Andrew: Hey there, freedom fighters. My name is Andrew Warner. I’m the founder of Mixergy, where I interview entrepreneurs about how they built their businesses. And I do it for an audience of real entrepreneurs who are often building their businesses while listening to these interviews.
If you’re like me, you probably read about tech a lot, and you probably have read a lot of the articles about how much each part of the tech you love costs, and how much the whole thing costs to put together. Well, maybe you noticed that the company that they keep referring to in those articles is called iSuppli. I see them all the time. In fact, in preparation for this interview I just looked at how many times iSuppli comes up on “Wall Street Journal” articles, and I just couldn’t even count it, it was so many times.
Here’s one, “PC Sales Go into a Tailspin from 2012.” iSuppli is the company that they use for research on that. Here’s another one, “Global chip sales expected to fall 9.9%.” How does “The Wall Street Journal” know? This was back in 2008. Well, market research firm iSuppli helped them understand it. Same thing, “New York Times,” and so many other places. Here’s an article from “The Wall Street Journal,” “Slim profit for Amazon Tablet.” This was written in 2011. I did a search on that article, the name iSuppli comes up six times.
All that’s to say that when the people you trust to tell you what’s going on in the tech industry and specifically in the products that come out of the tech industry, when they’re looking for research, when they’re looking to understand they go to iSuppli. And I’m proud that today I’ve got the founder of iSuppli on here to talk about first of all how they get in all this media. And second, how they built up this credibility that the media would trust them, and this knowledge that the media would turn to. And thirdly, what’s the business model behind all this? And so, that’s what this interview is going to be about.
Derek Lidow is the founder of iSuppli. He created it back in 1999 and sold it about 11 years later. iSuppli is . . . Here’s what I’ve got from the press release from the day that they sold, “The global leader in tech value chain research and advisory services.” This interview is sponsored by two phenomenal companies, the first helped me find great developers, it’s called Toptal. And the second, well it’s what’s hosting our website, it’s called HostGator.
Derek, good to have you on here.
Derek: Andrew, I’ve been looking forward to this. Thank you so much for having me on.
Andrew: Thanks. What did you sell the company for? How much?
Derek: So it was somewhere north of $100 million. And it was a very fair price. We weren’t actually for sale at that point in time, but a great company IHS said that they basically needed us, and they made us an offer that was very generous and good for everybody involved.
Andrew: And their focus was on intelligence in the energy and environment sectors, is that right?
Derek: Correct. They own a lot of sources of information. Their major econometric models for example that are used to predict for banks or governments, what’s going to happen to the economy or theirs . . . And the company I founded, iSuppli, we had all the unique datasets that described how the tech part of the economy worked around the world. And so, it was a missing link for their datasets.
Andrew: Help me understand why a client would have hired iSuppli. Can you give me an example of a client, that maybe a company that we’re familiar with and what they might come to iSuppli for?
Derek: Well, let me tell you the story why I started iSuppli. I started it because I was CEO of a major global semiconductor company at the time, New York Stock Exchange listed. And I was being asked to sign checks of $100 million or more to build new factories in various places in the world. And I would ask some questions about, “Well, how much inventory is in the pipeline?” Or, “How much capacity do our competitors have online?” And nobody could answer that.
And ultimately, I tried to get some other people interested in getting that information for us, nobody could, and so ultimately I put my money where my mouth was, and I retired from the CEO of IR to create iSuppli.
Andrew: So this is you saying, “I want to know before we start creating a factory, to create this product, how much of it already exists? How much can other people make?” And you can’t even answer that?
Derek: Correct. Correct. For no amount of money.
Andrew: For no amount of money.
Derek: For no amount of money.
Andrew: And so what shocked me in my research was what you said people did before iSuppli, it was just gut instinct?
Derek: Correct. Yeah, so we . . .
Andrew: You know what, that’s shocking to me. So this company was called International Rectifier. Am I right?
Derek: Right.
Andrew: This is a company founded by your grandfather, headed by your father, and then you?
Derek: Correct.
Andrew: I had no idea by the way in that industry that there were three generations. We’re not talking about like the [schmuck 00:05:34] industry where my dad was, where you can understand it, not changing and going through three generations. There’s three generations in a tech industry like that. That’s surprising. Isn’t it?
Derek: That was true for the entire semiconductor industry. So we were talking about the most sophisticated industry on the planet at that point in time, you know, microprocessors, memory, all of that. And this information was considered so secret that nobody had a good idea of what the totality of the situation was.
Andrew: Was there also blindness to it, or were the people in the industry aware that they didn’t have this data? Did they just accept that’s the way the world works, or did they say, “I wish somebody would create this”?
