Andrew: Hey there, freedom fighters. My name is Andrew Warner. I am the founder of Mixergy.com, home of the ambitious upstart and the site with the mission to bring you both the most successful and the biggest failures out there. The most successful entrepreneurs and those who’ve had the biggest failures, to come and talk openly about what they learned from their journey so that we can learn from their experiences, use what we’ve learned, build successful companies ourselves, and hopefully, hopefully if you’re out there doing that, you’ll want to come back here and share your story the way today’s guest is.
Today we’re going to find out how a former journalist boot strapped a multi- million dollar company. Tim Berry is the founder of Palo Alto Software, which creates business planning software. This interview is sponsored by Scott Edward Walker of Walker Corporate Law. Scott is the lawyer to talk to if you’re an entrepreneur, especially in the tech base. Later on, I’ll explain why. First, I’ve got to welcome Tim. Tim, welcome.
Tim: Thank you. It’s so nice to be, I love Mixergy. I’m so glad to participate.
Andrew: Well, thank you. I’m so proud to have you in here. One of the things that made me excited about this interview is, we shared with you the way we do with other interviewees, our pre-interview notes, and you saw the headline which, do you remember what it said?
Tim: Something like, how so and so makes $10 million a year.
Andrew: Yes.
Tim: Andrew, with words on either side, so don’t ask me the question (laughs).
Andrew: Right. That’s it. And you added a comment to it, which was what?
Tim: I wasn’t really comfortable with that.
Andrew: Why not?
Tim: The company I founded . . .
Andrew: Mm-hmm.
Tim: Which I and my wife and our family owns, has revenues of that but that’s not the way to measure entrepreneurship anyhow, and those would be the revenue. That’s a tough line, revenues. I would have killed the company years ago if I had taken more than what the company could afford out, and my measure of success starts with this company was about me making enough money to support the family doing what I liked, working on things I liked with people I liked, to be honest.
I mean, I was creating some place to go every Monday morning that would make me feel like, “Oh cool, I had a great weekend, but now it’s Monday and let’s go.” Doing something I believed was good for people with other people who believed the same. And then, yeah, it’s the real world, so to end up without debt and supporting the family, I’m a proud father of five college degrees and three master degrees that my kids have got, and the college degrees were all at our expense. We paid their loans. That’s entrepreneurship to me and what I take out is different than the upline revenues, and I was uncomfortable that way of putting it. You know?
Andrew: We were trying to get some yardstick internally to give us a sense of how big the company was, and frankly also, we put those numbers out there, especially since you’re a boot strap company, to get the audience’s attention and show, “Look, here’s a really mega-successful entrepreneur who’s going to talk about how he did it.” And, as a former journalist, do you relate to this? Was there a time when you were working as a journalist where you said, “I think I got to push it a little bit to get people to pay attention to the meat of this that is important and healthy for them’?
Tim: I started as journalist because I was a hippy. I left home and went to Haight Ashbury in 1966.
Andrew: Mm-hmm.
Tim: The (inaudible) Scott McKenzie if you’re going to San Francisco, and all that stuff. Journalism was a compromise with reality. I was going to change the world, and after a few years of filling the space between the ads writing about kidnappings and hurricanes out of Mexico City, I realized that we were just filling the space between the ads, besides which, money isn’t important when you’re in college and full of ideals, but when you have three kids to support, I was in this for the desire for such luxuries as when you stick the key in the car and you turn to the right, something happens. You know? Things like that.
And, we had to take the kids to school, so money became a well event and because of that, and only that, I moved from (inaudible) for United Press National to business journalism for Business Week and Financial Times and things like that.
Andrew: Did you feel dirty as a hippy saying, “I’m going to go to Business Week,” the magazine that’s read by some of the biggest corporations?
Tim: Those were different times, and dirty is an ugly word, but did I feel morally like I was selling out?
Andrew: Yeah.
Tim: Yeah, I did. It hurt, but then there was what the people immediately next to me needed versus what the whole world needed, and it was a (inaudible) 20 year asset, because that was an issue for me internally, but I did it. I got into business writing
And then to go on with the question, I did discover that business writing was really interesting. Furthermore, I didn’t want to just write about it. I wanted to try my hand. So it wasn’t straight from journalism to business planning software. I returned from Mexico back to the United States and enrolled in the Stanford Business Program to get an MBA at Stanford, in my 30’s. So the transition wasn’t quite as immediate as it might seem. There were a couple wonderful years of study in between. For me they were wonderful years.
That led to business planning and business consulting. Interesting to me the years in journalism, learning how to write so people could understand it, were really valuable as a consultant in business planning for Apple computer and Hewlett Packard. My absolute, favorite best client, told me once, Tim, you’re a differentiator, Apple likes you, not because you’re so great at strategy, no offense. It’s because you’re the only consultant we know who writes stuff that anybody can read.
Andrew: Why did Apple need you as a consultant?
Tim: There were Managers at Apple, specifically one, who became a very good friend. He was a client first. He was charged with creating an annual plan. He was managing the Latin America group. He didn’t want to do it and he needed somebody. I had a specialized background. I had the MBA but I lived in Mexico for 10 years, worked in Mexico, my Spanish is fluent. And Literature degree or Master’s degree or not, I love computers. I built my first computer in 1981. I programmed the original memory and had [??]. I just sort of took to it.
So he had a combination of somebody who understood the product, understood the market, understood the language and I had credentials to do their annual plan.
Andrew: By the way, about the hippie part, I love sections of Jeremy Weiss’ pre-interview notes. Apparently you told him that one of the reasons why you weren’t a hippie was because you were afraid of LSD. What happened?
Tim: Yeah, that’s a true story. I did in fact leave home in sort of unpleasant circumstances. I grew up in the Bay area, Los Altos, California, close to San Francisco. I left home to join the hippies over ideological differences with my parents, who didn’t deserve all the bad-mouthing because they were pretty liberal, liberal.
Andrew: And you still would argue with them over the dinner table and yell back? Yeah.
