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Here’s the program.
Andrew Warner: Hey everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. You know what we do here. Every day, I bring on a different entrepreneur or CEO or someone who’s building an incredible company to teach us what he or she learned along the way as they built up their business.
Today I’ve got with me Peter Sisson. He is the founder of Line2, an incredible iPhone app that “The New York Times” gave such a raving video review to, that when I went to Line2.com to look up what the company did, bam! There it was, “The New York Times” video. Can’t say it better than the reviewers. In a moment, he’ll tell you what Line2 is.
But that’s not why I invited him here. Peter has spent over a decade launching and selling companies. I want to ask him about it, and I’ve got a list here of the companies. He created WineShopper.com, which sold to Wine.com. Created Mixonic, which is an ongoing profitable company. Created Teleo, which he sold to Microsoft. Now, he is the founder of Toktumi, which created Line2. Peter, it’s a long intro. Welcome to Mixergy.
Peter Sisson: Thank you, Andrew. It’s great to be here. This is really fun to share a little bit about what I’ve learned and all the mistakes I’ve made, which is how I seem to learn. For some reason, I always learn from mistakes much better.
Andrew: You know what? Me too, especially other peoples’ mistakes, which is why I’m making a big note here to make sure to keep asking you about your mistakes so that we can learn what happened.
Peter: [laughs] Well, I learn most from my own mistakes. I’m happy to help. Let me start with just what I’m working on now. I have my iPhone here.
Andrew: Okay.
Peter: This is Line2. Line2 adds a second line to your iPhone so that you have two lines on one phone.
Andrew: For people who are listening to the mp3 version, what he’s showing us looks almost, in fact, to me, it looks exactly like the dial pad on an iPhone.
Peter: It is. One of the things that surprises us is Apple has actually been very supportive of this, and we’re working closely with them on this project, which is great. Line2 is a little different from Skype and Truphone and all of that in two keys ways. One is that it hooks up to a Google-Voice-like platform which offers business type features like an auto attendant and ways to route calls to different callers depending on who’s calling or different ways depending on who’s calling. It offers call announce and business type features that set it apart from Skype.
The second thing is that on the iPhone, it’s truly dual mode, which means it’ll switch between cellular and VoIP depending on what network you’re on. I’m sure you won’t be able to see this, but what I’m actually trying to show is there’s a little cloud there and if I tap on that . . .
Andrew: He just tapped the call button. There’s a dial pad. There’s a call button, and there’s a little button that has a picture of a cloud on it and it says VoIP underneath it.
Peter: If I tap that, you can see it now changed to cellular. It can switch between cellular and WiFi.
Andrew: Ah. Okay. Before I dial a number, I say, “Do I want to be on a regular phone connection or do I want to be using my Internet minutes”?
Peter: Right. If you don’t tell it, it’ll pick the best one. Like, I’m in my home right now, so it knows WiFi is available. It knows that I have crappy AT&T reception in my home, so don’t even try to do it over cellular. It knows that I want to reduce my AT&T bill, so it knows to use WiFi when it can.
When I’m in my car, I want to return calls that I received on that number. I want to go through voicemail, whatever it may be. In that case, I want to be able to place a call over cellular all using the same number and the same application. That works for both inbound and outbound calling. That’s the key difference.
As you mentioned, we got very lucky in that “The New York Times” did a great review for us. We couldn’t have asked for anything better. To us, in terms of the opportunity it meant to spread the word to a lot of users, it’s great. That’s the sort of thing that you hope for in the startup world, is how do you break out from the noise, because there’s so many people out there doing so many cool things. It’s those lucky breaks that can really make or break a company.
I remember when Walt Mossberg first wrote about Google and where Google was, that’s when Yahoo! was king. I remember that that article, when I read it, was instrumental in changing me to say, “I’m going to give Google a try.” The rest is history. If you have a better product, it doesn’t matter. People have to know it exists.
Andrew: How many customers did you get from that David Pogue article in “The New York Times”?
Peter: We tripled our customer base.
Andrew: How many customers do you guys have?
Peter: Everyone says, “Oh, we don’t release those numbers.” I don’t care. We’re at about 25,000 paying customers. We have another, right now we’re about 35,000 on trial. We convert between 10 percent and 20 percent typically, so that means we can continue to grow fairly aggressively.
Andrew: Peter, one of the very crass things that I do, that actually endears me to my audience, is I count up other people’s money. While our connection was broken, I was doing a little back-of-the-envelope math, and it looks like, based on 15 bucks a month, are you guys bringing in $375,000 a month in revenue from Line2?
Peter: Yeah. Our run rate is past $5 million. Literally six months ago, our run rate was $1 million. It’s just been really incredible growth since we launched Line2. We had Line2 out there last fall, but it didn’t have the VoIP capability. It didn’t have the dual mode ability. That’s what tipped it over, because there are so many people who don’t have good cell reception. AT&T handed that to us in a basket. That’s the angle we use is “solve your reception problem.” That’s such a simple value proposition that resonates with people.
That’s another lesson, I think, a startup lesson is that a lot of us are in technology. Technology is difficult to explain, particularly if it’s something new. You have to find a way to boil it down to a value proposition that’s a sound bite that you can explain in a sentence that helps people understand “why do I want to dig deeper on this.” When you hit that, it’s amazing. Yes, if you have bad cell reception, you could use Skype, you could use Truphone, you could use Fring, you could use Nimbus, you could use iCall. There’s a lot of people out there. But that’s the way we position it. Now we own that, where none of those guys do.
It resonates too because we are truly dual mode. If you were purely a VoIP product, you can’t really say “solve your cell reception problem” because then when you do have reception, you want to be able to use the same device.
Andrew: Can I, in the middle of a call, go from one to the other? So, if I’m in my house and I’m using WiFi to make a phone call, but I’m about to step out and there’s no WiFi outside the house, can I switch? Or will the system automatically switch me to phone service?
Peter: It’ll switch if you’ve enabled 3G calling. It [09:44] off between WiFi and 3G data.