Derek: Part of it was that the semiconductor industry had grown really fast for the previous 20 years or so. And the sense was, let’s hope it continues to grow fast. Let’s build a lot of capacity and help it along. And unfortunately in the mid-’90s the semiconductor industry growth rates started to slow down, so building capacity to inspire people to come buy product wasn’t working anymore. And yeah, we were, you know, still very secretive as an industry. And so that transition point was not being accepted.
Andrew: Why didn’t you do this internally? Why didn’t you say, “You know what, we need this kind of data, let’s just create it for ourselves, let’s hire a research department, let’s have them go out and tell us what we need, and then we’ll know what to create, we’ll know how much extra capacity to bring on?”
Derek: Well, we had an internal research department that went and tried to do this as did all our competitors and everybody in the semiconductor industry. But we only could get so far being an interested party. So, in the previous successful attempts to gather the data that shows how an industry works at its core requires a neutral third party to be the honest broker, to call bullshit when somebody tries to feed you some false information that might be in their best interests for other people to think, or for people to believe, to trust you that you won’t disclose all the information they give, that you will only extract from it things that will not be able to relate directly back to them.
Andrew: Okay, right. Sometimes you need a third party for people to trust you with the information.
Derek: Exactly.
Andrew: Okay, and so the first step that you took apparently was to create wire frames. What does that mean? That’s I think what you told our producer, and this does not seem like a wire framing type of business.
Derek: Well, it was because ultimately we were talking about information. And when I would go to customers, our potential customers, so I retired from the company so that . . . I made an official break, I would become independent. But now I needed customers, now I knew already from my fellow CEOs that they wanted this information too, but the question was, exactly what information are you going to get?
And the best way to tell that story was to show them what it would look like. So, that’s where the wire frames came in, is “Hey, here’s the experience that you’ll have, you’ll be able to go on your computer and press these buttons and . . .
Andrew: And get this data. But it was the way that they would get data that they were most interested about, not the type of data?
Derek: Well, they would see what the fields would be looking like, and that gave them a sense of what that information would include, and then they’d dig into it. So, it started the story. It didn’t tell the entire story.
Andrew: Okay, and from what I understand you also went to potential clients and you said, “If I create this, if I get this kind of data, what would you pay me?”
Derek: Exactly.
Andrew: And what did they tell you? What was the data that they got excited about, and what were they willing to pay?
Derek: How much capacity was online in the industry where the inventories were? These were super secrets bits of information. “If you got that for us, that would be extremely valuable.” Now, having been a CEO I could sort of say, “Yeah, I think that guy could save you many millions of dollars.” And then they would say, “Wow, well yeah, maybe it could, but you know I don’t think that I would ever share that all with you.” And so that would be usually the entry point to a discussion about, “Well, if I could get you all this data, I would consider that to be worth . . . ” And our price points, we were talking about tens if not hundreds of thousands of dollars.
Andrew: For that research?
Derek: Yes.
Andrew: And what was it that you could get in the beginning?
Derek: I started in a very small niche, but it was the single most important niche at that time because it was a product that was widely out of balance. There was way too much demand and not enough supply. And so we launched into dissecting exactly how much additional capacity would need to come online for it to balance that.
And we were able to predict that that supply and demand balance would occur exactly in November 2001. And that was exactly when the dot-com bubble burst, because that pinch point was the device that we were talking about.
Andrew: Meaning what? That there would just be . . . and you predicted essentially that companies would go out of business, and so then they would need as much hardware?
Derek: What had happened was that the companies were over ordering this part because they couldn’t get it, so they’d order it from three different places to see which one would come first. And they said, “Well, you know, we need so much of this, we don’t care if we over order.” Well, what happens is that when finally all those orders can be delivered because the capacity finally comes online, they start getting inundated with that, and they say, “Whoa, hold off. We cancel all the balance of the orders.”
And then all of a sudden there’s this huge collapse in the demand for electronics products because it goes all throughout the entire supply chain, and everybody is reporting that orders dried up. Well, that’s exactly what happened when the dot-com bubble burst, is that all these people simultaneously reported drops in orders.
Andrew: So how did you get all the data? Was it going to your clients and saying, “Let me understand your business so that I can get you the right data,” and then using what they teach you to put together data for everyone else?
Derek: It was flying around the world talking to former customers and also competitors, and describing to them what would be the merits of that information being shared. And that’s the issues that the semiconductor industry had faced in the past and were but starting to face again could be cured if we had a central repository of information that we could all trust. And then I was the right person to trust.
Andrew: How did you get them to trust you considering your family connections?
Derek: Well, but they also could trust me because I had a great reputation in the industry as a person that was honest and said it like it was.
