Andrew: Three messages before we get started. If you’re a tech entrepreneur, don’t you have unique legal needs that the average lawyer can’t help you with? That’s why you need Scott Edward Walker of Walker Corporate Law. If you read his articles on Venture Beat, you know that he can help you with issues like: raising money, or issuing stock options, or even deciding to form a corporation. Scott Edward Walker is the entrepreneur’s lawyer. See him at walkercorporatelaw.com.
And do you remember when I interviewed Sara Sutton Fell about how thousands of people pay for her job site? Look at the biggest point that she made. She said that she has a phone number on every page of her site, because, and here’s a stat, 95% of people who call end up buying. Most people, though, don’t call her, but seeing a real number increases their confidence in her, and they buy. So try this: go to grasshopper.com and get a phone number that will make your company sound professional. Add it to your site, and see what happens. Grasshopper.com.
And remember Patrick Buckley, who I interviewed? He came up with an idea for an iPad case. He built a store to sell it, and in a few months, he generated about a million dollars in sales. Well, the platform he used is Shopify. If you have an idea to sell anything, set up your store on shopify.com, because Shopify stores are designed to increase sales. Plus, Shopify makes it easy to set up a beautiful store and manage it. Shopify.com.
Here’s the program.
Hey everyone. My name is Andrew Warner, I’m the founder of Mixergy.com, home of the ambitious upstart, and as you know, the place where you come to listen to entrepreneurs tell you the stories behind the businesses they built.
Big question for this interview is: how does an entrepreneur discover his profitable business model? Paul Berberian launched Raindance Communications in 1997, the company went public in 2000, and sold in 2006 for about $160 million. Along the way, it did things like voicemail via email, remote presentations, and then it found its mojo as an online conference software creator. I invited him here to tell us that story, and to tell us about his latest product, Sphero, the robotic ball controlled from your smartphone. Paul, welcome.
Paul: Thanks, Andrew.
Andrew: So, Paul, I’m dying to hear the story behind Raindance, which, you told me in our conversation before the interview, was really colorful. I want to know everything about how you built it up, but I’ve got to first ask you this: how does one of the industries most successful entrepreneurs end up at TechStars? I thought TechStars funded young, new entrepreneurs who needed $15,000 per co-founder in order to get their idea off the ground. You could get your idea off the ground like that. Why TechStars? What’s the business? And then, we’ll go back in time and find out about Raindance.
Paul: TechStars is a wonderful program. I’ve been a mentor there since it started several years ago. I get really enthusiastic about helping the young entrepreneurial community, and, acting as a mentor, I got to see a lot of different companies. In 2010, I was in between gigs. I’d finished my sixth company and I was looking for number seven. I don’t have to be the originator of all great ideas. It turns out that as you get older, your ideas get a little bit more stale, a little bit more conforming to the status quo. So, I realized I needed to find some new young energy.
And so, I said I’m just going to get really involved this year, go really deep, mentor a bunch of companies. And I bumped into Ian and Adam, the co-founders of Obotics, the two technical founders who had this really brilliant of creating a new game system with a robotic ball that you control with your smart phone, this little guy here, little Sphero. And about halfway through the program, they asked me if I wanted to join them as their CEO. And I said, absolutely, once you guys finish the program, I’ll be more than happy to join you guys. So, I’m honored and proud to be part of this startup, and it’s number seven, and we’re kicking and going strong, and we’ve done a couple rounds of financing, and we’re days away from shipping our first product. So the excitement here is pretty high.
Andrew: So this isn’t a coming soon, this is a buy it now and you will get it in the mail before Christmas type of deal.
Paul: Well, no, if you buy it now, you won’t get it before Christmas, because there’s thousands of people before you.
Andrew Warner: I see. So if you would’ve gotten off your butt earlier and bought it.
Paul: You will get one eventually.
Andrew: OK.
Paul: There’s a lot of interest. It’s really a transformational type of product.
Andrew: What do you mean? Here’s what I saw online. I went to your website. You have a great website because as soon as I get on there I see the product in action. People basically controlling this ball as it’s moving around the room or moving around a grassy field. They’re controlling it from their iPhone and iPad and it looks like they’re having fun. What are they doing? Are they just playing a game or are they trying to dominate the world with this robot that will invade everywhere?
Paul: That’s the beauty of it. Think of it like a Wii except it rolls around on the floor. It’s a gaming system, so you download different games from either your Android or your IOS device and one game could be golf, another could be like an Etch-A-Sketch. We have some fun games with colors and music. You’re dancing with the ball and the ball is changing colors based on your movements. We have maze types of games in the works and multiplayer games, so there are all these different types of games and they’re all as simple as buying an app on the app store or from the Android marketplace. The robot becomes the interactive real world experience. It’s kind of a mixed reality type of system.
Andrew: I wrote a note here with my pencil, which I love. I still love writing notes with pencils during interviews. I wrote a note to come back and ask you, how did these guys, the entrepreneurs land you as their CEO? What did they say to convince you to come on? How did they get someone who is so experienced and so impressive in this space to come on and run their business? First I thought I’d introduce you to the audience by telling your story so by the end of this interview they’ll understand why I’m so impressed that these guys were able to partner up with you. And as you know, and as you told me in pre-interview, we could’ve gone into any one of these companies in real depth and I think learned a lot from your experience, but I decided to just focus on one business, Raindance, which started in 1997 when you had what idea? What was the original idea for that business?
Paul: Well originally, it was called IntelliStat Media Research.
Andrew: That’s even a name I didn’t see. I saw Vstream, I saw Evoke. IntelliStat, what was IntelliStat?
Paul: IntelliStat’s vision was to replace Nielsen Media Research by building a better set-top box to track who’s watching television, so we were going to tell you who was watching Grey’s Anatomy or who was watching CSI and we would be able to do it by not only identifying what TVs were on, but also what individuals because we were going to make them wear a special bracelet, so if they walk in the room we knew if they left during the commercial and all sorts of stuff. But we couldn’t get that funded.
We developed a plan. We talked to some executives at NBC and Jim [??], my partner and I went and met some of the VCs we met when we had our previous business together and they said that’s fantastic, that’s neat, we wish you guys the best of luck, but there’s this thing called the Internet and that’s what we’re more interested in. So we came back to the office and Jim and I talked and I said, we’re spending our own money and we have these employees and we’re building all this technology, but no one wants to fund us, so Jim, a very practical-minded guy, he said, he’s the plan, he always had a plan, he said here’s the plan.