Tim: But those were strange times. Just a few weeks later, what I told Jeremy was, I failed as a hippie. I went back home and had to apologize and ended up at Notre Dame. Their choice, not mine, but I had been accepted. The failure as a hippie was this, and hence that came out, there was a great irony in the hippie group that I was in. We were all individuals and dancing to our own drum, et cetera. But I had been the carry-on, or tag- along, or guide to two horrible LSD trips that my friends had taken; one after the other, two weeks apart.
By guide, I mean I was the one that wasn’t drugged. It was scary as hell to watch a bad trip, from the outside. A thousand times scarier on the inside but I wasn’t on the inside, I was on the outside. That scared me. And over the weeks the pressure, ‘Tim, come on, take the LSD, blah, blah, blah! Go ahead take the LSD!’ It made me realize, wait a minute. Here’s this strange paradox that we’re all different, but we’re supposed to be different in the same way. That drove a wedge between me and the people I was with, so I gave up. I failed as a hippie! I still like those ideals…
Andrew: I think you saw the truth of it. We’re all supposed to be different but if, God forbid, you wear clothes that are more, conservative? Then you’re out, you’re not allowed to be part of the group. I also think, tell me, Tim, if you agree with me. I remember movie “Pirates of Silicon Valley” and you see all the protestors who are fighting against the war. They’re really speaking out.
But it feels like not one of them had as much impact as Steve Jobs, who was going back into the school building as the protestors were going out. He was the developer. He was the coder. He was the guy that was going to have so much more impact than the other single person in that movement. I feel like computers and business have much more impact, is what I am trying to say.
Tim: Of course, you’re going over my rationalization for my life and sort of not counter-culture. So of course I like that! I love that explanation. There’s truth there. Another interesting truth before we leave it is, that process that, I forget who wrote the book, The Greening Of America, in the late 60’s, middle 60’s maybe about a process of, oh, Rachael Carson’s book, The Silent Spring, was part of it.
Andrew: Charles Reich is the author of “The Greening of America”.
Tim: Thank you for that. The greening of America then seemed to disappear by the late 70s and 80s. As I look back over my career, the respect for the individual, the triple bottom line, the social motivation for business, even if you look at I. Kawasaki’s theme on Ideas for Start-Ups, make meaning? You can see that over the last 40 years, I’m middle 60s so it’s been that long.
There has been this progression towards let’s say, a higher sense of values and that reflects in business as well as, and I love this, because of technology the pulverization of business that we see in something as iconic as in social media. Any one of us can achieve the equivalent of a voice through thought and content.
Whereas 30 years ago you had to be a corporation to buy a voice, or you had to go through the filter and gate keepers of the book publishers and editors to achieve a voice. It was much harder, I went through that. I had some books published in the 80’s and later. But now, these trends make me very happy about how some of the things that we who protested. I mean, I was there; I was one of hundreds that took over the Administration Building at the University of Notre Dame in the Spring of1970. I was in on that. I was already married. I took a few days off school and sat in the Ad Min building with all my friends. It was not a great sacrifice!
But I was from that side and here I am with the MBA and owning a small business. And seeing that a lot of the progress of humanity it’s been stop and start. But some of the things we were trying to accomplish as teenagers have been accomplished.
Andrew: I believe a lot of them have been accomplished by entrepreneurs like the people listening to us today in the audience. I believe they are freedom fighters because they are fighting for the freedom of the people who are out there using social media tools to express themselves because now they have a voice. Fighting for the people out there who are trying to live a better life. We are helping them do it as entrepreneurs. Your helping them do it by systematically helping them think through what the business is. That’s what you’re doing with your clients and your company.
It all started because as you were doing business planning for Apple, a man named Hector Saldana said what to you?
Tim: Saldana.
Andrew: Saldana.
Tim: Hector said so many different things. [laughs] I’m wondering which different ones…
Andrew: He basically told you…
Tim: He was the one who said as he was working with my business plans, my templates, my spreadsheets he was the one who said, “Tim, this should be a product.”
Andrew: Your spreadsheets, your business plan templates should be a product. Before that did you ever think, ‘I should just productize this and sell it as a Do It Yourself kit for Business Plan writers’?
Tim: It didn’t really start like that Andrew. It started one morning at 2 a.m., when I had to deliver a finished set of financials the next morning. It was 2 a.m. and I was tired and done with the financials but I had done something in either Lotus 1, 2, 3 or Excel because I use both. I don’t remember which one it was but I had done something to break the damn spreadsheet! If the financials are going to work, when you change the assumptions the balance still balances and the cash flow, and so on.
So it was 2 a.m. and I had broken the spreadsheet. I thought to myself, there is so much productizability in this. I have to be logging this out, assumptions, inputs, outputs so that this doesn’t happen again.
Andrew: So every time you create a business plan and a spreadsheet you don’t have to start from scratch and potentially make mistakes. So initially, it was a product you wanted to create for yourself?
Tim: Absolutely! And interesting segue from there to what led to Business Plan software on a larger scale, I wanted that for my consulting practice but after I had it solved in serendipity another problem that was just as important; or maybe more important which is in growth, in finance. In the real numbers of a company, there is this counterintuitive fact that the faster your grow, the more likely you are to need outside financing, even if you’re profitable.
So it was so counter intuitive that I had kind of a repetition where clients would say, But that doesn’t make sense, Tim.” You’re saying we have to raise more money if we grow faster. But we’re making $0.10 profit on every dollar we sell. So it should be…
No, well what I came to with the spreadsheets was instead of explaining, “I’m the MBA, I know and you don’t.” And that never works! I’d say, well here, sit down, you take the spreadsheet, you take the tools. I’ll stand right behind you and help you, because spreadsheets are not intuitive. That’s why we built the software eventually. But I would be there standing behind, looking over their shoulder. Now change you assumption here. Now, change your assumption there. And using that tool, I was then able to have them absorb for themselves and internalize.