Andrew: I didn’t mention in the intro that you’ve got a couple of books, the latest one is called “Building on Bedrock: What Sam Walton, Walt Disney, and Other Great Self-Made Entrepreneurs Can Teach Us About Building Valuable Companies.” In that book you basically, you’re trying to dissect what’s worked for successful companies. You come at this like a PhD which you are. When you were starting your company, how did you learn how to run it? What was it that you used to figure out how to become an entrepreneur? And what did you get right and what did you get wrong?
Derek: Well, I wish I had my books. I wrote them after the fact not before the fact. And I had been trained to operate in larger corporate structures, where you could call on somebody to do your marketing and, or provide your travel support [inaudible 00:15:16]. And, it was incredibly exasperating. Here I was a former CEO, and I had to make travel arrangements. And I did have my trusted personal assistant who came with me, but it was just the two of us and there was so much to do in creating a company from scratch. And a lot of it was mind bogglingly bureaucratic stuff to do.
Andrew: Like what?
Derek: So first, making myself want to do that or realize that I had to do that was important. The second thing was that the importance of pinching pennies. When you’re in a big corporation, especially a CEO, so $10,000 was a small thing for me to authorize when I was CEO. Well, $10,000 when it was coming out of my own pockets was a lot of money, and why did I have to spend $10,000? Why can’t we just figure out how to do it for 100?
And so being motivated to ask those questions was a central part of reconfiguring your whole mindset on what it was to be on your own, based upon how much money was in the bank account.
Andrew: I think you also wrote about how much of a jerk the CEO needs to be. And I think you talked about Steve Jobs, and you didn’t come across as saying you have to be a big jerk or not. You were a little more nuanced. What’s your point of view on that? And how were you as a leader?
Derek: Well, I wasn’t often a jerk as a leader. So being a jerk particularly for males of our species is hard wired. It’s how you become a dominant alpha male, if you’re out in the Serengeti, you know, with a small tribe chasing mammoths, whatever, so you yell, you scream, you look fearsome and domineering, and we’re trained to do that.
The issue is, when you start growing larger corporations you need to pull talent from wherever you can get that, and that means that you’re not just trying to, you know, get other males who are okay when you scream at them and the like, you have to get people that operate, that want environments that help them succeed, not help you be dominant.
That said, for leaders that are not skilled in relationship building and motivating others, they naturally resort to this dominant behavior.
Andrew: Let’s talk about how you were. You know what, that’s the phrase, it was “How much of a jerk” was the title of the section in you book. “How much of a jerk to be,” and you can talk about how Walt Disney was often a jerk, but the animators who worked for him even though they felt stressed around him felt that he was just so good that they needed to be around that. So what about you? You said you weren’t often a jerk. When were you a jerk that was actually good?
Derek: So, when I was when I felt I needed to be a jerk was when we had major changes in direction to make. And people were resisting making as big a change in direction that I felt was not necessary.
Andrew: For example? What’s an example of a major change in direction they had to take?
Derek: For example, were we going to have an online presence where people could order information online? That was very controversial back in that time. People felt that it should be a small little experiment. And they had some good reasons for it, but nonetheless I felt that it was absolutely imperative for the future of the company.
Andrew: Wait, what were the reasons for them not to do that? You’re talking about a data company, feels like data is a natural fit for online. What was their reasoning for it?
Derek: Well, back in that day and age, it was very hard to secure that information. So people could steal that information more easily if it was online.
Andrew: Right, right. I could just give somebody else my username and password. And if I’m paying guys tens and thousands of dollars, that person doesn’t have to pay anything, maybe we split it. I got it. That’s a legitimate reason. And your opinion was, we need to make it more accessible to our customers. We can’t start FedExing them packages.
Derek: Right, we have to fix this.
Andrew: I got it.
Derek: So, “You don’t understand. You have to fix this.”
Andrew: I got it. Meaning you saying to them, “You don’t understand. This has to be solved, and we’re not negotiating. We’re not going to talk it over. We’re not going to come to a middle ground here. We need to be online.”
Derek: Exactly, “We have to do this.”
Andrew: And did you hate yourself for being that way, or were you secretly proud that you finally have spoken up?
Derek: Well, no I felt that needed to be done.
Andrew: Okay, and as a result of doing that and being, I don’t know that I call it a jerk, but let’s call it a jerk, what happened? What did they do that they wouldn’t have done otherwise?
Derek: They came up with solutions that they thought were more expensive than the company could afford. And I said, “Well, if those are the solutions, we’ve got to afford it and do it.”
Andrew: I see. So it was more than should have been able to afford, but if that’s the only way you’re willing to pay for it. And what was the solution, how do you avoid privacy online? I feel like that’s hard.
Derek: It was very expensive, digital rights management, software that was at first a little clunking for the customers to use. But it allowed us to track every bit of information where it was being used at any point in time around the world.