You go into a conference room with a couple of employees and you figure out the next business to turn this into. Meanwhile, I’ll run the continuing operation of this as we go look for money and we will, in two weeks if you come up with a new idea, great, and if you don’t come up with a new idea we’ll continue doing what we’re doing until we’ve either raised money or run out of money. So that’s kind of like, all right I now have a shock clock, so we went into a conference room and we came up with the idea to stream videos over the Internet. Very similar to YouTube, but doing it more for corporations so they could take the meetings and expand them and enhance them into the desktop environment, so that’s what we came up with.
Andrew: Let me break down what you’ve told me so far. First of all, I noticed that you said you had employees in a conference room, but the idea still hadn’t gotten off the ground and hadn’t gotten funded. Where did these people come from? And where did that conference room come from?
Paul: Well, our previous business that Jim and I sold, we made some money. And so we funded this new business.
Andrew: I see. This is, Link VTC was the business that you sold?
Paul: That’s correct.
Andrew: OK.
Paul: So we sold that in . . .
Andrew: [??]
Paul: Late 1995.
Andrew: My researcher was able to get me a lot of information, but not the sale price. How much did you guys sell for?
Paul: Yeah, I don’t think we ever told that, but it’s just shy of 20.
Andrew: Just shy of 20. Is this the first time you ever revealed that number?
Paul: Sorry?
Andrew: Is this the first time you revealed it in public?
Paul: I think we revealed it before. There were all these different components. There was a non-compete, there were a couple of other [??] employment agreements. So, you have to aggregate it all together. It’s kind of a net zone.
Andrew: So how much of that did you use to . . . Let me just tell the audience- you see that could be a whole other interview on its own. But since we’re focusing on Rain Dance, how much of that money did you use to fund your business? What was your initial seed funding?
Paul: We put a half a million dollars into starting [??]
Andrew: You [??] them together?
Paul: Yeah.
Andrew: OK.
Paul: Together. And we used that money to advance the idea and build some technology. And we built some really cool technology. We built a bracelet that tracked you when you walked across the TV. We had a slight problem with it emitting something very close to the radio range of microwaves. So we had to limit children’s time in front of TVs. So that was kind of a drawback. But we were working on it. We were working on the technology. And from that, there’s this weird [??] of how we took the technology that we developed for that and how we ended up into streaming videos over the internet for corporations.
Andrew: Let me pause for one more question about that. I want to unpack again what you told me earlier, and ask you this. You’re going in one direction because you have a world view. You believe that tracking could be done so much better than Nielsen did it. And you have this passion for it and belief in it so much so that you put your own money into the business. And now the world is telling you, “No that’s not working, you should think about another direction”.
A lot of entrepreneurs are faced with that same question. Should they abandon this vision and go for something else? Or should they stick with the vision mercilessly and just see it through? How did you make up your mind? Why did you say, ‘” want to go and come up with something new”, instead of saying, “No, damn it, this has to change and I’m willing to fight to the end for it?”
Paul: I think Jim and I were pretty much like-minded. So if you have a partner and you kind of click at the same frequency, and you think about the world the same way. We knew that we were very fortunate to have sold the company early in our careers. And we put some money in the bank, we paid off debts. And we said, OK we’re going to protect that. And this is our risk capital. This is our risk capital, just like going to Vegas. When it’s gone it’s gone. We were spending the money building the plan. And we could see the end of the money. And we knew through our efforts that to raise money for this type of business, was going to take more time than we had money. So we made the decision that we needed to change to a business that was more fundable. The last business we did with all of our own money, the Link VTC [??]. This business we wanted to do it with other people’s money.
Andrew: I see.
Paul: We wanted to go out and raise venture capital. We just knew that we wouldn’t have the time. It wasn’t like . . . I still believe it’s a great idea. I still believe someone can come around and kick Nielsen’s ass. They haven’t done it. Many have tried. All have failed. Nielsen still is the 800 pound gorilla. But I still think there’s an opportunity for someone to go after them. So my world’s view hasn’t changed. But I’m a realist, and I live in the real world. And when the money is gone, it is gone. So we changed because we had to find something that we could get funded.
Andrew: OK. All right. So you were starting to tell me about how you transitioned from one product to the other. Can you tell me where the idea came from also, so that I see where the new vision came from and how you transitioned into it.
Paul: The idea to compete with Nielsen was Jim’s idea. After we sold the company, he and I would work off-hours and work on this business plan for a whole year about this company to compete with Nielsen. We hired a CTO, Todd Verna [SP] to join us in this quest. One of the big challenges we had to discover was how do we identify what TV program their watching? We got the little bracelet for when Johnny in front of the room, but how do we know he’s watching Nickelodeon?
It turns out that it’s mandatory, and it was just implemented into law back then in ’96, that by a certain date all programs would have to have closed captioning. You know, the little text that goes around. We could read that closed captioning- it’s going to sound like, I can’t believe you made this connection to streaming video. It turns out that closed captioning, we could build this unique code based on the characters coming by every five seconds. We’d know when you’re watching Nickelodeon because we would know that unique sequence of characters. We started peeling into what’s going on with closed captioning. When we were looking for a new idea, I said what have we gained experience with? Well we gained experienced with this wireless technology, but we actually outsourced that so we didn’t know that much about it. But we got really smart on closed captioning.
We investigated the closed captioning industry and said this is a really manual process. If it’s an hour show, it takes several hours for someone to listen in and type the whole program in. We said, what if we could get ten people and we could take the video and we could break it up into ten small segments and have them just really crank really intensely can we shorten the time and reduce the cost to do a closed caption?
We said, well how do you take a video, cut it up, and send it to a bunch of different people in remote locations? We said, well, there’s this new technology out there called streaming media. Why don’t we use streaming media? We said, wait a second, streaming media, maybe that’s a business in and of itself. We could take videos from corporations and we could distribute them because the person has a computer, but he doesn’t have a TV. We could do training videos, introductory videos, and promotional videos for corporations and we could stream that to computers in corporate environments. That’s how we came up with an idea in two weeks, but we kind of learned from this lesson of [??] media research.
