Andrew: There’s no video for this interview. I thought there’d be video for it. You’ll hear us, actually, in the interview being very confident about having video, but it turns out the video didn’t work out. That’s all right because the content of the interview is still very strong and the content, or course is sponsored by three people, three companies.
First, Scott Edward Walker of Walker Corporate Law. Scott is the entrepreneurs’ lawyer. He knows the tech space. He knows the startup space. So if you fall into that space, if you’re an entrepreneur in the tech startup world, you’ve got to talk to Scott Edward Walker of Walker Corporate Law.
Second sponsor is Shopify. They make stores that are beautiful, and that is what you are going to want on your site. You’re going to want their designs. But what you need is their salesmanship. Shopify stores are designed to increase your sales. If you mention Mixergy, I’ll get credit for having sent you or your friends over, because I know you are going to refer them to your friend, but you will also get some kind of longer free period with them. I don’t exactly know what it is. I don’t really care to be honest with you. I don’t care about the freebie that you get or the credit that I get. I care that when you use Shopify, you’re going to be proud that I introduced you to them.
Finally, Grasshopper is the virtual phone system that entrepreneurs love. If you have a Grasshopper phone number, you can create multiple extensions, maybe have one go to you, have the sales department go to one salesman. Maybe you have a tech department and that goes somewhere else. A customer service number that goes somewhere else. It’s helpful to sort calls before they come in. It’s impressive too for someone who is calling you and wondering whether you are a real business or not to hear that you have all of these different extensions and all of these different departments in your business. They say, “All right. This isn’t just a guy with a cell phone. It’s a real company that I want to do business with.” Grasshopper.com gives you that ability.
Let’s get to the audio program.
Andrew: Hey, everyone. I’m Andrew Warner. I’m the founder of Mixergy.com, home to the ambitious upstart and the place you come, of course, to listen to successful entrepreneurs tell you the stories behind their businesses so you can see how they did it.
So how do you bootstrap a company to over $45 million in revenue? Joining me today is a founder who did exactly that. Dan Engel is the co-founder of FastSpring, a company that helps businesses sell software, games, eBooks, and other digital products online.
Dan Engel: Hi, thanks for having me.
Andrew: So my goal for this interview is to hear the story of how you built up the company and what you learned along the way. What I’m wondering is, when did you launch the business?
Dan: So we launched it in 2005, so we’ve been at this for a while.
Andrew: So not a startup at all anymore, right?
Andrew: Do you consider it still a startup?
Dan: No. I don’t think so. When you get into the tens of millions of dollars in revenue, I think you’ve passed startup phase.
Andrew: I think you’re right. How many customers do you have?
Dan: We have over 1,000 customers around the world.
Andrew: So let me ask you this. I want to make sure that my audience understands the product before we get into how the product was built. How would the average person interact with FastSpring? Not one of your customers, but say an end user.
Dan: The way an end user would interact with FastSpring is that, say they were on a website that was selling a downloadable software product.
Andrew: For example, what’s a specific website they might be on?
Dan: So I’ll give you an interesting example that some folks like Irfan View, which is actually a free software product. They’re pretty well known and I think it’s the most popular image editor out there, it works with a lot of the social sites. Anyway, if you’re on Irfan View and you’re playing around on the website and you decide, in that case it’s free so the only option is to give a donation, so you click to make a donation and then the order page that allows you to make a donation using say, PayPal, Visa, Master Card, AmEx, Discover, all that’s going to go through a FastSpring hosted order page that looks like the rest of the Irfan View website.
Andrew: I see.
Dan: So our order pages blend with the rest of the website and then have all the functionality one would want on an order, anywhere from having cross-sales and up-sales to having the order page be localized by language and foreign currency and whatnot.
Andrew: We’ve been actually looking into this for Mixergy.com recently and it’s not easy. It’s not easy to find a system that will help you manage your sales if what you have are digital products to sale and if you want it to integrate with you’re doing now.
Dan: Yeah. What we do is we make it so you can basically outsource everything to somebody else who’s been in the E-commerce business for a long time and has all the functionality. And that way as an entrepreneur you get to focus on growing your company, doing product development, doing sales and marketing, and the kinds of things you should be doing, as opposed to building and reinventing your own E-commerce infrastructure solution when you don’t need to be in the E-commerce business. There’s just too many complexities, too many issues that you don’t need to deal with.
Andrew: So at the top of this interview I asked the question, how do you bootstrap a company to over $45 million in revenue. Let me ask you this, do you do it by counting all the revenue that goes to your customers as your revenue? In other words, if I sell a product for $10 to the Mixergy audience and two people buy it, $20 in revenue goes to Mixergy, do you also see $20 in revenue? Is that how you get to such a big number?
Dan: So we are the merchant of record. We resell all the software products that we sell and we collect all the funds. Basically the way it’s set up is, we’re essentially buying the products wholesale through Flash Title so we take ownership of those products, we resale them, and then once the delivery is made to the customer by our client, at that point it goes back to being owned by the actual supplier of the software product to us.
Andrew: The client is owned by me at that point, after you’ve serviced them?
Dan: No, I’m sorry, what I’m saying is that, we take temporary ownership of the product and we resell it.
Andrew: I see.
Dan: So it becomes our funds and we’re essentially buying those products wholesale, selling them in retail, and then paying the appropriate proceeds, the commission for the wholesale product, back to the supplier of the software product that we’re reselling.