Andrew: Oh, okay. All right, and so by being that strong of a leader you’re able to guide them. Let me take a moment to talk about my first sponsor. And then I’d love to come back and ask you about when you were softer, when you had a softer touch. If you could give an example of what that type of leadership looks like could be helpful.
My first sponsor is a company called Toptal. And I think what you just talked about is a great example of what phenomenal developers can do. When you give a great developer a problem like that, you don’t have to give them the solution. In fact, you shouldn’t give them the solution. Am I right? You say, “Here’s our problem. We need to make our information available online. Here’s your problem now, figure out how to do it in a way that doesn’t get people to steal all of our data.”
And now it’s on them, and the right developers will love that problem. They’ll spend time on it, they’ll come up with a solution, they’ll take your feedback well, and then they’ll create it. Am I right about that Derek, or am I just talking like this because I’m about to talk about a sponsor?
Derek: You are describing a dream.
Andrew: The dream developers?
Derek: Yeah, yeah.
Andrew: And do you experience them often or not enough?
Derek: Not enough. They’re hard to find, and they’re a gem. They’re a treasure.
Andrew: And you know what, what new amateur developer founders, the ones who are like you, where when you were starting trying to save every penny possible, what they try to do is say, “I’m just going to go online and find somebody who can do my bidding, who could do it exactly my way. I think I know it.” But the truth is that you can’t know the solution because you don’t know all the options. You don’t know all the software. You don’t know what’s worked in the past.
You can play with one option and then immediately dump it as in the creative process and try something else. That’s why you need to developers who could do it for you. Anyway, the idea behind Toptal was, they said, “What if we find a bunch of these developers, as many as we can, test them, make sure they’re the right ones, put them in our database, and then when a business needs to hire developers, we can ask them a little bit about themselves and go into our database and find these developers for them? What if we can get these best of the best developers into a database, and allow anyone who wants to hire them?” And that’s the idea behind Toptal.
If you have any doubts whether this works or not, I support you guys. I actually was skeptical myself, and I’d urge you to always be skeptical when it comes to hiring from a company like this. But here’s what Toptal would do. They’ve got a page that I’m about to give you with a big green button. Well, as soon as you hit that green button, you don’t hire anybody. What you do is you’re basically setting up a call with one of their matchers at Toptal. They’ll talk to you, they’ll hear what you’re looking for, and then they’ll introduce you to often just one or two people who they think are perfect for you.
If you like them after you talk to them, if you think they’re a good fit, I’ve found within a couple of days I could hire those people, because they’re already in the Toptal database, they’re already a part of the Toptal network. And then let me tell you what you’ll get at that URL. You’re going to get 80 hours of Toptal developer credit when you pay for your first 80 hours, but you’re also going to get a no risk trial period of up to 2 weeks. If at the end of that period you’re not 100% satisfied, you don’t really believe that these are the best developers, you don’t really believe that they could think the way that Derek was looking for his people to think, you’re just not going to be billed.
All right, so here’s the URL. It’s top, as in top of your head. Tal, as in talent, toptal.com/mixergy. Mixergy is M-I-X-E-R-G-Y. I picked, you know what, I picked a name, Derek, that is a little bit hard for people to pronounce or to remember. They always assume it’s mix energy. I wonder if you had a similar issue. iSuppli with that I at the end could be a little confusing.
Derek: Yes, it could. People tended to put Ys back there, and therefore misspelled our URL.
Andrew: Why did you do that, was is hard to get iSuppli with the word supply spelled out back then?
Derek: It was already taken.
Andrew: Already taken in 1999.
Derek: Oh, yeah. And even with the small I in the beginning, it was already taken in 1999.
Andrew: Wow, all right. And so I guess in your world though you’re not speaking to that many people. Right? We’re not talking about thousands of random people who hear your name in a podcast who have to go Google you, it’s a small select group of customers that you are pursuing, right?
Derek: Correct.
Andrew: So it’s not as big of an issue as it would be for me.
Derek: Probably not, although it’s pronounced iSuppli in Italy, which means some sort of pasta but I didn’t know.
Andrew: All right, let’s go into a good leadership. When you were a little bit more of a softer touch, the person that actually gets more results but is less dramatic, and therefore we see less of it in books, in newspapers, what were you like? Do you have an example?
Derek: Yeah. Well, so at the very beginning I was probably too soft.
Andrew: Really?
Derek: Yes.
Andrew: Tell me about that.
Derek: Well, as I was trying to find my leadership voice let’s say, I went from being a hard-nosed techie, arrogant, hard-nosed techie who thought they knew everything, and therefore my first style was telling people, “This is what you’re going to do, and you’re going to do that.” And that didn’t work very well at all.
Then I went to trying to develop consensus. So let’s take what everybody thinks and put it all together and go with the lowest common denominator. Well, that produces mediocrity. And so for a while I wasn’t producing very good results at all.