Oh! I get it now. It’s about business-to-business, Accounts Receivable. It’s about inventory. You buy stuff in October, sell it in January and get paid for it in July. It’s about all that and people didn’t see it until I sat them down with the numbers so they could prove me wrong. Of course, the numbers proved me right. So that was all part of that.
Andrew: I see. And there’s something so convincing about letting someone play with it themselves as opposed to telling them, ‘trust me, I’ve done this.’ This makes sense.
Tim: Oh, yeah. You’re an entrepreneur, we’re talking to entrepreneurs. We all have that character flaw. Well, beware of generalizations. But many of us have that character flaw where, you don’t just believer the expert. Right? It has to be into…you have to see it, you have to kind of work with it. That happens with this realm of the numbers in the finance too. I didn’t have that kind of clients that were just going to say, ‘oh, okay.’ Nobody wanted to not going to worry their pretty head. You know? This is what people were living and breathing, so they wanted to know.
Andrew: And so, is this what Hector saw that made him say, “You should create a product, this should be the product?”
Tim: Yes. Hector with that said it, not as a client, but as a friend because my repeat business with Apple was 12 years from 1982 to 1994. My clients became friends, not as some sort of sales thing, but you work with people a lot in business planning over the years and they become friends. And this was advice of one friend to another. There’s a business here. You should make this a product.
Andrew: I see him now on his LinkedIn profile. He was the General Manager for Latin America and Far East. He’s the person you worked with over there. All right, so he tells you this should be a product. Now this is before the days of the internet. This is before the days of just toss a SaaS up there, or even a landing page and you’ll get some customers. It’s a day when you have to figure out where the customers are and what the product looks like and get it right because you can’t update it tomorrow morning if there’s a bug. So with all that in mind, what did that first version look like in that world?
Tim: Well, Andrew, I was stubborn and then goodness my wife stuck. We’ve been married 45 years. It took a lot of patience from her too. For about eight years, we lived with the mantra, “I want to sell boxes, not hours.” Because it took eight years of failures, stubbornness before computing and programming platforms came together to give me what I need to actually create a product that other people could get and use.
Andrew: Are you saying it took you eight years to launch the first version?
Tim: I started with something called Business Plan Tool Kit. It was a collection of templates and a well-written manual. I’m a good writer. I’ve written books. I was a journalist, so. It was a well-written How to do a Business Plan with spreadsheet templates. There was a Windows version with Lotus 1, 2, 3 and a Mac version with Excel. That was my first product. It came out in 1987, technically, but really launched in 1988 at the Mac World. That product went on and there were various others, then there was the Marketing Plan Tool Kit and Corporation Tool Kit.
I had this tool kit template business, which I was actually feeding and supporting with my consulting. It just kept us going and that’s why I say, my wife was patient because I wasn’t taking home what I was billing and consulting. I was taking home enough to keep us going.
Andrew: So wait, are you saying that this collection of templates, the ones that worked on Lotus 1, 2, 3, etc., this was a package product that you sold?
Tim: Starting in 1988.
Andrew: Yeah, and before that what was it?
Tim: I had templates that another bookseller sold with a book, beginning in 1984.
Andrew: Ah, like mail order.
Tim: My first product as Palo Alto Software was the business plan toolkit in 1988. It was a manual shrink wrap with discs inside it.
Andrew: I see. And how did you sell it? How did you get it out to customers?
Tim: Our best channel was something that Microsoft published as a companion folder collateral to Excel, and we would pay Microsoft for an ad in the page of that. I was buying little ads at the back of the book in, personal computing. I think we didn’t use (inaudible), it’s been so long. Personal computing and things like that.
Andrew: Wow.
Tim: And I’d pay 1000 bucks for a square inch to advertise my templates, and get about 3% of the user’s readers were interested in that. Or else I’d pay 1000 bucks to Ink magazine to have a little inch and get about 3% of them who were interested. Those were tough times. We never really broke even with the products. I supported it with my consulting, but I kept believing it could be done, and in 1994, things came together between Windows, memory storage, visual basic, where instead of a template, I was able to create a product where I managed the menu, how it printed . . .
Andrew: Real software.
Tim: Yeah. Then finally, we had a product that people understood and would buy in enough volume to begin to pay for marketing expenses. We got into the retail channels.
Andrew: Why did you continue even to that point? If things were so hard that you weren’t making a profit on it, it was clearly then taking up your time, why did you spend more than half a decade on this? How did you know it had it?
Tim: I believed that I could do something that would be useful to people that would make me money. Here’s a case of an entrepreneur. I fell in love with business plans and business planning after my MBA, because in my years as a business writer, I had discovered that you can lie with words, you can lie with numbers, but when you put the words and numbers together, it’s much harder to lie and it’s closer to something called truth. And, I’ve always been a writer, and the idea that the business plan would combine concepts and numbers and create a kind of a truth, it’s almost like writing a fictional story and then adding the steps to make it come true. That fascinated me.
Andrew: So, was it just that you had this mission. You believed in numbers and letters coming together. You believed that people needed to create business plans, and so you just kept going.
Tim: Yes. I used the consulting to keep the family whole.
Andrew: Yup.
Tim: And kept going with the product. I kept making it better and looking for better ways to advertise. I was all direct selling. Eventually, ’93, ’92, we moved from Palo Alto to Eugene, Oregon, where we live now.
Andrew: Okay.
Tim: We moved in the house I’m in with the window in the background. It’s kind of nice.
Andrew: Yeah, beautiful.
Tim: And in ’93 and ’94 we were still selling templates, but we got them packaged, got them into retail. They were still failing, and when we finally were able to launch a stand-alone product for Windows that did the business plan, that essentially proved the concept. I was early, but I was in love with what I was doing, I believed in it and I kept doing it because I could, because I was making enough money from the consulting to be able to support the family, and it was just the possibility.
Andrew: I see. And so you kept going with this possibility, then you hit it with, was it called Business Plan Pro?
