Before we get started, do you know how I’m ensuring that I get paid? By using FreshBooks. FreshBooks helps you save time, get paid faster, and look professional. One of the best things about Fresh Books is that getting started is completely free. And here’s a really amazing thing that they’re doing for Mixergy viewers. They’re giving away a birthday cake every day to a viewer who signs up for a new account. All you have to do for a chance to get your birthday cake is sign up for a new FreshBooks account and enter “Mixergy” in the “how did you hear about us” section when signing up. The cake is a great incentive, but do it because with FreshBooks you’ll get paid faster.
Next who’s the lawyer that tech startups trust? Scott Edward Walker of Walker Corporate Law. But don’t take my word for it. Check out what Neil Patel founder of KISSmetrics said about Scott. “Scott is a great lawyer. He is affordable, responds fast, doesn’t charge you for a five minute phone call, and always gives great advice.” Walker Corporate Law.
Finally, if your friend wanted to create a store online, which platform would you recommend? I recommend Shopify. Shopify stores look beautiful and they increase sales. So if you know anyone who wants to start a store online, tell them to check out Shopify.com.
Andrew: Hey everyone. It’s Andrew Warner, still very hoarse from South by Southwest and still founder of Mixergy.com, home of the ambitious upstart. Mixergy of course is probably the only place where you can get in-depth interviews with bootstrap entrepreneurs who are willing to tell you how they did it and teach you so you can go out there and build your own companies.
Joining me today is Joshua Baer. In 2006, he sold two companies that he bootstrapped, and you’ll hear in this interview the story of how he did it and maybe even what he sold it for. You’ll also hear why he’s moved on to investing in others companies through Capital Factory, an early stage accelerator program for tech startups that provides a small amount of seed capital and weekly mentoring sessions.
So Joshua, welcome to Mixergy.
Joshua: Great, thanks for having me Andrew.
Andrew: So the focus of this interview is about how you built those two companies and sold them, but I know that you’ve got a pressing desire to tell people about Capital Factory because there’s, at the time that I’m publishing this, there will be a looming deadline coming up. So let me make sure you get that out there clearly. What’s the deadline and what’s going on?
Joshua: Thanks. Well, the deadline is March 27th, so it’s a little under two weeks away and looking for great companies and great entrepreneurs to work with who want to come to Austin for the summer. You don’t have to be here. You don’t have to stay here. You just have to come for the summer and work with our 20 mentors. All of us who have built and sold one or multiple companies, some are bootstrappers, some have taken companies public. And really we just want to get our hands dirty and dig in with great entrepreneurs to help really get their business pointed in the right direction. Usually that either means one of two things. It means helping them get towards cash flow positive so that they can run on their own and grow and have a lot of choices at the end of the program, or patching them up and getting them ready to raise their first run of funding.
Andrew: Okay. Capital Factory. We’re going to come back to it and I’m going to ask you questions like why are you investing money in companies when you were able to build these two great companies without getting outside investments?
Joshua: Great question.
Andrew: And also find out what people need to do in order to get an advantage when they’re applying for Capital Factory, because I want my audience to have an advantage over anyone else who’s applying with you. But with my weakened voice, I will go back to the original story. You created these two companies and you sold them all at once. I said maybe you’ll tell us what you sold it for? Are you open about that?
Joshua: I generally don’t, and it’s more just because I don’t . . . I find focusing on dollar amounts just can sometimes attract the wrong kind of attention. But it was low eight figures. At the time, due to the nature of the timing of when I did it, I ended up really being the only shareholder. I bootstrapped it, I grew it through the dot com crash, and so most of my employees didn’t want equity. They wanted just to get paid as much as they could. And so it wasn’t a huge deal but it was huge for me.
Andrew: Wow. All right. So low eight figures, over $10 million. All of it your business. That’s an incredible story. I’ve got to find out how you did it. Going back to, let’s see what the first . . . I wasn’t able to find that much research on you, and I’ve got to tell you it’s because back then the Internet didn’t have much data on people as it does today. I can go back and do a search on Google for all articles containing your name from 1996 to 2001, and it will show me maybe three. It will show me hardly anything. Today if you launch a company, there’s already, I think, the day you launched, ten articles written about you. So we’ll have to fill in the gaps together. 1996 when you launched SKYLIST, the first of these two businesses, what got you to launch the business, where did the idea come from?
Joshua: You know, it wasn’t some big idea. I always kind of expected to be an entrepreneur. As I look back in my family, I’m surrounded by entrepreneurs. I knew I wanted to run my own business and be independent, but I didn’t really know what it was going to be. But I was really fortunate to be going to school. I was studying computer science at Carnegie Mellon. I was there form ’94 to ’99. While I’m sure everyone has different perspectives, from my perspective, the commercial Internet, the Internet people were using to do business on and make money was just exploding all around me. I remember my freshman year was the year that Netscape, Mozilla, that it was version 1.2 which I thought was like the first version that actually worked. Images loaded properly, you could use it. It was a really unique time because of all these technologies coming out nobody was an expert at them, nobody had been doing them for a long time because they were brand new. And so I could go and learn about them and teach myself on the Internet like everybody else was and know as much about them as anybody else. And so at the time my freshman year . . . it was back before beta programs were free. Netscape was one of the first free betas right? And so as a young, poor, computer science student, I wanted to get my hands on software that I could use and I couldn’t afford to buy any of it.
So I would apply for every different beta program out there, and I applied for this web server called WebSTAR that was the top web server on the Mac at the time. And of course everybody was applying for that program, and so I got rejected because I had nothing to offer this. But at the same time I was applying for WebSTAR, there was another program listed right next to it called ListSTAR. I didn’t really know what it was or what it did, but I was applying for anything. So I signed up for that one to, and that one was an e-mail server. It was a visual e-mail server, kind of like a Majordomo or Listserv, but very customizable using kind of visual flow charts. So not as many people had applied for that. That wasn’t quite as sexy as the web server, and so I got accepted.
So I get shipped this piece of software, and I’m like what do I do with this? I start playing with it. I set up a server. I start hosting some e-mail lists, and sending some things out. I started participating in their online forum. They had an e-mail Listserv where the customers talked about it. And me being a college kid with more time than money was answering a lot of people’s questions and just poking around and doing interesting things with it, and very quickly they asked me to be [inaudible 07:21] intern. To keep doing that, to answer questions on the forum and to do some custom programming and things on the side to make the product better. One thing led to another. Customers would call that company and ask for custom work for customization which they didn’t do. So one day they said, “Hey we don’t do that, but we’ve got this college kid that’s an intern, and I bet if you buy him some pizza, he will do that for you”. And those became my first little e-consulting clients, where people would hire me, you know, 20 bucks an hour to do some consulting work for them to help customize it.