Andrew: I see. All right, by the way, I’m so glad that I asked that because it does give me an understanding of where new ideas can come from. You broke down everything that you did and said, what are we especially good at and what would the market be interested in? I like hearing that thought process. all right, now that you’ve got streaming video as a possibility and you have experience with it so you understand roughly how to bring it to life, what do you do with that experience and that new vision?
Paul: Let’s see…
Andrew: I’m sorry to interrupt you but I’m really glad that that’s the way you described it. So many people, when I interview them, they hadn’t thought through where their idea came from, because you’re living your life. You’re not sitting down and figuring how you got from point A to point B. It’s so interesting to hear you say not just, Andrew, it was a good idea, someone needed to bring it about, it just happened, it just came to us. I like seeing that broken down. Alright, I apologize, you were about to tell me what you did with that new vision.
Paul: We came out of the conference room. We investigated all the technology, it was really raw. Microsoft was just getting into it. Real Networks at the time was called Progressive Networks. They were streaming audio predominately. There was this company called Audionet.com that later became Broadcast.com and that was the big win for Mark Cuban? It was a really small community. We said, okay, this is a sandbox we could play in. We could become experts as good as anyone of these guys. Of course we could use the Internet. That was important. We needed to use the Internet because that’s what people were getting funding for. We put together a business plan. From the time we came out of the conference room, to the time we got a business plan, to the time we pitched it, to the time we got our first million dollars was like three weeks, in the bank. That worked really well. Now we had to go build it. That was in September. We had our first customer which was Cisco distributing their training content by December. We invoiced in December.
We had our engineers, software people, we had operational people. We had a pretty good team of about six or seven folks. We were able to get moving pretty quick and we essentially built this incredible video on demand system and Cisco was funding us.
Essentially they were our largest customer, they were our only customer. They had all these great requirements of what they wanted on a video on demand system. We built it for them and as we built it for them we would take parts of it and sell it to other companies as a service.
Andrew: What kind of things did they ask you to build for them that you wouldn’t have thought of if it was just you and your guys in the conference room?
Paul: Well so they had this idea of the video and they wanted the slide synchronized with a talking head, something very common today. Then they wanted multiple layers of security so if I log in I can see a hundred videos. If you log in you could only see 10 videos.
They wanted this notion of once I do these 10 videos then these new 10 videos would show up. They wanted tracking, they wanted reporting, they wanted multiple technologies, both Microsoft and real networks.
We built up this pretty sophisticated database management system to manage video on demand. That’s part one of the story. There’s a part two and a part three I’m sure we’ll get to.
Andrew: One more question. How did you get Cisco?
Paul: It was someone I knew in the past, made an introduction when I was describing what we were doing. I called the guy and said, “Hey we’re doing this streaming media what do you want? Give us anything. We’ll do it. Just give us anything, we’ll do it for a couple thousand dollars.”
We just hustled our way in there. At that stage of the company I’m the sales guy. We hustled our way in and I said, “We’ll make you happy.” We wowed them and then we just continued to wow them as we went forward.
Andrew: Now you’ve got a product, you’ve got a customer, you’ve got a product visionary in your customer, and you have other customers who are buying pieces of what this vision is doing. It seems like you have a perfect business and still as we will hear, it changed, pivoted and adjusted.
What was the next step and why did you have to take it? What was the next pivot I should say and why did you have to turn?
Paul: OK. Streaming media in 1997, it’s so common place now. Back then we were pushing the envelope. Our biggest complaint was the internet is not good enough for this stuff. I can’t jam that much bandwidth into a corporate environment.
I’ve got crazy firewalls and half of our clients don’t even have speakers on their PCs. How are they going to hear this? It turns out the Cisco system was the leading edge in terms of adopting this technology and close behind them was Microsoft. If you talked to Eli Lilly, Visor [SP] or Ford Motor Company, they’re five to ten years behind these guys.
Streaming media was considered the evil stepsister of bandwidth hog. It was just terrible. No one wanted streaming media in a corporate environment. We could only sell to the more technology advanced companies like Oracle.
We determined there wasn’t really someone who manages all of their video content. There’s not that one person in a corporation who manages all their video content. We were struggling trying to find a customer with inside the corporation.
We got lucky with Cisco, we got lucky with Microsoft and Intel. At 10 grand a month per customer it doesn’t get you to millions quickly. 10 grand was a lot because they didn’t have much content.
We raised a million bucks. There’s a little anecdote I’m going to throw in here. We’re about to close our $10 million wrap because it is hot, it’s the hot frenzy of the internet in the ’90s.
Andrew: I mean apparently you go from not saying the word ‘internet’ and getting doors closed to saying the word ‘internet’ and within three weeks, you get cash. A million dollars.
Paul: Yeah.
Andrew: Right. So and you’re about to tell us about the ten million dollars.
Paul: So we’re about to close a ten million dollar [??] like April. We get a call from this guy, Mark Cuban, and his partner, I think it’s Tom Wagner. I think that was his name, and they go, ‘Hey, we are streaming audio for the general public with sports radio to college radio and stuff like that. You guys are doing for corporations. Let’s join forces. We’ll have the business arm and this arm.’ And we were negotiating just on the phone and, you know, we didn’t know, neither of us were successful at the time. I mean we both had success in the past and they were further along in their business model, but we were negotiating and it was just, ‘Nah, we want to do it on our own. How do we know hooking our wagon to your horse is going to be better?’ And that was like the most costly mistake I ever made because it ended up that Audionet.com became Broadcast.com and then sold for like four billion dollars to Yahoo and with the number we were throwing around, if I took their first offer, I would have been, we wouldn’t be having this conversation. I would be on some Caribbean island.
Andrew: I like to think that you’d still have this conversation with me from the Caribbean island on Skype.
Paul: I wouldn’t have done it. I would have stopped at number three.
Andrew: The co-founder’s name is Todd Wagner. I had that wrong. I just looked that up.
Paul: [??]. Your research is, I just haven’t, it was just, you know, that moment in time back in ’98, ’99, very good. That was great.
Andrew: [laughs]
Paul: So anyway that was a little side story. It didn’t come back and. . . .
Andrew: And they were acquired for 5.9 billion dollars in Yahoo stock back in 1999. So not that much longer still. I mean you just needed to hang on to that stock for a little bit.
Paul: Yeah, I did.
Andrew: All right, but you ended up with a great exit also and a great reputation builder and if we compare it to Broadcast.com, every story in Mixergy is going to sound like it’s just puny and no one’s gone anywhere.