Andrew: Oh, that’s great.
Peter: If you have a solid 3G data connection, it can do VoIP to VoIP. To do VoIP to cellular, we’d have to have some equipment in the data center of the carrier to be able to do that.
Andrew: Okay. Run rate, by the way, is something that I’ve been hearing a lot in my interviews. Basically what that means is you take the last month’s revenue and you multiply it by 12 and that’s what a run rate is.
Peter: Exactly.
Andrew: What I’m wondering as I’m looking at this is, first of all, very impressive, but since when do tech companies, Internet-based companies, iPhone-based companies, try to make money? I thought the goal was to just give stuff away, to conquer the market, and have 100 percent market share? Why did you decide to charge?
Peter: It’s a great question. Part of the reason we decided to charge is because, when we were raising money for this company, we had two strikes against us. I had just sold my company to Microsoft and I consider that in the plus column. But we had two four-letter words that were associated with our company. One was VoIP, which three years ago, was a non-starter for a lot of people because Vonage was trading at a couple bucks and Skype was being written down at eBay and all of that. The second four-letter word was SOHO, small office, home office.
VCs are petrified of that because there’s a lot of wreckage strewn along the roads of people who have tried to sell products to small business because it’s very difficult to reach them cost effectively. With large companies and enterprise, you can have a direct sales force and account managers, and each sale is hundreds of thousands of dollars of revenue. With small business, you can’t really reach them the way you reach consumers. Reaching them the way you reach consumers is very expensive, but it’s sort of the only way you go. You’re caught in between a pure consumer model, which typically involves a free download of some sort, and the enterprise model where you’re selling with a direct sales force.
If we had raised $20 million, we could have considered the free option as a way to grow very quickly. We haven’t ruled it out either, depending on the competitive landscape. I think there’s some new wisdom that’s been emerging recently as I’ve been talking to other entrepreneurs who do have free services, where they offer the premium model where there’s a solid product that’s free and then they’re trying to upsell. They can’t get these people to pay for anything. If someone’s attracted to free and they’re there for free, they will fight tooth and nail to even give you 3 bucks a month. It’s almost like there’s a principle that once you’ve been attracted to something that’s free, you feel stupid if you’re paying for it. It’s like, “I’m the dumb one that’s paying 3 bucks while all my other friends are using it for free, just because I wanted to be able to send an extra 10 texts a month.” I think that’s the challenge.
Obviously, what’s great for iPhone apps is that it is becoming possible to monetize your app through advertising with AdMob. We’re using, I’ll put in a plug here unsolicited, Greystripe, which is an ad network that has a really great offering where you just pay 99 cents a download. All you have to pay them is 99 cents a download for however many downloads they generate. That campaign is performing brilliantly for us on the costs.
Andrew: You pay them 99 cents every time they get you a download?
Peter: Every time they get us a download.
Andrew: Okay.
Peter: We convert, as I mentioned, say 85 percent of downloads convert to trial, and then we convert 10 percent to 20 percent of trials to paid. You do the math, that’s 3 or 4 bucks cost per acquired customer. That works.
Andrew: Right. The customer brings in 15 bucks of revenue a month, give or take a few pennies.
Peter: Let me tell you what I just did, because I think what’s happening is on my local side. I’m sure Comcast is not evil. [laughs]
Andrew: Okay. Maybe not so sure.
Peter: But I always wonder if they detect 20 minutes of a Skype connection, they just every now and then recycle the connection somehow. I don’t think it’s possible. I just switched over, for kicks, to Verizon MiFi. I don’t know how many of your listeners and watchers know about this device, but this has changed my life. I don’t know why I keep the Comcast, actually, because I can use this.
Andrew: Are we now on your Verizon MiFi?
Peter: This is a Verizon MiFi. It’s a portable WiFi access point. I can connect up to five devices to it. I can connect my MacBook and my iPhone and my iPad and my iPod Touch. If you pair a MiFi with an iPod Touch, then you use Line2, you turn the iPad into a cell phone, which is an interesting way to think of it.
Andrew: You’re saying turn the iPad into a cell phone, too. Are we now on your Verizon MiFi?
Peter: Yeah. Is it a little jumpy?
Andrew: No. It’s fine.
Peter: Yeah. This is the iPad with Line2 on it as well. All of these things are now phones over the Verizon MiFi. If you just get this and ditch your DSL, your cable, then you’ve got Internet access and you’ve got phone service all for the price of your Verizon data connection.
Andrew: Am I supposed to put that big iPad to my ear in order to make a phone call?
Peter: Yeah. Do you want to see me make a call?
Andrew: I just want to know do you have to put the whole thing up to your ear, like a big block like that?
Peter: [laughs] Sort of like the bomb squad. This would be the cell phone of the ’80s or something.
Andrew: I guess you wouldn’t even have to do that. You’d do it on speaker phone.
Peter: Yeah. There. I don’t know if you can hear. I just called American Airlines.
Andrew: For the mp3 audience, he’s using his iPad now to make a phone call, and he was showing it to us on speaker phone. That’s pretty cool.
Peter: It is pretty cool. Anyway, let’s get back to entrepreneurship. I think we were talking about customer acquisition.
Andrew: Yeah.
Peter: These in-app networks, whether it’s AdMob or iAd or Greystripe or whoever, they’re really working for us. They’re performing better than our web-based campaigns. I was skeptical at first. Our ads tend to be serving games. Then I thought about that. When someone’s playing a game is when they’re at leisure, which means they’re not busy, which means they may be more responsive to an ad. Whereas, if you’re starting up a PowerPoint thing or some important tool like email or chat on your iPhone, you will probably not be responsive to an ad because you’re trying to get something done. If you’re starting up a game, it’s probably when you have some downtime and you may respond to an ad. We’re seeing great click-through rates and great conversion. It’s interesting.
Andrew: You said you were working closely with Apple. People couldn’t believe that you were allowed to have your app on the iPhone, but Google wasn’t allowed to have a similar app on and a couple of others, I think, had similar issues with it. What is your relationship with Apple?
