Andrew: I got you some great information in the interview you’re about to watch. We found out about the setbacks early on, about working in a basement, rising up from all those setbacks, from the basement, to make the first million, and then multiple millions in business. You’re going to hear all that in this interview, and how and why he sold, and what happened to him afterwards. But before we get into this interview, I’ve got to ask you for your help.
You see, one of my new sponsors is Wufoo, and Wufoo offers surveys and forms that you can embed on your website. And I know that you can you can use forms and surveys to improve your product if you use them to get the right questions answered by your audience. So here’s the request that I’ve got from you: How? What? What should I do? What can I ask? How can I use this properly to learn from my audience how to build my product, how to make these interviews and how to make Mixergy.com better? How can I use Wufoo’s surveys and forms to improve Mixergy? So let me know; I’ll do it and then I’ll report back in future sponsorship messages here.
All right, I’ll also tell you that I’ve got two other great sponsors, including Grasshopper.com, and they’re the virtual phone system that entrepreneurs love. I’ve been using them for a long time, and I’ll report to you in the future how I’ve been using Grasshopper’s phone number to improve my work here. And Shopify.com, they are – they allow you to create stores online within minutes, and again in the future I’ll tell you some stories of people who are using Shopify.com to build their online stores. In the meantime, check out shopfiy.com and see how easy it is to build your own store there. All right, here’s the interview.
Hey everyone, it’s Andrew Warner, founder of Mixergy.com, home of the ambitious upstart, and I’ve got Pat Matthews with me today. He built webmail.us, and I invited him – and sold it to Rackspace – and I invited him here to Mixergy to talk about how he built it up, why it grew so quickly, and also why he decided to sell and what’s life like at Rackspace.
So, Pat, before we get into the story, can you tell people what Webmail was?
Interviewee: Yeah, definitely. So we were an email hosting company, kind of a – in the broader sense we were a software service company with our software being email. We essentially helped businesses put their email in the cloud as kind of — as it’s thought of today. Most every business in the world uses email in some way, shape or form. And traditionally, businesses would have to go out and buy their own software, buy their own servers, integrate their own anti-spam and anti-virus and kind of manage the whole thing on their own. And we built a platform that allows them to offload all of that management to us, and so we pretty much host their inbox, protect them from spam, viruses, et cetera, et cetera. And we feel that we’re part of the larger movement where businesses are starting to take a lot of their IT and put it into a cloud with companies like us here at Rackspace.
Andrew: Okay, so I did a little research on you. I looked up your LinkedIn profile to get a sense of what you did before you launched this business, and there wasn’t anything before this. Did I miss something? W as there something left off your LinkedIn profile?
Interviewee: Probably not, although I haven’t updated in a while, but I was at Virginia Tech. I was a student at Virginia Tech before we started Webmail. And you know, when we were going to school that was when the whole Internet boom happened, when we ended up dropping out of school and starting our original dot com startup. That’s when the market crashed and we essentially reinvented the company two or three times, and ultimately it became Webmail and then a company that we grew up and sold to Rackspace.
Andrew: Oh, cool. Then I’m glad to hear that because I’d like to hear about the different changes that went on. So let’s talk about – you built the company right after you graduated or soon after you graduated?
Interviewee: Yeah, so me and a couple of guys that I was friends with at Virginia Tech ended up dropping out of Virginia Tech our senior year to get the business started. Once our dot com – essentially our dot com failed and once it failed, we took turns going back to school to get our degrees while we reinvented the business at the same time. So that’s kind of how that happened.
Andrew: What was the original vision for the original business?
Interviewee: So the original business was all about creating a website where users can do two things. So it was all about building user-generated content where users could go online, create profile pages, put local event information online so that the actual user of this service would then be able to come to the website and find out what’s going in their local community, like on a Friday night or a Saturday afternoon. A lot of companies are still trying to tackle this problem today. I mean there’s companies like Yelp and CitySearch, and I mean even Facebook and others to a certain extent, but our whole void in the market that we saw, which we actually still see today, is if you want to go and do something, you want to go watch a movie – or, I mean, I guess movies are kind of easy, but if you want to go see a band
Interviewee: They’re kind of easy. But if you want to go see a band in your local town, or you just want to go out on a Friday night, there’s not a great destination site where you can go and find out kind of all that local event information. So that was all in our original model. It evolved rapidly from there, like most startups. You know, the original idea didn’t quite work, but the ultimate one did.
Andrew: OK. Well, if you don’t mind, I want to go deep into the details of how it all changed, and what happened.
Interviewee: Yeah.
Andrew: So what year was this when you first launched?
Interviewee: We launched the original business in the year 2000.
Andrew: OK.
Interviewee: March 2000.
Andrew: March of 2000.
Interviewee: Right.
Andrew: And how much money did it take to launch it? And where did the money come from?
Interviewee: Yeah, so we raised, I’m going to guess, in the neighborhood of 40 or 50 thousand dollars to get the business launched. We raised that money from, I would say, friends of family mostly, a little bit of extended family, and then friends of family. And we did it in small chunks. I mean $5,000 here; $10,000 there. And this is before we knew about like, you know, what capital raising was all about. I mean, we probably didn’t even know what a venture capitalist was at that point. But you know, we had a lot of people that just sort of saw our energy and drive, and believed in us enough to write a small check. And that’s kind of how we got the original site off of the ground, but our capital needs evolved from there. So we can go into that as you desire.