Then one day one of those customers came to me and said, “Hey, you know, every time my server breaks, it’s a big pain for me. It’s not even so much the money of paying you to fix it. It’s that I don’t want it to stop working.” From his perspective, my server that I ran always worked. It worked all the time. He didn’t have to worry about it. So he said, “Hey, instead of me paying you every time my server breaks, how about I just pay you 50 bucks a month and you run it on your server and you keep it running all the time and then I won’t have to worry about it?” Me being an optimistic college kid, I’m thinking, “Hey it’s never going to break. I’m going to get paid 50 bucks a month for doing nothing.” I think I was probably hosting it on the college network at the time. I had no expenses. That was the beginning of SKYLIST, which was an e-mail hosting service, where we could host people’s discussion forums and e-mail lists and newsletters, and it just grew. Because I was in school, I had very little expenses and I was able to just grow it organically.
So I had that one client, and I kept on answering people’s questions and participating in online forums. Almost the equivalent of answering questions on Twitter today, except it was groups and news groups and list serves and things. Through that I would organically generate more and more hosting clients to the point where, when I graduated a few years later, I had a business that was doing, it wasn’t a huge business, but a couple hundred thousand dollars a year in revenue and a few big clients. Our biggest one at the time I think when I graduated was we were sending all the e-mails for Dummies.com and CliffsNotes.com, which was like the Internet for Dummies, This for Dummies, That for Dummies. They were both published by the same publisher.
We had a number of clients. We were doing some real revenue. It was me doing most of the work with one or two of my friends working for me part time. But I was in a position at that point where I didn’t have to go take a job. It was big enough that it could sustain itself and I could bootstrap it and grow it from there. I think, like I said, it wasn’t some big idea. I was really fortunate to just be in the right place at the right time and have someone offer me to pay me to do something that I wasn’t expecting. Also, I didn’t have any expenses. I didn’t have to pay my rent. I didn’t have pay for myself. I was in college and that was a great time to be able to bootstrap this, be able to get it going so that by the time I did graduate it was big enough to support me.
Andrew: I don’t know what to make of these stories. When an entrepreneur comes on and says, “Hey things just happened. Someone offered to pay me money. Then someone else offered to pay me more money, and before I knew it, I had a living and before I knew it I ended up with a killing.” Would it have happened if this guy didn’t come to you and ask you . . . do you think you would have been able to make it if this guy hadn’t come to you and said, “I’ll pay you 50 bucks a month,” and if you hadn’t entered and gotten accepted into the beta program?
Joshua: I like to think so. I think that if it hadn’t been that guy, I do think it would have been somebody else.
Andrew: Okay. So if it hadn’t been him, it would have been someone else. Then it’s something about you. What do you think it was about you at the time that would have lead you here roughly to where you are today, maybe down a different path, but still in the same place roughly?
Joshua: I’ve been super fortunate. I’ve had so many great mentors. I had so much luck. There have been so many times along the way where I could have imagined everything collapsing and falling apart unfortunately. There are a lot of things that were outside of my control that, like, fortunately didn’t squash me. But at the same time, I also believed that you can create luck, and you do that by working really hard, by spreading the good stuff around, by doing good things for other people and hoping that those things come back, and by being smart about what you do. So while I didn’t have some great plan and I didn’t know exactly what was going to happen, I was busting my butt. I was working on lots of different things, I was communicating with a lot of different people. I was learning about a lot of different things and putting myself in a position to take advantage of the luck when it came. I think that worked for me.
Andrew: Now you’ve given me a bunch of quotes here that I can come back to you with and dig in deeper to understand how you got here. I’ll start off though with something that’s not a quote. I want to understand how you got the second, third, and tenth customer. The first one comes to you and says, “Hey, build this for me or you maintain my e-mail server”. How did you get the rest after that?
Joshua: Looking back, it was really just simple social media. You didn’t call it back then. Just like we didn’t call it cloud computing, even though it really was. It was a hosted service in the cloud. Back then, we called it application service provider. But similarly, it was social media. Just like again today people build businesses by going out and helping other people, finding them on public forums, answering questions, being helpful, and then building a business out of that where people then come back and ask you for more help and for more things. That was very much how I built SKYLIST. I went out and I participated in online forums, but like I said then it was things . . . Yahoo groups didn’t exist yet, but it was private listservs and majordomos and Usenet groups. I would look for people talking about the types of problems I was interested in and I could help with. I would generally try to answer the easy questions for free online and give out some value for free, help some people. And they would see that I was smart, that I was helpful, and that I could probably help them with other things.
Inevitably, they would come back, and even often they would write to me off the list and they would say, “Hey, you know, I’ve got this other big problem. Would you mind helping me out with this? Can spend some time with it?” About half the time, they would expect to pay me for that. They would come in saying, “I want to hire you right away,” without me even asking. And other times I would have to say, “Hey that’s going to take quite a while. That’s going to be a couple of hours. I do do some consulting and would you be interested in hiring me to do that?” Those customers naturally grew into hosting customers. Then my e-mail signature had said, “I can host your e-mail list,” and those would naturally organically grow. I think it’s just like what people do on Twitter today where people go out and you set up your hash tags and your searches and you look for people talking about the things that you’re engaged with. You don’t be spammy. You don’t just push your things on them. You be helpful. You look for people asking questions and you answer the questions, and that can build a business organically.
Andrew: Okay. Once you discovered the format, the formula, for getting new customer, did you starting going in and juicing it? How did you actually go in and juice it? By maybe saying, “This kind of question is probably going to lead to more business and more follow-up information. That kind is someone who’s not going to help me and I can’t really connect with him.” Was there a period where you figured that out and you started going full force into the right channel?
Joshua: I can’t say that I was that sophisticated about it. I was a little more shocked in approach. I just answered a lot of questions. Another thing you find is that that approach doesn’t actually directly scale. I could go do that. I was the CEO and as long as I was answering everybody’s questions, it was great. But that only went so far. Then the next part of our growth strategy, since we didn’t have money to be spending on advertising or marketing or things like that, was really around partner channels. Finding partners that we could work with who already had customer bases that we could help and they felt we were helpful to them and they could help us get in front of their audiences.
Andrew: Was it already “we” when you started going after partner channels?
Joshua: Yeah, it was.
Andrew: So let’s talk about before we. We understand how you got the first customer and the first few customers. What’s the next thing you did after answering questions that helped you get more customers?
Joshua: I think at that point I realized that this was a business that I wanted to grow, wanted to scale. So I was really, especially with my early company and it’s funny because I don’t take this approach anymore, but with my first company, I was always focused on trying to be prepared for the next step, because I didn’t know what that was going to be. I didn’t know where it was coming. When we were a one-person company, I was trying to put the structure in place to allow us to be five-person company. When we were a five-person company, I was thinking about, ‘Okay, how do we make this a 10-person or a 20-person company? What additional process and structure do we need to have? What do I need to document or codify so that we can grow this?”