Peter: Nothing more than we have been able to ask them ahead of time, “If we added this feature, would we get in trouble?” They said, “No, don’t worry. Go ahead and add that feature.” I think what’s changed is last summer they probably had a lot more pressure from AT&T. Now, AT&T doesn’t have leverage with them anymore because rumor is Verizon’s coming January 1.
Probably the reason Ivan Seidenberg at Verizon, the CEO, is keynoting at CES is probably to announce the iPhone. Unless, and this is my contrary thing, unless he’s going to announce, because they just did that thing with Google today, that in fact, they are not going to do the iPhone and never will and they’re doing an exclusive with Android. Talk about a strategy that would rock the world. Google would have to pay them a hell of a lot of money to get them to do that. Google has a hell of a lot of money. It will be really interesting if Google tried to trump Apple with a dirty move like that. Who knows?
Andrew: Let’s go back in time and find out how you got here. Looking back, you have a lot of VoIP history. You analyzed small-cap telecom companies in the voice over IP space at Montgomery Securities. You did projects in the telecom space for Arthur Little. The first entrepreneurial adventure, the first big one was WineShopper.com in ’98. What was the vision for WineShopper?
Peter: The idea was to just take the intimidation factor out of buying wine and to make it accessible. The problem, you walk into a supermarket and you see rows and rows of bottles and you see a lot of guys standing there and scratching their heads like, “Which one should I get?” There’s no information at the point of sale to tell you what to get. Now and then, they put little cards that say “Wine Spectator, 93 points,” but you don’t even know what’s going on.
The idea was to combine the ability to buy the wine with all the information you needed to make an informed decision. We had deals with “Wine Spectator” and “New York Times,” all the other major reviewers, so you can get all the information you wanted about a wine. Then you could rank them and keep track of what you bought and all of that stuff.
It was an interesting experience because the challenge for wine, and the reason I was attracted to it, is that wine online is actually very difficult because of regulatory issues. There was a company out there called Virtual Vineyards, which became Wine.com. Virtual Vineyards was, basically, shipping illegally. It’s a long, long story, but long story short, we did a deal with the wholesalers, which are the people that typically have the exclusive rights to distribute wine into a state, so that we could legally ship the wines into a bunch of different states. Are we still here? Yeah.
Andrew: Yeah, we’re still here.
Peter: By doing that, we opened up 42 states for legal shipment. I did an exclusive deal with the industry association for wholesalers, which brought me 200 wholesales and retails around the country. That deal, combined with a wine guy that I brought on my team and a wholesaler guy that I brought on my team, got me $46 million.
Andrew: When you just assembled that, you were able to go out there and get funding? You didn’t go for funding until you got that?
Peter: Yeah. Those days are over and I think it’s a good thing, but literally, three guys, some kind of exclusive contract. It was a powerful contract, don’t get me wrong. It was basically locking up legal distribution online. It was a business plan and Kleiner Perkins and Amazon, combined, put in $46 million.
Andrew: How did you feel when you got the $46 million? You get a check, right? It goes into the bank. How’d you feel at that day?
Peter: I felt pretty good. [laughs] The highlight of the whole thing was here I was, this green entrepreneur, and I had a term sheet for $3 million from another VC and with an exploding offer, which was a cruel thing that VCs sometimes do where they give you three days to accept it or they pull it. I told Kleiner that I had this exploding offer, what should I do? They said, “Don’t take it.” This is three days before Christmas, by the way, that these guys gave me this exploding offer. Real scrooges. I met between Christmas and New Year’s, and they said, “Don’t sign it.” We’ll get John Doerr and Jeff Bezos . . .
Andrew: We’ll get who? I’m sorry. The connection was breaking up again.
Peter: It was unbelievable actually. John Doerr . . .
Andrew: Oh, John Doerr and Jeff Bezos of Amazon, of course.
Peter: Amazon CEO Jeff Bezos, John Doerr, the uber-alphadog of Kleiner Perkins, probably one of the smartest VCs in Silicon Valley, the guy behind Google and before that he was involved in Netscape and they were involved in a million other things. I had to explain my business to them, but then they came to basically pitch me on why I should take their money. They came into our little office on California Street downtown. People were doing double takes in the elevators and all this kind of stuff.
That was perhaps the most exciting moment where I had gone from, literally, being nobody to having Jeff Bezos and John Doerr sitting in the same room with me, having a conversation about putting $46 million into my company. I’d say that was a pretty exciting day. I’ve never topped that, unfortunately. It’s been kind of downhill since then in terms of the amazing moments of my life. It was a pretty amazing moment.
Andrew: Do you stay in touch with either of them? We have a bad connection today. Sorry, guys. Do you stay in touch with either of them? With John Doerr or Bezos?
Peter: I try. Yeah, I try. John Doerr is always receptive of my emails. At one point, I asked him for an intro into Google and he made the intro. So he’s been very supportive. Jeff Bezos, I have not been able to get to return my emails anymore. I think I don’t rank first anymore. John Doerr, despite being fabulously successful, is a very grounded, decent person. He’s always been respectful to me whenever I reached out to him. Really surprisingly nice, nice guy.
Andrew: Excuse me one second. There’s a whole lot of commotion here outside. This is the most unprofessional, unCNN-like interview. One second, I’m sorry.
Peter: [laughs]
Andrew: I love that everyone speaks English. Good. I’m in Buenos Aires. They don’t usually speak English, but I’m glad in this office that they do.
Peter: You’re in Buenos Aires right now?
Andrew: I am. I am.
Peter: I love Buenos Aires.
Andrew: Oh, cool.
Peter: Yeah. I know this is a tough connection. I think there’s a lesson in this in why we should continue to do it this way because we are doing it over Verizon MiFi. I think it’s doing pretty well, actually. I think this also illustrates the perils of 3G. The 3G is not going to be as good as a WiFi connection, even from when I’m sitting still, from a top-notch carrier with a five-bar connection. I think that’ll be interesting over time as we evolve and more and more services go over 3G. It isn’t perfect yet.