Andrew: OK, so how did you know… Well, yeah. You launched it, and then what was the reaction? What happened?
Interviewee: So we launched our original website. I mean, we got a lot of really good reaction. I mean, we really tried to get the site going in our local community in Blacksburg, Virginia, which is where Virginia Tech is located. And we had a great reaction. I mean, people were using the site. It was getting popular. I mean, it was also one of these things where there was so much hysteria around the whole dot com thing, that like, you know, the local news channels came and interviewed us. And there was just a whole lot of buzz around what we were doing. So, from that standpoint, it was good. I would say, though, that we were way before our time in a lot of things. Like user generated content is one. Like the whole idea, in the year 2000, of normal kind of non-techie people putting content online themselves was just so foreign that we couldn’t really get the content built up the way that we had hope to. And so, if you don’t have the content, then even if you get the users to your site, if there’s not a lot of content, they leave and they don’t come back. So, that was part of our challenge. And that’s ultimately why that first piece of that first concept really just never took off, like we wanted it to.
Andrew: Did you seed it with your own content at first?
Interviewee: We did. We seeded it with our own content. We even hired kind of what we called marketing reps back in the day, who would go around town, and you know, work with all of the different publishers of content; restaurants, bars, you know, art centers. All that kind of stuff. And so we did have a lot of content, but that model just wasn’t very scaleable. I mean, our idea for how to scale it was to make it really easy for the user-generated content to go online. To make it really easy for businesses to post their own, like happy hour specials, and entertainment guides, and all that kind of stuff. And that was the part that, it just, we couldn’t make it work.
Andrew: What kinds of things did you do to get them to submit their own content?
Interviewee: Well at first, I mean, I’d bring my laptop to their, you know, to the establishment. I mean I did a lot of knocking on doors, a lot of just one-to-one education. I mean, I think, our thinking was that if we could just get it going, and kind of, you know, light the match, that the fire would take off from there. But it just wouldn’t. And again, I think it’s one of these things that a lot of entrepreneurs go through, where you’re just ahead of your time a little bit. And you know, that’s why a lot of startups actually fail. I think timing is really critical, and we were just definitely ahead of our time there. And who knows if it would have worked, if we would have hit at the exact right time. But I do think that, you know, of course, today, user-generated content on the web is huge. And people have no problem, you know, putting their own thoughts online these days. And there’s all kinds of different ways they do it. But back then, we just couldn’t make it happen. We just couldn’t get the viral adoption to really pick up.
Andrew: OK. Now Pat, often when I go through stories like this with entrepreneurs, and they talk about the setback that they had, the very next thing we go into is how the next idea, or the one after that, was a hit.
Interviewee: Yeah.
Andrew: And I think I leave my audience with this feeling that, well, these guys who were successful, they get over their setbacks quickly. It’s not as painful for them as it is for Andrew, or as it is for me in the audience. And I can’t. I don’t want to leave them with that fake vision of business. So, I want to ask you if you could remember what it was like when you knew it wasn’t working. What you were feeling, what you were going through.
Interviewee: Yeah.
Andrew: …going through.
Interviewee: Yeah, so we actually went through a couple stages of it not working, and so I would say that, when we realized this one wasn’t working, I mean, it was a challenge for us. But I think that we were really disciplined at realizing that, hey, this is going nowhere. Or when we started realizing, at least, and we probably realized six months too late to be real honest with you, but I think that once we did realize, we were real disciplined about changing our model. And, you know, once when we changed our model, it kind of, it was a epiphany we had one day about how we should attack the market differently. And so I think that actually re-energized us. And so once we were re-energized, you know, that kind of gave us the momentum to really kind of get started on the next “go to market” strategy. And it wasn’t until that one failed, where the real gut-wrenching kind of emotional pain started to set in for us. So I can go through all of this.
Andrew: I’d love it. In fact, we’ve got two different periods here that I’d like to talk about. I wrote down the word “epiphany” to remind me to come back to ask what the epiphany was. But let’s talk about the six months where, if maybe you were standing outside of your body, maybe if you were looking at yourself like your own father in the future, looking down at you, you’d say, “This is what you have to notice.” And you want to hold yourself and just shake you. What was it like? What weren’t you seeing then? Why weren’t you seeing it? And by the way, that was the worst analogy I think I’d ever given in any of my interviews, but you get my point.
Interviewee: Yeah.
Andrew: In the six months, what weren’t you seeing?
