harmony was formed in 1998 to design software to help human services agencies track case load, mimicking the way that enterprises have adopted customer relationship management, or CRM, systems. The company operated profitably throughout its history until taking on debt for expansion two years ago, and raising a Series A round of $7.5 million in equity funding from JMI and Updata a year ago. Harmon said the need for systems to track individual social services cases has risen significantly over the last decade, as government and private funding sources have increasingly developed performance-based standards for reimbursement. The sector has also expanded as use of custom-designed software has diminished in favor of commercial off-the-shelf products, particularly after federal reimbursement standards for state and local governments were changed in 2004. "There have been a few significant changes in the human services sector in the past 10 years, the first being funding based on outcomes, where private as well as Medicaid programs had to have a way to track performance," Harmon said. "And in the last five years it has been acknowledged that design-to-build systems and the transfer model do not work well." Harmon said the so-called transfer model, where systems designed for one government agency could be picked up for free by others, has increasingly become a boondoggle for systems integrators generating implementation fees, and private and government funding overseers have encouraged agencies to purchase commercial software. Tim Myers, a general partner with Updata, said he had followed the market closely, particularly since the regulatory changes in 2004, and that he was attracted to Harmony by the way it had approached what he termed a classic "late adopter" industry. "When the government changed the rules on reimbursement we saw that as a huge opportunity, because Harmony had a system that it had built from scratch that really allows caseworkers to track things the way private enterprises use CRM systems," he said. "This is a $9.2 billion market, and Harmony is a company that can have a huge impact in the way human services are administered." Harmon said the company's revenues in the past have broken down to about 50% government and 50% nonprofit sales, but that with the acquisition of Synergy that will shift to about 70% government. Synergy sells software similar to Harmony's products, but with a larger emphasis on services to the elderly. Synergy also has an active hosting service to sell software on demand, and Harmon said that would become an increasingly important model for the company, which previously had sold most of its products in a licensed model. Myers said that the board elected not to go to outside investors for the new round in order to reduce dilution, and he said the decision to take on additional debt would leverage investors' position. "We both wanted as much of the deal as we could get, and the debt just adds more octane," he said. Harmon said a portion of the new money will go to Synergy shareholders, who are receiving an undisclosed amount of cash and stock in the combined company, but she said the company expects to invest heavily in expansion. Harmon said the combined company has about 130 employees, and she expects that to increase by 50% in the next year. Harmony had legal work in closing the deal from Mike Lincoln of Cooley Godward Kronish LLP in Reston.  Deal Video
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