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Finally, who’s the lawyer that tech startups trust? I should also say tech investors because I’ve gotten emails from both groups, investors and startups, and they’ve asked me, “Which lawyer should I turn to?” And I always say “Scott Edward Walker. He is the entrepreneur’s lawyer. He is the tech startup lawyer.” If you’re in this space and you need a lawyer, go to WalkerCorporateLaw.com.
Here’s the program.
Hey, everyone. It’s Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart and of course the place where entrepreneurs tell the story of how they built their companies.
So, how does a founder who struggles to raise funding for a whole year suddenly raise money and watch his company take off? Joining me is Dan Shapiro. after the first tough year of investment hunting, his mobile photo sharing company Ontela suddenly raised about $4.5 million. We’ll find out about the funding but more importantly since this show isn’t about funding, it’s about building business, we’ll hear about how he grew the company after the funding and eventually bought Photobucket. Today, Dan is runnning Sparkbuy, a comparison shopping engine and we’ll hear a bit about that. Dan, Welcome to Mixergy.
Dan: Thanks, Andrew. It’s great to be here.
Andrew: So, how many users were there on Ontela before the merger?
Dan: So, we never actually announced that publicly but we had distribution on all the top 5 handset manufacturers’ handsets, about 30 different carriers. So, it was pre-installed on these phones. You got it, turned it on when you first powered up the phone. You’d use it for a while. It’d pop up after two weeks and say, “Hey, would you to subscribe to the service?” and away we went.
I should mention that this was about 2005 that we first founded the company, and this is before the advent of app stores. The product was sold entirely through these carrier distribution pre-installs so you didn’t get it unless it came with you on your phone. So, we really measured things by how many phones shipped with it and then the carriers would handle activation and so on from there.
Andrew: So, the way I understand it, if I had one of these non-smartphones that did have a camera, I would take a picture of you and for a long time that picture would be stuck on my camera and I could only show it to people on my camera. What Ontela did was allow me to take it off the camera and then share it and keep it forever, right?
Dan: Yeah. Now, the notion of photosharing web mobile aps is to the point of comedy. There are so many people out there doing it but back in 2005 these little feature phones, as we like to call them, dumb phones as we actually call them, were just graveyards for photos. I mean you’d take a picture and it would be in there forever because best case you’re going to pay $30 to $40 to get some USB cable with a proprietary connector or you’d buy some auxiliary media and you’d move it to the media and just nobody did anything with these. Your best option was like an antacid, $0.25 to $0.30 a pop and that was something like 20 clicks to get the picture off.
So, we said “Look. What if this phone was your always connected digital camera?” Moreover, and this was kind of revolutionary at the time, what if there was no UI whatsoever? What if every single picture you took on this device was automatically synched to the cloud or to your PC. We actually had the ability where the photos would show up on your hard drive directly as soon as you took the picture. That’s what we were out there to do. I still think it’s a really compelling opportunity that you can get now through the Photobucket service which is based on the Ontela technology. I think even some of the current start-ups working on photosharing are just starting to touch that notion of having the photos automatically connected to you wherever you are, whenever you are versus the “Hey, look. I wanna show you this,” email sort of paradigm.
Andrew: Yeah. The native ap that comes with the iPhone still does a terrible job at that. I can’t even email myself or move to dropbox more than I think it’s about a half-dozen photos. I have it to connect it to my computer and manually move it, not within the iTunes program that connects to the iPhone, but within iPhoto which is where you pull photos off. It’s still a mess. So, I could understand the idea being compelling back in 2005.
We talked about raising money being a struggle but was that the first thing you did? What was the first thing you did after this idea popped into your head, Dan?
Dan: Well, it didn’t even work in that order. “After it popped into your head” sort of presumes its idea first and that wasn’t the way it went. What actually happened and this is going back a little further, was it started in about 2002 when I was at a party with a friend of mine, a guy named Charles Apav [SP]. Fantastic guy. We were brainstorming about crazy ideas and we had this idea of delpha [SP] furniture. What if you could custom order and config to order your couch just like you configure a laptop on Dell.