Interviewee: Well, you know, one of the things that I really remember is, I remember coming home one day and watching the stock market just bottom out. And that was like a month after we had launched our original business. And this was, I mean I was just so clueless back in the day. This was when I was, you know, in my mind, I was like, “Well, I’m glad that we’re not a publicly traded company because the stock market crashing really isn’t going to affect us.” And I think that we carried that mentality for a little while longer. But what we realized is that we weren’t going to be able to raise the money that we needed to, you know, even if we got some momentum, we weren’t going to be able to raise the money at that time, to get our idea off the ground. So that was kind of a big one, if I would look back on, because that really had a lot of effects on us. I mean our whole idea was to kind of prove our model out in our hometown, and then go out and raise the money to kind of expand it out. And you know, the capital markets, you know, the whole dotcom crash, I mean it changed everything, at least for a little while. And you know, so I think that kind of tying together the macro economic effects with, you know, how that would impact our business, is something that I wish we would have thought better about. Another thing, too, is that, you know, it was one of these things where, back then, it just sounds crazy to say today, but revenue just didn’t matter as much. Like making money didn’t matter as much. And I think that we got caught up in a lot of that hysteria. And you know, look, you see the smartest people in the world, at least theoretically, who were launching these dotcoms, and making millions and billions. And before they even, they make a lot of money by selling their company before they even hit any revenue or profitability milestones. And so, I think that we got away from like, core business principles for a long time, too. And I think that tha
t kind of distracted us for too long. And so, I think that, you know, look. I don’t think every start up, by the way, needs to focus on revenue right away, or definitely not profitability right away. But I think that you need to have a path to all of that stuff. And I think that, you know, we just got a little bit too caught up in all the hysteria. And then when everything bottomed out, we didn’t realize that that bottoming out would actually affect our business in the way it did. But, you know, I’ll tell you that potential investors stopped calling us overnight. I mean it was just such a different landscape. But still, you know, look. We probably had a little chip on our shoulder, and you know we thought that we were going to win no matter what. And I look, I think a little bit of that made us go down the wrong path for too long. But I think a little bit of that also helped us ultimately succeed. So it’s hard to say, you know, what’s good and what’s bad. But if you want, I can describe what that epiphany was,
Andrew: Yeah.
Interviewee: in terms of changing our model up. And then I can go into sort of the gut-wrenching failure days, if you like.
Andrew: Yes, please. So what was the epiphany?
Interviewee: So, the epiphany was like if you remember what I talked about in terms of our original model. So we built this website with this user-generated content platform that would allow really anybody to create an account with us, and put content online. Well, we kind of had an epiphany one day that what we were actually good at is building some of the software and technology. And what we were bad at, is building the content. And so that then we realized, you know, we kind of looked out into the market and said that there is a lot of content in this world…
Interviewee: …But then, we realized, we had to look out into the market and said that there is a lot of content in this world. It just hasn’t all made online yet. So, we took our whole kind of dot-com and all the technology that powered the dot-com and we repackaged it in a way that we can go out and sell it as a software or as service package. The idea was we could go out to newspaper publishers, and just all kinds of content publishers that have content that already exists, and help them be more effective with their online strategies.
I would say, to a certain extent, the model worked, but we realized quickly that it was not that scalable. Every newspaper wanted a completely different type of software solution to power their website. So, we were really trying a product ties a website engine that one product, while it was customizable and had different templates and all that kind of stuff, every newspaper just had radical thoughts on how they wanted their newspaper to work. So, we probably ended up landing ten newspapers, but the revenue wasn’t that big. I mean, this was another problem is that we were selling it to a market that was just really struggling from the financial perspective. So, it just was not very lucrative.
So, this is when now, I mean, if I had to guess where we’re a year and a half in now, we’re out of money, the buzz is gone. We dropped out of school. We don’t have degree. It’s just sort of all like emotional stuff that was really hang on us. I had gone and picked up some part time jobs on the side, worked in some crazy jobs in some crazy hours. I mean, it was a really, really tough time.
So, this is when me and my business partner, we decided to take turns going back to school. We didn’t want to give up on the business, but it’s a real tough time, and it’s very gut wrenching. I mean, I remember that pit in my stomach. It was tough, it was real tough time. Plus, by this point, we probably raised a hundred grand from friends and family. I don’t think entrepreneurship should be afraid of failure because I think it’s part of the game. But, look, it was gut wrenching. I mean, it was tough.
Andrew: Yes. I know. There were nights when I wasn’t able to fall asleep. I mean, literally, you say you can’t fall asleep, it sounds like a cliché. No, it’s true. It afflicts you. And then the next day, I can’t imagine the damage it did to me.
Interviewee: Oh, yes. Still, I can’t sleep. I mean, Ambien is my new best friend, no question about that.
Andrew: Still can’t sleep. Why?
Interviewee: I don’t know. So, even today, I’ve sold our business, we sold it in a way that we became a part of a larger company. So now, we run and are responsible for a really large division in a big and rapidly growing company, which is Rackspace.
Andrew: High profile, too.
Interviewee: Yes. You know, I’m just as engaged and committed as I was when it was two or three of us sitting in a basement. I don’t know, I guess I’m just one of those people where it’s hard for me to turn my mind off and then sort of it’s always spinning. Night, it’s no different than day.
Andrew: But you’re not going to be out on the street, you’re not going to be sleeping in a cardboard box outside of Rackspace, even if the worst happens. True?
Interviewee: Right. No, that’s very true, but I guess I just don’t think like that.
Andrew: Okay. I get that.
Interviewee: I take my responsibility very seriously. I don’t know, I’m just somebody that work really hard, I’m really ambitious, and I’ve got a lot of responsibility. I mean, I would say that that is the one thing about an entrepreneur that sticks with the rule is the responsibilities just change a lot overtime. You know, it’s not just about me, and really never has been. But you’re right, definitely, the worst could happen. I could get fired tomorrow and I’m going to be fired, but that is not necessarily how I think. I think about the responsibilities that I have, the opportunities that we have as a company. I don’t know how much just concentrating on that. Different sets of worries, like I don’t have to worry about making payroll tomorrow like I used to.
Andrew: So what do you worry about?