Paul: Yeah.
Andrew: But if you. . .
Paul: So we said, “No, screw it. We’re going to do it on our own. We want to do it ourselves.” We were young. We just wanted to it.
Andrew: Yup.
Paul: We just wanted to a big business. That was what we wanted to do. So we raised the ten million, things go on, we keep trying to sell. We’re getting sales, we keep building technology, and we have a strategic off sight with the board, and we brought in a new investor, Highland Capital Partners out in Boston and we come out of this strategic off sight, it was a keystone, and basically at the end of it everyone goes, “Yes, this is great time. Yep. Keep pressing along.[??] and at this time next year, sales aren’t at least three million dollars, we’ll sell you guys or, you know, we’ll liquidate the company.”
And we walked out of there and everyone was saying, “Great. Let’s go do it. All we have to do is hit three million by this time next year.” and in the back of my mind I was going, “There is no frickin’ way we’re going to get the three million.” We’re trying to scratch five grand, ten grand, twenty grand out of any company which has a computer with a speaker in it and has decent internet access and it’s just, we were too early. We knew it. So we said, plus we don’t know where the content is and these guys at Broadcast.com, you know, there seems to be a huge, there’s no problem getting audio through because it’s much lower bandwidth. So we said, “We need to go to where the meetings are. We got to get away from this video training [??] because you can’t find that in a corporation, but we know where meetings are, and meetings are happening in phone conferences. So what we need to do is we need to build a system to tie in the phone conferences.”
So we looked at it and go, “Well all these phone conferencing systems are, you know, antiquated. You’ve got to get an operator involved, it need scheduling. So that’s too heavy handed. So why don’t we. . .” We knew about this technology from [??], our previous business, that these guys were trying to come up with a way of getting rid of the operator from phone conferencing. So we called these guys, they were our buddies, and we said, “Look, you’re building this. We’ll buy it right now.” They go, “Well, it’s not quite ready yet. We’ll figure it out. We’ll work on it together.” So we built this really cool automated audio conferencing system so that we could jack into it automatically to stream the meetings. So the whole point of the conferencing business was so that we could justify our streaming business.
Andrew: I see. Ordinary conference calls systems would just work with telephones, yours worked with telephones, but also grabbed that audio and presented it online.
Paul: Right.
Andrew: And this, I think, was called Net Call?
Paul: Yes. Gosh, I haven’t heard that name since it came out. We also would synchronize the audio with a PowerPoint presentation, so we’d give them ability to do slides. We pitched as hey, this isn’t a pivot, we just need go after the content. It turns out that the audio conferencing piece was so much easier to sell because we had such a huge economy of scale because we had no operators.
The going rate was $0.35 a minute and we could price it at $0.05 a minute and still be profitable because it was all automated. I remember having a board meeting after we made the decision to start selling audio conferencing, was what should we price it at? We could price it at anything and we decided to price it at $0.27 a minute, which in my mind was perhaps our biggest mistake, outside of not selling to Broadcast.com.
The reason was we had this huge advantage over the competition and we could’ve put them on end with a price that would be breathtaking for them when they saw it. They’d go, I don’t even know how they come close to doing that. By being just slightly below what they were selling at it was easy to get customers to switch onto our platform, but there was enough margin in it to buy them time to figure it out.
They could meet price or deal with a price erosion there while at the same time investing in technology to duplicate what we had, but if we came in so low there wouldn’t be enough margin in it for them to invest in the technology. Anyhow, that’s another side of the story.
Andrew: I see. You’re telling me that conference call systems at the time would have operators handling them? So if I called into a conference call I wouldn’t just punch in the numbers that needed to connect me. No, I would have to talk to a person and say, I have a conference call coming up with my brother and my co-founder and then they would connect us together?
Paul: Yes. There were varying grades of it, but at the most basic level you would need to call someone to schedule a meeting.
Andrew: Oh, no. Wow.
Paul: You’d say, I need to have a call tomorrow at 3:00 p.m. for 8 people and they would give you a phone number and an ID and you would have to disseminate that to all of your participants and then they would call in and dial it. In some cases the operator would answer and patch you in, other cases they’d put you in together, but that scheduling piece was like a big hassle and every time you would say, it’s a pain, I have to get a number, I have to distribute it. So we would give you a number, it was your for life, you could use it whenever. Not only would we be cheaper, but we’d sell more activity because it was so much simpler.
Andrew: So a great model way ahead of its time again, this time the issue was just that the pricing was off. If you would’ve come in really aggressively you could’ve destroyed the competition and owned the conference space business.
Paul: Right. As it is we did pretty well. We grew the business from nothing to $70 some odd million in sales in a couple of years.
Andrew: The big product as I understand it was conferencing with the web component, kind of like what WebEx does poorly today and what GoToMeeting does better.
Paul: Yes. But the dirty little secret is that most of the revenue came from the audio side.
Andrew: I see.
Paul: Because most calls don’t have a visual component.
Andrew: I see.
Paul: If you break down the numbers, 80% of our revenue came from the audio conferencing, but because WebEx was selling this story of web meetings and was getting a higher multiple in the public markets and we might be getting a little ahead of ourselves. We put a lot of energy into spinning our story as being more web centered, but in reality we were doing just a shitload of audio.
Andrew: I see.
Paul: We were doing tons and tons of meetings, millions.
Andrew: And by then you were public, right? You were a public company?
Paul: So we went public in July of 2000, so after the bubble burst, we were in S1 registration when the bubble burst. Most companies pulled out. We decided to stay in. We weathered the storm through the summer and we made a push to get out in December of 2000.
Andrew: And you were one of the last of that period to go public?
Paul: Yes. And actually WebEx and us went public within a week of each other.
Andrew: All right. I want to come back to the IPO, but first let me ask you about this. One of the things I do is when I research people is look for contemporary articles about them. So I looked back to the late ’90s to see what articles mentioned you and of course there was one asking what you read and that seemed interesting, but not especially useful. Here’s the one I was especially interested in. A New York Times article about something called Beep. Do you remember what Beep is, or what Beep was?
Paul: Yes I do.
Andrew: What was Beep and how did that idea come about?
Paul: We had this automated ability to patch into a phone call and then simulcast it over the Internet, all automated. Not only that, we could record it and put it in email either as a file and send it out or make it a link that someone could click on and it would play through a browser. I was friends with Jared Polis, Jared was the founder of bluemountainarts.com, that was an online greeting card company that sold for a lot of money to Excite and prior to their sale they were starting to explore ways to monetize and further differentiate the product because they were one of the most popular websites online, online greeting cards.