Dan: I hope that’s not too confusing.
Andrew: No, I think I get it. We’re saying that the $20 would be your sale.
Andrew: And you would count it towards your top line number, towards your revenue.
Dan: Exactly. Yeah, just like in eBay, somebody like that.
Andrew: Okay. And one of the reasons why you do that is because it simplifies the order processing. I don’t have to have my own merchant account, apart from you. I don’t have to integrate my merchant account with your software, you just handle it all for me. True?
Dan: Exactly. Yeah. So you don’t have to have your own merchant account. You don’t have to have your own gateway. You don’t have to make relationships with PayPal and all the different credit card processers. You don’t have to make relationships to be able to handle transactions in Yen and Euro’s, and Pounds. You don’t have to deal with PCI compliance, which is a big pain in the butt. You don’t have to deal with taxes and paying, say the value added tax, for new sales and having a relationship there in Europe. All those different elements are part of the service.
Andrew: What about this? When the end user needs to go back to the site to pick up another copy of the program that he bought a year ago, because he lost it on his computer or he lost his computer completely, where does the user go?
Dan: They just send us a support email and we respond to it. We generally respond within two hours and we’ll provide that code again or whatever it is that they need in order to either download or to activate a product they’ve already downloaded.
Andrew: Okay. So the way to access the old data is to email and request it or into their email inbox and find the original email where you sent it to them?
Dan: That’s right.
Andrew: OK. All right. So now that we understand the business, I want to find out how you got here. Where did the original idea come from for FastSpring?
Dan: Well, we have four cofounders and between the four of us, we’ve sold three different companies to Digital River, which is kind of the 800 pound gorilla in the industry, they’re a $1.5 billion market cap value company. And after we sold our companies to Digital River we worked at Digital River and by doing so we learned more and more about areas of dissatisfaction that their clients have. And we just decided there was an opportunity in the marketplace to address some of those areas of dissatisfaction.
Dan: Like price, things like customer service, flexibility, and also having next generation technology as opposed to kind of legacy technology from old acquisitions form the late 90’s. So, basically, we built FastSpring to address the market needs and the dissatisfaction that we were experiencing by being at Digital River. And, of course, we had very relevant experience, because we had more or less pioneered the industry in the late ’90s and the early 2000s with the companies that built and eventually sold to Digital River.
Andrew: So which company did you launch and sell to Digital River?
Dan: Not me, so the other three partners.
Andrew: I see, OK.
Dan: Yeah, so RegSoft, RegNow, and SwiftCD. Swift CD is the largest CD backup solution for software products, so most sites that you go to that are selling software where they give you the option to purchase it on CD, are provided by SwiftCD, and the CEO and founder of that company is one of the four partners at FastSpring.
Andrew: So you an E-commerce, even though you didn’t sell to Digital River, you have an E-commerce background yourself. Was this in college, in your dorm room, you created E-commerce Times?
Dan: Not exactly. Let’s see. when I was in college I started a company called GrapeApe.com and that was a magazine subscription website, basically like an online news stand. And basically we figured, that with Amazon really doing a great job with books, and by then it was CD Now with music, we were looking to be kind of the Amazon for magazine subscriptions. So anyway, I started that in college, initially with my brother, and then graduated in college from Tulane, and this is ’97 to ’98. And those were crazy times, definitely, you know the whole .com thing and whatnot. And eventually what happened was, we discovered that that product is just not one, despite what we thought, that consumers are interested in purchasing through the web, because there’s such a conflict between, ‘well what’s going to happen if I get something that falls out of the magazine,’ or, ‘I get something in the mail am I going to duplicate renewals? That kind of thing. And still today magazine subscriptions are not all popular to be purchased on the web.
So that business, eventually, it had all the rise and fall and interesting times on the Internet or in the .com times. I remember there was a cover story I was included in on the Wall Street Journal, Amazon was going to buy us for a while, and Blue Mountain Arts, and eventually some billion dollar company in Amsterdam that I flew out for, but in the end we ran out of cash and had to move on. And we had competitors that had raised $120 million and that kind of thing. We competed well against them, but we never did a huge round. Actually, I remember there was a point where we had Morgan Stanley, so we looked at a venture deal and Morgan Stanley came into my studio apartment to do their due diligence and we had five employees there doing customer support and I remember they said, ‘Don’t let any of the other investors see this place, they’ll never want to invest, it’s crazy.’
We had a $12.5 million evaluation and I was really the only full time employee of the company everybody else was, kind of, independent contractor or were related to me. So those were interesting times, no doubt. So that was our business.
Andrew: I remember when the dot com bubble burst. I was sleepwalking through Manhattan. Walking from my home to the office and then just shell shocked in the office in the office and then sleep walking back home. It was just exhausting and it was shocking. What was your experience after going from such heights that an investment banker’s coming to your place and doing business with you, and then suddenly you go from that height, and the height of the valuation, to running out of money. How did that feel to you?
Dan: It was depressing. To be honest, what I did after that, I did some consulting. I mean, that was kind of like a depression in our industry.
Andrew: Yep. I mean, not just business professionally, but personally too. What was your depression like?