So, we sort of played around with that, thought it was a fun idea and then didn’t talk about it again for years. A couple years later, Charles called me up end of 2004, start of 2005 and said “Dan, I’m totally excited about this idea. I want to start a company.” You know Magic the Gathering or Pokemon, these trading card games? He wanted to start a company to build a game like that but instead of having cards, you’d have electronic ink surfaces that could automatically automate.
Now, that seemed a little crazy. It seemed a little out there because at the time nobody was producing commercial, e-ink surfaces, right? This was before the era of the Kindle. It was just starting to be commercially viable and people were saying, “Hey, look. In 5-10 years, this will be as cheap as paper,” but we were a long way from that. So, I told him, “I don’t think this has any legs right now,” and we kind of brainstormed about it. He said, “Well, what if we did a patent and then sat on it for awhile until the technology became viable and then we could start that company?” So, we actually did that. That patents filed in 2004 or 2005 and it’s still processing, believe it or not. But we’re still pretty excited about it and we finished it up and said, “That’s a lot of fun!”.
We looked at each other and said “Would you actually start a company? Would you actually quit your job and do that?”. We kind of talked back and forth and said, “Well, let’s see what that would be like.” So, we went into this really top-down process of saying, “What if we started a company? What would the values of that company be? What would it be about? What would we want to do? What would our priorities be?” Then we started brainstorming ideas once we laid out some sort of framework. We actually had a spreadsheet of I think it was 40 odd different concepts for companies, some of which were atrociously bad like indescribably horrible. Things I’d never want to be attached to but we came up with this long list and then we said, “Well, what makes a good company?” We did another brainstorm where we said, “Well, okay. You want to be able to pitch it in an elevator. You want to be something that’s in a hot financing area, so if you need to raise money, you can. You want it to be something where it can grow to be a billion dollar company but on the flipside you want it to be something where it doesn’t have to where you could have an early exit, if that’s what made sense. It’s not “go big or go home”.
We came up with all these ideas and we had about a dozen different criteria. Okay. Big spreadsheet geek. So, it came with this giant spreadsheet. It had columns, rows, we assigned w8s to each one and we scored all of our different ideas across this whole thing. We each did it separately. Then, we discussed what we came up with. This sounds like an MBA. I don’t have an MBA but it sounds like what you’d do in an MBA class but we were just messing around as friends and this seems like a fun way to go about it.
Anyway, we finished the whole thing up. We hit ‘Sort’ and there were 3 ideas at the top. I’m trying to remember now. One of them was 3D screens for cell phones using actually a technology really similar to what has come out on the 3DS, the Nintendo 3DS, autostereoscopic. I don’t remember what the second one was and the third one was this idea of Ontela.
That was the whole lead-in to how we got the idea. We wound up prototyping [??] I don’t remember very well and the Ontela concept. The funny thing about the Ontela concept was Charles, the developer. He was for some reason working on a 3D screen idea. I don’t remember the reason why. I outsourced the creation of the first really crude, just embarassingly simple Ontela client to what at the time was called Right decoder where it’s now called vworker [SP]. I gave it to six different people. Divided the project into three pieces, gave it to six different people so each piece had two people doing it so I had some redundancy. I paid each person about $50 and that was success-based so one of them didn’t finish. He didn’t get any money. The other ones I just picked whatever worked best, wired up the pieces together and I distinctly remember calling Charles at 11:00 to 11:30 at night saying, “Charles, you have to come over and see this. It works!” He said, “Oh great! I’ll be over tomorrow.” I said, “No, you have to come over right now,” because it was really something to behold in 2005 to take a picture and 30 seconds later have that picture appear on your desktop. There wasn’t anything like it at the time.
Andrew: So, how much did it cost you to get that first version up and running?
Dan: Little under $600.
Andrew: That seems incredible that you could do it so simply and so cheaply.
Dan: The world of outsourcing is really amazing. It’s something where I built the first prototype of Sparkbuy, my current company, on the same site, on vworker as well. It’s a funny thing. What I always advise people is you’re gonna think that you’re gonna save a lot of money but you’re missing the big equation which is time. My experience is a great developer will take as long to produce to product working by themselves as a great program manager will managing those sites because it just takes forever. You’re constantly going through and you’re doing your own QA and so if you can do it yourself, you should. The quality of the code will be better and it will be faster but for people like me who are miserable developers. I can fake it but it’s ugly. This is a way to trade management hours for development hours on pretty much a one-to-one basis. So, it’s really time-consuming but it’s not very expensive.