So we said hey, you have all these online greeting cards that are just sitting around, why do we put this technology underneath it so people could leave a message, so when you get the online greeting card you could say, it’s your mom, she sings you happy birthday or something in your online greeting card and make it more personal. We built this incredible system. They were doing millions and millions of cards a day, so we had to scale this thing up.
There was this massive cluster of Lenox machines, which at the time was not an industrial grade type of operating system. We were cutting edge with Lenox. We were cutting edge with the cluster. We were cutting edge with this telephone to Internet real-time encoding and conversion process. That whole system was called Beep, which was the ability to leave a message on the phone and have it play over the Internet. It was a pretty massive system and the primary user of it was bluemountainarts.com.
Andrew: The New York Times article on it said, boy this is really cool technology, but I’m not really sure how it would fit into my life. I think that the reporter’s take on it was, I’m not sure I need to get voicemail via email, I’d much rather get email via email and maybe not get voicemail at all, but they were still excited because it was new technology and they wanted to play around with it. How did it do as a business? Beyond the interesting technology and the skepticism, how did it do?
Paul: Beep?
Andrew: Beep.
Paul: It never made a buck.
Andrew: It didn’t, because why?
Paul: Because it was a free service that we were providing to bluemountainarts.com for the exposure we were getting. Perhaps it helped with Excite investing in us and I’m not sure of the timing of when Excite invested in us and when Excite acquired Blue Mountain. Maybe there was an overlap there that helped that investment. Then there was a transaction where I remember us charging Excite for the Beep platform and ultimately we sold it to them.
There was a little bit of this going on back and forth between Excite and Blue Mountain Arts and us, but it wasn’t a mainstream product that we were able to go out and sell over and over and over again. It basically was this massive system with this one unique customer and it helped create and leverage that relationship.
Andrew: Okay. Though what I’m seeing as I read your story is, as I did research on you is, there’s a lot of trying to figure out the next step. For me, when I don’t know the next step, I tend to get insecure, I tend to get doubtful, I tend to get distracted by the need to figure it out. What are you like in that situation?
Paul: Yeah, I get really agitated and I can’t stop thinking about it and I want to iterate very quickly on ideas. I’m willing to take risks with product to just get it out there. Let’s go, just do it. I know this is better than this, let’s do this. It’s not afraid to fail, it’s just constantly wanting to try again and again and again. I think as you look at the story of Raindance, the one thing that we did build that was vastly superior to anything that was out there for many, many years was this really cool and sophisticated audio conferencing system. We were experts at that, and we were the best. But we didn’t like the on-Internet moniker that plain old Telephony has. So we kept trying to be something else from a story standpoint instead of just embracing the business of audio conferencing and continuing to develop it.
Andrew: Was it just from a story standpoint that you kept looking for something else? Or internally, did you and Jim and the company say, no we want to be more cutting-edge, we want to be in a sexier business?
Paul: I think there was a little bit of that we want to be in a more sexier business, but then, we were business people. How does someone who became passionate about media research all of a sudden find themselves in conferencing and is just as passionate? If you look and Jim and I said hey, we operate at the same frequency. We’re both fascinated with the mechanics of a business. Making a product or service, selling it, collecting money, putting it in the bank, making a profit. That whole machine excites us. That’s what we love. If the machine’s cranking out stuff for conferencing or stuff for media research, they’re both exciting businesses to us. When you look at how we deal with uncertainty with a product, it’s just another thing to sell, right? If it’s not selling, kill it. Move on to the next thing.
But we had this problem with this public perception. The profits were one thing, but the public perception was stock market valuation. Hey, these guys are trading at thirty bucks a share, and you’re at three bucks a share. Well if you had more revenue like them you’d be at ten bucks a share. We needed to add some sex appeal to our story. We were really good at developing the Web end side of the technology. I think our Web conferencing product was technologically superior to WebEx but WebEx was much better at marketing and much better at telling a story. Eventually their technology caught up to their story. Our story never caught up to our technology. We were always ahead from a technological standpoint. I think when you look at the fact that much of the Raindance technology that was developed, large parts of it are still in use today, many years after being acquired. It’s because we built some really fantastic technology, we just never got the story right.
Andrew: What do you think the impact of being able to tell your story better would’ve been on your bottom line and also on your valuation? What did you give up by not being masters of the story the way others were?
Paul: I think we gave up a lot. I think we gave up a tremendous amount of focus in the company. I think we gave up 10x our ultimate exit value. There’s a timing to everything and whether or not we got our story right, it may have been the wrong timing for that story. Telecom was hot in the ’80s and ’90s, then went sour in the late ’90s and 2000s. It was all the Internet. There’s starting to become another story here because people are starting to see the blending of telecom and the Internet. Really what we were trying to preach back in the late ’90s and early 2000s is starting to actually happen now. You do want your voicemail on your email. You don’t want to have to dial into a number and punch in digits. Yes, you would love it to be transcribed, you’d love to build your call flow through the Internet and have it magically happen on your phone. I mean at Obotics we don’t even have a land line.
Andrew: We’re all on our cell phones. I think I might have had to pay extra not to have a landline in my office here. I know in the last office I had, I had to pay for the landline anyway because it came with the office and there was no way to get rid of it, but you’re right. We don’t want it. Let me ask you this: I thought when I asked you what did you lose by not being able to tell you story well, I though you were going to say something like we lost potential buyers who were looking for a sexy company to acquire, we lost market cap because the market was interested in a great story and that’s what drove up stock prices and we lost sales because a fun, interesting, sexy story gets more people to buy. But I think the first thing you said was, we lost focus. How does not having that story cause you to lose your focus? That surprised me.
Paul: When you look in the mirror and all you want to see is something different, you never embrace who you are. We always wanted to be the next sexier thing. You couldn’t help but hear from your investors, read it on the websites, see it on the stock prices, you couldn’t help but see all these other things that we should be doing. The fact of the matter was, and I go back to that story of the 27 cents. Conferencing business is a multibillion dollar global industry, has been, and keeps growing, in spite of the prices coming down. Had we embraced, hey it’s telecom, this is what we do. We provide great meetings. 98% of all meetings have an audio conferencing component to it, we’re the engine that powers that and we can do it for a fraction of the cost of anyone else and we can do it with better technology and better service and we just went out there and we looked to acquire revenue- because we had an incredible war chest.