Tim: Business Plan Pro came out in very early ’95, February of ’95. It was just amazing for us. ’94 was a horrible year. We ended up with three mortgages and $65,000 in credit card debt. In ’94, we had kids in Notre Dame, Princeton, and NYU, all of them got some scholarship money because it was a huge expense, but none of them got a full ride. My Apple consulting ended in ’94 because I became so dedicated to this product. We had returns from the templates. It was like, the perfect song.
Everything was wrong in ’94 except I had found some programmers who would work with me. I did about a third of the code, they did two-thirds and the interface to create the product that got us to 1995. We don’t even have a mortgage now. We became neurotic about debt. The company doesn’t have debt because it was so bad then.
Andrew: Three mortgages. Does three mortgages mean three houses, by the way?
Tim: No. Three mortgages mean you get a second mortgage–
Andrew: And then a third on top.
Tim: Because you’re so broke, but you’ve got equity in the house, and so they let you add to it. It’s sort of like a reverse equity. And then, the third mortgage was the same damn thing. We were just broke again and had no other way out.
Andrew: Tim, did your wife ever say to you, “What are you doing?”
Tim: (laughs)
Andrew: C’mon, take up another hobby. Have you considered gardening?
Tim: You know, I taught entrepreneurship for years, and one of my students asked me afterwards, and that’s going to stop ringing. Sorry about that.
Andrew: Don’t worry about it, it’s all real life.
Tim: One of my students asked me, “What do I do? I’ve got this great business plan, but my wife doesn’t believe in it.” At that moment, I realized how lucky I was. What my wife said in more than one key moment to me was, “Tim, do it. If you fail, we’ll fail together. We’ll survive, we’ll manage. You believe it. You can do it, do it.” So, when these hard times came, it wasn’t, “You idiot, I told you so.” It was, “Oh shit, what do we do now?”
Andrew: What do we do now, not what are you going to do now?
Tim: Yeah, yeah.
Andrew: Yeah.
Tim: And that’s huge for an entrepreneur. When I got that question from a student, he was then in his middle 20’s because he was an ex-student, I had to tell him, “Don’t kill a relationship for a start-up.” You know, it’s not right for it if it’s going to be, “I told you so, you idiot,” if you fail. The stakes are too high, don’t do it. I had that kind of support at home.
Andrew: I get that. You know what, I haven’t been married nearly as long as you, but I find that if something’s really important to me, I first have to sell it to my wife. Get that support from her and then go on. Otherwise, it just becomes too distracting to have to explain to her why I need to go for one more run. It’s much easier to say, “Look, baby, running is really important to me. I want to do long runs and continue to do them as part of my life. Can you help me do it? Can you help me find a time that works?” And with her support, now suddenly she’s finding time for me. And the same thing with work.
Tim: And then it’s we, and then it’s we. And then you can do it.
Andrew: Yeah.
Tim: I mean, that’s huge.
Andrew: So, how did you get into stores back when they had limited shelves, when it wasn’t as easy to get your product out there? What did you do?
Tim: You know, I took key things that I liked to share with others because they were so important to me. One was, I had found contract programmers who were willing to work for me for a small fixed, monthly fee plus future revenue. That worked out so much better than, I get all these emails where they say, “I want to make the programmers, how much equity do I give the programmers?” And I didn’t.
Andrew: No equity (inaudible) share of upcoming revenue.
Tim: (inaudible) Yes. And they ended up making several hundred thousand dollars from their work for eight months to get this thing going, and then maintenance and new versions. So, they were very well paid, but it was a way to deal with all our debt and lack of capital. That, number one, was really important to me, and it wasn’t equity, and it worked because I didn’t have all the skills. I did a third of the code because I knew the spreadsheet.
Another one like that was, I ran into the phenomenon of sales reps. Sales reps would for, in my case, 15 years ago, ’95, God I guess it’s almost 20, it was 6% of the sales they accomplished to be paid when I got paid. So, we had no capital, we were not investable. I mean, I am an angel investor now. I’m in a group, I’ve been a consultant to Venture Capitals, I did raise VC Money later but then bought it out, so I know that territory. We weren’t investable. But, we found the programmers, and the sales rep was very enthusiastic. She helped me get much better packaging. One of my insights for the world of retail distribution, it was in the middle ’90’s, was your boxes suck, you’ve got to change your boxes. They were very articulate about how bad the packaging was.
Andrew: And, they had an incentive to tell you that and to work with you to improve it, because they were making a percent of the sales, and that was their only commission.
Tim: And the sales rep function, in those days, and I know for certain industries this is still true, was great because it wasn’t upfront cost, and if they didn’t get my stuff into retail, they weren’t going to be paid. So, a sales rep firm and a programming firm gave me, even though we were really broke, gave me the wherewithal to have Business Plan Pro on the shelves of Egghead Comp USA, the major retail of that day, beginning in 1995. And, it took us until 1996.
We were very close to having the IRS put padlocks on our front door because it takes six or eight months for the retail channels to pay you. So the day is darkest before dawn. The dawn took a while to flow through, but beginning with Business Plan Pro, clearly the product was working. I stopped doing consulting and focused on building this product business finally. There was no distraction with consulting.
Andrew: Do you remember what that revenue was? Actually, I think I’ve got it here. This is amazing. Will you feel comfortable saying what it was in 1995, after you launched the package software?
Tim: Yeah. And we’ll see if it matches, because I was doing that from memory the other day. We were doing just a 2 or $300,000 of product business until 1995. 1995 was 1.8 million, and then we went to 2.8 million, and then 3.5. By the year, 2000, we were at five and a half, six million. And, all of this, I mean it’s important because this doesn’t sound like anything to our normal channel of entrepreneurs, but this was done without outside financing.
When we were started we were full of debt. This cleared us of debt. This created a company that had critical mass, that had stability, that made me happy and my family were able to send the kids to college and so on, without the damn debt. That’s part of the reason that it didn’t go from 1.8 to 10 to 20 to 50. It went, you know, like I say, in five years we’re up at 5 or 6 million.
Andrew: You’re saying that’s why it was such a conservative growth rate, but the big jump was ’95. When you get over a million in sales after struggling for so long and finally are profitable, how do you celebrate that?