Dan: I would say, you know, I was just so bummed out, because having my own company and doing the entrepreneurial thing right out of college and failing ultimately and having to pick myself up and admit that I needed to get a job and get income and that was a hard thing to swallow. But I tried to focus on what the positives are, and there are a lot of positive things about going the other direction. Both sides have positives and negatives. Working for someone else getting a paying check, irrespective of what’s going on that week, you still get your check, you get to clock out at a certain time. You know, it’s just a different kind of way of doing things.
So I was totally bummed out and I definitely lost a lot of confidence and it took me a number of years before I was [TD] to raise money again. That became kind of a sticking point for me, and I was able to do it, but it took a few years [TD]. The other part of it is, I think I was just so, there was so much noise, so much craziness during the .com times, that I just decided I was going to bail on the whole scene. I was in Boston.
So I did some consulting and then I went and was hired at one of these incubators to be an entrepreneur in residence focused on the wireless space, trying to build a new wireless company and IPO it. And that company bombed. So then I went to Idea Lab and I was an entrepreneur in residence there, I was about 24, and again focused on the wireless space, and that was a really exciting time to be there, except when they shut down that office. And that was it, I kind of had it, and I said, ‘That’s it, we’re going to the palm trees and the warm weather.’
And we moved to California where things were more relaxed. So we went to Santa Barbara and I just needed to get away from that whole scene. And I did. So I think it was a very good and it’s not a sleepy town, but a much more quiet town than Boston. It didn’t have the same buzz as Boston or Silicon Valley and just didn’t want to be part of that. And turns out that Santa Barbara, and I knew in advance, is a wonderful place for startups. There are just so many companies that have come out of there, people don’t even realize. And I just started getting cranking there.
Andrew: Did you think you were going to go back into another Internet business or were you in Santa Barbara to get into another industry?
Dan: You know it’s interesting. So I needed income at the time, this is 2001, and I worked my butt off to try to get a job that would be in the industry and use my skills and talents and experience in something I thought I’d enjoy. It actually took me five months of looking before I could get a job. I mean, people would say they were interested, but they were such depressing times. Nobody was hiring. They whole tech thing had fallen apart. The NASDAQ was down 80%. So people would just elude that they would be interested and in the end they wouldn’t shell out the money. And I worked hard, actually, during those five months. So it was actually a pretty painful time and hard to get through so I can relate to anybody who’s gone through that themselves.
I had really good experience. I had been an entrepreneur in residence at Idea Lab. I had my own startup for a number of years. It didn’t matter. I figure that’s kind of what some people are experiencing now in the finance industry. That industry, while the rest of have recession, they kind of have a depression. You know, try getting a job in finance. So I think it’s probably pretty similar.
So eventually I worked on a photo software startup and we raised $250,000 at a time that was like the worst time to raise money. And we built that up and we starting to run out of money and we ended up selling it to Broderbund, a software company in northern California.
And then I went and joined a company called Expert City and I did the customer acquisition and online marketing for Go ToMyPC, which at the time that I started, nobody had really heard about. And marketed the heck out of it and basically helped put it on the map and generated, personally, about $40 million in revenue over 18 months. And everybody started to hear about it and eventually we sold it to Citrix for a quarter of a billion dollars.
So that we a really good experience. I learned a heck of a lot about how to market online and I had the opportunity . . .
Andrew: I want to dig into that. Let me pause this for a second . . .
Andrew: . . . just to let what you said up until now sink in. That difficult moment didn’t come through in your bio. When I looked at your bio I said, “This is a guy who’s bullet proof. Every single thing he touches is gold, it’s successful.” We got into Citrix a little bit, but we didn’t even get into AdSense and AdWords over at Google. We didn’t talk about all the other things that you did. And by the way one of the issues that I had with that was, ‘So how do I make Dan relatable to my audience, when he’s got all this experience working for these great companies? Everything he touches in successful, am I going to do a whole string of stories about, “I touched this, it was successful and moved on to that.”
All that’s to say just, I really appreciate that you’re willing to go there in this interview and you’re willing to share that setback and they way that you felt. And I’m wondering if after all that you went to Go ToMyPC to Expert City, because you said, “I can’t run my own startup right now. I need to just work somewhere where I have a clear defined workflow every day or a clear defined goal?”
Dan: That’s right. I don’t of it like I need accountability and a goal and all that kind of motivation. I think it was more financial at the time, needed the income, needed a job, needed a paycheck. And so what I wanted to do is get going there, have success, and maybe do something on the side that over time the dream could alive again and I’d build something that would get to the point that I would make enough money that I could off on my own again. And that’s exactly what I did and that’s where Morpheus Software, actually it in 2001, and that actually became a business. I don’t even know if it’s listed in my bio. But that turned out to be relatively successful for what it was doing, that was able to be a launching pad toward leaving the employment world again and going off on my own.
Andrew: They dig in. As you were starting to say earlier, you worked at Expert City, you were marketing Go, uh, it was Go ToMyPC was the product?
Dan: That’s right.
Andrew: And you learned a lot from marketing that. What did you learn?
Dan: Well, when we started we were basically starting from scratch. We a tiny bit of revenue. To give you a sense, today it’s a $300 million annual business, recurring revenue. What I learned is a ton about marketing, I just learned a lot of lessons. For example, most things in marketing that are logical and would make sense don’t actually end up in reality occurring. So, ‘Oh, course this kind of ad test, of course it would work, or this partnership or this is a relative audience or these prices seem reasonable.’ But 19 out of 20 times you’d lose your money. Even when you thought it made sense, even when you did all the work up front. When it comes to marketing, you just don’t know.