I was definitely the kind of person, particularly coming in with a computer science degree, where I wanted to do everything myself first. I wanted to learn it myself, document it, figure it out, and then hand it off to somebody else. As the business grew, that was kind of the typical MO. Everything new I would go do first. Now, again, that’s helpful and useful, but doesn’t scale. One, if you want to grow quickly, that can really slow you down. You can’t do everything yourself. Two, you learn to hire great people with experience that can come in and add their own value.
Andrew: What’s one of the processes that you put into place when you were just one person and imagining yourself, at some point in the future, being two, three, five, and more people?
Joshua: I think the first obvious thing was customer service. Right? Started to create templates and documents around how do we respond to customers and deal with the common issues that come up. That was one of those things that overwhelmed me. “Wow, I’m trying to grow the business. I’m trying to develop new products and go out and help do things that drive in new business, but I have all these questions coming into me from existing customers.” My e-mail box is filling up at the end of the day with people that we need to be responsive to. So in order to enable someone else to answer those questions, I had to go through and document and template the different types of answers and create an escalation process.
Andrew: I see, okay. So that’s one thing. Was there anything else that you did? Maybe around customer growth?
Joshua: At the beginning, I don’t know if I should be embarrassed or not, we weren’t that smart about that. It was very organic. It was very much me going out and just continuing to participate in these online areas and causing these inbound leads to come in. I was really the main salesperson dealing with those. I had a lot of trouble hiring salespeople. I would try to hire a salesperson and I would still end up doing all the work and they wouldn’t, I didn’t feel that they weren’t really adding value or being effective. It took me a long time to figure that out, and then eventually we did and then that’s where we really entered a whole new era, when the sales organization was able to scale itself.
Andrew: I see. When you left school and it was time for you to – I’m looking now at my notes here – and it was time for you to pay your own rent and pay your own way in life, the business was already, you said, profitable enough that you can count on it for a salary. What size revenues were you doing at that point?
Joshua: This is off the top of my head, but I want to say it was probably in the $200,000 to $300,000 a year range.
Andrew: Really and that’s within what time period? How long since you launched?
Joshua: I guess probably two or three years.
Andrew: In two or three years, you left school, you did $200,000, $300,000 somewhere around there. What were your expenses?
Joshua: It was enough to pay all my bills and pay for myself and still hire a few people to help out. We weren’t putting a lot of money in the bank or anything. Any money we’d make we’d pretty much instantly invest back in the business, in some kind of growth. But yes it was enough that I think of it as a small business.
Andrew: I remember when I was in college and I had this door-to-door food selling business. When I did a few hundred dollars a day, I was flying high. I couldn’t contain the excitement. What was it like when you hit a $100,000 while you were still in school?
Joshua: It was great. I was really having a lot of fun. I could always buy a keg of beer on the weekends for our friends or for the fraternity house and that was nice. It was nice to be able to feel very independent. My senior year I moved off campus. This business was growing. We rented a house. I had the servers in the basement of the house. We had a fractional T1 line coming in. I could buy a car. I could do a lot of these other things that made me very comfortable and efficient as a college kid. Other than that, it still felt really hard. It didn’t feel like I had made it yet or anything.
Andrew: Be honest with me. Were you showing off about it at dates? I know I would have.
Joshua: No, I was more the guy . . . in our fraternity house, the party would start at 10:00 and everybody would be getting kind of warmed up at 9:00 or 9:30, and I would work until about 11:00 or 11:30, with the door open and everybody partying all around me. I would feel like I was in the party but finishing my stuff up. I would usually be the one they saw still working, and then I would come down and get my party on late night.
Andrew: Why? Was it a part of you that wanted them to see that you were still working and then have something to ask about? Were you shy about going into the party? Why were you working with the party still going on right over your shoulder?
Joshua: I don’t think that it was either of those things. I think it was honestly just that I was more excited about finishing up the thing that I was working on and felt a real need and drive to do that. It was a fraternity house right. We partied till 4:00 in the morning.
Andrew: I see. It was time.
Joshua: I could start at 11:30 and still have a good night, right? At the same time, to me that was like having the best of both worlds. If I am going to be working on a Friday night, at least I am surrounded by this fun environment, and people would still stop in and say hi to me and I could . . . it’s not like I would never take a break. Sometimes maybe at 10:30 . . . I used to say in college, I would take a 15 minute break and get an hour’s worth of partying in. Close my door, run down stairs, hang out with people for a bit, and then go work for another hour.
Andrew: All right. It’s a little off topic, but did you have a long-term girlfriend while you were building the business or were you dating?
Joshua: Yeah. Particularly my kind of senior year, I probably had a girlfriend for like a year and a half or so that was pretty steady and consistent and . . .
Andrew: Let me ask you this. Senior year you’ve got this business going on. You’re in a fraternity where there are parties going on. You’ve got school still. How do you maintain a relationship while you’re doing all that?
Joshua: Well, it’s the same question now. I’ve got a wife and two kids and I’m trying . . .
Andrew: So how do you do it?
Joshua: I think everyone’s got to find their balance. I don’t think it’s one thing. Some things that maybe help the balance like I not particularly into sports. I don’t spend a lot of time watching sport games, which some of my other friends were doing. I don’t really watch TV. So there are some different tradeoffs that you make in order to be able to spend time on the things that you want to. I think I do a good job finding things that are synergistic. My girlfriend would come over to the fraternity party and we’d party at the fraternity party and I would kill those two birds with one stone. You just have to find that balance. I will say, it’s funny in hindsight, my fraternity brothers made fun of me a lot. Not in the way fraternity brothers make fun of everybody. But it was always like, “Why are you working? Why aren’t you partying? Come on down. Oh you work all the time.” Then I remember them . . . oh, I got made so much fun of, because I created an e-mail list for the fraternity so we could e-mail each other. It was like, “Oh why are you doing that? It’s just good enough to post it on the wall.” Now like 15 years later, 20 years later, that e-mail list is still there and actually is the main way that everybody communicates with each other now and it’s not so silly anymore. But I got a lot of flak for putting that together the first time.
Andrew: I wrote down one of the quotes that you had earlier. You said, “I was busting my butt.” And I said if I don’t allow you room to talk about that and all I do is leave my audience with the impression that you lucked into this business, you partied while you were building it, and life was good throughout, I think I’ve given them a skewed view of what really happened here. Describe how you were busting you butt. Tell me about some of the tough points.
Joshua: Sure. In the college days it was . . . again, I feel like I have been so fortunate my whole career. Even when I’m busting my butt, I am usually doing something that I think is fun and interesting. There’s very little, “Oh, this is terrible.” Slogging away. It was just continually going out and teaching myself new technologies, learning about things, trying to do things. A lot of failed experiments, a lot of throwing things against the wall and not having them work. I remember the summer of my junior year, I think it was, I wanted to move from this service business of a hosting business. I really wanted to release a product, and so I built a small add-on tool that allowed you to customize the product in some way. I set this goal that for me was a BHAG, a big hairy audacious goal at the time of I wanted to make a $100,000 selling this product over the summer. I didn’t know how I was going to do it and I didn’t know why. But I knew if I did that, that would be a measure of success. That would be a good thing and I would learn a lot from that and that would help me grow my business. I was not able to do that, but I was constantly thinking ahead, setting those kinds of goals and trying to find out how can I do different things, how can I grow it in different ways. As far as the . . .