Andrew: Why does that produce mediocrity? I sometimes feel that way too about myself. I’m a consensus builder. I want to understand. We’ve got these smart people that we’ve hired. Let’s see what they all think. Let’s come up with something that makes sense based on all their input. Why doesn’t that work out?
Derek: Well, because it’s not based upon an ultimate vision that is trying to move things forward in innovative and newly productive ways. So, in other words what happens is that when you try and take bits of what everybody has to say that they all agree upon, it tends to be something that’s easy to implement rather than hard to implement. And the challenge, the implementation challenge is what gives you your competitive advantage. It’s what distinguishes you as a department leader or as a founder of a company, is that ability to do what is hard for other people to do.
Andrew: Okay, and so what was it that finally got you to stop being that person and to be more of a leader and more of a visionary?
Derek: An executive coach.
Andrew: Really?
Derek: Yes.
Andrew: How did you get that out of the executive coach? I found that I haven’t had great experiences with them.
Derek: Well, I had a good executive coach, and the company International Rectifier at that point in time provided executive coaches for everybody that made director level title. All right, and that person really gave you a hard time. They basically came back at you and said, “Hey, this isn’t effective, and that’s not effective, and here’s what you need to change.” And fortunately they gave you good advice on how to think in creating those changes.
So I got an executive coach who gave me good advice that I realized would make me a lot better, and that’s . . .
Andrew: And that’s where you start having a clear visions, clear direction for the team?
Derek: Exactly, not going down into consensus or democratic vote, or have a clearly stated vision. Every time you get people together that says, “This is what I want to accomplish. Now how are we going to do that?” And then taking, harvesting the good ideas that come up, but putting them together in a very specific way to achieve your vision.
Andrew: Was there a methodology that they followed?
Derek: There was I remember a book called “Managing for Excellence,” I mean this is already back in the ’80s that was really easy to read and very insightful, and I used it as my bible for 5 or 6 years before it became second nature.
Andrew: I noticed in your book “Building on Bedrock” you talk about how much leadership and the importance of leadership in a business.
Derek: Well, so ultimately in working with a lot of entrepreneurs I see that a lot of them do not state their vision clearly enough for people to know how to help them, how they can help have that vision come true. And so that creates so much wasted effort. So the clarity of the vision, having a vision that really pushes the limits but isn’t . . . it distorts reality. And so, you know, it does that reality distortion but not to something that can’t be accomplished. So, it’s not defying gravity.
Andrew: How long did it take you to break even in the business? I imagine it wasn’t very long because it was you and your assistant at the time. Were there other people on the team?
Derek: I quickly hired about 20 some odd people.
Andrew: Really?
Derek: Yes. So the vision was a slightly bigger vision at that starting point. So I wanted to capture all this information that nobody else had, and I wanted to help people use that explicitly to reduce the inventories in their warehouses. And so, there were two parts to the strategy, getting the information and helping them use the information. And that helping to use the information was where I invested, reinvested all the profits.
Andrew: Like a consulting company?
Derek: Yes, but a specific one called Business Process Outsourcing Consulting. So, when you actually take over a repetitive process because you can do it much more productively then [inaudible 00:33:31] customer.
Andrew: So once they understood what they needed to do, they would hire you to do it and you would do it, your team would do it?
Derek: Exactly.
Andrew: But your clients didn’t end up buying into that, why not?
Derek: Well, they did. I proved that it worked. So we got some extremely high profile clients to try us, and it worked. And our biggest most famous customer says, “This works, go global. Go big, we’re with you.” And at that point the dot-com bubble had burst, and I had to go out and raise the money to go global in 2002.
Well, to do that I would have had to have sold 90% of the company, value of the company, because nobody was investing in tech at that point in time. And so I had the excruciating decision on, do we keep going with that and basically lose control over the company or do we shut it down and only focus on the super profitable information side of the business? And that’s what I did, is I shut it down.
Andrew: Because what you told our producer was your biggest challenge you told her you were in a hole as a company, meaning what, in debt?
Derek: Well, we had invested $50 million at this point.
Andrew: You had earned $50 million at that point, by 2010?
Derek: That does include a bunch of my money that I had made as CEO of a semiconductor company, and I had brought in some other investors at [inaudible 00:35:16] time as well because they were excited about this. And so, cumulatively between both of us we were 50 million in the hole.
Andrew: Fifty million, and then you had to start, well letting employees go, retaining the confidence of the remaining employees at a time when everybody was scared of tech in every way, right?
Derek: Exactly. And how can you lay off three quarters of your employees and retain the trust and confidence of the quarter that are going to be essential for enabling a prosperous future?
Andrew: What’s the answer to that? How did you do that?