And we learned that a lot in online marketing, because we did so many deals. But even offline marketing, I remember the traditional thinking and the guy running the branding side of the business was saying, “Well that’s not going to work, this is a direct response product and radio and TV, there’s no way that that’s work something that sold well through the web where people need to respond right away and what not.” Well it turns out today, thank God I started doing those TV and radio commercials, today Go ToMyPC, which is Cetrix online, spends more money on offline advertizing in TV/radio than they do online, even though there’s ads all over the place for the online ads.
So you just got to try things. You’ve got to test, you’ve got to tweak. And I’ll tell you, even that radio and TV stuff failed in the beginning, but you’ve just got to keep going. And in fact when we started marketing Go ToMyPC I remember we failed. We set up all these deals and they revenue share [TD] CPA, sound awesome, I thought we were going to make all this money and they only got so far. We had to expand, we to do CPM up-buying, we had to try all different things. And most ad channels even for a very successful product, and like I said [TD] $300 million unit, most channels did not work, even ad distribution channels or banner ad networks, affiliate programs, emails campaigns, pop ups, all that kind of stuff.
Most channels we tested didn’t work and we were surprised, because there was the X1, or whatever it was called, wireless camera they were able to buy ads everywhere and video [TD] I think Netflix at the time and why were these guys able to compete? But we did have something that I learned a lot about, which I still use to this day, which is, we have recurring revenue and had a lifetime customer value of like $300 dollars. So what meant is, we were able to compete well for buying advertizing, because even though our conversion rate was really low, because Go ToMyPC is a product not for the average Joe who wants to buy music or buy a book or something mainstream. It’s kind of for the business consumer. So we weren’t as attractive to as big of an audience, but when we actually got a customer there was so much money, because we did such a good job retaining them and getting the recurring revenue that they would stay for multiple years. And so a competitor for ad inventory would get a much higher conversion rate, but a much lower lifetime value and that’s how we were able to afford to buy ads and get as far as we did and do a lot of revenue sharing deals and have our partners make money.
Andrew: Yeah, recurring revenue is phenomenal.
Andrew: Let me just say this. I probably should have said it up front, I kind of assume that everyone knows what Go ToMyPC is, but I should say that Go ToMyPC is a program that allows you to go from one PC to another. To access another computer kind of like you’re sitting there, with mouse control, with monitor, with the ability to see what’s going on the desktop, the whole thing. I used to use it when I was in Argentina and I wanted to see what was going on on my desk. I’d just go to GoToMyPC.com, I’d login and I would have full access to everything.
Dan: Yeah, remotely access your computer. And it’s used the most for people to access their work computer, their work email from home.
Andrew: Yep. I should have just let you say instead of me saying it.
So recurring revenue is fantastic. You actually have a product now called SaaSy that helps other people do that. What’s the product now that FastSpring has?
Dan: So a few weeks ago, with the help of TechCrunch we launched Sassy. And basically what SaaSy is, is the first all in one E-commerce payment and subscription management service for SaaS and Web 2.0 companies. So basically before SaaSy existed if you wanted to launch or run or operate, manage a web based subscription service, whether it’s Go ToMyPC or the next 37Signals, Salesforce.com, or just some idea you have that’s going to be sold on a per quarter, per month, per annual subscription basis, you basically have to build all that infrastructure yourself. But because SaaSy is a recurring billing solution combined with backend of FastSpring, which is all things E-commerce, now you can launch a subscription service, and if you’re doing a basic integration, just three days. You don’t have to spend months you don’t have to spend years. And part of it is because we have the merchant account, we’re the reseller, we’re the merchant of record. So you don’t have to get your own merchant account. You don’t have to build all those relationships. Again, you don’t have to deal with CPI compliance. But also we’ve got all the functionality that one needs for doing not just E-commerce and refunds and charge-backs and things like that, and dealing with taxes and all of the infrastructure and the complexities, but also for merchandising.
So what do I need to increase my average order size? What do I need to do to maximize my lifetime value? What do I need to do to avoid having churn? And so we provide all this. We do the customer service for the payments and orders. We enable cross-selling and up-selling on the order pages. The order pages are localized by language and currency. We give you all the tools. We allow you to take the order page, if you want to have your order page be three pages long, one page long, all on one page, you want to have cross-selling on a dedicated, you want to have it on a first page. Whatever you want to do we’ve got all that flexibility in there and then of course we tie in all the payment options around the world. So you have to do all that yourself and if you were to use one of these existing services, which are pretty basic like there were Curly or Chargify or Cheddargetter, Spreedly, you still have to build most of the infrastructure yourself. And in a lot of cases you’ll find it can take you a year or even more than a year, in some cases two years we’ve heard.
Andrew: Two years to build recurring revenue into a product?
Dan: Well, to build to build the full functionality that we bring to the table that, eventually, if you’re going to build a big company, you’re going to have to build yourself.
Andrew: Now with FastSpring you service the client, you deliver the eBook or you deliver the software or the game or whatever. How do you do that with SaaSy?