Andrew: Trading time. You know, what? That’s a great way to look at it because it is a lot of management time. You’re trading management time for development time.
Now, one thing that I would think if it took me so little time to build that is, “The carriers are going to see this. They’re going to copy this. They could build it themselves.” Did any of that come to you?
Dan: Oh my gosh. Yeah. So, at the time there were the objections we heard over and over again. One of them was, “Well, the carriers can just copy this and do it themselves.” The counter-argument and I think this is still true and still valid which is the carriers are at their hearts, system integrators. This isn’t to denegrate or promote them. What they do is take lots of interesting technology to really work well together. They’ve done some experiments where they’ve built their own products whether it be hardware, software services, etc. but for the most part that hasn’t worked as well as when they’ve taken companies who are really good at what they do and integrate those service under a single brand.
Now, sometimes that’s great because it means startups can build a relationship and bigger companies can build a relationship. There’s some great symbiosis there. Sometimes it drives people nuts because you get them saying, “Oh no, we’re going to provide the ap store and it’s going to bright red and it’s gonna have all of our aps in it and it’s going to be integrated.” So, when people really care about what they get, they don’t necessarily like that. Love it or hate it, that’s what carriers do. That’s what they’re good at. I’d say it was a common objection. It wasn’t one that we got from people that were really deep in the wireless space because those folks got that the carriers didn’t really want to rule it themselves but it was always something we had to kind of be careful of, to be sure we were never giving away too much.
Andrew: Okay. I’ve got a couple of other questions before we continue with the story. Customers. A lot of times when I think about a business, I say, “How accessible are the customers to me?” If the customers are these wireless carriers, I feel like I can barely get AT&T on the phone, if my current phone has an issue. How am I going to get them to partner up with me? What was your answer to that?
Dan: Yeah. You know, it’s really tough going. What I’ll say to that is speaking generally and then I’ll speak specific to us. Speaking generally, you don’t try to partner with carriers unless first off, it’s the only thing you do. Second off, you know, in-house expertise about how that’s done and with the right sort of people and the right sort of experience to make it happen. Third, you have the right kind of financiers and financing to make it happen because it’s a kind of business I’ve never seen bootstrap successfully.
Just to give an idea, I actually just gave a talk at the Web 2.0 conference about this. So, I went back and look at some numbers and talked to some folks like Sequent [SP] and Swipe [SP] who have had huge success in the carrier pre-load business and the numbers were pretty consistent. The time it takes for a carrier to make a decision that they’re going to pre-load some software on a phone is about a year. The time it takes for that phone to show up in the market is between 12 to 18 months on top of that. So, you’re looking at running with no revenue and no product in the market for up to 3 years before you finally start to have it happen. To pick one example, Swipe, the guys who do the really cool touchscreen keyboard. Mike McSherry [SP] is the CEO there. They got their pre-load in 2007. That first pre-load didn’t hit the market until 2010 and by the end of 2010 they were on 25 million phones. One year.
Andrew: I see. So, a lot of time to get the OK, a lot of time to roll out but once you’ve invested that time, man, you’ve got this huge audience that’s just flooding towards your system. You said you that you needed financing and you needed to have relationships and you needed a lot of things that I was trying in my head to see if you had any of them. It didn’t seem like you did.
Andrew: Your previous experience was working for a full year at RealNetworks. That doesn’t prepare you to work with carriers. So, what was your answer to that?
Dan: Yeah. I should say that the 3 years prior to that, I worked at a start-up called Wildseed, which was building basically the Linux-based cell phone targeted to the teenaged market.
Dan: So, I did have some experience working with the hardware manufacturers, working with carriers and so on and had just my toe in the door of that business. Nowhere near what I would recommend or what was really required. So, you mentioned this isn’t about financing and to some extent that’s true. But this business really required the right kind of investment in order to make it work and it took us awhile to figure that out.