Andrew: What did you get out of that? I want to stay with that before letting you continue. I’m sorry to interrupt. But that’s inspiring to say, “Over the summer I’m going to make $100,000.” And you didn’t do it, but it sounds like you stretched right and you were able to do more than you could before. How and what were you able to do?
Joshua: Well, this particular product was . . . there are so many lessons along the way right? It had a terrible name. It wasn’t in a really big market.
Andrew: This is a different product from SKYLIST? You had this idea for a different . . .
Joshua: Well, no it was an e-mail add-on tool. So I was hosting products using ListSTAR and so I didn’t write ListSTAR. It was a product I bought a copy of and would run on my server and then rent it out to people. This was an add-on product on top of ListSTAR that allowed it to do some additional functionality. It had a terrible name. It added headers and footers onto the e-mails to customize them. So the name was HSKT, which is obviously terrible by itself, but it stood for Head Shoulders Knees and Toes, which was terrible, but I was a college kid trying to be cleaver. The market was very small. There weren’t a lot of people using this product. People did need it, but it wasn’t easy for them to find it. I didn’t know how to market it. There are all these things I did wrong along the way, and so it didn’t work. But in hindsight, I feel I learned a lot from that. I can look at all the different ways I’ve done things since then to improve it.
Andrew: What did you learn? What’s one big thing?
Joshua: It was my first, “Oh if you build it, everyone’s going to come,” kind of let down. Oh, wow, there’s a lot more to taking a product to market then coding it.
Andrew: I see. By the way are you standing up as you’re doing this interview?
Joshua: I am.
Andrew: You are? Do you stand up as you work?
Joshua: Yeah. I’ve a standing desk. I do have, as you can see here, a table where I meet with people and I’ll sit down often during the day for a short meeting, to sit down and talk to somebody, and then usually the rest of the day I’m standing up and moving around.
Andrew: Interesting.
Joshua: And part of it is just ADD, like, I’m a fidgeter. Even when I had a sitting desk, I would find myself not sitting on a chair but standing over it. Kind of looking at the laptop and so this is a lot more comfortable. I think in the end it’s healthier, and it just gives me some good ability to stand up, sit down, move around.
Andrew: Our mutual friend Jason Cohen, who works with you at the Capital Factory, when he did an interview with me I think he was standing up too and I didn’t get around to asking him. Does he do the same thing? Is this a Capital Factory thing?
Joshua: I wouldn’t say it’s a . . . I mean, a couple of other employees do do it. Jason has a desk over here. I haven’t seen him doing it here, but maybe he does it at home.
Andrew: Maybe. All right. So you tried this Head Shoulders Knees and Toes. It didn’t work but it taught you that you really need to market stuff. People aren’t just going to find you. I see how that’s a setback. But I’ve got another quote here that I wanted to come back to you and ask you about where you said, “Everything was collapsing.” That’s not the big “everything was collapsing setback.” What was?
Joshua: I’m trying to get myself back to where we were talking about that. There were times along the way where it felt like things might collapse. I don’t know if it was that everything was collapsing.
Andrew: Okay. Right. This is we’re still sticking with SKYLIST, which is your e-mail service provider.
Joshua: There were many times along the way where I thought it was all going to fail. There’s no way I could make this work
Andrew: Can you think of an example?
Joshua: Yeah, many of them. But one, certainly the competition. We were a bootstrapped company. There were big companies that were well-funded that we were competing against, that obviously had a lot more talent and expertise and resources and trying to figure out how we could be successful against them. Early on, we had a partner where we were reselling their product, and we really depended on them and it quickly became clear that while at first they really encouraged us to build a business doing that, that eventually they saw it as competitive and really didn’t want us doing it anymore. They started to change their pricing structure and other things in ways that really made my business very challenging, made it very hard to . . . I didn’t know if the economics were going to work out. Interesting enough, that caused us to go write our own software. Instead of using theirs, which I never would have done if they didn’t put the screws to me on the pricing and made me feel like I had to. Then we ended up creating our own product, which we got a much higher margin on, which gave us some unique advantages, ended up really creating a lot more value from that than from the pure hosting part of it. So they forced us into it, but I thought it was going to kill us when it was happening.
One other example is when we went from contractors to employees. I started out and I was hiring my friends around me, and I just made them all contractors. I didn’t know any better. I didn’t want to have to deal with payroll taxes and all of these other kind of things. So I would hire people as contractors. Then at the point where right after we graduated, I moved down to Texas, I brought five or six of my friends from school back down here to work for me. We had a number of people. They wanted health insurance. It became clear real company we were a real company. We needed to have employees. I went through part of the process, but then I didn’t start paying my quarterly payroll taxes. I should have known. I brushed over it. I didn’t want to know. I assumed I’d deal with that at the end of the year, which would have been terrible too. Then, what do you know, suddenly I owe the IRS $100,000. To me, at the time, that just seems like a huge amount of money. I was like I’ve never owed anybody $10,000. Now I owe the IRS $100,000. I’m thinking, “Are they going to come bang my door down? Are they going to take things away from us? This is terrible.” It really made me sick to my stomach and really worried me. In hindsight, what I’ve learned is that actually wasn’t that big of a deal. There are lots of companies that owe the IRS $100,000. They’ll put you on a payment plan. They’ll let you pay it off over time, and it wasn’t actually a big deal. We were able to pay it off, get our stuff in gear, make sure we’re paying our things properly, and now it’s not an issue. But at that time, when I first got that notice from the IRS that said, “You’re in big trouble. You owe us $1000,000,” I thought it was over. I thought I’d let everybody down.
Andrew: How did you get it back together again personally, internally when you were feeling that way?
Joshua: There was definitely some soul searching. It makes me think back. There was a book that I was introduced to by David Rose from the New York Angels called the “Hypomaniac Edge.” It’s a book about entrepreneurs. I don’t know if you’ve heard of it. It’s basically this theory that many entrepreneurs are hypomaniacal, which is kind of crazy. Not crazy enough that they’re dysfunctional. Actually crazy enough that it works for them. But part of the features of that is often actually having a lot of mood swings, having some really high highs and some really low lows. That was a really low low for me. There were a couple days where I was really depressed. I kind of holed myself up in my house. I worked from home for a couple days. At some point, you’ve got to pick yourself up and move on and figure out how are we going to deal with this. Then I learned that actually there were steps to take. It wasn’t like I suddenly had to come up with $100,000 in a week or two and that there were options on how to deal with it and it wasn’t that bad.
Andrew: I didn’t notice any hesitation as you were telling us that you were a little depressed. It sounded like more than a little depressed and you were holed up in your house. Why not? Aren’t you a little afraid that maybe someone’s going to hear that and say, “The guy is running OtherInbox.com right now. He’s running Capital Factory. What happens if things go bad and he gets depressed again?” Or maybe judge you in some other way.