Tim: (laughs) Let me count the ways because at that time, I had mentioned, we were paying Notre Dame, Princeton, and NYU. And one of the celebrations we did was the older one then graduated in ’95, and the second in ’96. We paid their student debt. That’s how we celebrated.
Andrew: Ah, and you got to rip that up.
Tim: They were in college in the early ’90s, out in the middle ’90s. They had to work in the cafeteria, and they had to take on the maximum of debt that was allowed, but then when things straightened out, one of the great celebrations was, we’ll pay off your student loans. Don’t worry about it.
Andrew: Wow.
Tim: Things like that are a (inaudible) satisfaction.
Andrew: So your kids got to leave school without the heavy debt load.
Tim: Yep.
Andrew: Wow.
Tim: Yep.
Andrew: So then you end up with, what I’m looking at right here which is a website, very basic bare-bone site. How did you decide in 1996 to launch a website?
Tim: Oh, I’m so glad for that. Somebody showed me the web in December of 1994, and in 1995 I had registered password, Palo Alto Software, Palo- Alto.com and a number of things in January, including B plans and biz plans because it struck me as, this is the future. I’d been on CompuServe, but this looks so much better.
So, it just made a lot of sense to be there, and furthermore, I had a nice serendipity that my son, we have four daughters and one son, he’s in the middle, was a freshman at NYU, and my accountant was saying, “Make him an expense. You’ve got a business, pay his tuition with pre-tax money and not after tax money.” But, I couldn’t deal with the lying until I found a job for him. So, I put Paul in charge of Bplans.com in January of ’95. He had just started school at NYU. And, the funny thing happened. By May of ’95 it was on national television as the site of the day, and MSNBC, or something.
Paul took to it and loved it. Google Paul Berry now. He was the CTO of Huffington Post. He’s founder of RebelMouse. He got started with that because he and I were on the same page on let’s get on the web. Then, sort of… This is a follow up, but that was us on the web for marketing.
But, in 1998 I was playing Age of Empires frequently with my youngest who’s now in her late 20s. Google Megan Berry. She’s very successful in social media. But, Megan was like ten. She was programming in ColdFusion. She had a site of the day in some kids magazine, national magazine, when she was ten. She was my tech buddy. She was out getting the…
We needed an update. I think it would’ve been a Diablo Age of Empires, and we discovered that it wasn’t available online. We had to go buy it from a store. We were so bummed that we had to go buy it, because we wanted it [Inaudible 0:01:23].
From that day in early 1998 it became clear to me that we had to have Business Plan Pro downloadable, that we couldn’t do that…
Andrew: I see. You’re saying if you as a customer, if you as a user want something right now and you’re forced to go to the store, and it’s too much of a hassle, think of the hassle that you’re then imposing on all your current and potential customers.
Tim: Exactly.
Andrew: We have to get online and we have to put everything there. And, it’s not just going to be marketing.
Tim: Exactly. So, me and Megan…
Andrew: Feeling your own pain.
Tim: …were both bummed that day that we couldn’t download the update, that we had to get it at the store. And, the store didn’t have it.
From that day I started working to put Palo Alto Software Business Plan Pro online. We went through several turnkey vendors. Finally, in August of ’98 I convinced Paul, who had graduated from NYU, to come back from New York to Eugene. Paul did the coding ColdFusion for checking the credit card and making the download. We started downloadable in October of ’98. That was another big growth spurt.
Andrew: I see. Before that it was a lot of business card contests and latest update about spell checker and so on. It was more…
Tim: Yeah.
Andrew: …of a info site.
Tim: Yeah, yeah, exactly…
Andrew: Here’s something else that I learned. You’re saying that if you hired your son, not only can you write off whatever you pay him to do your site, but you can also pay for his college from the company and write off the expense of his college.
Tim: No. That would be double counting. Actually, to not give the wrong… I was paying him from the company to do work on the website, and he was using that money to pay his tuition.
Andrew: And his tuition is then tax… He could write it off his taxes?
Tim: No. We didn’t do that. You know, I think later that might be true. I think the deal is you can pay for an employee’s tuition if it’s directly related to the job…
Andrew: That’s what I thought.
Tim: …which might’ve been the case. But, we weren’t that extreme. I was always afraid of the IRS and lying. So, we kept it straight. I will pay you whatever it was a month to do the website.
And, everybody won. Because he loved it. I loved it. It was fun to work together. Then, the company was providing him with a job that was enough for him to pay tuition. But, he had to pay taxes on his earnings. We paid employer taxes. The company didn’t pay the tuition directly.
Andrew: I see. Now he is the founder of RebelMouse. Doesn’t RebelMouse do social media aggregation? I think I saw it on your site at one point.
Tim: RebelMouse has been… I’m very proud. RebelMouse is really the first social CMS. What it’s doing is automatic aggregation for some huge enterprise – ESPN, Burger King…
Andrew: General Electric, NBC, Fox…
Tim: …huge companies. Time Magazine is using RebelMouse. It’s hugely successful for enterprise.
But, more interesting to me is somewhere between half a million and a million users who simply set their Twitter stream, or Facebook stream, or Google+ stream, or LinkedIn stream to aggregate onto their website in one spot on one page, and that’s RebelMouse. It’s cool. And, it’s free for most of those people. Enterprise is paid for special uses, but there’s…
I’m not sure it’s past a million yet, but it’s close to a million users of RebelMouse for their own sites.
Andrew: Yeah. I’m going to give a quick plug here for Scott Edward Walker. I promised at the top of the interview that I would say that if you’re an entrepreneur and need a lawyer, I will explain to you why you should go to Scott Edward Walker. I’ll say it this way, look, there are so many firms in Silicon Valley, not just here, literally in Silicon Valley but in the tech space. Where the big firms who represent guys who get lots of funding. The reason they do it is because when a guy gets a lot of funding, he doesn’t care about spending an extra, 10, 20, $50,000 on legal bills. Because it’s not his money. Just pay for the big brand and just keep moving on!