I think our low cash point was 28 million and our high cash point was, like, 50 million and we had no debt. We had an incredible war chest to go out and do stuff with. Had we been single-minded in dominating the audio space and said screw what the world thinks. This is who we want to become. We’re going to innovate on this audio piece as much as possible and continue to drive down price and become the WalMart or the Target of conferencing. We could have done some interesting things. But instead we resisted and we wanted to add in more technology, Internet technology, because that was hot. So not having that singular focus impacted our activities on a day to day basis.
Andrew: I see. No actually, that’s really meaningful. It’s one of the most meaningful things that has come out in my interviews. I’m really glad that you said it. As I heard it, I said, that’s going to stick with me. How do I find a way to excerpt this out so that other people can see this even if they’re not going to watch the rest of the interview? I want them to get that message because it’s so powerful. All right. On with the story, you then go public and you go public at a tough point, when the world just hates Internet companies, when the stock market is looking for villains it feels like, and when stocks are going down. What happens to you? Do you have a story of one of those difficult moments after the IPO?
Paul: I’ve got so many stories.
Andrew: Tell me. I used to think that the IPO was the finish line for entrepreneurs. You’re not a real entrepreneur or a real businessman until you graduate and take your company public, and no. Tell me about what happened after that.
Paul: Well, I think the story starts at the IPO. The IPO is launching out the spaces shuttle. All these people are working, so many different teams and then it all comes together on a Tuesday or a Thursday night at 5:00 after the market closes.
The bankers release the sales and the money comes in. This is a very specific moment in time where someone pushes the magic button. All up until that magic time you do all this preparation and there’s this thing called the road show right before hand.
You go and meet with investor after investor after investor saying, “Do you want to buy?” They will say, “Yeah, I want to buy.” After you have the meeting they will call up the banking side of the house and they will say, “I want to place an order for X.”
You will get this report on how many shares were soft-spoken for, soft-circled. They want a market; they want frenzy at the buying. The idea is you want to over sell so if you’re selling a million shares you want to have 7 million orders come in.
You’ll see that even with the recent IPOs like Groupon or something like that. You want to build up this book. So we would ask every day on the road show. What’s the book? What’s the book? What’s the book? They wouldn’t tell us. They’d say, “It builds on the last day. It all builds on the last day.”
We want to know are we one times oversubscribed, are we two times oversubscribed. Well it turns out at that magic moment we get into this big conference room at what’s now Citigroup but was Solomon, Smith & Barns. They put us in this big conference room, huge mahogany table. There’s three of us and 38 of them around the table.
They’re supposed to be pushing the button. We have everyone standing in line because you have to file with the FCC and all this stuff at the same time and make your registration effective. It comes down to that magic moment and the head of banking Michael Christenson [SP] looks at us and goes, “We can’t take you public.”
Going on the road show and failing the price is the kiss of death for a company. You spend these millions of dollars and all of the sudden everyone thinks there’s something terribly wrong, something wrong with the financials, something wrong with the business. It’s a huge de-motivational event for every single employee in the company.
You don’t get the money you’re trying to raise. It’s catastrophic to try to go public and fail. So we’re sitting there saying, “We’re going to fail, it’s not going to happen.”
I just go, “Are you saying you can’t take us public or you won’t take us public?” He goes, “Look the book is only three times oversubscribed we want to see at least seven so we’re saying we won’t take you public and I have no backup alternatives, there’s nothing else I can say.”
I just lost it. I started swearing every word in the book. I picked up the notebook they put in front of me I threw it across the table. It hit the table, bounced up and hit some guy in the head. He screams. I storm out of there. It was just chaos.
They had bottles of champagne at the office all chilled ready to pop and we’re sitting here in New York. We can’t go public.
We get on the phone to one of our advisors. He just basically says Paul here’s what you do. You get on a plane, come back home, go have dinner with your wife. Spend the weekend with her. You then get back on a plane to New York and you sit in the banker’s office and you say, “You take me public at any price, at any price. You are the one who leads this road show. You’re the one who leads this offering. You get us public at any price.” Then you come home and declare victory.
That’s what we did. It was great advice. Jack Tankerson [SP] gave it to us. But that cost us over $50 million. We were supposed to raise over $100 million but because we did a price on that magical moment the book vaporized. We went from three times oversubscribed to zero. They had to individually go back and call everyone and yet we eventually went public at eight bucks a share. This is a long story. What happened is the stock stayed at eight bucks a share until the quiet period came off after the IPO and the analysts were able to initiate coverage.
It turns out Solomon’s was holding a large percentage of the stock in the house and they had to dump that. They pumped it through the retail channel. All the sudden our stock shot up to 12, 13 bucks the day analyst’s coverage opened then it immediately closed at a buck that same day.
Andrew: Wow.
Paul: We saw the stock eight bucks, eight bucks, eight bucks, and then the quiet period. It’s not the quiet period it’s before. It’s the analysts can’t cover you then. As soon as it covers it initiates, it pumped it out the retail chain. Popped up, dropped and then we’re at orphan stock.
We had no institutional investors. We had retailer day traders. Very quickly we started trading below our cash cap.
Andrew: That means if someone bought the company at your market cap they’d end up with more cash then they spent to acquire the company and they’d end up with the company too.
Paul: Exactly.
Andrew: They were companies that were trading that way for a while.
Paul: We were one of them. This is incredibly de-motivating for a work force. On top of it we budgeted our business for a certain revenue growth and a certain expense earned and certain cash from the IPO. We were burning about $20 million a quarter.
OK. We basically had enough money to last us three or four quarters. Then we would be done. Everyone was looking at us saying, “This company is insolvent. Who cares if you have the cash in the bank. They’re burning 20 million a quarter.”
Everyone thought we were dead but we knew we weren’t. We went through the great restructuring right after the IPO. Imagine right after an IPO you start planning to restructure and reorganize the company. That’s what we had to do.
Literally Jim says right after the IPO, “We’ve got to cut this company in half. We’ve got to dump everything.” We don’t have the money. On top of that he said, “At this stage you don’t need someone like me. You need to take this business Paul and I’ll go on and do my next thing. You need to do what’s right for this business which is cut everything.”