Interviewee: Well, I worry about competition. It’s a very competitive market. We are in a very rapidly growing space, so our competitors have kind of turned from companies that look like us to companies like Google and Microsoft and others. So, we spend a lot of time trying to figure out how we’re going to outmaneuver those types of companies. There’s a lot of people management and just people challenges that you’re always going through in a larger business. There’s a lot of financial milestones that we have to hit these days. I mean, it’s just a complete different set of thinking and worries. But, then again, it’s all good, too. It’s not like I’m up at night crying myself to sleep or anything, it’s just that I’m just constantly thinking and it makes it hard to fall asleep.
Andrew: I got to say, when I sold my company, I thought that the days of not being able to fall asleep were over. From then on, life was just going to be like a meditation retreat, that kind of calm and acceptance. It didn’t happen, and I kind of wish that I could go back to my 22-year-old self and say, “You’re not up nights because there’s something wrong with you, because you’re on the wrong track.” It just happens. In addition to worrying and staying up late at nights or not being able to fall asleep, don’t also worry that not being able to fall asleep means you’re on the wrong track and that you’re a failure or weak or any of that.
By the way, this is not the Oprah Show. We’re going to get to the good part here. We’re going to be also very inspiring. So, let’s talk about the next step. You’re now going back to school. You’re finding other money. You’re trying to figure out what to do next. What do you ended up doing?
Interviewee: Yes. So, what ended up happening, and this is how it transitioned from kind of our second failure to our ultimate success. When we had turned our dot-com software into more of a software as a service package,…
Andrew: From then on, life was going to be, like, a meditation retreat, that kind of calm and acceptance. It didn’t happen, and I kind of wish I could go back to my 22-year-old self and say, “You’re not up nights because there’s something wrong with you or because you’re on the wrong track.” It just happens. In addition to worrying and staying up late at nights, or not being able to fall asleep, don’t also worry that not being able to fall asleep means you’re on the wrong track and that you’re a failure and weak or any of that. By the way, this is not the Oprah Show. We’re going to get to the good part here. It’s going to be very inspiring. So, let’s talk about then the next step. You now are going back to school. You’re finding other money. You’re trying to figure out what to do next. What do you end up doing?
Interviewee: So, what ended up happening–and this is how we transition from kind of our second failure to our ultimate success–is when we had turned our Dotcom software into more of a software as a service package, one of the components that we made available to our software as a service customers was email accounts. And so, our whole idea for the newspaper or whoever the publisher customer was was, look, we’ll help you put your website online. We’ve got this awesome tool that will allow you to update it all the time just by pushing a button, and kind of, like, Yahoo and some of these other destination sites out there, you can offer email accounts to your subscribers. And so, what ended up happening though as we moved into 2002 was businesses started coming to our website, and they stopped asking us about our core product and they said, “Hey, can you just host our email?” After enough of them did that, we said, “Hmm, we might have something here”, and so we kind of set a couple of milestones for ourselves. And then, we made one of the biggest decisions in the history of our company. We said, “You know what? We are going to help our handful of customers find a new home, and we’re going to get laser focused. And we’re going to help businesses move their email off premise and into the cloud.” We weren’t saying cloud back then, I promise. But, we were going to help them. We were going to host their email for them. From that day forward, some time in mid-2002 we got really, really laser focused on what we think of as email hosting. And inside the category of software as a service and we got rid of everything else. We kind of ripped the Band-Aid off, if you will, and we got super, duper laser focused. Also, at that time both Bill and I ended up graduating from Virginia Tech, and we moved into a basement where we incubated our new company. We spent two years building our company out of a basement, and we really did build it up. We had a little operation going there. We h
ad six people coming into the office every day. We signed our first Fortune 500 customer. Now, I will tell you that one of the things that we did is we always, always, always put our core production servers in world class data centers. So, this was kind of one of those things that always gave us, like we always felt good about what we were doing because even though we were working out of a basement, we were not putting our customers’ data in a basement. So, that is actually what ultimately led us to our partnership with Rackspace because we were this little tiny start-up working out of a basement, but we had put our servers in world class data centers hosted by Rackspace that at the time was really emerging as the web hosting leader of the world. That’s how all that came about, and then once we started to gain more traction in our email hosting business, you know, we labeled ourselves as the email hosting company. And we built all of our marketing efforts around this really new focus. We kind of changed up our management team a little bit and got everybody focusing on their strengths. That’s actually another thing that entrepreneurs do, by the way. You’ve got to figure out what you’re good at and get focused on it. Things really took off from there. We built the company out of the basement. I kind of think of it as incubating the new business for two years. We had thousands of customers before we moved out of the basement. That was also the point in time where we went back to one of our early angels. We raised a little bit more money from him, and then we ultimately put a plan together to go out and raise larger capital.
Andrew: OK. Let’s talk about that in a little bit more detail. First thing is you had this core product and all people wanted, or they were gravitating only wanting the email portion of that product.
Interviewee: Yes.
Andrew: Did you first try to convince them to look at the big picture? Did you, at first, try to sell them on the rest of it? What was that transition like?