That’s fine for guys who don’t care about their expenses. It’s not fine for the average entrepreneur or the strong entrepreneur who says, ‘I want to care for every dollar; whether it comes from, my pocket, family and friend’s pockets, or my investor’s pockets. Those entrepreneurs deserve good, quality representation without the heavy expenses that come from the big Silicon Valley firms. So who do they often talk to? Scott Edward Walker of Walker Corporate Law. Scott is right here, just a few blocks away from me in San Francisco. He also represented some of the firms that you know but he doesn’t allow me to talk about them because that’s the way lawyers work.
What he does tell me to say is that his law firm will help you get started. He will help you create your co-founder agreement, with the other co- founders so you get up and running on the right foot. He will help you set yourself up so when you’re looking to get funding, you are ready to go. He’ll help you do those big buyouts; or sell your company when the time comes. He can do it all because that’s what he’s done for years. I’ve known him for a long time. Even if you don’t decide to go directly with him, I urge you to at least talk to Scott.
My guess is even if you decide to go with one of the major firms, just having said, ‘Look, here’s what Scott is charging me. You guys know Scott, and he’s not a corner-store law firm. Here’s what Scott is charging me. Here’s what Scott can do for me. Here’s the experience he has. How do you guys compare? What do you guys do?’
My guess is that they’re not going to be able to match it and you’re going to connect with Scott so much that you’re going to want to work with him. But if you don’t that’s fine. But you owe it to yourself to consider Walker Corporate Law. Their website is walkercorporatelaw.com. When you get to walkercorporatelaw.com scroll and take a look at those names of people who have said nice things about him. He comes highly recommended. Not just by me but by many people in the text base. walkercorporatelaw.com
So Tim, you then continue to build, you continue to get online, but software is moving more and more toward web apps. How do you keep making the shift from software that’s a spreadsheet; to software that’s actually packaged and in the store to software that’s now downloadable; to software that works and lives in the cloud? How do you keep up with it all?
Tim: Well, Andrew, if you don’t, you’re doomed? Right? In my specific case, Business Plan Pro still exists but Palo Alto Software is now paying much more attention to liveplan, at liveplan.com.
Andrew: Yeah, when I went to one of your sites, to bplan.bplans.com, it said, ‘on a Mac’. And I am, I think the site detected it. It said, ‘click here to start now with liveplan.
Tim: Liveplan is our web app. To be honest, we started in the early 2,000’s with two problems. One, we saw that CPU based software you install is threatened. Two is, our Business Plan Pro was developed for Windows. Depending on a spreadsheet that you used to be able to buy that was Excel compatible that you could just plug into the interface so that we had an Excel compatible spreadsheet and we could deliver that to people. And it’s a business plan so it needed it. Well, liveplan was our answer for the Macintosh people because I’m on a Mac, you’re on a Mac, a lot of the world is on a Mac.
We were very frustrated with the constraint of Windows because you couldn’t buy a spreadsheet for Mac that you could plug in. So that led us to the web. And then trends led us to the web and liveplan was then the work of a team. To give credit where it’s due, in 2007, I stepped down as President and asked Sabrina Parsons to be CEO. She then led the team that released liveplan in 2011 with me looking over her shoulder.
I was still working full time as a blogger but was time for that change. The team that is now in place, built liveplan to respect our view on business planning. We didn’t want [??] to fill in the blanks. We don’t want one of those things, say, “Here, just change the name and it’s fundable. We want actual business planning that teaches people, gives them an idea of cash flow, and is really good for the people who use it.” Live Plan is that and now it’s a web app that I use all the time on all my Macs.
Andrew: What share of revenue now comes from Live Plan as opposed to the software, the desktop software?
Tim: Oh gosh, I own the company but I don’t look at the numbers in that much detail. It’s 60 or 70% now.
Andrew: 60 or 70% . . .
Tim: Yeah.
Andrew: Of the people who are paying 1166 a month essentially.
Tim: My plan is quite successful actually. There’s no freemium. Live Plan is, I think of it as 1995, you’re looking at somebody discounting when you say it.
Andrew: No, no, no, that’s what it comes out to per month if people buy annual, 19.95 a month if you don’t buy annual.
Tim: (inaudible) The simple thing is $19.95 a month for two users and three plans. There is no freemium and Andrew, we’ve got more than 45,000 people now since (inaudible)
Andrew: Who are paying monthly.
Tim: Who are paying monthly to use . . .
Andrew: Monthly is an amazing business model.
Tim: Yeah. Yeah.
Andrew: You know what the cool thing is, and I want to get to whether business plans are outdated and a couple of other questions, but they amazing thing for me is that you can say, ‘I’m not running it anymore, she’s running it. It’s going bigger than it was when I was doing it, and I don’t even know the details of the exact percentage of revenue that’s coming from web versus desktop.’ How do you hire someone like that?
Tim: (laughs) You may notice a theme here, but I didn’t hire, I raised.
Andrew: Oh, this is your daughter?
Tim: Sabrina Parsons is one of my four daughters. She’s our (inaudible)
Andrew: I didn’t realize that.
Tim: So.
Andrew: I see. So she kind of grew up with the business and she got to take it over.
Tim: Yeah. She used to, when she was mad as a teenager she used to say, “I would never work with you with Palo Alto Software.” It’s funny, but my wife and I never encouraged our kids to think of that as their future. We did insist when they were teenagers and younger that, for example, if there was three hours of work on a Saturday to put plastic labels on plastic discs, teenagers did it. They were our teenagers. They knew where the money came from.
Andrew: I see.
Tim: They grew up in a home of entrepreneurs, but they didn’t study business and they weren’t pushed towards Palo Alto Software. It became an opportunity for Paul because of the web. It became an opportunity for Sabrina because it worked for what she wanted to do when she got more product oriented, and we’re glad it was an opportunity for them.
Andrew: Do you have any advice for me on delegation though? Because even if it is your daughter, it’s still hard to say to someone else, “Okay, you can run it. You’re in charge of it.”