Andrew: It’s unfortunate because I keep hoping that they’ll be strong competitors to cable or to any kind of landline. I don’t want to be locked in to whatever happens to be piped into my house. I want to be able to get a MiFi as you have, but it’s not perfect. It’s not fully there yet. I can’t BitTorrent every single episode of “Entourage” that way. Not yet.
Peter: Not yet.
Andrew: I can’t do interviews like this on video Skype.
Peter: I would hate to see your [26:44] after that.
Andrew: I bought every episode from iTunes because I’m a sucker. Actually, because it’s a lot easier that way. Who needs the headache of dealing with the other services? Things, as you said, went downhill. Well, there was trouble. You had to sell the company to Wine.com, right?
Peter: Yeah. We launched in April of 2000, right when the market crashed. Amazon reneged on their promotional deal. Initially when they invested in their six or seven companies they invested in, they had committed to either making us a tab on their homepage or at least give us a lot of visibility on their home page. Jeff Bezos walked away from that commitment, and we were left with no customer acquisition mechanism and a burn rate of about $3 million dollars a month.
Everybody was drinking the Kool-Aid back then, and we all were building big companies. It was a land grab was the mentality. We all built really big companies. If the top line didn’t catch up quickly, after April 2000, a lot of companies died. They had built a Land Rover expecting there to be a gas station every 300 miles. In hindsight, they needed to build a Prius and make sure they could go as far as they could, because there’s no assurance there’s going to be a gas station. That’s what happened after April 2000.
Andrew: The $46 million that you raised, if it didn’t go into, and sorry if it sounds like we’re stepping on each other, it’s just because of the lag, but the $46 million, if it didn’t go into marketing, where did it go?
Peter: We had a huge product because we had to build, integrate with these wholesalers, all around the country. We had to integrate their archaic inventory and data systems, their billing systems, the systems that collect taxes for regulatory compliance. That was the barrier to entry that attracted me to this business, because if we were successful at doing that, we would have built a machine that had incredible value for delivering wine legally.
In fact, that machine was the asset that emerged from the rubble of Wine.com. Wine.com bought us and then a year later, they went bankrupt. What emerged from that bankruptcy was a company called EVineyards, who bought the, which was the third runt that couldn’t raise any money, so they had to build a company the old-fashioned way, which is on revenues. That was part of the reason I built this company now on revenues. You asked me at the beginning of the interview how come I’m actually charging. Because I’ve seen the value of actually trying to get profitable.
They were the last ones standing. They swooped in. They got the Wine.com name and the customer list for a song. Then what I had built, which was this fulfillment infrastructure, was snatched up, was actually refunded as a company called New Vine Logistics, that was a wine fulfillment company.
It was incredibly expensive to do that. Fleets of engineers that had to travel all around the country. We had big, expensive Oracle database licenses, all the EDI work that had to be done. We were pioneering an integrative, data interconnected world that didn’t really exist in 1998 and 1999. It was very expensive. None of that $46 million went to marketing.
Andrew: Wow. When you merged, and by the way, EVineyard, I even saw a press release today from back then, they were crowing at the deal that they got. They swooped in, and I think it was soon after Wine.com went out of business, and got all of these great assets at a firesale price. It was incredible.
Peter: Right.
Andrew: After all of this, you spent around three years of your life battling, building, dreaming, reaching a height, and then being brought back down. How did you feel? How’d you feel about entrepreneurship? How’d you feel about your own personal powers as an entrepreneur? How’d you feel about your place in the world?
Peter: It definitely knocked me down. For a while, I had a little wind knocked out of me. Not only had I failed, but I had failed spectacularly. I had failed in front of Jeff Bezos. I had failed in front of CNBC and the press. I had failed in front of “Fortune Magazine.” I had failed in front of John Doerr and Kleiner Perkins. Because this was such a visible company and to have it get where there’s nothing left, I was like, “Wow. I failed.” That, sort of, “I’ll never eat lunch in this town again” kind of feeling where that was it. I just screwed my career royally and it was over.
As much as Silicon Valley says, “We embrace failure,” it’s a hell of a lot easier to raise money if you succeeded than if you failed, no matter what they say. I was depressed for a little while. Then after about two or three months, I resigned from the board at Wine.com when the writing was on the wall and they were not going to make it. Depressed for a while, then suddenly, it’s one of those things when you wake up in the middle of the night or one morning and you say, “I’m just going to try again.” You get right back up on the horse.
I was able to convince a bunch of really, really smart engineers to work for me just for equity for six months. No startup capital other than I had a little bit of money that I had gotten. I started Mixonic and then was able to raise money from angels in 2002, even though it was a horrible fundraising environment, and got that company off the ground. When you fail that spectacularly or when you fail at all, the lesson is that you learn so much more from failing than you have from succeeding.
Andrew: Like what? What would you have learned from that experience? Couldn’t you have just said, I would have looked back and said, “Hey. You know what? We were all in a crazy time. My head got caught up in the same bubble as everyone else did, and that’s where I was. It’s not going to happen again because I’m not going to get carried away and I’m not going to be in that kind of bubble again.” As far as applicable ideas that I could then use in the new market, which is where you were in 2001, what was there? What did you get?
Peter: What did I take from that?
Andrew: Mm-hmm.
Peter: I wasn’t willing to blame something else. That’s part of my own, whether it’s my own insecurity or my own drive, I’m not willing to accept that I wasn’t responsible for it, no matter how many external factors there are. I think that’s just a life philosophy that I have that I think a lot of entrepreneurs need is that if you choose the entrepreneurial path, you are choosing to shape your destiny. You’re not choosing to work for a big corporation where your destiny is at the hands of some downsizing that you have no control over or whether you play tennis with your manager so you can get promoted. The politics, the schmoozing, I could never survive or thrive in that environment. An entrepreneur chooses to shape their own destiny. If that’s the case, you have to take responsibility for that.