Dan: So FastSpring we deal specifically with downloadable products, software, eBooks, anything downloadable, PDF, games. With SaaS, it’s not so much download as it’s web based subscription services. So in some cases the SaaS clients are enabling their users to have access to content. In some case they’re just having web based access to an ongoing service so you can continue to use and online service each month or each week or each year, however you’re paying for it.
Andrew: Okay. So then they have to build a connection to you into their product?
Dan: Right. So we have pretty open, flexible API and basically there’s a callback from our clients servers so the servers are talking to each other and communicate with information such as, this customer paid for x period of time now give this customer access to such and such, allow them to keep using this web service, or however it’s set up.
Andrew: Easy. I get that. Okay. So you’re marketing Go ToMyPC, you’re trying television ads. I was surprised when I saw Go ToMyPC on TV. How do you fix a TV ad? Online if there’s a problem you get instant results, you can adjust instantly. On TV and radio you have to give it some time to work, don’t you? And then you have to go back and try something else, which means reproducing the commercial and then see the results and then reproduce the commercial. How do you do it?
Dan: That’s funny, you made me think of the first commercial which was awful. I’m glad you didn’t see that one. You know it’s funny, because when people look at something like TV they’re like, “[TD] could do that.” And that’s for big companies. In traditional times maybe it was, but you know that first commercial cost us ten grand and actually were able to do some testing in a revenue share basis. There’s companies out there that will take excess ad inventory just like there is with online. And that’s how we initially started testing it. But in terms of tweaking [TD], yeah, you go back and you try to [TD] what might have worked, what didn’t work, and you do a little bit of a focus group, get some feedback, and you adjust, you get new actors, or you adjust the script, or you adjust the quality. Like I said, that first ad was pretty bad quality we were just sort of testing it out and we figured it wouldn’t, but we always test.
Andrew: By the way our camera is so strange. Our audience isn’t getting to see the video they way that I see it right now. I don’t see anything, but what we’re doing is, now might be a good time to say it is, you’re using your iPhone to record your side of the conversation, I’m using Skype to record my part of the conversation and Joe, Mixergy’s editor, will edit the two pieces together and it will flow smoothly, hopefully.
Dan: Yeah, hopefully. We’ll find out.
Andrew: We lost your connection there for a moment. Now that it’s back, take it away.
So you were saying you were using different actors, that you were redoing the script.
Dan: Yeah, so you adjust the script, you adjust the actors, and you adjust the quality and then you go out again and you try again. And also, you know, it’s the same as online advertizing, you test different forums. So initially we thought about doing the late night thing so we’d do infomercials and then we did some testing, because it’s really inexpensive to get in front of stay at home moms during the day, but of course those are bad customers for us, but you can get at them cheaply. And then we started testing things like tech TV shows, which were on Satellite, tech radio programs, and we were able to see that even though, initially, the cost per customer was in the high, I think initially it was $600, we kept tweaking, getting closer and closer to that $300. And we knew that there was a certain value out there that we were unable to measure, especially with the offline advertizing.
Andrew: What’s one tweak that you made that had outsized results?
Dan: I’d say when we significantly improved the quality.
Andrew: What do you mean, the production quality?
Dan: Well meaning you can kind of tell the low budget ads from the big budget ads, especially with TV commercials, it’s very visual. So like I said, the first one was pretty bad. And nowadays if you see the ads, and they’re all over the blasted place, they’re pretty good. They’re pretty much as high quality as they can be so it makes a big difference on the impression and what people expect and the credibility and whatnot. So those are some of the ways that we tweaked the commercials on the radio and the beyond the tech programs then we went more mainstream. I think at one point we were on Fox News, I don’t know if they’re still doing that, and all sorts of shows that I don’t like personally, Rush Limbaugh, and whatnot, and those more mainstream shows, so we’re able to be successful.
So where we thought: A, TV wasn’t going to work. B, if TV works it’s only going to be tech programs, maybe seed business programs. Well it turns out that actually [TD] mainstream [TD] pretty well. But also at the same what we were doing is we were getting our lifetime value higher and higher as time went on, selling more products and services to the same customers, finding ways to get those customers to last longer and longer. So I guess as those offline channels became closer and closer to becoming profitable, part of what working toward making that happen was that the lifetime value was growing. And that’s an important thing to continuously try to improve upon, whether you’re selling a software product for $50 and you want to get your average order size up to $65 over the next year or you have a recurring service where you’re making $150 in the lifetime value, but over the next year you can get that to $200. Make all the difference in being able to compete for advertizing and thus get customers.
Andrew: All right. Let’s jump forward now to FastSpring. You and the three other cofounders, how did you guys connect? How did you meet each other?
Dan: It’s interesting. The four co-founders of FastSpring are actually all located in four different states and we hardly ever see each other. Our company has 25 people, there’s no office that has more than two or three people in it. Many of the people work from home and there’s a lot of advantages to that.
But in terms of the co-founders of the company, so I pitched the idea to one of the other co-founders and he said, “Well it actually turns out I’m working on that with this other guy who’s a co-founder, maybe the three of us could work together.” Now I had known the one gentleman, Jason, and Jason knew this other gentleman, Ken, and so they had worked together. And then the three of us got together and we said, “Well who can actually build this thing.” Well, Ken and Jason after they had sold their company to Digital River they worked at Digital River, they had worked with Ryan, our other cofounder, had sold his own business, they really helped pioneer the industry, Digital River, and they had worked together there. And it just so happened Ryan was available and everybody’s non-compete had expired with Digital River, it had been long enough, and the timing just worked well. And it’s not like we could have asked each of the four people to uproot their lives and move their families all to the same place. We happen to be one of us in Seattle, one of us in Santa Barbara, one of us in North Carolina, and then Atlanta, and we stayed there.