Interviewee: Not really because customers really were coming to us with very specific needs. See this was the time, like 2002 was the time, when spam really started to become a pain in the ass. It’s when the computer viruses really started to spread through e-mail and that. I mean, this was all happening for a long time, but I guess the reality is the masses were now adopting e-mail as an everyday business solution. So, it drew a lot of attention to the nuances that it created which, in turn, as it started annoying more businesses that, of course, created more spammers. It created a whole industry as well. But this is what was happening. Businesses were saying, eh, I need e-mail for my employees, but I just can’t deal with all this spam and crap that comes with it. And so, they were coming to us with very, very specific needs. I’m kind of a fan of it. I think that entrepreneurship and even business overall is all about solving needs and not just trying to sell people a bill of goods. And so, we understood quickly that the business that we were in and the problems that we needed to solve. And so, we just got really, really focused on doing just that.
Andrew: I read an old quote of yours about the need to charge. Of course, webmail.us was a product, a web service that you guys charge for. Can you talk about the decision to charge, and why you stuck with that even as you were watching others offer things for free?
Interviewee: Absolutely. I think it’s a great point, and we decided to charge for a couple of reasons. Number one, we wanted to really focus 100 percent of our efforts on business needs. For years, there had been–the consumer markets had been dominated by HotMail and Yahoo and a whole bunch of others. Even today, there’s Gmail and that consumer market continues to evolve, but we saw the need to solve problems with businesses. And so, one of the things that businesses need, and I think is essential for them to succeed with technology, is services core. And so, for us even really from day one when we reinvented our business, we realized how critical the service angle is to technology in business. And so, we wrote the consumer world as one we did not want to plan. We didn’t feel we had the right to go and try to play in that world. And so, playing the business world …
Andrew: I’m sorry, Pat. I’m hearing a lot of outside noise on the mike. Is there something else going on there, or is it just you in a conference room?
Interviewee: It’s just me in a conference room. Is that better?
Andrew: Yeah. I think if you get closer we get less echo.
Interviewee: OK. Great. Yeah, so being in the business world where service really matters I just think you have the right to charge for that service, and boy, frankly, it’s impossible to offer a really great level of service without charging in the first place. And so, look, I think businesses realize that. I think the ones that care about service are happy to pay for it. I think that, again, kind of gets back to what you asked me earlier about the business principles that we were missing in the beginning, in the early years of our company. We just didn’t have a business model, and those happen to be pretty important.
Andrew: Having a business model, yeah. Amazon, you guys built your business on top of Amazon. How did you decide to do that?
Interviewee: So, we actually built our business on top of RackSpace. What we ended up doing is when Amazon came out with all of their cloud computing initiatives, what we ended up doing was backing our services up to Amazon. And so, we ran all of our primary data centers and servers to RackSpace, and we’ve been doing that since, probably, 2002-2003 time frame. And then, a big part of our data is these really highly scalable applications sitting on top of RackSpace servers and RackSpace data centers throughout the world. But then, we needed to back up all of that data as well, and Amazon presented a really compelling way to do that for us. And so, that is what we have done with Amazon.
Andrew: I see. For a long time, from the articles that I read from the period, you guys were seen as a case study, as a model of what could be done with Amazon, but you’re saying that all you were doing was backing up.
Andrew: …Amazon, but you’re saying that, all that were doing was backing up. It’s not you built your business on top of Amazon the other way businesses were being built now, in the cloud.
Interviewee: Absolutely.
Andrew: OK.
Interviewee: See, another thing there too, is that Amazon presented, you know, kind of a commodity layer of computing that we really thought would be great for backup purposes. When you think about e-mail in the corporate environment, and like e-mail calendar, all that kind of stuff that we host for businesses, and things like Up-Time, or Up-Time Security. A lot of those types of things, I mean, they’re essential. I mean, that’s our business, that’s essentially what we do. And so, we couldn’t really rely on Amazon for that. But in terms of like hosting data that is just purely backed up, like things like an hour of down time here and there, it just doesn’t matter as much. Then, so, that is why we kind of ended up going, using Amazon for the commodity layer, and RackSpace for the primary layer.
Andrew: OK. A lot of businesses use Microsoft Exchange. And I know that one of the issues you guys faced at the time was that you didn’t have MS Exchange support, and that’s also why RackSpace was a good company to work with, since they did. Why was having support for Exchange so hard to implement?
Interviewee: Well, can you still hear that feedback, by the way?
Andrew: Yes. It’s strange. I wonder what it is. I wonder if you maybe turned around and faced the other… Oh wait, I think it’s the kind of echo you get when you’re in a room without much else there. Oh, that helped. That helped a lot. Thanks.
Interviewee: All right. When it picks back up, I’ll just try to adjust it. So, why didn’t we offer support for Exchange when we were an independent company? So, it’s actually a really easy answer, man, because it comes back to the whole focus thing. And so, as a young start up, we were very determined to carve out our niche, and be very good, you know, at a specific thing. And I think that it’s easy for start ups, especially technology oriented start ups, to… You know, I think that a lot of times technologists are very confident in their ability to do everything. Just because you can do everything doesn’t mean you should. And so, we were very determined to stay focused and to be really, really special in one area. And that’s exactly what we did, and that’s where we built our value, and that is why we were ultimately acquired, and ultimately became, you know, quite successful. And I think that, once we merged with RackSpace, it was a great time for us to start to diversify our product portfolio, because we had the resources to do that, number one. And when we were an independent company, I mean, we never raised the type of capital you read about on TechCrunch everyday. I mean, we were very much a, we became very much of a bootstrap company that raised a little bit of money, but we mostly funded our business out of cash from operations. And so, you know, we had to be very careful not to over-extend ourselves. Like another thing we didn’t do that we could of done, is we could have easily gone into web site hosting. I mean, you think about it, just about every business in the world that needs e-mail also needs web site hosting. It could have been easily done, it would have given us revenue-pop right away, but ultimately would have decreased our ability to stay focused, and may have ultimately hurt our long term value. So, you’ll hear me say “focused” a lot, because I think that’s something most entrepreneurs are bad at, and need to get good at in ord
er to be successful.