I took responsibility for the failure. I said, “What lessons can I learn from it?” The lessons were one, don’t get a burn rate of $3 million a month when you still don’t have revenue. It sounds obvious now, but that wasn’t the thinking back then. I’ve actually done things very frugally since then and that has really been better.
When you bootstrap and you build a company frugally, this frugality gets baked into the DNA of the company, and that’s a very valuable skill set for a company. Look at what happened in 2009. The companies that had frugality baked into their DNA, and maybe even took steps to reduce their burn, were able to ride out the storm of late 2008 and 2009, where there was zero funding. Including my company. We are just, next month, for the first time after three years, moving into an office. We’re all virtual. We use our Line2 and Toktumi software.
Andrew: Are you now at home?
Peter: I’m at home, yeah.
Andrew: This is where you work on a regular basis? You didn’t just happen to be at home today?
Peter: No. I work at home all the time. We are, because we’re expanding, I do want to be able to create the camaraderie of an office. We’re getting a very inexpensive office in San Francisco. We’re actually subleasing from a startup that is running out of money and they couldn’t fulfill their lease. When I walked in there, I saw a foosball table and a ping-pong table and beanbag chairs. They said, “You can have all the furniture.” I said, “Fine. Take out the beanbag chairs, take out the foosball table, and take out the ping-pong table.” I don’t want to communicate to my employees that this is a game and that this is a playpen. We are in business to make money and survive. I think that was the lesson I learned. I had all that.
In WineShopper, we had in-chair massages. We had fully stocked kitchen. We had Aeron chairs for every employee. That was the excess at the time. I have learned I just don’t run my companies that way anymore. I run them about frugality. I’m all for work hard, play hard. But I’m not going to turn the office into a playpen or communicate to potential customers and partners that the office is a playpen by having toys and games around. I think that was my biggest lesson is that if you build a company who’s DNA is about getting profitable and keeping the burn down, then you expand your options because if things go bad, you have the runway to ride out that storm. That’s exactly what we did through 2009. We had not hit it by then. We were still searching for a product that was going to resonate with people.
Andrew: That’s a whole interview in itself. I’m looking at the time and wondering how I’m going to fit all that in. You had a little device that people could use to plug their real phones into their computers. There’s the Toktumi.com website that’s a whole other business from Line2 as the iPhone app. There’s so much that I want to talk to you about. Then of course we got Teleo. I don’t know how much we’re going to be able to fit into this one interview. Maybe we’ll have to have you back. Let’s continue with Mixonic. What is Mixonic, for people who don’t know what it is?
Peter: Mixonic is online CD and DVD. Let’s talk briefly about it and then I think let’s move on, if we may, to Teleo and Tok. Mixonic was an interesting company. I’m going to be very honest and a little bit brutal. It was a very interesting company in 2000, 2001, 2002, 2003, even ’04, ’05. We were doing online, on-demand authoring of CDs and DVDs. You could create them and do it with online tools, and then you could set them in electronic inventory so they could be printed on demand. Targeting businesses as well as musicians and what have you. It had a nice trajectory.
The challenge Mixonic faces, it’s a great company, it’s very well-run and it’s profitable. But as an entrepreneur now and a part owner, a board member, and investor, the challenge that Mixonic has is they are in a dying industry, which is CD and DVD, physical media. The company now is at a turning point where does it transition into electronic distribution or does it cut costs and become a cash cow and just pay dividends to the investors? It’s at a twilight point in its history where either it’s going to be twilight or it’s got to be a brand new dawn. That’s the challenge for that company.
That was an example of a company that was built very frugally, and the guy that runs it is one of the most excellent operating CEOs ever. In that business, he needs to be, because he’s turned it into the most cost-efficient producer of CDs and DVDs in the country. As such, he’s pulling in a lot of wholesale where he does all the back office for major brands that still ship CDs and DVDs. I give a lot of credit to him.
Andrew: I saw that he also got into USB drives. The USB drives that people give out at conferences, I think he produces those, too. Right?
Peter: Yeah. Mixonic was doing that as well. They are trying to reach out to new markets like that. That was a story where after that happened, I was with the company until around 2004, 2005, and then I moved on because I’m an entrepreneur and I wasn’t adding value there anymore. I think the investors, quite frankly, were glad to see me go. I moved on.
Andrew: What do you mean? Why were the investors glad to see you go?
Peter: I think where they wanted the company to go was different. As much as I am about frugality, I’m also about you have to spend the money to get the word out there. You can’t just grow slowly if you’re doing a startup. If you really want to make a real impact and build a very successful company, you have to be very aggressive at how you’re going to grow, once you’ve hit on a product that was successful.
We had a successful product, but the investors were not willing to invest the marketing spend into growing the business that I wanted to. We disagreed. Ultimately, you have to choose whether to fight or to move on. I fought for a while. Then I said, “You know what? I’m going to move on.” I moved on into a company that, a year after I joined it, sold for $25 million. I thank those investors. Right? Thank you! Thank you for chasing me out.
That’s why entrepreneurs have to know what they’re good at. I’m a builder. If I wasn’t given an opportunity to build, which Mixonic wasn’t giving me the opportunity to build, they were working on cost management, and so they took a different strategy. As a result, they built a very cost-efficient company. I’m not the guy to do that.
Andrew: One more question on that and then we’ll move on. I think it comes from Anthony Sera in the chatroom. He’s asking how did you get investors to come in and invest in you in that business? By then you had revenues, so I can understand that it would be easier to get investors. Where did the investors come from? How were you able to get investors after WineShopper.com?
Peter: They were angels. I was able to get investors because we had traction, quite frankly. It wasn’t just about me trying to paint a picture. I didn’t have the ability to paint a picture anymore that was credible since I had failed. What I did was I bootstrapped it and so I had a hockey stick of growth. That’s what attracted the investors.
Andrew: Any chance, by the way, that you could have painted a picture despite what happened with WineShopper? Maybe you were just feeling that you couldn’t or maybe temporarily the market wouldn’t have paid attention to that picture?