Dan: And it’s worked very well. We don’t [TD] fine. You know, people question that and it’s very unorthodox and I can appreciate that, but actually it’s wonderful. We talk on email, we talk by phone, we don’t even do anything in video, we know what each other looks like, it’s not a big deal.
And in this day and age, this kind of business, you can do it that way. And actually that’s how those businesses were built by my cofounders in the past that were successful. They had virtual teams, they had remote workers, they were distributed around the country, and there’s a lot of advantages to it. And there’s a lot of output you get from employees when they the flexibility and freedom and benefits of working from home on their own terms. So that’s part of what we take advantage of with having this kind of model.
Andrew: Where did the idea come to for you? How did you come up with this idea that you took to Jason and Ken and Ryan?
Dan: Well actually, I had an idea for something similar, a merchandizing up-selling tool that I’d pitched to Jason and just, “Oh, that’s a great idea.” However, there’s no way that we would be able to integrate that merchandizing tool into the shopping carts and order pages of these software companies, because most of that’s owned by Digital River. The only way to get into those carts is to become the cart and become the order page. So we said, “Well that naturally makes sense to compete against Digital River.” And then we would have the opportunity to do these kinds of merchandizing ideas that we have that weren’t being done, that we thought made a lot of sense. And that’s where we started to think, “Well, wait a minute, there really is a big opportunity here, because there are a lot of areas of dissatisfaction out there that we can address, flexibility, pricing, customer service, technology,” all areas of dissatisfaction that we have been successful addressing in the marketplace since then.
Andrew: So after the four of you got together, what was the first product you built? What did that look like?
Dan: Well, the big challenge we had, you didn’t ask but, was coming up with a name. And I’ll just throw that in there, because that’s how difficult it is for .com’s. And it actually took us, like, two and half months and after that I was thinking, “This is going to be a hell of a ride working with these guys.” Well, it turned out, that to date, it’s been the most difficult thing we’ve probably had to debate amongst the four of us.
But anyway, the products, we had some struggles with the products, because we really thought that we would have something to sell within, like, a year and a half. I mean here you had the guys who had done this before, very successfully. Brian Kull’s [SP] probably the most talented guy in the world to build this kind of system. We had done it before multiple times and we know what we were getting into. Well, it turned out we under estimated the quantity and quality of the functionality that we would need to build in order to even be on par with Digital River and other companies in this space that had spent, in some cases a decade, building this functionality. It’s like we would have say 70% of the functionality and then we would start pitching clients quietly and they’d say, “Oh, yeah, you A B and C and now I need D E and F.” “All right we’ve got to go and do D E and F.” And then we’d do that and they’d say, “Oh, you have D E and F, well now you’re missing these other things.”
So we had to play catch up at the time that our competitors, who had been around for over a decade, were adding new features and functionality. So it took awhile and it’s a very frustrating experience. And there were definitely years and struggle and years where we actually thought about not continuing the business. But, one thing we did from the get-go is, I try to build businesses, I mean the whole team is a bunch of bootstrappers, that’s just our approach. To us it’s common sense. It’s a natural way to do it. I had learned in entrepreneurship class, I remember in college the professor used to always say, “What’s the number one reason businesses go out of business?” and nobody would get it right. And the reason is, that they would run out of cash.
So I try to build businesses that remove the largest potential obstacle to success and the biggest way to fail, by building businesses that don’t require lots of money that you then go spending and you create a burn rate and then you have to deal with that and then there’s all the pressure and then you fail. You get out of that. So really the way we had modeled the business from day one is such that, the only way we could fail is if we happen to lose interest. Because it was just a matter of time before we’d get clients and maybe we wouldn’t get enough clients that this would make sense to continue, but there was no option to run out of money. We didn’t go and spend a ton of money. We invested, you know, three of the four partners put ten grand each together and that was kind of it.
So we didn’t take any salaries and we just rolled up our sleeves and did the work ourselves. Even though it took a long time, we were fortunate and able to do that. Part of how I was able to do that, personally, I mean I had been through some successes, Go ToMyPC, Picasa got sold to Google, but the way I was able to support myself leaving some of those situations is because I had built the software company on the side that wasn’t crazy successful, but it was enough to really help be a launching pad for me leaving, and that was income that I was able to us as we built FastSpring starting in 2005.
Andrew: This is Morpheus, the company you built before?
Dan: Right. Morpheus is a software which make digital photo-morphing and animation software. It’s just for goofing around with pictures of kids and pets and whatnot.
Andrew: The website’s still active. What’s the website?
Andrew: Morpheussoftware.net, if anyone goes there they can actually see it in action right now. You can see a boy being morphed into a . . .
Was one of the pictures morphing a pet into a human being and back?
Dan: Well, so you can morph pictures, you can warp and distort pictures with the warping product or you can create a composite, which kind of blends two images together. So you can take like a boy and a pet and put the dog’s body with the boy’s face or something like that. So people like doing things with celebrities and whatnot.