Joshua: No. I mean, I wasn’t holed up for weeks. It was a couple days. People go through cycles, and I’m pretty confident in my track record, what I’ve done, and people know I work really hard. That doesn’t really worry me.
Andrew: I’m really glad that you did that because we all have those lows, and I feel that it’s hard to get people to talk openly about them and because no one does, or rarely do people do it, we give the audience the impression that there are superstars out there who never go through these periods. There are superstars out there who never have these big setbacks, and if we’re going through those periods, then it must mean we’re not one of those superstars.
Joshua: Yeah. It’s so not true. There are so many times where I don’t know what’s going to happen and I don’t know how it’s going to work. Like I said, I’ve been very fortunate and things have worked very well for me, but I’ve had lots of setbacks along the way, lots of things that didn’t work. This is another interesting point. My first company, and Jason’s as well, Jason Cohen, you mentioned before, we’ve been solo founders. We’ve also had partners. With my first company, I was a solo founder and that made those times much harder. One of the biggest reasons why I think now even though I don’t need to have a co-founder if I do a company because I can fund things myself, I’ve had some success, I can pull together a team, I want to have a co-founder because I don’t want to be going at it myself, because it’s a really hard journey no matter what. There are a lot of ups and a lot of downs, and it’s really important, I think, to have someone else to lean on, someone else to be going through it with. That’s to me one big reason why I prefer to have a co-founder.
Andrew: Someone else to sometimes just expect you in the office by a certain time or expect you in the office at all. Otherwise, if there isn’t that expectation, you’re staying at home. Let’s see what else I’ve got here in my notes. I wanted to come back and ask you about the hires. Who was the first person that you hired?
Joshua: The first person was a customer service person. That was the immediate thing I could take off my plate and help with.
Andrew: Was this a friend from college?
Joshua: It was. It was one of my fraternity brothers living in the same place as me.
Andrew: What was it like to hire a friend of yours and suddenly be their boss if only for part time?
Joshua: I was really in denial for the first couple years. I did not allow anyone to use the word boss. That was a no-no. It was this weird balance of working with my friends and ending up hiring a lot of them. Also, many of them were fraternity brothers where the fraternity has its own social structure, its own hierarchy I didn’t want to mess with. At the same time, I actually learned over time that was untenable. You have to have a real working relationship and you can’t be afraid to . . .
Andrew: How’d you learn that?
Joshua: I felt like, in the end, it caused more conflict. It wasn’t clear where things were. That people would abuse the relationship or step over bounds. I’ve had to fire friends, which is a really difficult and challenging process. At this point, many years later, I’m still on good terms with everybody, but I created some rocky roads as we went through that and people had trouble separating friends and business and other pieces. I don’t regret working with my friends, and there are still many of them that I would work with or choose to work with or hire. But I think I’ve learned a lot more how to be careful about it and how to pick the right kind of friends. There are some friends that are great friends but I would never want to work with, and other people that are great friends and I would want to work with them every day. I also think that in general it’s easier to start out as working together and become friends than to start out as friends and then work together. It doesn’t mean either one can’t work, but in general that’s an easier path, more likely to succeed.
Andrew: Why?
Joshua: Because you develop that rapport first. You have a professional relationship and you understand where those lines are and you don’t abuse that, whereas the other way, it’s just easier to abuse it. It’s easier to feel like, as you go into the business relationship, “Oh, but we’re friends.” Maybe something is going to be different. I’m going to be treated a different way.
Andrew: Do you remember when you earned the first million dollars at SKYLIST?
Joshua: I remember celebrating. For us, it was actually . . . we were a cash business, so we didn’t really track that we made a $1 million. It was when we had $1 million in cash in the bank. Another one of my co-founders, Joel Lucas, he was one of my lead developers but he was also very close with me watching the finances and the business. We were just watching that number and we’d hold off paying vendors and doing other things just because we wanted to see it hit $1 million. That was some kind of magic milestone for us, that we hit $1 million in the bank. I remember that really well and celebrating that.
Andrew: What was it about that? Did you feel, okay, now I’ve really made it? What was it about it that was worth the celebration?
Joshua: I think a lot of celebrations like that as soon as you hit them, they’re gone and you’re looking towards the next milestone. It’s not like it was some lasting thing. It didn’t actually mean anything. It was just a symbolic kind of . . . that was more money than either of us had expected to see or had ever dealt with. We joked about we’re going to go to the bank and take it all out in a big briefcase and just drive around all day and then go put it back. But there was nothing that significant about it besides seeing a lot of zeroes and feeling like we’d hit a significant milestone, that we’d accomplished something. Then as soon as we hit it, we had to go pay a bunch of people that we owed. Then you just reset for the next goal.
Andrew: That’s strange how that happens a lot. I keep hearing that in these interviews. Did you say that you had a co-founder?
Joshua: A few people that I consider co-founders. To be honest, I didn’t call them that at the time, but in hindsight, they were. I know that they were. Joel, who I mentioned. Another guy, Ian Ragsdale, who I still work with, they were all there from the very beginning and they helped me grow that business and they added a ton of value and I couldn’t have done it without them. I think of them as co-founders now, for sure.
Andrew: You had this business that you launched in ’96. You keep building it up, keep building it up. Eight years later, 2004, you launch something called UnsubCentral. What was the reason for creating UnsubCentral and what was it?
Joshua: Again, this was another one that wasn’t a great big idea. It wasn’t like I invented something or thought something up, but a problem was thrown in front of me, an opportunity and a problem. What happened was I had been working in e-mail for many years and we think back, some of my other early employees, we think back to the early days of e-mail and we call it the Wild West, because there were no rules or best practices, there weren’t laws in place and we had to figure out what the right things to do were along the way. We made some mistakes. Sometimes we’d bring on a customer and realize they were a bad customer, they were a spammer and we had to cut them off. We had to learn how to do that. How do you figure out which customer is bad and which one is not? Ideally how do you do that before they even hire you in the sales process? We had to figure those things out along the way.
Similarly, at the end of 2003, they passed this national law that was the first law to say, “Here’s how you should handle basic e-mail marketing.” It was called CAN-SPAM. I learned a lot of things about laws in that process. This law didn’t really do anything that fundamentally different. Most people that were sending good e-mail were already following the law. It said that you had to put your name on it. You couldn’t lie about who you are. It said you had to give them an option to unsubscribe, which most people were doing. It required you put a physical address on there so that if some reason they wanted to contact you another way, they could. It said you couldn’t do anything deceptive. Really nothing earth shattering.
But one of the things I learned is that a lot of laws, while they’re designed to stop bad people from doing bad things and they can often be effective at doing that, sometimes not, they also create a bunch of obligations for good companies that were never doing anything wrong to begin. They just need to be able to prove that they’re not doing anything wrong, that they’re complying with this law. I think Sarbanes-Oxley and HIPAA are good examples of that as well. There is a lot of overhead created even if you’re not doing anything wrong just to show that you’re not doing anything wrong.