Derek: I was upfront with everybody going into this crisis, saying, “Hey, you know, the good news is that our customers like this. The bad news is I don’t know where we’re going to get the money. And if we don’t get the money, we’re going to have to shut it down.”
Andrew: And you were open with them?
Derek: Yes, I was open with them.
Andrew: You know what, I never understand why companies are open with employees to that degree. Here it sounds great in an interview, but in reality it’s really dangerous, because number one, they’re then going to start to focus on whether they’re going to have a job or not as opposed to doing their job. And number two, it’s your job to take on all the headaches of the company and to keep that to yourself. No?
Derek: Well, it’s my responsibility to make everybody successful, and so I’m there to try to make them succeed. And I felt by telling them exactly what the status was and realized . . . Now, I could count on them. They wanted to see the business succeed, so they wanted to take it all the way to the end to see if we could get the money. Nobody wanted to give up before they had the answer, could we do it or not?
Andrew: So you’re saying, it made them want to fight harder day-to-day, to know whether this whole thing could fall apart.
Derek: Exactly.
Andrew: All right. How did you keep your head on at the time? I remember talking to people who’d gone through that, and they lost confidence in themselves, they lost confidence in the industry, they had to do a lot of things to keep themselves going. What did you do?
Derek: I didn’t lose confidence, but I was distressed that that part of the business hadn’t worked, but I knew that what I wanted to accomplish was ultimately going to provide a lot of value. And so I had half of the business model that was still working, and customers counting on me and still one quarter of the employees that I could still offer a bright future too.
Andrew: So just the belief that what you were doing still made sense is what kept you going? You didn’t have to work on yourself to stay committed, to keep believing in that?
Derek: No, no. But I did have to work hard one-on-one with every single person that I wanted to remain with the company, and instill in them this is the vision on how it’s going to work without that portion that we just shut down. And we didn’t lose anybody. We kept all of them.
Andrew: How long did it take you to get back to profitability?
Derek: Well, we were . . . So what we made was incrementally profitable after we did the layoffs, after we shut down that side of the business. And ultimately, the valuation did not come back to where it was. We had to pay back the $50 million until about 2007. So it took us to climb out of the hole, and then ultimately to be worth a positive $100 million dollars took until 2010.
Andrew: We’re talking about 5 years to get back on your feet as a company, and then another 3 years before you suddenly became, not suddenly, but before you became $100 million plus company.
Derek: Exactly.
Andrew: All right. Let me take a moment and talk about my second sponsor. And then I want to find out that question that I brought up at the beginning, which is, how did you guys start to suddenly get press? You were not a sexy company but you’re everywhere. I want to know how you figured that out. I want to understand about the dilution that happened to you with your stock options.
And then finally, I’m kind of curious about the day you sold. What was it like after all of this, this up and down, this battle, disclosing to finally sign the papers and know that this is over? But first, I’ll tell you and everyone else about my second sponsor. It’s a company called HostGator. I got fascinated by chat bots. I made a couple of angel vestments in chat bots companies. I said the world needs to know how this stuff works because I thought everyone was going to bad direction with it. They all thought chat bots has to be artificial intelligence, and you could chat with a robot, and it would give you the answer. They’d say, “No, no. It could just be as simple as we’re all reaching our customers via email, just shift to chat. It’s so much easier. And then add intelligence when the intelligence comes.”
Anyway, that was . . . I could go off for hours on that. So, I created this website, and I just went to HostGator and I was able to publish it. One-click install WordPress, everything worked. And people started to come to it. And the site was doing really well. And I thought, “This is great. Really inexpensive, easy, it works.” And then one day I did this webinar with this big audience, and we had a hiccup in the site. Not that the site crashed, but it was slow. And when you’ve got a webinar and people all have to show up at the exact time and the site is slow, that’s a problem.
So, luckily, we didn’t lose that many people. But I went to Michael and I said, “Hey Michael, you’re the guy who’s in charge of all the technology, find a way to keep this up and running, and if it’s possible with HostGator, do it. But you know what, as much as I love HostGator if it doesn’t work, go find somebody else. So he said, “Oh yeah, I’ll call them up.” He called them up, and it turns out HostGator doesn’t publish this guys, but yes, you can host on the cheap with them, but if you call them up, they’ve got these elaborate, fantastic products. Everything from dedicated servers to manage WordPress hosting, which frankly if didn’t have Michael I would use, and so many other things.
And so Michael called them up. He got the price. He said, “Andrew, it’s actually cheaper than their competition, and if you like HostGator and you like the service that they’ve been giving you, you’ll get everything you’re looking for. And now you can withstand an avalanche of traffic.” So we did it, we signed up, and I haven’t had an issue. I don’t have any more stories to tell you guys, because it’s just been silent. We just paid them. We think we even like them so much we signed a three-year agreement with them.