But that was an interesting story too. It was back in 2001, there was a guy who had in college created this product called Morpheus, which just did morphing, because he felt like there weren’t any good products for the average Joe to morph, just kind of industrial strength products that were at there in the industry. And he gave it out for free, figured nobody would ever buy it, and I happened to see his product listed on download.com, which you’ve probably seen as a software download repository. And I sent him and email and said, “Hey, you think anybody would buy this? Why don’t we work together.” And he said, “Oh, nobody would ever buy it.” And I said, “Well, why don’t we give it a shot.” So I handled the business side and he handled the tech side. And it was slow going, we stopped making it free and made it commercial ware, sold it for $9.95. We thought that would be the extent of it, today the average order size it $65 and order.
Andrew: How did you do that? How did you take it from free to $9.95 and then to $65?
Dan: That’s a good question and I learned a lot from it. So initially Morpheus was just one product that did morphing and it was a marketing thing. What I did was, I looked at all the functionality and I said, “Can we turn this into multiple products and charge prices for each one? And perhaps we’ll make a suite that cost even more and includes everything.” And so that’s exactly what we did. And for each of those products maybe we can have different versions. Why do we have to give away all the features for free? Why don’t we say, “Well, these features you get for standard, these are for pro, and these are for industrial.” And industrial was basically our way of saying, “Well, we know there certain potential customers out there that are totally price insensitive, maybe they’re corporations or whatever, they don’t care, they’re not worried about $200 anymore than they’re worried about spending $29.95.” So we come up with an industrial suite version.
You know every day people pay $200 for a product that was $9.95 or free. Now of course it’s more than that. We upgraded the website, we made it all very commercial and good quality. And the product itself, we did a whole new version as well. And then I was very involved with just making sure this was a product that the average could use, there were tutorials, and it looked high quality, the kind of thing you’d be willing to spend a good amount of money on. So the base price is $29.95 and we get to that average order of $65, because X% buy the pro version and the suite, or the this or the that, and that’s just how it makes a plus.
We had started playing with the e-commerce business structure that we had spent two years building, so that’s how I learned the experience, actually, for FastSpring, was going through the pain in Morpheus of building all the functionality myself. I need to track this ad campaign, we need to plug into PayPal and Visa, Master Card, and merchant accounts, and dealing with all that stuff. That took about two years of time we could have been selling and doing product development, which turned out to be a very, very important learning experience. So that’s kind of how that went.
Andrew: You know, Dan? I could do a whole interview just on that experience. I mean, that’s incredibly clever. To take a product that just existed already, whose creator didn’t see the value, couldn’t see charging for it. To take that and build it into a business that then supported you and enabled you to create something that now you’re running and is doing incredibly well. That in itself, I think, would be a great Mixergy interview. Maybe we can get you to come back and do that.
Dan: Sure. Sure, naw, it’s a fun business and it runs itself, pretty automated and still makes us nice income and the gentleman who I started with, who was in college, finished college and had a job for a few months, quit the job, he’s been working on it ever since, supported by the business.
Andrew: So I see now what you meant when you said you could keep working on FastSpring for as long as it took, as long as you hadn’t lost interest you can keep at it. There wasn’t a big infrastructure in place at the time, it was four guys who were all working on it.
Dan: Yeah, but there weren’t any expenses.
Dan: Our biggest expense was bandwidth.
Andrew: How did the other guys support themselves?
Dan: Well, since it took a while before we were able to get clients. It took a few years, so there wasn’t any customer support to do. So another one of the partners also had a Morpheus type business, it’s called NextUp.com, he still has it, still makes an income. So he made money from that.
Our third partner, he had his own business so he was the most part time. And then Ryan Dewell, he went for a while with just no income. He had some savings, he lived off the savings. And then after a while we starting some of that initial 30 grand and paying him a very small salary and then slowly that salary got bigger and then we started getting clients and getting bigger and bigger and today we all get nice salaries and that’s how things worked out.
So you just got to find a way, that’s the trick with these startups. You’ve got to figure it out, it’s not an obvious easy answer, there’s struggle and you’ve got to be creative, but if you can make happen, you know, you buy yourself enough time that you can’t run out of money and you’ve got all the time in world to figure this damn thing out or reinvent it if you need to .
Andrew: So for a long time you were going to clients, you were pitching them your product and they said, “No, we like to have A, B, C but you’re missing D, E, and F.” And you go back and build those features in and then you’d come back and they’d say, “No. you’re still missing some things.” At what point did those conversations turn and people started to say, “Yeah, we’ll sign up with you. We want to work with you. You have everything we need.”
Dan: When we had 90% of what they needed and they could live without that other 10%, that’s when things changed. And then what happened is, we really started to pick up steam, it was like a snowball effect, like they talk about. And as we got bigger clients then that led to bigger clients. So we started with lots of small clients, but we didn’t just give them the product and the service and let them move on with their lives. We blew these people away with the customer support. To the extent that they wanted to run out and tell other in the industry about the experience and it’s how it’s so different and so much better than what they’d experienced in e-commerce, and in some cases then working with any company.
So today we have clients that have told things like, “This is the best customer service experience I’ve had in my life,” and we post it on the website, or, “This is the best company I’ve ever interacted with, not just in e-commerce but overall.”
Andrew: Give an example of that. What do you do that makes you stand out with your customers and makes them send you notes like that?