In the case of CAN-SPAM, on its face it didn’t do anything earth shattering, but it created a new requirement around the sharing of unsubscribes across vendors. If you have three different companies that you work with that send e-mail on your behalf, which is a very common situation, if someone unsubscribes from one, you want to make sure they get unsubscribed from the other ones. The law said that had to happen. While it seems obvious, it’s a technical challenge and also a technical challenge to do it in a secure way because you don’t want to be passing around big lists of e-mail addresses that can then be compromised or abused. When this law got passed, I looked at my own business selfishly and I said, “Wow. This is going to be a big pain in the ass. This is going to be a lot of work for me and for my customers. And everyone’s going to have a different way to do it and we’re going to have all these files flying around. It’s going to be very insecure.” I was really concerned about that. Then I realized that everyone’s going to have this problem. Not only is everyone going to have the problem, but wouldn’t it be so much easier for all of us if everyone just did it the same way so that we didn’t have to code all these different interfaces, and so we could make it reliable and secure.
That was the beginning of UnsubCentral. This law was passed in December 2003, and we were able to bring this product to market and launch it in January 2004, really just a little bit more than a month later. We were able to hack out a whole bunch of code from our existing e-mail management system, which already dealt with large lists of e-mail addresses and processing them and comparing them, put that into a separate product that was a standalone tool for giving you a centralized cloud database of your unsubscribes that was very secure and could interface with any different partners that you might work with. I set it up as a separate company because I realized that in order for this to be successful I was going to have to partner with all of SKYLIST’s competitors. It needed to be its own separate thing because they wouldn’t want to work with SKYLIST’s version. They would only want to work with something separate and standard. I had to structure it that way, make it its own company, and then I really had to evangelize and convince the rest of my competitors that yes, this was going to be a separate thing and they weren’t helping me out, their competitor, by partnering with me.
Andrew: And how’d that go at telling with them, “Hey, I know I own both companies but I’ve got two different incorporation documents”?
Joshua: It was a hard sell, but I was successful at it and I was able to show them over time that we weren’t going to abuse it and that it was going to work well and this was going to be a good solution for them. I remember there was one competitor who I was friends with, I liked this guy and we had a good relationship, but he just could never get over it. He would not work with UnsubCentral because he saw it that way. But overall, we were able to get through that and overcome those objections.
Andrew: How big did that business get?
Joshua: Before I sold it, it was doing a couple million dollars a year in revenue. It’s the gold standard for CAN-SPAM compliance, for e-mail suppression. Pretty much everybody that’s doing affiliate marketing over e-mail or any kind of e-mail marketing that would need this uses that as the solution. It’s continued to grow since I sold it and it still is the gold standard.
Andrew: Why would the affiliate business need it more than anyone else?
Joshua: Because inherently in the affiliate business you have a whole bunch of different people sending e-mail on your behalf. That was part of what CAN-SPAM changed. It defined who was responsible for each e-mail, and it defined it in a slightly different way than the industry was dealing with it. One of the key things that it said was if I had . . . say, Daily Candy. Well, Daily Candy’s probably a little bit fuzzier example. But say you have an e-mail list that sends out an offer once a day and if it’s not highly, highly branded for that company that’s sending out an offer for a different company every day, different ad every day, that the advertiser is the one who’s responsible for the unsubscribes, for making sure that works. So the advertiser who’s working with all these different affiliates and before then had taken a bit of a hands off approach like, “Hey, even though they’re sending an ad out for me, it’s not my list. It’s not my responsibility. It’s theirs.” The law said it is your responsibility. I think that was a really good move. It helps follow the money so that the people who were making the most money off it the most were responsible as well for making sure these things complied. That was all happening through affiliate networks.
Andrew: Otherwise that would be a big loophole that anyone could use to send out e-mail regardless of unsubscribes.
Joshua: Right. At the time, the people running the affiliate networks were, “Are you crazy? How can we ever know that? No way. We’ve got our own list. How can we know if the unsubscribes over here for this other thing? It’s unrealistic. It’s unreasonable to ask that.” But from a consumer’s perspective, I don’t think it is that unreasonable. If I unsubscribe from Best Buy, I don’t want to hear anything else about Best Buy. I don’t care who sends it. It was an achievable, solvable problem. It was something we could do. You had to do things a little differently, and that’s what UnsubCentral helps them do.
Andrew: Before I ask about why you sold in 2006, I wonder about the business. Around the time that you launched UnsubCentral . . . no, a couple years before it. We were sending out something like 40 million e-mails a day for our own list, and I said, “We can get in the business of sending e-mail for other people, but deliverability is so hard that even we couldn’t get our own email out.” Once you start delivering for other people who could potentially be spamming or could potentially be making mistakes and not knowing that they’re making those mistakes, then you really endanger your ability to get e-mail in. How did you solve the deliverability issue?
Joshua: UnsubCentral didn’t have to deal with that problem, but SKYLIST did. We had a number of different clients that we were taking on and we had to manage that. As I mentioned, we definitely made some mistakes along the way. Sometimes it’s almost easier to not pay attention to the things when people are paying you lots of money. It’s not that we knew anything bad was happening, but we didn’t have all the safeguards we needed in place to be able to make sure that we knew what was happening right away.
Andrew: You’re saying that at times people took advantage of you and were sending out e-mail that they shouldn’t have?
Joshua: Not just that they took advantage of us, we should have paid more attention. In hindsight, now we know and we developed those processes. It all starts in the sales process. There are all kinds of technical things that you can do to try to make sure that you’re monitoring what’s being sent and you measure everything and you know if someone hits a spam threshold. But the most effective thing we did was learning in a sales process how to target and pre-qualify our customers. How to make sure we were going after customers that were going to be good clients, that weren’t going to send spam, and also knowing the right questions to ask to ferret out someone that was really a spammer trying to sign up for our service.…
Andrew: Even now, even if you ferret out every single spammer, you end up with legitimate people who sometimes make mistakes and send out e-mail they shouldn’t have and then you endanger your ability to deliver everyone’s e-mail. I know they’re all looking at their test AOL account, their test hotmail account, their test everything account to see what’s being delivered. Was there a crisis where you couldn’t get into one of them?
Joshua: I think over time there were certainly some different deliverability challenges early on. It’s not as much of an issue these days as we put the right processes in place. For the ongoing efforts of existing customers who may, like you say, make a mistake, they send a campaign out the wrong way, they try a new way of doing something that has an unexpected response, those are where we have the technical safeguards in place. Things that watch for certain types of thresholds, watching the spam complaints coming back, are able to automatically stop a campaign that we realize is causing a problem, things like that. There are technical safeguards that you can put in place as well to help protect you.