Tim: Yeah.
Andrew: I can see what you did with your son was, you said, “Look, this is not really that important to us, the web at the time. Do what you think you can with it. It’s not going to sink the company and if it goes great, terrific. We have this whole new opportunity, but I’m giving you something to control that’s not going to damage anything so I could leave it alone.” Here you couldn’t. What did you do then?
Tim: It was hard, to tell you the truth, to focus entirely on, see, I needed something to do. But, I have this writing background. So, as we speak today, I’ve done four and a half thousand blog posts since 2007, and two more books. I have six books published now. I wanted to write, I wanted to focus on the business planning. It was still hard. It’s hard to let your baby go, in terms of the company.
Andrew: So give me advice. What do you do then if it is so hard and you were able to make that work?
Tim: It took a while to get used to not getting into the details. It took a while to trust that it was being right, but it’s been six years now, and it gets easier when as it turns out you close your eyes, you sit in the backseat and trust the driver, and it works. But it’s hard in the beginning, and there’s no denying the temptation to look over the shoulder. We had some tension between us for the first couple years. It’s not easy to do, but here’s the bright side.
I was in my late 50s, I really wanted to write, and nobody respects family business but I’ve got somebody who’s been running the marketing for seven years, smart, Princeton grad, loves the business, wants to run it, who I trust, who I know is a hard worker. So, that’s an ideal situation in a way. And that, by the way, is another reason I say we under-emphasize, underestimate the benefits of boot strapping, because that could happen. Because in 2007, as today’s (inaudible), I own the business. My wife and I own the business.
Andrew: So you don’t have to run it by your investors and say, “Hey I’m hiring my daughter, and have them say, we don’t want family to take too much power.” By the way, you did raise money and you bought your investors out. Why did you raise money and why did you decide to buy them out?
Tim: You have to remember 1999. It was crazy. The valuations were crazy. In 1999, people were talking to me about buying Palo Alto Software, not for what it was worth, but for 10 times what it would be worth. By any decent MBA analysis based on revenues and costs and so on, and hey, I’m not an idiot. We’ve lived in this house for 22 years, somebody knocks on the door, offers me 10 times what it’s worth, I’m going to give them the keys, right?
Andrew: I see. So how much did you raise?
Tim: So 1999.
Andrew: Sorry. How much did you raise?
Tim: Just half a million.
Andrew: Half a million. Oh, I see, okay. And then when you bought them out, did you buy them out for how much more than you got?
Tim: We bought them out for what they had paid plus market interest over two years.
Andrew: But how?
Tim: in ’99, that half a million went straight into marketing and we were really trying to take advantage of the window, we saw the window. And they’re talking about valuations that were just absurd and delightful. So, I raised the money. I had the Stanford MBA. I raised it in a Palo Alto VC firm where the main partner had been a classmate of mine in Stanford, so I used connections. Classic Silicon Valley (inaudible) money.
But then, and this is what’s important for the story, you need compatibility with your investors. When the whole thing crashed in 2001, then we had completely different business models. Our investors needed us to have an exit, a liquidity event. Valuations were back down onto what they really were, you know, two and a half times revenues, for example, for a healthy software company.
But two and a half times revenues wasn’t enough money to make me and my wife and our family feel like we wanted to just sell the business. I had to be 10 or 20 times revenues. But, our VCs were trapped as minority investors. And they were trapped forever. I now have eight angel investments. I understand how bad it is to be trapped as a minority investor with no hope of a liquidity event. I don’t want investors, even as a minority who aren’t happy with me or my company, so we negotiated and after the negotiations, their leader partner there is still in investments, Jeff Webber was the guy, and he’s still around. He told me later that not until the negotiations were done, but he told me later, “Tim, actually I can tell you now, you are our best investment for 1999.”
Andrew: Oh, yeah.
Tim: Because they got their money back plus interest. And they were happy with that and we were happy, and we own today and again, that was in 2002, so since then it’s family-owned again.
Andrew: So let me end it with this. I was starting to think that business plans are outdated, and hear me out on why. I do interviews with people who use a lean startup methodology, which is to say, I’m going to talk to customers about their problems, and then they’ll tell me what their problems are. Then, I’ll suggest a solution through either a conversation or through a minimum viable product, and they will give me more feedback on whether I should do it or not.
And then I’ll adjust it based on what they tell me and give them the next version, and the next, and I evolve the product through this conversation with my customers and the conversation comes with me creating in the next, and them telling me whether they like it or not. And me improving on it and so on. Not through sitting down for four months or even four hours and saying, ‘I’m going to take my company here. How do I get enough customers, we’re going to get there.’ So, what do you say to that? I see you’re smiling so you’ve obviously heard this before.
Tim: Well, I’ve had this with Steve Blank and Eric Ries in email, and it’s a strong man argument.
Andrew: Why?
Tim: Because the business plan that took four months, that gets printed out at Kinko’s, coil-bound, used for a week and then goes into a drawer, nobody can remember where it is, that’s crap. That’s obsolete. And when Eric and Steve and the rest say, “Oh, don’t do a business plan,” I couldn’t agree more if that’s how you define a business plan.
But what a business plan actually is, is as MVP is minimum viable product. It’s minimum viable plan and it’s setting the key points of strategy, what you sell to whom and how you’re different, and keeping those in mind, and then setting milestones and metrics and tasks and responsibilities. Only a minimum viable business plan, a lean business plan, it doesn’t include some stupid executive summary from investors. You don’t describe your management team to yourself. You have the core there and it’s streamlined.
And just like you say, with the cycle of talking to customers, so to the cycle of the business plan. It takes three hours not three months to do. But you know when you finish it that it’s not finished. You’re going to review it the third Thursday of every month. Once a month, you’re going to spend two hours, you’re going to review it, you’re going to note where assumptions have changed, you’re going to remove the milestones and the metrics and the tasks and so on every month. And what you’re going to have then is steering the company in management and it’s not a document.