Andrew: Yeah, Andy Dang in the audience actually wrote that. That, focus is one of the best things, or let’s see, actually. Just like an untech focus on one thing and make it best. Focus on one thing and make it best, yeah, a couple of people are picking up on that. Definitely a theme with Pat, focus, says Fred in the audience. You are profitable, right?
Interviewee: So, we at WebMail, we were about break-even. So, we never had the ability to lose a lot of money. And I actually do believe that in start up companies, like that’s the reason to go out and raise money, so you can make big investments for your future. We never really had the ability to do that, because we raise money in two rounds. OK. In two phases of our business, I should say. So, in the first, failure phase if you will, we raised about $130,000. And then in our more successful phase, we raised about a half a million dollars. And so, you know, we basically got to the point where the bank account can only go but so low. And so, what we really did is, we continued to reinvest, any amount of money that we brought into the company, we would reinvest into the future, while keeping a small cash cushion…
Interviewee: …And so, what we really did is we continued to reinvest any amount of money that we brought into the company, we would reinvest into the future while keeping a small cash cushion at all times.
Andrew: What would you invest in? You didn’t need hardware much. Or maybe you did, actually, since you’re hosting your own servers.
Interviewee: Right. So, servers is definitely one. I mean, as you grow, you have to add new servers. Just to give you an example, we actually became Rackspace’s largest customer at the time because we were running so many servers. That is number one. Number two, we also wanted to aggressively expand our product itself. So, while we didn’t go into other product lines, we did advance our single product quite a bit. So, we would want to reinvest in mostly software development which means software developers. That was a big area. Then, I would say the investment was in software and then, as we would grow, we would invest in customer service people and servers.
Andrew: Okay. The basement, you talked about that a lot. What’s the significance of being in a basement at that period?
Interviewee: Well, a couple of things. First of all, it was cheap, number one. That was really important. I think, at the time, it was years before I ever drew any kind of a salary, for example. So, we could justify the company paying for the entire basement, of which, I had room down there. So, my room in [xx].
Andrew: Oh, you had like a bedroom in the basement, too?
Interviewee: Oh, yes.
Andrew: Wow! Talk about bootstrapping. Okay.
Interviewee: That was my office.
Andrew: But, you get to sleep in there, too?
Interviewee: Oh, yes. Oh, yes.
Andrew: Wow! Okay.
Interviewee: Yes. So, another thing, too, is as a startup, I mean, you’re working around the clock. It was a lot easier to work around the clock when you’re living in the area that you’re working. Another big thing, too, is no traffic if you’re living where you’re working. So, that’s all these little things that add up, they’re actually big things in my opinion. It was just easy. I mean, you set a folding table and a couple of chairs and some phone lines. It was just all simple. That’s why the problems are getting bigger is there’s all kinds of overheads that you need to add in that make it more difficult to be productive. When we’re working out of the basement, it was cheap, it was productive, it was easy, and it was a lot of fun, too.
Andrew: What size sales did you have before? By the way, it’s amazing, I bet you’ll look back on those days as some of the most fun days that you had in business.
Interviewee: Definitely.
Andrew: What size sales did you, guys, have when you sold?
Interviewee: So, we were on a one rate of about $8 million dollars when we sold the business. We are a company that brings in subscription revenue. So, what that means is that customers pay us every month. And so, we look at run rate as a pretty important metric in our business. At the time, when we actually close the acquisition, if you take the amount of revenue that we were doing in the month of the acquisition closed, you multiply by 12, to around $8 million.
You’ll probably ask me how much we sold for as well. That is something that people can go and try to read about in the documents that Rackspace put together when we went public. I, personally, one day want to be able to talk more in depth about the deal itself, but it’s kind of one of those things that we don’t really talk about.
Andrew: What part would you want to go in depth into it now? But, if, in ten years from now, what part would you want to talk about and why?
Interviewee: Well, I think, the whole selling process was just fascinating. I think it was a real fascinating event for any set of entrepreneurs to go through. There is a lot of learned lessons there. But you know, look, it was a really cool experience. The type of deal that we did was very intriguing, if you will. One of the things that we did, I mean, I’ll tell you this much and then we’ll kind of move on here. We sold our business to a privately held company for almost 100% stock. So, we were still really taking a big risk because it was not a liquidity type of a deal. So, there’s a lot of fun stuff to kind of think about in a transaction like that. It was a great experience, and, definitely, no regrets for me.
Andrew: And you still had your shares when they went public.
Interviewee: That’s correct.
Andrew: Okay. All right. Then, I’ll feature to what you said and move on from there. Here you are, a guy who had failure. I wrote down the phrase, “Got wrenching,” since you said that a few times about some of your earlier experiences. You hit $8 million in sales before you sell it. Can you talk about that first million? For many people, that’s the validation point. What was it like for you? Do you remember it?