Peter: I think it was, to some extent, my own. Like I said, I really got the wind knocked out of me. It really hurt me to have failed so massively because I had always been fairly successful. I had gotten into good schools and gotten great jobs. I had taken the risk and I had failed. I really think I didn’t believe in myself for a while.
Andrew: How do you get past that? We all are going to go through that period. To say one day I woke up and I had a new idea and I was able to go through with it is too short an explanation. How did you get past that feeling to get you comfortable enough to go out and launch another company? To incorporate again without, in the back of your head, saying, “Am I going to embarrass myself here? Am I going to lose it all? Should I go and get a job here? Maybe I don’t know what I’m doing. Maybe it’s these other guys who just talk a lot more than I do who are more deserving of entrepreneurship or more appropriate for it.” How do you do it? How did you do it?
Peter: All of those thoughts went through my head. All of the self-criticism and beating yourself down and saying, “Maybe I’m not cut out for this.” It’s like a mourning period. When you lose someone special or a special pet or something like that, you go through a period where you’re inconsolable. Then one day you wake up and you move on. I don’t know whether it’s brain chemistry or what’s going on, but you can’t really predict when it will happen. But one day you’ll just wake up and you’ll move on.
It’s like a bolt of lightning when it hits. If you’re a religious person, you would think it’s divine inspiration or encouragement from . . . there’s many different explanations for it. But it definitely is a flash of “Okay, I’m ready to move on. Enough of this. I’m ready to try again.” If that flash doesn’t come to you, then maybe you have a problem. It may take a while, but you just have to . . . part of it, you’re squeezed too because once you’ve taken the entrepreneurial path, you’ve burned some bridges, not in a way of making enemies but in terms of your employability because if you were to go back into a corporation, entrepreneurs, it’s like a scarlet letter, that they’ll be unmanageable because we are, basically.
For me, even if I had wanted to go back and try to get a normal job, I think it would have been very challenging for me because corporations don’t value, good corporations do, but many corporations don’t value entrepreneurial initiative because they want you to do your job and stay focused and not be insubordinate and not make trouble. That’s why a lot of big corporations don’t always create great products. It’s the little companies that create great products.
It’s a mourning process. Then once you’re done mourning, you just snap out of it.
Andrew: All right. Teleo. I was not able to find out how much you sold it for, but you just announced it right here–$25 million. Did you guys announce it before, or did I just get an exclusive about five years after the fact?
Peter: I think [46:56]. I think that’s because the NDA has expired, long since expired. There was $2 million invested in that company, so the investors were very happy. That was a really nice return.
Andrew: $2 million invested, $25 million out. By the way, you did say this was the first time you said it publicly, right?
Peter: Yeah.
Andrew: All right. Let’s take that. Somebody put that on a headline somewhere.
Peter: [laughs]
Andrew: What was that business?
Peter: Teleo was a white label version of Skype. That was one of those situations where timing is everything. There’s a period in a product cycle where a new type of product is getting tremendous traction, and it makes big companies nervous because they’re afraid the train is leaving the station. There’s a period in a startup’s life cycle where very young in the company’s life cycle, if they’ve timed it right, they will get offers to be bought by companies. It’s more of a time and market issue, or they just want to have something so as that train is leaving, they get on the train.
They were all scared of Skype. We were like, “We’ll white label it so you can turn it into your own Skype. We’ll get you to market. Boom. By the way, we do these cool things that Skype isn’t doing yet.” I went to Google, Yahoo!, AOL, and Microsoft offering to white label. Then two of those four said, “Hell, white label? Let’s send it over corp dev and buy you guys.”
Part of the reason is if we white label it, you’ll go raise money on that and you’ll have to build all the infrastructure to deal with our 250 million MSN users or whatever it is. We’ll just buy you instead, and you’ll put it on our infrastructure instead of having to build out something. From their point of view, it was logical. I wanted to keep fighting and build this great big company. But the investors were, “That’s an excellent exit. Let’s take the money and run.” In hindsight, it was the right thing to do because, within six months, our competitive differentiation had basically been matched. That was purely about timing. Very fortunate timing.
Andrew: What did you have that the competitors didn’t have? I read a lot about Outlook integration. What else was there?
Peter: Exactly. Outlook integration, at that point we actually had call forwarding. Skype didn’t have that. Real phone number, call forwarding. You could receive your phone calls on your cell phone if you weren’t present. We just had a little more complete feature set, more telephonic features. Then we had click-to-call in email and we had, even before Skype, we had website-based click-to-call, which was actually based on a little toolbar that took us about two weeks to make, which did nothing more than find what looked like a phone number on a web page and turn it into a call-to link. For programmers in the audience, it’s a simple thing to do. That seemed like magic because we were the first to do it.
Andrew: This whole company wasn’t around for more than a few months if I’ve got my facts right. Started ’04, sold ’05.
Peter: Yeah. It started ’04 and sold in August of ’05. It was about 13, 15 months since the company was incorporated.
Andrew: How long did it take you to build the first version?
Peter: A little more than that, like 16 months.
Andrew: 16 months.
Peter: Huh?
Andrew: How long did it take you to build the first version?
Peter: There were two founders that were tech guys that had been working six months on the technology. Then I came in to productize it and build the company. I came up with the business model, the model with how we reach customers. We all came up with it. Right? The raw technology was done within six months, because the two guys that did that were brilliant. Then it was about just turning into a product, and we had that done by fall. I joined in July. Turn it into a product with a user interface and a model for it.
Andrew: What was your model of how you were going to get users?
Peter: We had the conversations with Google, Yahoo!, and Microsoft in winter and early spring. We were in M&A discussions with two of those four companies by March of 2005. Had an LOI from Microsoft by May of 2005, and then closed the sale in August of 2005. Very quick.
Andrew: I see. So instead of saying we’re going to compete with Skype and go directly to end users, you said we’re going to white label our product. We’re going to make deals with Google. I think there was a deal with Virgin Mobile, with Amazon, with all these other companies. Let them go talk to the end user. We’ll just focus on the technology and creating a product.