The document…it’s like the business plan is the teenager and the document is the photograph of the teenager the night before the Junior Prom when he or she is all dressed up. That’s the document. My company has had the same business plan for 22 years. It’s never been done. It gets reviewed and changed every year. It’s the same business plan, just like the farmer’s ax. The blade has been changed 12 times and the handle 22 times but it’s still the same ax. That business plan gets reviewed and revised. In 22 years, 14 times we’ve had Business Plan events, which meant we had to present the stupid, formal document because somebody demanded it.
We raised capital to get the credit card authorization. Then you have a business plan event and you do the document. But the real plan isn’t the document, the real plan is what’s going to happen strategy, tactics, metrics, performance and basic numbers. You use that plan to review and revise every month and that gives you steering of the business and management.
Andrew: I see, so, I guess we don’t consider that the business plan anymore. But we do, do it in a spreadsheet and because we’re so resistant to business plans, we’re using spreadsheets in a clunky way. What you’re saying is all that data where you’re projecting how well your ads are going to perform, where you’re projecting how well your content marketing is going to do. Putting it in a spreadsheet is inefficient.
Stop fighting the term business plan or just call it live plan or whatever makes you comfortable. But understand that if there’s more formal software around it, you can be more organized about where you’re going. And you can assign that responsibility to someone else instead of just sharing those Google spreadsheets.
Tim: And you manage. Steering… The I-5 between Eugene and Portland is really boring. It’s just straight. Right? But still when you drive it, it’s like I-5 through Central California. The same thing, when you drive you’re constantly correcting. That’s what your business planning is doing. You keep it straight-lined. The core problem is the vocabulary because in email when I’ve asked Eric or Steve, both of them, the leaders of the lean start- ups. Don’t you believe in setting priorities, and setting metrics, and milestones and looking ahead and setting the way you want to go? Both of them said, “Yes, of course”. Then I said, that’s a business plan.
And they’ll say, and they have in email, “That’s not what I mean when I say don’t do a business plan…” I mean don’t do a for-. You know? So we get into this circle.
Andrew: Don’t do that old Kinko’s business plan. Do key planning on an ongoing basis and that’s what liveplan.com is. That’s what Palo Alto Software is about. You know what? I want to ask one last question. Are your net margins better than 10%?
Tim: No.
Andrew: No? So even though you’re all digital now, it’s still cost more than 90% of your revenue to run the business?
Tim: Oh, you know, I’m glad you asked me that. Through the years and throughout the growth, I think I had something to offer. I think I did it right. I set my priorities. We talked about the debt. Our priorities were first, cash; second, growth; and third, profits. I believe that’s the right way to run a company. Profits are only enough to feed the cash flow. So you can pay, increase your working capital and grow. It’s about growing. If you pull too much out in profits then you’re not growing.
Andrew: Can you get taxed on it? As opposed to keeping it invested in the company by growing its equity?
Tim: And you should be using paper-click or something. To me it’s a trade- off. That extra money that’s called profits means I under-spent my marketing. All these years that we’ve owned the company we’ve grown, we never spent money we didn’t have. We aimed for 2% on sales as profits because we wanted to grow the company.
Andrew: So 2%? For every 10 million dollars, it’s only 2% that comes in. See, this is why when I say it’s a $10 million company, I have to refer to sales because if I talk about a company’s profit I don’t think it’s significant, unfortunately. I think it’s important but it’s not significant for this kind of discussion. The reason it’s not significant is there’s some times when your business is (inaudible) when you have to lose a little bit of money, because, for whatever reason. There are a lot of incentives to say I do not want heavy profits. I’d much rather grow my equity than grow my profit because equity isn’t taxed at all, profit is taxed pretty highly.
Tim: Absolutely.
Andrew: I don’t want to…
Tim: Get so excited.
Andrew: I don’t want to cheat this way, and I don’t want to pretend that sales and revenue are the only important metric out there. I can’t use profit, unfortunately, and I want to keep saying to the audience, and to guest and to you that I recognize that just sales alone aren’t the metric. They’re just an important metric that I don’t think we talk enough about in the tech phase. You can see on Tech Crunch, you can see in Tech Me{SP] tons of worries about how much funding someone got. but hardly ever any stories about how much revenue a company has, how much business it’s really doing. I thought we could be the counterweight to that.
Tim: Yeah. Good. Good. We’re this boot-strapping case where we didn’t have the luxury of spending somebody’s else’s money to grow. That’s an interesting… I mean, in my role as Angel investor now, I find that as a group, we more frequently end up with a company that we want them to raise more money because we want them to grow faster. We know and they know that that means deficit spending. We want that because that gives us a better business later on. If we didn’t have that luxury, we could only spend what we had. That was our version of it.
I get why a lot of high-tech companies are [skips] raise money and spend more than their revenue because they’re growing the classic eyeballs thing that mainly [skips] for the craziness of 1999 has some truths still. Look at the value of Facebook and Twitter and don’t tell me that they’re not valuable because they don’t have enough revenue. Of course they’re valuable. Those are properties that everybody would like to have a piece of because they’re changing the world, and they’re growing like mad.
Andrew: Growing like mad. If people want to follow up with you, usually what I would do is tell them about the website, the business site, which in your case is PaloAlto.com. What a great domain name. PaloAlto.com. Not Palo Alto Software, PaloAltoApp.com, PaloAlto.com, one of the most famous places in all of tech if not the whole country. Palo Alto.
PaloAlto.com is software, but that’s not where I’m going to suggest people go. I’m going to suggest they check out TimBerry.com where they can see your blog, where they can find out more about you, where they can get a sense of your history and how you got here, and hopefully they can click that “Ask Me a Question” button and get to ask you something that will appear on the site. How’s that?
Tim: That’s cool. I appreciate that.
Andrew: Cool. I really appreciate you doing this interview, and I always like someone who challenges me. Someone who says, “10 million yes, but that is honest but it’s not the whole story.” Call me out. Thank you so much, Tim, for talking about that and telling us your story here. Thank you all for being a part of it. Bye everyone.