So, we started out going around to angels and doing the angel circuit with an idea that we were going to do this over the year that people would go to the website and provision it from our website. No ap stores so that was our initial notion. We quickly realized that the carrier channel was the one that was going to be successful. In order to do that, we had to bring in investors who had wireless expertise and we had to hire those people into the company and bring those experts on board.
So, that became apparent to us over the course of that long, dark year that you referred to initially. It really helped us set our sights. If there was one thing I could take away as a lesson about this, it was that success in this really required us to narrow our field of view. This never would have worked if we were simultaneously trying to distribute online and through ap stores and through handset manufacturers and through carriers. It never would have worked. It didn’t work. Financing didn’t work when we were simultaneously going after angels and VCs. It only started to come together when we narrowed our pervue and focused the heck out of what we were doing.
Andrew: Why didn’t it work with angels and VCs? I guess I could understand why. Well, I have a theory on why based on what you’ve said so far but I should hear your story because you’ve lived it.
Dan: Yeah. So, I’ll tell you the story and then I can back up a little bit and tell you why. As a side note, it’s funny because the whole time I was seeking advice from everybody and thinking to myself, “All this advice is completely contradictory. I’m going to figure out what works so that I can give good advice later when I’m successful at this.” [laughs] So, I sort of had this running mental track of “Okay. I’m getting this advice. We’re going to see if this works. No, that didn’t work. Okay. Mental note: that’s not the secret key.”
In any case, so what happened was, near the end of 2005, I was working full-time at Real and playing around with this on the side. We built the prototype and at the time I knew exactly one Angel investor and exactly no VCs. That was the extent of my network. The angel investor wasn’t active in mobile but that was about it. So, I started going to events and I started ne2rking and talking to anybody who would take my calls. I mean literally going to events where I thought wealthy people might be hanging out and looking for folks who thought they might be talking about technology and have resources and striking up conversations with them. Anything I could do to just start connecting.
So, I wound up connecting through a lot of great local events in the Seattle area. Things like the Alliance of Angels and other Angel associations. Got some connections there and brought on our third co-founder, a guy named Brian Schultz. This was essential to our ultimate success because Brian was very involved with M&A at Microsoft for about four years prior. So, that’s what he’d done. He was buying companies from a lot of VCs and had a great of those folks. He started helping with introductions and we were hitting the fundraising road together.
We’re talking to angels. We’re talking to VCs with more of an emphasis on angels. One of the pieces of feedback is “We can’t really take you seriously while you have a day job.” So, we pulled together some family and friends’ money and at the end of 2005, literally, like 2 days before the end of the year, I officially quit from RealNetworks. Charles officially quit from Expedia where he was at and sort of the big moment was we went to the Alliance of Angel’s luncheon to go pitch and we got fantastic response. This is like a week before the Holidays. We got fantastic response. Tons of interest and we sat back and waited for everyone to call and follow up.
Well, you know how that story goes. One piece of advice I can definitely say is you don’t wait for people to follow up. No matter how much they tell you that there’s an established process. No matter how much they you, “Well, it’s going to be hard to get people to return your calls over the Holidays, so you might want to wait until it’s done.” No. You’ve just got to continue to be dogged and aggressive, to run your own process, to put together the dates and to find your own lead and make that happen. So, we wound up squandering a really great head of steam that we got out of there. We did wind it up ultimately closing some investors out of that but it wasn’t for a long time later.
So, there we sat in sort of January and I’m trying to re-interest the people who were interested in December and reconnect and February, and there really wasn’t much happening. So, I’m talking to anybody who will take my calls and going to every meeting that I can. Between Brian and I, we were spending 8 hours a day on financing, about two-thirds of my time and a third of his time while Charles slaving away at the code. I was still working with some of the outsourcers and Brian was working on some business development stuff and financial models and so on. We were just hustling every way we could.
It’s funny because this whole time I’m looking for the magic bullet but I can’t really recommend it to anyone. I’ll tell you but I’m afraid of even telling people what it is because it’s going to sound like advice and it’s the worst possible advice. It’s like somebody who bet it all on 47 in roulette to say “This is the secret to massive wealth,” because it’s actually really bad advice. It just happens to be what worked for us. What wound up happening was one of the people on the list we kept hearing we should talk with is this guy named Tom Guesby [SP]. He was described as a venture capitalist but we did out a little background diligence and we found out his fund was pretty much invested and wasn’t really making new investments. So, we really couldn’t figure out why we should talk with him but everybody says, “He’s the guy who is involved with every company in Seattle that’s making money in the carrier space. He is the Godfather of Seattle wireless VC investments.”