And I think it’s less to pay them for three years than it is to pay for their competition for one year, so great price, and I could set it and forget it, and frankly I don’t really think . . . I wouldn’t think about HostGator at all if they weren’t a sponsor. It just works. All right, if you’re looking to get started with them on the cheap for any idea that you have, go to hostgator.com/mixergy. Because when you go there, two things are going to happen. Number one, you’re going to get up to 62% off their already low prices. Frankly, if that is a difference, great, enjoy it.
But the bigger benefit you’re going to get is, you’re going to be tagged as a Mixergy customer, which means if you have issues, you can contact me, and I’ve got my people over there that I can reach out to. God knows I’ve talked to them a lot over the years, and I’ll be happy to help you out. So hostgator.com/mixergy. Be part of the Mixergy community by signing up with them, bring your website, and if you ever have an issue with them or anyone else I am always here, andrew@mixergy.com. I want to know about it. But what I found is, that people are really happy when they sign up for them. Super low prices, dependable service, and you could scale up with them as your business scales, hostgator.com/mixergy.
I was like having second thoughts Derek about constantly giving out my personal email address. I’m going to create a directory of all the podcasts you need to be on and everybody else in the directory, we’re talking about Gimlet [SP], NPR, the rest, they all have their professional email addresses, like press@ whatever. I’m the only one in their directory that actually has his really email address because I give it out over here. And I got to the guy, I said, “Can you please remove my email address, because that’s what I use for all my banking and everything.” Then he said, “Yeah, yeah.” But he didn’t do it. It’s out in the wild. But I feel weird about giving a secondary like fake email address. It just feels disingenuous.
All right, let’s go into press. How did you become this ubiquitous force in tech reporting?
Derek: By actually having the real information that everybody would want to know. And so what we would do is dribble a little bit of information that nobody knew out in the press that the press was happy to report on because they couldn’t get it any other way. And then that created a lot of attention, and brought people to call up our company or to our website. And so, we became the go-to place for the technology press to come to ask their questions.
Andrew: So you started out by finding some interesting stories within all the data that you had, something that would be more mainstream. You went to the media, you showed it to them, they started reporting on it, and over time by doing that you became the resource for them to go to.
Derek: Exactly.
Andrew: And whenever they wanted to know something they would come to you. But you were also really good at the sexy stuff, like iPhone comes out, you know, people are going to wonder how much money Apple’s making on it, and so you start to get that kind of data. That’s not your bread and butter though, right, figuring out what the cost of an iPhone is?
Derek: Well, actually it was part of our bread and butter. We had an entire division that did nothing but tear down one piece of equipment every day, a different type of piece of electronics. We needed that to actually get our internal models accurate on how much of which type a piece is in which equipment, made by which company? So we can tell you that Hewlett Packard, you know, makes blank many this model and of that model, and inside those models are these parts.
And people just sucked up that information, because if you’re selling those parts you want our reports to figure out where you’re not going . . . you know, who your competitors are. And the companies that made those products, one of the reports on all their competitors’ products, and the press wanted to know what the bottom line costs were. And so, we got to repurpose that information to all these different audiences for different price points.
Andrew: I always wondered how you knew. How could you know not just what a hard drive costs, but what it would cost Apple to buy it, the deal they would have with their suppliers?
Derek: Our company’s expertise came from people who actually operated as the product managers in the industry. So, if we had somebody that was saying, “Hey, here’s the price of memory,” those people came from high level positions inside memory companies, and they knew all the pricing models. And so, they knew that on average Apple’s memory cost would be 22% less than the average cost reported to Wall Street.
Andrew: Because of what, how would they know that?
Derek: Because they would understand how the cost would build up for those products, and therefore how the margins, the profit margins . . .
Andrew: Because they would know what it cost to produce the product, they could then estimate what Apple would pay for it?
Derek: Exactly, and they knew how much R&D, what yield issues Apple’s products would face relative to those bought by Samsung. So we had an in-depth understanding of the cost buildup of each of these products.
Andrew: Because they work for the manufacturers, is that what it is?
Derek: Initially because they work for those manufacturers. But then what happened was that as we built more and more data on more and more products, we created a complete picture of all the economics of the entire value chain of the electronics world. So, from a dollar being spent on whatever product, we could take it and extract where that value went and flowed through the entire world chain of manufacturing.
And then when we had that information, we could see things happening that companies were considering super-secret. So for example, when apple switched from hard drives to electronic memory, all electronic memory, we could see that there was this, a price distortion and this disproportionate flow of products going into Asia for this product that didn’t make sense. And we were able to, you know, surmise that only Apple could be buying that much product.
And so we went public before Apple did about, “Hey, we forecast that Apple will be switching over on the type of memory that they’ll be using.” Well, that caused a huge fear, and then then that moved stock markets around the world.