Interviewee: Yes, I do, actually. I remember we were all sitting in our upstairs conference room. We actually had an office at this point, so that was pretty cool. I guess, we didn’t have a million dollars in sales in the basement. But, I remember we were in like one of our team meetings upstairs, and I hadn’t even realized it, to be honest with you. One of our guys, Trevor, actually, he mentioned that we had just hit like a million dollars in sales. Everybody cheered and clapped and it was really cool. That’s kind of the part that I remember more than anything. I remember that we actually didn’t spend as much time thinking about revenue everyday as we did customers and mailboxes.
Andrew: And you still had your shares when they went public?
Interviewee: That’s correct.
Andrew: All right then I’ll be true to what you said and move on from there. Here you are, a guy who had failure – I wrote down the phrase “gut-wrenching” since you said that a few times about some of your earlier experiences. You hit eight million in sales before you sell it. Can you talk about that first million? For many people that’s the validation point. What was it like for you? Do you remember it?
Interviewee: Yeah, I do actually. I remember we were all sitting in our upstairs conference room. We actually had an office at this point so that was pretty cool but we… so I guess we didn’t hit a million dollars in sales in the basement. But I remember we were in like one of our team meetings upstairs and I hadn’t even realized it to be honest with you but one of our guys, Trevor actually, he mentioned that we had just hit like a million dollars in sales and everybody cheered and clapped and it was really cool. That’s kind of the part that I remember more than anything. And you know I remember that we actually…we didn’t spend as much time thinking about revenue every day as we did customers and mailboxes. Those were kind of the metrics that we wanted to drive because if we drove those then the revenue would kind of take care of itself. So those are the ones that I remember the most. But yeah, you’re right, I would say that that first million dollars is the hardest to get to. I would even say that the first couple hundred thousand is even the hardest because that is where you have to prove your model out. Once you prove your model out…kind of the way I always thought about it is if we can get 100 customers to sign up with us in a week, we’ve probably got something. That probably means that there’s 100 more out there that will sign up. And so that’s when you kind of know that you’re onto something. And then people used our product, they loved it, they stayed, churn was extremely low and we realized that we really had something there. And from there, I mean a million’s cool and then a couple million and then it kind of gets fuzzy. I’ll tell you one of the coolest things that happened to us is right before we sold the company we ended up winning an award for… Inc magazine puts out the fastest growing private companies in America every year and we hit number 217 on that list. And that was really cool. That’s kind of one of the ones I always
remember. I had a little plaque hanging on my wall at home actually. I mean, that’s one we were really proud of. I think we all had such a level of pride in the success we had, especially because we tasted failure for so long. And see, this is one of those things that I think everybody gets caught up in the media hype and you sort of see these companies like, you know, Facebook and twitter and everybody thinks it’s going to be Facebook and twitter land when they go to start a business and I would say for most of the time, like probably 99.99999, as many nines as I can say, per cent of the time, it’s not that. But that doesn’t that mean you can’t have an awesome level of success without kind of hitting one 4o f those homeruns if you will. Look, I would say unfortunately, that most entrepreneurs actually end up failing. And I think once you taste that failure, success feels that much better.
Andrew: Was there a point where you knew…where you could just let the air out and go, “All right. We’re okay for now”? Was it after the sale that you were able to look back and say, “All right, the danger’s over; let’s settle into the next stage of my life.” Or was it when you guys went public or was it after the first hundred thousand in sales?
Interviewee: You know, I don’t remember a specific time. I think there’s a lot of those times in short increments because when we bring on a big contract, for example, or we sign a big customer and that check actually comes in I think those are those types of times. I’ll tell you very early on we had one of those times where we had a…we were still operating out of our basement and we signed a fairly large customer at the time and we had…you know how big companies are. You sign them up and they take forever to do everything else. And this company in particular I bet it was like 60 or 70 days before we got the check and our bank account was really struggling and the day that we got that check – it was for $50,000 – and we had about $1200 in the bank just to put that in perspective. And so that was one of those one where we took the rest of the day off and I think we went and had a beer something like that. That was one of those moments. I would say that after that it’s just…There’s probably a whole bunch of those moments. Like when you land a big customer, you get the check in. Or the end of the month you balance everything out and you ended up having a good month. There’s a lot of those. I would say with Rackspace, once the deal finally closed, that was one.
Interviewee: I mean, that was one. But there hasn’t been any kind of moment where everything is perfect and I’m going to go to Argentina and spend a few months, like you. I haven’t quite done that yet.
Andrew: Well, anytime you’re ready come on down here, we’ll have a steak and a Malbeck.
Interviewee: Don’t tempt me.
Andrew: Actually, you know what? Funny thing. Last night I saw a guy who I interviewed here who happened to be in Buenos Aries at a party. People are coming over. And I hope that if you do, and when you do, we’ll get together here. Mark Wells in the audience is asking what changed afterwards. How did the business change after the sale?