Peter: Right. Exactly. That turned out to be an interesting way to get acquired because the one rule about companies, they always say good companies are bought not sold. We were bought because we actually went truly with the idea that we were going to power these guys. We weren’t shopping the company. We were like, “We want to be MSN communicator powered by Teleo.” That was our strategy.
In all cases where typically successful acquisitions happen is you have to date before you marry. We went in there trying to date them and they said, “Let’s do a shotgun wedding.” Typically for companies, you do business relationships of some sort for months, or sometimes years, before that company will ultimately buy you. That was the advantage of that model, is that we did have a model where we wanted to date companies that ended up being companies that maybe would be interested in acquiring us. That happened a lot quicker than anybody thought.
Andrew: I think this one acquisition could have given Om Malik a heart attack. I was reading his coverage of it in preparation for this interview. Om is sitting on the sidelines saying, “Come on, Microsoft. Get into voice over Internet protocol.” Finally, they bought you guys. He said, “Yes. Microsoft is now understanding VoIP. They’re going to bring it to the masses. They know how to create it.” Microsoft sat on the technology, didn’t do much with it. Om Malik comes in there and says, “What’s wrong with Microsoft? Where are they?” Microsoft gives him just a little hint that they might do something else. He’s back there cheerleading this, up and down. It must have sent him to the hospital at least once.
Peter: [laughs]
Andrew: Why? Why didn’t Microsoft do as much as they could have with this?
Peter: Politics inside the company for the most part. When a small company gets bought, small companies typically get bought for the IP and the engineers, the actual head count. They’re certainly not buying customers. We had about eight engineers that went to Microsoft. They were then dropped into a swarm of 50 engineers that were already working on this stuff. Management had said, “Here. Integrate this.” I think the existing engineers, it just wasn’t one of those [54:19] tier political things. I don’t know if a few lines of code ever got used or what. The engineers, some are still there and when I talk to them they said that most of it was never really used. It’s kind of sad.
Andrew: Yeah, it is.
Peter: Writing a check for $25 million for Microsoft is like putting a quarter into a washing machine.
Andrew: Right. We talked about the lows of entrepreneurship, the time when it gets depressing, when you’re not sure if you can do it again. You get a check, $25 million, it doesn’t all go to you but you get a good piece of it. Can you describe that day? The day you actually saw it hit your account or when you got the check?
Peter: Yeah. It was pretty incredible. My piece of that was not life changing, but I was able to pay off a lot of debts, and I got a couple of nice things for myself, basically. I still have to work.
Andrew: It wasn’t life changing? You were brought in as a co-founder, but you were getting employee shares?
Peter: My percentage was not the same as a founder. I was brought in as a hired CEO, in that sense.
Andrew: I see.
Peter: You get a much smaller percentage in that type of situation. But I’m not complaining.
Andrew: The two guys who co-founded it, how did their lives change?
Peter: They did much better. Good for them. It was a happy outcome for all of us. I have no complaints. Are you kidding? It was fantastic. It was actually a nail-biter all the way to the end. In August, there were some things that came up because Microsoft’s due diligence is incredible. We had used some open-source software in our solution, and Microsoft freaks out about that. Those issues came up.
There were some other issues that came up where it was a nail-biter all the way to the end whether this would actually close. I would say there was a point where it was 50/50 that it was going to not make it. Talk about on the edge of my seat, I was overseas. I was being dangerously optimistic and had taken a vacation in Italy with some friends. The vacation was ruined because I was on the phone in the wee hours of the morning trying to figure out all of the things that we had to do to get Microsoft to be happy. I was no fun on vacation. I’d go to dinner and I’d just be distracted and grumpy, because I was on the verge of my second big failure. Right?
One of the things about going through an acquisition is that, if in the end they don’t buy it, so much momentum has been lost and so much has been screwed up that the company’s over. We were 50/50 from it melting down, and then I would have been, “Okay. That’s two for two.” It would have really been bad. That day when it did close and I did see the wire, the emotion of that day was more than just, “Wow, I made some money.” It was like I have just skirted death. It was relief more than anything.
Andrew: Do acquirers use that to their advantage? They know that when you’re a smaller company and you’re spending all this time on the acquisition that you’re vulnerable. Do they use it to their advantage, or do they step up and say, “We’re going to go home. Deal with that”?
Peter: It’s really dirty pool. In the past, Microsoft had been accused of that, sort of the bear hug.
Andrew: Yes. Right.
Peter: Then they say no. Then you have to come back crawling, and they do a deal for half the price. Microsoft was actually extremely professional in the acquisition. In fact, they don’t even do their own due diligence so that if the acquisition doesn’t go through, there will be no legal claim that they had any access to IP that they had gotten through the due diligence. So they have a third-party company do it. It’s a Chinese wall between that. In that way, if the acquisition does fail, they have learned nothing about you. They had to learn a lot, but they didn’t have your crown jewels or whatever.
That is an absolute issue. Because we were a non-revenue company when we were bought, that was the risky position. If you’re a non-revenue company, it is very risky because then, if it falls through, your investors are unlikely to keep ponying up. They’ll be like, “Okay. We tried and failed. It’s over.” If you’re a revenue company and you have a decent runway and money in the bank, you obviously have a lot more leverage and you can get a better price and you won’t buy from the bear hug.
Andrew: There’s so much that I want to ask about Toktumi. Maybe we should save it for the next interview. Let’s leave it here. Let’s save it for the next interview. If anyone wants to find out more about this, you guys have gone through a lot of iterations, a few pivots here. It’s just so interesting how you even got to Line2 that maybe we should save that and do a full interview.
If anyone wants to read about that, GigaOM has got incredible coverage of your company. They talk about what happened along the way. They get excited for you along the way. SeenIt also has some good articles. I hope that people read it. Actually, when you released the softphone, the one that failed, SeenIt, when they talked about it, said it was a slam dunk, can’t fail, great idea. Not too long afterwards, it failed. We all make mistakes. It’s really hard to predict what’s going to work.