Dan: I would say, related to customer service what we do is, we treat everybody extremely well. We treat all our customers like gold.
Andrew: Do you have a specific example of how you did that.
Dan: Yeah. So we respond at once, generally within one or two hours. Often it will be on weekends, might be on Christmas day, might be late at night, and they’re not used to that. The kinds of people that doing customer support are in some cases pretty technical and so they can go head-to-head with the people who are asking us questions.
Sometimes our responses, you know in customer service you get a sentence back or a paragraph or maybe even a form letter from another company. Well with us you might get two and half pages of insights. Because, we ask our people to take the time to really go back and forth. We don’t care how big or small our clients are, they’re clients and they’re going to be out there talking to people, they’re going to be on forums, on Twitter, or whatnot. So the snowball effect led to a point where you go out there on a public forum and say, “Who should I use for e-commerce for selling software or SaaS service.” These days you’ll have so many of our clients who will respond even before I can get to it. And they’ll post, “FastSpring. FastSpring. FastSpring’s the best service. FastSpring has the best support.” “FastSpring’s the best technology.” So now these days they’re doing our work for us. But you know we can’t retire.
Andrew: I talked to you about that before the interview started. I said as I was researching you I’d come across blog posts that weren’t very favorable, some blog posts that weren’t favorable and instead of just ignoring them you’d go in and you wrote a full response and said, “Well here’s what you’re not seeing in our product. Here’s how our product is different from what you imagined.” And you’re just responding. And then people in the comments would have feedback on other products or issues with FastSpring and you’d jump in there too. How much time do you spend responding to people that way?
Dan: That’s a good question. I work with someone to monitor every possible newsgroup, blog, forum, Twitter, Quora, I mean you can just imagine, LinkedIn. I keep an eye on what’s going on out there every single day and I know what people are saying and when it’s time for us to chime in we chime in. Whether they’re talking about us or thinking they need to kind of solution that we provide.
Andrew: So you have somebody who just goes through all the material that exists online or is created online about you or about this industry in general, and if there is something that you guys need to respond to, that person will email you and say, “Hey, I think you need to go into this comment. I think you need to go and respond on that forum.” That kind of thing?
Dan: Exactly, yep. And then I go and do it. I do it personally. And why do I do it? It’s a very good use of my time, because I can tell you just about every single time since 2005 that I’ve responded, we end up getting clients from it. And of course it stays up there, it gets indexed, so when people are searching for various things. And people see that it’s the CEO’s response. Well, if the CEO’s taking his time to respond to Joe Schmoe on this forum, what does that say about the company and their values and their culture. And well it’s consistent with reality [TD] the situation. So I think people appreciate that and they know if they can get access to the CEO, which they can access me directly. It doesn’t matter if we have 25 people of 250 people, we try to have a mentality were the door’s open if you have a problem and the person you’re working with doesn’t get the job done, come to me and I’ll take care of it. And so we try to get that across by having me be the person out there answering questions and trying to be an authority in the industry on [TD].
Andrew: I got to tell you, it’s incredibly effective. I think too many companies underestimate the commenting systems on site like TechCrunch. They say, “TechCrunch is full of trolls. It’s empty comments. Why bother even responding there.” I’ll tell you why, because when your employees go to do research on you, they’re going to check to TechCrunch article that happened to get written about and then they’re going to scan the comments to see if anyone had anything negative to say or anyone has something positive to say. And if you go in and you respond to what’s being said in the article that completes the story. The same thing for Mashable, for any website out there, for any forum. I think if you could engage in it, it is incredibly effect to do that, not just for the people who happen to be reading it when it’s first published, but for the people like me who are going to be researching you, future employees, future reporters, incredibly helpful, future customers.
Dan: Yeah. And now, of course, you do a search for even the word FastSpring or SaaSy and I think that TechCrush article comes right up.
Andrew: With a long detailed response from you. That’s, I think, one of the longest responses that I’ve seen and you corrected some issues with it.
Dan: Well, it’s a unique opportunity me to get into the editorial content of a very important article. I can’t write the article, I just deal my responses in an interview, but here I do actually have some control, because people are going to look at those comments, and people are going to make comments. And I get the opportunity to respond and make that article even more powerful by adding my comments. But also I get [TD] a forum or a TechCrunch article or whatever somebody post, then I have some control over the solution of it and it going in my direction, because I get to be on there than other people are and I give my answer and try to have it be something they may benefit us in the long and help us to look good.
Andrew: Well it’s very effective and even this interview, I hope, will be effective. It will let people see who your company is. Where the idea came from and I was going to say hopefully you get some customers from this, but that’s not really my goal here. I know that in the end you’ll get some business from this, but my goal and what I’m really appreciative to you for helping me with is, sharing your story, telling others how you built your companies, telling them and showing them what happened along the way, I thing, is very valuable and I appreciate you doing it.
Dan: Yeah. Well I’m happy to participate and I’m always happy to help other entrepreneurs to succeed as much as I can.
Andrew: Thank you.
The company, of course, is FastSpring and from FastSpring you can go to SaaSy.com.
Cool. OK, Dan. I’m going to take this interview, I’m going to send it over to Joe and Joe will find a way to combine your iPhone video with my Skype video and make this into an interview that I know people will enjoy. So thank you for doing it and thank you all for watching.