The other thing that was a big trend that started I would say around 2004 was the concept of dedicated IP addresses; having each client have their own IP, and then that way trying to section off and partition their deliverability just to them. That’s something that’s worked fairly well for the past six to eight years and I think does have some advantages. It also brings its own challenges. I think in some ways it was a cop out for the e-mail service providers, for the hosting providers to say, “Hey, it’s not our fault. It’s your fault. You’re on your own IP. That’s not because of the rest of our network.” And it does do that. At the same time, I think that with the developments we have now around domain authentication, what we call domain keys and other ways of authenticating individual users, I think we’re going to be able to move beyond everyone having to have their own IP address. I think we’ll be able to move towards having your own domain name, which everybody has anyway, and that be authenticated and using that to base the reputation off of.
Andrew: As I move here, I’ve got shoulder pain and back pain. I’m not getting enough sleep and I’m doing too many interviews. South by Southwest really did do it. I came back exhausted and then I wanted to catch up on all the e-mail. I’m still looking here at a jam packed inbox. Never mind my problems. We’ve got a goal here. I’ve got to understand the next step in the process. You sold to a company called Datran Media. Why’d you decide to sell at all?
Joshua: That’s a great question. I’d been doing it for about ten years at the time that I sold it, and I remember thinking back, along the way, if you had asked me at any given time what our strategy was and when we were going to sell the company, I would always have said, “Oh yeah, about three years from now.” Basically, I think in hindsight, that was as far as I could not see. About three years, I didn’t know what was going to happen so that always felt like that was where we were going to sell, which really meant I didn’t see any point at which we were going to sell it and I didn’t know exactly how. I had different theories along the way about who might buy it and why. But this really happened very opportunistically. Datran raised a large round of funding. They were a very profitable business. Their venture capital firm was Vantage Point. Vantage Point had just sold MySpace for $800 million and had a big win through that and this was their next big investment.
Datran had a big war chest and they were planning on acquiring other companies and technologies to help them grow, and they were one of our larger customers at the time. They reached out to us. It actually started over an IM conversation where literally their COO IM’d me and said, “Hey, did you see we just raised this big round of funding?” And I wrote back and said, “Great. You guys should buy us.” And they wrote back and said, “Yeah, we should. Let’s have that conversation.” That was the beginning of the whole thing. I didn’t expect to have that conversation. It was an off-the-cuff thing, but it turned out that was why they had raised a bunch of money and they were interested in that type of thing. We started that conversation and I really had to have a heart to heart. Do I want to sell this company? Is now the right time? If we didn’t sell it, we probably would have raised money. We were doing very well, we were profitable, we were growing, and yet it was time to get serious and scale the organization if we were going to take on a lot of these other well-funded competitors.
For me, it really came down to two things. I had what I consider to be a fairly low minimum bar of cash I needed to have in my pocket to make this worth it. For me at the time that was $2 million. I fortunately got much more than that, but no matter what, I wanted to have $2 million in cash because I felt that really changed my life. That gave me a sense of security. It gave me a feeling that if something were to happen to me or my family, I’d be able to take care of myself and do other things. That was my minimum bar. I had to hit that. Then I thought about where are we as a company and where am I in my career and in my life. I’d been working on this for ten years and I’d been bootstrapping it the whole way. I realized that even if I said, yes I want to sell it, it was going to take a year to sell it. Then after I sold it, I’d be locked up for another two or three years as some kind of an earn-out or employee because they wanted me not just the company.
After ten years, it was still three or four years out if I started on it right then, if I started selling the company right then. I knew that I wanted to be a serial entrepreneur, that I wanted to be involved in many startups, that there were other things I wanted to do as well. I also felt every time you do something for the first time, it’s harder and it seems more intimidating. Then the next time you do it, it’s a lot easier. So I wanted to get through the cycle. As quickly as I could ,I wanted to be done with it. I love SKYLIST, it was my whole life, but I wanted to be through it so I could move on to the next thing, so I could be completely through the cycle. I realized that was going to take many more years. If I signed up and raised more money, now it’s probably another five to ten years before I would have an exit and be able to move on to the next thing. For those reasons, I hit my minimum bar and it was that reset of the cycle, the faster I could get through my first startup, the more quickly I could get working on my next company or getting involved in angel investing or other things that I really enjoy.
Andrew: I’ve asked a lot of entrepreneurs about this. What happened when . . . did you get cash or did you get stock?
Joshua: A mix. More cash than stock but a mix.
Andrew: What happened the first time that you looked at your account and saw the cash there?
Joshua: I don’t know if anything happened.
Andrew: Do you remember when it happened?
Joshua: Very similar to the day when we looked and we hit that million dollar mark. You’re definitely checking. Did the wire transfer come through? Did the wire transfer come through? Wow. There’s the wire transfer. The coolest thing about it, the first thing that did happen and one of the coolest things parts of it is that I wrote out a million dollars in checks in bonuses to my employees, to people that had worked with me. I didn’t have to, but, again, due to the nature of it, most of them didn’t want stock options. I was the only owner but obviously a lot of people helped me get there along the way them, and I wanted to reward them as well and that was really a fun, great experience. Pulling out my checkbook and writing out a million dollars worth of checks and bonuses out to other people that helped.
Andrew: I’m feeling a tingling right here as you say that, right here in my temples. So people who you didn’t have a contractual obligation to give money to, beyond their salary, you gave a $1 million bonus to?
Joshua: Yeah.
Andrew: Wow. Why?
Joshua: It was the right thing to do. While there was no commitment, there were one or two key people who I think certainly had some expectation that they should be rewarded and they seemed justified. They didn’t have any contractual relationship. I’d asked them many times along the way, “Do you want equity or do you want to get paid more money?” They always said, ‘Pay me more money. Pay me more money.” It was right after the dot com crash and nobody wanted stock. But at the same time, how could I not recognize that so many other people had helped me get there and helped to make it all happen? I’d sacrificed a lot. I’d worked my tail off, but a lot of other people had too.
Andrew: I said that I’d come back and ask about Capital Factory. I’m wondering a lot of things, but one of the things I’m wondering is why is that an entrepreneur who didn’t raise any money, who was able to pull himself up by his bootstraps, who was a bootstrapper, why does he follow up by saying, “I’m going to take all these new entrepreneurs and I’m going to give them money and help them grow their business”?
Joshua: That’s a great question. The crux of it is that it’s not about the money. Any kind of accelerator program you look at, whether it’s Capital Factory or Y Combinator or Tech Stars, I don’t think anybody should think that they’re doing it for the money. It’s not worth your time or worth giving up any part of your company to get $20,000 or a small amount of money. That’s the cherry on top. That’s a side effect. “Oh yeah, by the way you also get 20 grand, so you’re not going to be eating into your cash while you’re doing this program over the summer.” Really it’s all about the mentoring. That’s what I really enjoy. That’s what I get excited about, and that’s what I think is the real reason why companies should participate in a program like this.