I gathered our senior leadership team and we spent from October through December kind of planning how we were going to cut the business. If you look at it in 2000, most people were cutting it late 2001, late 2002. We cut very early and we cut very aggressively.
We got rid of over half our employees. We shut parts of our business, things like Beep and the streaming media business. We shut down Bowl division. We shut down Aversion of Skype we created. Internet to internet phone calling.
We had all of these different technologies because we were pitching ourselves as this next generation com. company.
Andrew: That’s a tough decision to make. Here you are holding in your hands the future of YouTube, the future of GoToWebinar, the future of Skype and so on. You cut them at some point and it’s the smart move but I think a lot of us entrepreneurs would hold on and just keep waiting for it to hit.
We would hold on because we started it. We would hold on because we made the statements both internally and externally that this is the future and it’s going to change the world and so on. We have a hard time cutting.
I want to learn from you. How did you cut it? When it’s time for me to cut something that I feel is my baby I can cut it just as quickly.
Paul: Well it goes back to the first lesson. It’s hey we’re going to run out of money.
Andrew: That’s what it really is. If you can accept that we don’t have the money to do this then you can make the tough decisions to go along with it. If you don’t accept it then you end up being like Steve Jobs a brilliant visionary who doesn’t accept the diagnosis and maybe ends up dying because of it.
Paul: Yeah. I just know if we continued doing what we were doing we would run out of money.
Andrew: OK.
Paul: I could see the gems of the business. I could separate it, take all the dirt away and I could see the gold nugget in the middle and that was that audio business. It was like an ATM machine, man. You would go home and you would come in and you would have another thirty grand in the bank and like, two people like, you know, playing minesweeper at night. It was a wonderful, wonderful business.
Andrew: Why did you leave the business before the sale?
Paul: My family and I were in a terrible car accident when I was on vacation in Hawaii.
Andrew: Wow.
Paul: And my wife almost passed away and I shattered my right leg and I had to literally just dedicate a year of my life to getting my family in order so it was a personal reason. And, you know… shit happens man. You just got to deal with life as it comes to you and that was a tough time in my life.
Andrew: How did she do after?
Paul: We recovered fantastically… I’m 98% of the person I was before. I’m missing a couple parts. [??]. And my wife is doing well.
Andrew: I see now where I got the, I was going to in the introduction say ‘sold for 110 million dollars’. I see now why I got that number, where I got it, from Brad Feld’s post from 2006, he said that it was sold for 110, but it was 160. That was the sale price?
Paul: Yeah… I was involved in the transaction and nor was Brad, and [??] we had a lot of cash at the time and I think that might have been the delta between the 110 and the 160. I know this whole [??] I got were based off. It wasn’t 110. I think it was.
Andrew: Yeah, how did you do from the sale?
Paul: I did fine. I did fine. I’m not going to the poorhouse.
Andrew: I don’t want to get into the details of the numbers but how does life change after a sale like that?
Paul: Well… it doesn’t… I don’t know how my life would change if all of a sudden I had a billion dollars versus a million dollars.
Andrew: But you suddenly did come into some cash. Life does change if you end up taking more.
Paul: It does but it wasn’t the first time, right? We had success with Link VTC so it wasn’t like I was sitting on… When life changes is the first sale, where you can say, “I no longer have a debt. I can put money in the bank. I can put money away for my kid’s college. I can buy a house and I can have money to try the next thing and I have my whole life ahead of me.” That’s life changing money where it sets you up to where you don’t fear going back to zero because before when we were with Link VTC, I had seven credit cards and they were all maxed out.
So, transforming to the state of “OK, I’m no longer, zero is no longer an option for me or maybe it is but I’m trying desperately not to ever have that as an option in my life.’ The next chunk that comes on top of it, it just allows you to think about “OK, what do we want to do with this.” If you look at my career, I spent a solid seven years after Raindance before I landed into Obotics, starting other businesses that I was funding and also paying for my own lifestyle so I didn’t have a job but I was funding new businesses, investing, trying new opportunities.
Andrew: And all of that essentially was from Raindance and from Link VTC.
Paul: Yeah so a couple of nice pay days.
Andrew: The founder of Carbonite was on here and I asked him, “Why were you able to stick it out and keep building your business when Mosey had to sell and also had to make some tough pricing decisions?” and you said the same thing. You said: “Look, I had enough cash in the bank that my lifestyle wasn’t going to be impacted. It allowed me to take a much longer-term view of the industry, of my business, and it allowed me to make better long-term decisions as a result of it and you can see one person still running his company Carbonite and the other, Mosey, has been sold.” Seems like the same thing is true for you. How can entrepreneurs who haven’t gone through that process, I was going to say how do they compete with it, but I can’t even formulate a question around it. You recognize some of this though I saw you nodding as I was saying it.
Paul: Yeah. I think you have to have your, so much of the new young entrepreneur crowd is looking for the big win on the first one. Is looking for the end game, they’re 27 years old. I’m on business number seven, I’m still looking for the end game.
Andrew: What do you mean? What’s the end game that you’re looking for?
Paul: The end game is where you have so much money that you don’t have to dedicate your life to the business unless you choose to.
Andrew: Aren’t you in that position though Paul?
Paul: I am but not, I am in that position but not to the point where you start thinking about some of the philanthropic work you want to do, right. Because what happens as you become more and more successful your dreams expand both from a personal, what do I want to do with my life, but also how you want to help others. What do I want to do to, do I want to do more Angel investing? Do I want to do some philanthropic work that I’d love to do as I get older. As I think about that I’m not there yet. I have enough for me personally but that becomes a very selfish lifestyle that you would live and I could just live in my house and go on my vacations and do whatever, but it doesn’t keep me connected to the community or society.
Part of working with this business is to start thinking about what is the legacy you’re going to create? You’re going to create a great business and hopefully you’re going to expose other people to that so they can go on and create great businesses and if you look at Rain Dance, four or five companies came out of the senior team there that went off and started their own businesses.
What’s beyond, right? What’s beyond once you have a few businesses? You want to make sure the next generation gets to do what you did. So, I’m not there yet for the big [??].
Andrew: You’re doing it through Tech Stars, Brad Feld who I guess is your investor now, again funded Rain Dance. He’s funding, am I pronouncing it right, Obotics or excuse me [??].
Paul: Robotics without the “R” Obotics.