Interviewee: Well, I would say the biggest change has been the growth. So we…so essentially what happened was once we were acquired we became a division of Rackspace. At the time we had, let’s think of it in terms of my responsibility if you will; and so there was about 50 full time people in my organization when we were acquired and two and a half years later that’s grown to 250. So that just gives you an idea of how fast the business has grown. And another thing to is we have about half of those people that are still in Virginia where we started the business. The other half is in San Antonio here Rackspace is headquartered. So there’s some geographic challenges that we have had to work through. Which I think, by the way, that is a growth type of thing that you just have to deal with. You’ve got to locate where good people are and so we are getting more and more geographically dispersed as we grow. But I would say growth has been the driving factor. And a lot of things have come from that. For example, we have badges now that we have to go click in and out of the door. We didn’t have those in the basement. But most everything has been really, really good. I think we have jelled very well with Rackers, Racker is a Rackspace employee by the way. I think that it’s just been such a really good fit. So many of our values were aligned in the sense of, we were both before the merger, we were both kind of technology product companies but we thought about service first every day. And I think that that really makes a big difference. So our cultures were just very much aligned. We see the same world from the same set of eyes. So I think it’s been great; it’s been really great.
Andrew: The name. It started off as Webmail dot us. It changed. Can you talk about…can you say what it changed to and why you changed it?
Interviewee: Yeah, so we’ve changed our name probably, I don’t know, seven or eight times it seems like since our very early start up days…
Andrew: Actually, I was going to start asking you about the different name changes throughout the interview but I said it wouldn’t make sense. It would be too many names to keep straight but…
Interviewee: I won’t go through them all but in the early days we had, in the beginning, a kind of dot com oriented name and then we kind of moved to more like business sophisticated name. And then I think we didn’t like that one so we changed it and then ultimately we went to Web Mail. We had some challenges with the name “Web Mail” because web mail became a very generic term in the industry so it confused a lot of people. And then the dot US extension just added onto the confusion and so that’s when we changed the name to Mail Trust. At the time, we were going back and forth at Rackspace about should we build kind of that single specialist brands that signify a certain product line? And we did go down that road for a while but then we realized that the Rackspace name is the one we ultimately want to build and we want to put all of our brand equity into. And it has the most power in the industry. So when you look at the types of companies that we’re competing against these days, we just believe that like one really important brand is just smarter for us than having a portfolio of different brands.
Andrew: And so what is your division called now?
Interviewee: So we’re called the E-mail and Apps division of Rackspace. But really, I mean, you can just think of the company as Rackspace. In fact, the formal name of the company is Rackspace Hosting and that is really the brand that we are trying to build.
Andrew: So Robert Scobel, working for you guys, right?
Interviewee: Right.
Andrew: He is out there, he is interviewing. He’s interviewing people in the company, outside of the company. How does my interview compare to Robert Scobel’s interview? Did I do as well? Did I get close?
Interviewee: No, look. I think you’ve’ done a great job. I’m not sure that he’s ever interviewed me actually. He spends a lot of time out in the community kind of interviewing other companies and he’s very plugged into the tech community. So I think he spends more time outside of Rackspace than he does inside of Rackspace. And I think that’s a really good thing so…
Interviewee: … all right, other companies. And I mean, he’s very plugged into the tech community, so I think he spends more time outside of Rackspace, than he does inside of Rackspace. And, you know, I think that’s a really good thing, so.
Andrew: Yeah. All right. Is there anything that you want to leave us with? Any advice that you would give your 20-something year old self?
Interviewee: Yeah, so, a lot of what I’ve already talked about, I think that to be a successful entrepreneur, I mean, I think, there’s a whole lot of things you’ve got to think about. I think, one is focus. I think that, you know, so many times that you know you want to do whatever. I think a lot of entrepreneurs, they want to do. They want to take on more than they really can, simply because they think they have that capability. And I think that really getting focused in a certain area is just very, very important. I think that knowing when to change is also very important. I think that you’ve got to adapt, evolve with, you know, with your potential customers. I think that knowing when to change is very important. And I think, probably above anything else, I just think, you know, passion matters so much. I mean, you’ve got to find whatever it is that you’re going to be passionate about, because that is ultimately what you’ll be great at.
Andrew: All right. So let me ask you about that, actually.
Interviewee: Yeah.
Andrew: Passion is very important, but we started out passionate about one thing, and then moved to another thing. And then to another thing after that. Is is that you had all these different passions, or is it that you didn’t do well until you discovered what you really were passionate about? Was there something else going on here?
Interviewee: Yeah, so look. I think that’s a great question. So, I would say that passion strikes people in different types of ways. And so, I am passionate about business. And you know, I’m passionate about growing businesses. And you know, I probably didn’t necessarily know that 10 years ago, but I know it today. And so, you know, I am, you know, that is the area that I’m passionate about. And so I would say that Bill, who is the co-founder of the company, I think he’s very, he’s much more passionate about technology. And you know, I think that so for back in, even when I go back to our early days, I mean, I love the idea of starting a business, and really growing that business. And you know, he was excited about having the opportunity to build that piece of the business. And like I would say that, we are both very passionate about the opportunity that’s ahead of us from a, you know, we just feel like the market is moving, you know, in a certain direction. And we think we can, you know, play a big role in that. And I’m like, look, I love that piece, you know. And so, it’s maybe hard for me to characterize like exactly what it is, but I’ll tell you that, I mean, I’m just a very passionate person. I love the opportunity to be a part of the growth that we’re going through here at Rackspace. I think that, you know, we’re making a difference. And I love that.
Andrew: Well, thank you. It’s great meeting you. Thanks for doing this interview, and thank you guys all for watching. And give me your feedback. Come back to Mixergy.com, and in the comments, tell me what you thought of this interview, and what kind of interviews I should do as follow-up, and any input that you guys have. See you in the comments.