Peter: The trick is you just have to get stuff out there. That’s where the “don’t be afraid to fail” does ring true in the startup world.
Andrew: You have another 10 minutes?
Peter: Huh?
Andrew: Do you have another 10 minutes to talk?
Peter: Oh, sure.
Andrew: All right. Let’s get into it. Let’s see. Let’s talk about this. You had this idea in 2006 for a company that was going to be called Toktumi, T-O-K-T-U-M-I for the transcribers. If you didn’t get it exactly right the first time, it’s okay. What was the original idea for the business?
Peter: The original idea was a business version of Skype. It would be entirely self-contained in a softphone that you download it, but built into it would have the ability to support multiple lines. It would have the ability to transfer calls. It would have server-based conferencing for up to 20 people so that you’d be able to run large conferences off of it. It would have an auto attendant, “Press 1 for sales, Press 2 for service.” It would be enterprise grade.
The stuff we’re experiencing right now, we were client-server rather than peer-to-peer. That allows us to create . . . right now this is more Internet stuff than Skype’s fault. It creates a very enterprise-grade, reliable system. We are still on that client-server architecture, which is more expensive, but it means we have thin clients and lots of stuff in the server. It allows for a better quality experience and more reliable experience. Anyway, that was the idea. We threw it out there and it just didn’t get traction.
Andrew: A softphone, for people who don’t know, it just means a software-based phone. It’s software that you install on your computer and boom, people can start making phone calls. Right?
Peter: Exactly.
Andrew: Okay. So you market this first version . . .
Peter: Yeah. Skype is a soft . . .
Andrew: Sorry?
Peter: Skype is a softphone, so yeah. That’s a softphone.
Andrew: Okay. Sorry. I see that the live audience is having some trouble with our audio, but we’ll just have to plow through and we’ll let them download it. The recording’s coming in okay. You come out with this first version. How much time did you invest in the first version of the product?
Peter: How much time did I spend on it?
Andrew: Yeah. How many months in development?
Peter: About a year, actually. I incorporated right after my non-compete with Microsoft ended. Then I worked on it with just a few people, very low burn, and no overhead for about a year. Then we launched a demo in January 2008.
Andrew: You launch this thing. Everyone gets excited about it. What was the response from the customers?
Peter: Even though we got people excited about it, the press got excited about it, customers didn’t get excited about it. If customers don’t get excited about it, that’s not good. When that happens, the first thing you got to do is start talking to your customers and you iterate. You say, “Okay. This isn’t what you want. What’s missing? Why don’t you like this?” You do focus groups. That’s what startups do well. You just have to get it out there so you can get feedback, and then you iterate on that feedback until you get it right.
Andrew: What were they telling you? Why did they tell you this wasn’t the right version, this wasn’t the right product?
Peter: Because they were business people. It wasn’t industrial grade enough for them. The problem was that it was, they understood the value proposition and they liked it because they did have issues with Skype, the reliability and stuff like that, and they wanted the features. But purely as a softphone on their PC, it wasn’t flexible enough for them. They also wanted to be able to use phones with it. They wanted to be able to route it to their landlines and route it to their cell phone.
We’re like, “Okay.” We started to add all that into it. Then they said, “We want a web-based component because we might not be at our PC. We want to access the system from the web.” I was like, “Okay.” So we built the web-based component. We already knew, and our are customers are telling us, “We want to be able to access it on our smartphones. We don’t want to have to have our PC with us to use the phone. We want to use it on our cell phone. We want to use our business line.” So, our customers told us where to go.
That’s how we ended up with Line2. It’s purely because of what our customers told us to do. If you’re lean enough when you’re in that experimentation phase, where you’ve got a really low burn, a few engineers, and you just iterate and survey, that’s what you do.
The only time you hire a bigger team and you start to put on additional executives and stuff like that, I’m the only executive in the company right now, is once you’ve hit the product where you think you can get enough traction to support having a big team. Now, we’ve got that traction and the features we’re launching next month, September 8th, which I won’t tell you about, are mind-blowing. We think we’re going to get really big traction. We are now willing to up the burn rate a little bit, cautiously. Our burn rate is still going to be a fraction of what a typical Silicon Valley funded company burn rate will be. We’ll be 15 employees instead of the eight that we are now, excluding customer support.
Andrew: All right. I can’t wait to see what the new product is. I’m seeing that there are some tech issues here. If they’re watching the video and they sometimes see me clicking around, it’s because I’m wrestling with the technology sometimes to make it work. I’m really disappointed that the technology wasn’t there to support us today, because I’ve seen you on camera before. You’re a great interviewee. You’re a great guest. You’ve got a lot to say, great stories, and when the technology doesn’t support that, that’s when I get frustrated. There’s some people who I interview, and the audience will know, that don’t really have enough to say and if the technology could maybe cause little problems during those interviews, it would help all of us. Unfortunately, it doesn’t go that way. It happened today with you. As I said earlier, I hope this won’t be the last time that you and I will talk. I hope it won’t be the last interview here. Glad to meet you.
Peter: I’m more than happy to come back if you want to try again at some point.
Andrew: Any time, I’d love to do it. Maybe after you’ve released the next version.
Peter: I think that’d be great. If you’re interested, I’d love to do that. Then we’ll do it in our office.
Andrew: [laughs] You mean I got to leave Buenos Aires?
Peter: That way, we’ll have 100 megabyte Internet instead of using this MiFi.
Andrew: Ah. You’ll be in the office where you’ll have the 100 megabyte. Yes. I like this.
Peter: I think let’s shoot for that. I’d love to. I’d be delighted.
Andrew: All right. Great. Thank you. Thanks for doing this interview. Thank you all for watching. Joe, thank you for editing this interview. Bye, everyone.
Peter: Bye. Thank you, Andrew. Bye-bye.
This transcript brought to you by www.SpeechPad.com.
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