Andrew: Oh, then I’ve got a typo here in my research. So, what was I going to say, right, right, right, now you’re at Tech Stars, you’re a mentor. You’re helping all these entrepreneurs out. A lot of them I’m sure are desperate for more help from you than you ever have time to give, but two of them, right, it’s two co-founders at this company say to you, “Look, we’ve got this great product, we need you to come in” and they somehow get you to come and run their business, with your reputation, with your ability to raise money, with your knowledge of what it takes to go public. With your understanding of opportunities that you need to seize as an entrepreneur, how did they get you?
Paul: With my failures.
Andrew: With your failures, really so now they don’t have to go through those failures themselves. They get the benefit of your experience, how did they do it?
Paul: I can screw their business up. It’s not like I put out a shingle saying, “Who wants to hire me?” I was really looking for a match where I felt that the team really would benefit from my skill sets. The team had strong technical skills that they could operate and build stuff on their own. Like if I come up with an idea, I got to go hire people to build it because I don’t build stuff, right? It’s been a long time since I programmed a computer. You need founders who are doers and I can do a lot of stuff but the stuff of building product is not what I do.
Andrew: OK. So that explains . . .
Paul: I was looking for a specific team. A lot of teams there the have a business guy already. Well that guy wants that experience. I’m not going to say, “You step aside and let me come in.” I was really looking for that team that could benefit and I had passion for what they were doing and I liked the guy. So it’s just really, Ian and Adam are just, they’re just awesome. So I think it was more of a mutual courtship than it was a, how did they land me? I don’t think that was the case. I think it was I landed them. I feel lucky for joining them.
Andrew: All right. And you’ve got a vision to create other products too. Am I right?
Paul: Yeah, we have this first little [??] here that we think has got a lot of legs in him and the technology inside there is actually pretty special and will allow us to expand it to different products.
Andrew: And what do you have in mind? What’s the next product?
Paul: We’ve got to stay tuned. Right now this is it and it’s awesome.
Andrew: And that’s the way to actually promote. You don’t want to talk about what’s coming in the future. You want to talk about what you just launched, what you’re about ready to launch.
Paul: Yeah.
Andrew: All right. Now I see now my issue here with the typo. We reversed the ‘R’ and the ‘B’ and that’s why I was pronouncing or about to pronounce it wrong. So it is Obotics. Let me just do a quick plug here and then I’d like to ask you for one last question and then I’ll let you go because I know that you’re trying to preserve your voice for the rest of the week here, you’ve been doing a lot of talking. Here’s the plug. You know how as an entrepreneur I’m talking to the audience? As an entrepreneur, you the person that’s listening to me, end up with all kind of issues like suddenly you built the product, but you can’t get customers, you built the product, but you can’t get anyone to check it out, or maybe you get people to check it out, you get the hits, but you can’t get customers, or maybe you get customers, but they’re not buying repeatedly.
Now you end up with a lot of these challenges along the way. Well, where do you get the solution? If you’re lucky enough to get Paul as your CEO, you’ve got a guy who can come through for you with every issue, but if you’re not, go to mixergy.com/premium and I’ll tell you what you get there. I bring on the top entrepreneurs, the doers, and I say, ‘Look, teach what you’re good at.’ So if it’s about how to get traffic, I say, ‘Flip on your computer screen. Let us all watch your computer screen.’ I don’t use WebEx because WebEx stinks. Excuse me, Paul. I say, ‘Share you screen and explain to us how you do what you do. Show us. Walk us through step by step how you do it and teach it to us,’ and that’s what mixergy.com/premium is.
If you’re not a premium member, I hope you check it out, you’ll see that we have dozens of courses and many more coming soon from entrepreneurs who will teach you specifically how to do things like get traffic, get publicity, make sales, etc. So if you’re not, I hope you go to mixergy.com/premium and sign up and if you are, go and take advantage of these courses that are there for you. You don’t have to pay anything extra. Every single course is available to you there. Paul, how did I do with that plug?
Paul: It was a great plug.
Andrew: All right. Good plug.
Paul: It was fantastic.
Andrew: It was not bad. We’ll see how many people end up as a result to this little call to action, take that action. I’m actually getting a lot of favorable emails on this. People are saying, ‘Andrew, you still need to do a little bit of work with the way that you’re plugging the premium membership, but at least you’re plugging it. You used to be too mute about it.’ It’s true. I used to promote everyone else’s stuff except for mine. Now I’ve got a place to send people. I’m promoting mixergy.com/premium for all those courses. All right so, Paul. Here’s the last question. Based on all this experience, what’s the one piece of advice that you can give my precious, precious audience, the people who are listening to us, about how to build their businesses?
Paul: [pause] You know, keep trying. Just keep trying. If I gave up after my, I had two failures back to back and they were both exceptionally costly for me from a personal standpoint, both financially, emotionally, and reputationally, right? You can’t worry too much about the past. It’s already happened. The only thing you control is the future and the future is for you to go out and create. So make decisions, act, and just keep trying.
Andrew: You certainly have. . . I hope you come back here, Paul, to talk especially about the failures, but maybe we’d do another interview on focusing on failures and yet another one still about some of the other successes. Well, let me say this to the audience. I’m about to do something that I urge all of you to do, which is I’m to thank Paul, and I say this all the time, thank the interviewees if you got any value out of it. This guy today sent me an email and he said, ‘Andrew, you tell me to say thank you. I finally started doing it,’ and he sent me a list of all the people he had thanked and how many good things came out of it. Things like, he sent a thank you note to one past guest who’s great at SEO. He got advice on how to get more traffic to his site. He sent another email to someone else and ended up getting a conversation with him for an hour full of advice.
Don’t do it with any intention of getting anything because Paul’s got to be very busy. Do it with the understanding that if you get comfortable for just thanking people for doing things like what Paul just did. He spent an hour here telling you about his experience and what he learned. You’re going to find that naturally good things will come to you. So I’m going to do it right here. Paul, seriously, I really admire the success that you’ve built, especially after doing all this research on you and I can’t tell you how grateful I am that you took an hour plus including that pre-interview conversation with me to go through it and to share with my audience and with me. I’m really grateful to you for doing this.
Paul: Happy to do it.
Andrew: Thank you, and, guys, check out the video that I’ve been talking at gosphero.com. G-O-S-P-H-E-R-O dot com. Thank you. Thank you all for watching.
Paul: Thanks Andrew.