Andrew: What happened with the dilution of stock options for you?
Derek: At what point are you talking about?
Andrew: You know what, I didn’t know anything about this, but our producer basically checked in with you and wanted to understand what was the lowest point for you as an entrepreneur. And you said, “Is it 30 to 1 stock option dilution?” Stock options diluted, do you remember that?
Derek: Yeah. And so that was what we had already talked about, was that there was that low point, was when I realized that here was this portion of our business of helping people manage their inventories that had proven itself to be working. And we got to the go ahead to go global. And to move forward we would have had to sell, you know, more than 90% of the company.
Andrew: Okay. But that’s . . . So you didn’t end up having that dilution? You didn’t end up having to sell?
Derek: Correct.
Andrew: Okay, got it. You know what, as I was searching for what to say, I said, “Did he just have like he’s stocked diluted? Did he do any of these?” I couldn’t find anything about it. What kept coming up as I was doing searches on sec.gov was other people’s stock reports, other publicly traded companies’ stock reports with references to data from iSuppli Corporation.
Derek: We were the gold standard. We were so much more accurate. We had so much more information . . . everybody. So we had built ourselves up in to being the gold go-to standard that everybody had to use us.
Andrew: Why did you sell the company if you got to that degree?
Derek: So, ultimately, we weren’t for sale, and IHS came to us and said, “Basically, we have to own you. Your information would fit so beautifully with ours, and we’re bigger than you are. We need to own you.” And I said, “We’re not for sale.” And they said, “Well, basically everybody has their price. Tell us what you would consider to be a more than fair offer?”
And so, yes, it had a price that’s fully represented our profitability and how fast we were growing and the like. But also, would create opportunities for the team that we had assembled. So, I said, “Look, if by buying us you could invest more than I ever could in growing this company so that our people had more opportunity inside your company than they would working for me, then that would be fair, that would be me making a decision that would be in the best interest of everybody on the team.”
And, IHS is a very honorable and smart company, and they came and said, “Okay, well, we’re going to invest $100 million with you, and then we’re going to invest another, at least $100 million in creating a division around your company.” And I couldn’t compete with . . . I couldn’t, you know, invest another 100 million, and I wasn’t . . .
Andrew: So it made sense.
Derek: So it made sense.
Andrew: How did your life change after you signed that agreement?
Derek: Well, so it changed in a completely unexpected way. So, that announcement was made in let’s say October, and the company was sold by the end of the year. And shortly in the New Year, in January I got a call from Princeton, unexpected saying, “We want to expand our entrepreneurship offerings, and students are extremely interested in it, and we would be looking for somebody with exactly your background. Would you be interested in coming to Princeton for a year and seeing if you like teaching?”
And that caught me completely off-guard, because that’s not exactly in your normal career path after selling a successful startup. But I had two grown sons living in New York City, and so my wife said, “Wow, this would be great to move, to be closer to them.” And I thought it would be fun trying to teach, and so I accepted that.
Andrew: And you’re teaching in the School of Engineering and Applied Science, right?
Derek: I am. But the program that I teach in is for the entire campus. So I have students from every single major on campus.
Andrew: It’s called entrepreneurial leadership?
Derek: That’s one of the classes that I teach in.
Andrew: Okay. All right, and of course you teach in your books, and I should have mentioned in the intro your website, where is it? dereklidow.com. How do I do on pronunciation of your last name?
Derek: Excellent, excellent.
Andrew: Oh, good.
Derek: That dereklidow.com is one word, dereklidow.com.
Andrew: And what you can get when you’re on there is to learn from an entrepreneur who did it, who built up a company to over $100 million dollars after giving up his role in a major publicly traded company. What were they, a $2 billion company at the time that you left?
Derek: Yeah, exactly.
Andrew: All right, go check it out. And of course the book is “Building on Bedrock.” I want to thank my two sponsors for making this interview happen. The first will host your website right, it’s called HostGator. And the second will help you hire your next phenomenal developer, it’s called Toptal.
Derek, how is my voice sounding? I feel like my voice is sounding very tired. I’m not getting enough sleep? How many hours of sleep did you get? Do hear it in my voice?
Derek: A little bit, it’s softer than usual, and I don’t know why.
Andrew: You know what, I was at a conference. I got a beautiful suite at the Fairmont, and even the nights when I wasn’t in the suite I was a nice hotel room, I just couldn’t sleep away from home. I think I need to just be next to my wife. I finally got home, I’ve been sleeping better.
Derek: Well, that’ll do it. And I know I have that same problem.
Andrew: I can’t believe it. It feels like a little bit of a weakness. I should enjoy the big bed, doing what I want. No, it didn’t work. All right, Derek thanks so much for doing this. Thank you all for being a part of it. Bye everyone.