We have no problem funding companies that want to bootstrap and think they can be successful without raising money. I find that the majority of the applications are from companies that do want to raise money. They do think they’re going to need some kind of angel funding or some kind of venture round later. When somebody comes to me as an angel investor and they want me to invest, the first thing I do without fail is try to talk them out of it. I explain to them all the reasons why other things they could do besides raising money, other ways they could try to get there and other reasons why they might benefit from it, explaining why it’s not a requirement and how much prouder they’ll be of themselves and potentially how much more successful if they’re able to bootstrap it. But, for me, Capital Factory is not about giving them money. It’s not about the fact that they need a lot of money to grow their business. It’s about the mentoring relationship, and that’s what I really wanted.
When I was a first time entrepreneur, there were all kinds of consultants offering me services and there were lawyers I could talk to and professional mentors who wanted to get paid to do what they did, but many of them hadn’t actually started their own businesses. I wanted to talk to someone that had seen this movie and knew how it ended, that had been through the steps that I was going through, that was another entrepreneur. Part of it was the business decisions, part of it was the emotional part. They’d been through the same experiences I had and that was really important to me. Fortunately, as a complement to that, now that I’ve had some success, I really enjoy meeting with other young entrepreneurs. It fires me up and I learn things from them. It’s a way of giving back, but it’s also something I get a lot out of personally. I think all the other mentors in Capital Factory feel the same way. We don’t think of this as, “Hey, here’s the best way we can invest $20,000 in this company.” While we hope that produces a big return, if it does, it’ll be many years from now and that’s not why we do it. We all do it because we think, “Wow, this is the most fun thing I can do. This is going to be a great experience. I’m going to enjoy working with these other companies. I’m going to be able to make a difference for them,” and it’s a way to give back in a way that we would have wanted when we were first time entrepreneurs.
Andrew: Why Capital Factory for a new entrepreneur and not, as you mentioned, Y Combinator or Tech Stars, Dream It? There are so many other accelerators.
Joshua: That’s a great question. I think it’s wonderful that they are lots of options today. I don’t think it’s a situation where you’re not going to go wrong going to Y Combinator. That’s a great organization and they have a lot of things to offer. I do think there are some differences worth considering, and for different people those are going to be important to some and not to others. For some people, location is important and for other people it doesn’t matter at all. We look at companies from Austin and from outside of Austin, but half our applications come from Austin, half outside. For some of them, they wouldn’t consider moving anywhere from Austin. Obviously, if location is important to you, that’s going to be an important thing. Some people are sure they want to move to Silicon Valley. So if that’s important to you, either that will be an issue or it won’t. I think one of the next things to think about is the structure of the program. One of the things that I think is very different at Capital Factory from other programs is that it truly is run and led by the mentors. Our fund does not come from a VC or a small number of individuals that put in a large amount of money but actually comes evenly from the 20 mentors. Each of the 20 mentors puts up money to create our fund that then funds the five companies we work with over the summer.
Andrew: I didn’t know that. I don’t know of any other program that does that.
Joshua: We’re all invested in it, each of us are investors. When you say you’re a mentor at Capital Factory, I don’t think it’s exactly the same thing as being a mentor at many of the other programs where that’s a volunteer type thing. When you’re a mentor at Capital Factory, you’re meeting with companies not just once or twice, but every week and really developing a relationship with them. If you look at the numbers, Y Combinator again, I think is a fantastic program. I would love to go to Y Combinator. I would love to spend time with Paul Graham and learn from the other great people there, but they’ve got five partners and they’re doing 40 companies. Plus they have 100 companies they’ve done already before, if not more than that. If you think of how their time is split up versus us where we have 20 mentors and five companies, it’s flipped upside down. We think we really give a lot of attention to each company and are able to spend a lot of time with them to help work with them in maybe a way that’s different from some of the other programs.
Andrew: It’s only five companies that you’re accepting now?
Joshua: Yeah, we do five per year. This is our third year. We’ve done five each of the previous years, so we’ve only done ten total. We’ll do another five this year.
Andrew: The final question that I’ve got about Capital Factory is what can someone in my audience do to give themselves an advantage over someone who doesn’t listen to Mixergy when it comes to applying for Capital Factory?
Joshua: To start off, they listen to Mixergy, so they’re getting great feedback from . . .
Andrew: Bring up Mixergy.
Joshua: Certainly show that you’re knowledgeable and experienced. We’re big fans of the lean startup methodology. We’re going to look for people that are taking that kind of approach, that are focused on customer development, that are focused on creating real value. We look at different types of businesses and some of the businesses that we accept in the program are just an idea, they’re just getting started, and others are much, much further along. They’ve already launched a product, they’ve got it out there, they’ve got a few customers and now they really want to step on the gas. The further along you can get, the better. The more that you’ve thrown it out there and you’ve got some customer feedback, you’ve got something to work with, the further along the better. That’s going to really help your chances.
Andrew: I would love, by the way, to live in Austin. That’s one of the cities that was on my list before I came back to the U.S., and I showed it to Olivia and she said, “Austin. Really? Why Austin of all places?” We were at South by Southwest this past weekend, and I think she gets it. What a cool group of people over there.
Joshua: I love it here. I’m really glad I ended up here. It was also some good luck that I ended up coming down here, but once I got here, I just planted. It’s just a great environment. Like you were saying about accelerators, I think San Francisco’s a great place to live. I think New York’s a great place to live. There are lots of great places to live. Some of the benefits of Austin are you’ve got this great mix. It’s a technology hub. You’ve got the university, great music scene, great weather, people that are very forward thinking and willing to try new things. It’s a great environment. It’s very supportive to startups, and yet at the same time there are a lot of startups, it’s still cool to be a startup. It’s not like everybody’s doing it, so you can stick out. You can get some attention, and I think you can be a little bit more of a big fish in a small pond.
Andrew: I didn’t really get to spend much because I was at South by Southwest, but from what I saw things are pretty inexpensive there. Cost of living is pretty low. I remember when we were planning out the big event that we did in Austin and I said, “All right. Beer’s going to probably cost us $10 a cup, maybe eight bucks if the place gives us a discount.” And the people from Austin said, “Are you kidding me? It’s three bucks when you go into a bar to get beer.” I’ve never seen $3 beer anywhere here.
Joshua: Texas and Austin have one of the biggest import rates, where people are moving here because they realize, “Wow, I can own a house for $250,000. I can buy my own house and live somewhere. If I’m going to start a company, I can hire people and they’re generally going to be less expensive because they have such a lower cost of living.”
Andrew: I hope I get to come back there again. I’m grateful to you for doing this interview ,and I hope you come back and do a second interview about OtherInbox, which is your current startup which we didn’t even get into. We’ll leave it at the two companies we talked about which are SKYLIST and UnsubCentral. We also talked about Capital Factory. There’s a whole lot in here. Thank you so much for doing this interview.
Joshua: You’re welcome. Thanks Andrew.
Andrew: All right. You bet. Thank you all for watching.