So, we sent him an email, called him up, never really connected and for a period of a month or 2, just never really got the meeting that we were looking for. It wasn’t until we went to 3GSM in Barcelona and somehow Brian wrangled a ticket for us to get into the Lehman Brothers meet-and-greet. We’re wandering around target-rich environment and talking to everybody we can find. There’s VCs and investors all over the place when Brian comes up to me and says, “Dan, it’s Tom!” The guy we’d been trying to reach. So, I run over and sort of casually appear to saunter up and he’s chatting with somebody and I insert a few comments and wind up chatting with him and give him the 30 second pitch on what we’re doing. He says, “Oh, that’s really cool. Where you guys based?”. I said, “Two blocks south of you in Seattle.” He said, “Well, we have to get together.” I said, “Oh, that’d be great!”.
So we got some time on the calendar, sat down with Tom. I pitched what we were doing and I said, “Now, Tom, you pitch me. What is it exactly that you do? How does this work?” and he explained his deal. So he explained that what he does is he gets involved with start-ups, becomes chairman or takes a board seat, takes some equity in exchange for doing that and then works his tail off to be sure that they become financed and ultimately successful.
This was about the tenth person who had pitched me on something like this. The other nine were disasters waiting to happen. I had watched some of the other startups that had gotten involved with them. There are so many people who prey on the startup community by saying, “I’m going to give you help. I’m going to give you advice. You just need to give me a piece of your company and everything is going to be okayK.” I almost blew off the conversation right there but I made a decision early on that I was going to kind of leave no stone unturned. I just didn’t have that many networks and connections so I’d work each one to the best I could no matter how ridiculous it seemed. I explained, “I’m a little reluctant because I’ve had a lot of other people pitch me on this and haven’t seen it worked. Could I talk to some of the people you’ve worked with and get a sense for how that works?” He gave me this Who’s Who list of Seattle wireless and in running those people down, it appeared that he was the real thing.
So, long story short and we can get into the long version, it was actually getting Tom on board, wireless veteran, someone who rolled up his sleeves, put his credibility on the line for the company that helped us close our Angel round and very quickly, within a month or two, close the ultimate $4.5 million Series A that we did and get the company going.
Andrew: Wow. All right. Actually, you said “Don’t copy what I did,” but there is something in there that needs to be copied which is the way that you followed up by checking out that the people who had done business with him and getting to know their experience. If he had that track record and it came from those people, it did seem like a great deal. In the Intro, I said about 4.5. It actually was 4.5. From the email that you sent me before, it was half a million in a month and then $4 million two months later and that’s what made the difference.
Dan: Yeah. Exactly. The half million was convertible debt so it wound up being 4.5 in the Series A.
Andrew: So, in that year, while you and Brian are out there working your tails off to get funding, you said Charles was still working. What did he have done by the end of the year? What did that product looked like?
Dan: So, when we closed the financing round, it didn’t look materially different from what it did at the start of 2006 because what Charles was doing was taking this horrific disaster of a hack that I put together on vworker and turning it into something that actually stood a chance of being a real product. So, it’s funny because over the lifetime of Ontela the product never changed very much in terms of what it looked like. What it looked like was almost nothing. You picked up a phone. Took a picture. This is my demo. I did it all the time. In fact, I can do it right now with the Photobucket software on the phone. You pick up your phone. You take your picture. You put the phone down and you don’t touch it anymore. This is always what impressed people. Literally, pull it out, take a picture, put it down. I’d show them. “Look, I’m pushing the camera button. I’m not launching it. I’m just taking a picture. I’m just putting it down.” Then a minute later that picture would appear. Initially, we were just focused on the PC desktop. It would show up in a folder on your PC. Later, we brought it to cloud as well so it showed up in your Photobucket account or flickr or any of the other services that you may be passionate about and want your photos to go to.
This is really powerful concept. It’s like the difference between Twitter and Facebook. Everything by default is public and you have to go out of your way to hide something. That’s a fundamentally notion for something as personal as photos. I should say default public. Everything by default got sent. It may have gotten sent to a private location. It may have gotten sent to a public location but by default everything was sent.
Andrew: Now, as your telling the story, I’m wondering about Charles and how you keep him going and how he keeps himself positive when there’s no money coming in the door, when the prospects aren’t looking good, when this isn’t a gradual growth where you get $10 today, $20 tomorrow and eventually you end up with $4.5. It’s an all or nothing game. How do you keep yourselves and the guy who is working so hard motivated?
Dan: You know, it’s really difficult. I’ve thought a lot about what makes the difference between a great engineer, a great VP of engineering, and a great founder of CTO and Charles is a great founder of CTO. That difference comes from where you’re driven. If you’re driven by the process of development work, if you’re driven by building beautiful code, if you’re driven by a desire to do things the right way, the CTO founder route probably isn’t the one for you. Charles and the great CTO founders I know have this duality, the sense of being passionate about building great code, and high quality infrastructure and everything else, being passionate about customers and product and getting that right but also being passionate about building a business, about being able to make decisions that are ultimately about the broader scale of the business. One of the examples that I’ve held up was a friend of mine who is a CTO of I Can Haz Cheezeburger [SP] and when he came on board there was 6 months of horrific Visual Basic and .Net infrastructure in place and the site was like mad. He made what I have to imagine was one of the most painful decisions of his life to not update the site, port everything over to a more modern framework and scale it in a way that was a little less cringe-inducing. He realized that for him to take even three months to do that would derail the site’s explosive growth and he wound up committing that company to a multi-year, long term investment in technology that most startups would turn up their nose at because that’s what the business need. Charles had that and has that about him which is he cares about the business. So, what did that ultimately mean? That meant that he was a part of those conversations. He knew what was going on with the financing. He could see the progress or lack of it. He could see how hard we were working. He could see all the people around us who weren’t getting funding and the few who were and come to his own judgment about the fact that we were doing the damn best we could and had a good shot at making it work. I owe him a lot for that faith.
Andrew: I can imagine. What kind of decisions did he and you make in that first and then I’ll move on past that first year? What kind of tough decisions did you make that you wouldn’t have made otherwise?
Dan: Wouldn’t have made otherwise you mean because we were financed and then happy? [laughs]
Andrew: To me it seems like it’s a coder’s paradise because in some ways it’s full of anxiety but in other ways you don’t have any customers to impress, you don’t have any carriers to push you around and tell you what to do, you just get to do what you think would be beautiful and what the world should love but often that’s a trap from what I’ve seen in these interviews.
Andrew: When you finally get in front of a customer, they go, “This doesn’t relate to me. I see how this works with your perfect use case and how it was fun to create but, no.” So how did you guys get away from that?
Dan: Actually, it was almost the reverse. So, very early on we got some meeting with AT&T and talked to some people. AT&T has a huge outpost here in Seattle. It’s not the world headquarters but a significant percentage of their executive team and T-Mobile as well. So, we didn’t have a ton of trouble getting to some mid-level people early on who were curious about what we were doing. What happened was we’d get a list of “Oh, It would be great if it could do this. It would be great if it could do that. It would be great if it could do this other thing.” At the same time, we’re talking to an investor every couple of days, a financial investor. At first we didn’t really know how to vet people so we’re talking to people who we never would have in a million years invest but we’re getting their feedback anyway.
They’ve got this explosive list of stuff they want us to do and there’s been so much great writing and thought now about how to deal with customer input, how to use it constructively and we weren’t working with the benefit of any of that back in 2005. It was probably there. We just didn’t know where to find it. So, I felt like we were being buffeted in all directions by all these winds that were saying, “No! You’ve got to focus on carriers. You’ve got to focus on handsets. You’ve got to offer more UI and make it more involved. You’ve got to make it more intuitive.” and trying to figure for the big meeting which is Dan going for coffee with this guy he met on an airplane, who is a consultant to T-Mobile, “What’s he going to want and what do we show him?” So we actually spent a lot of that first year churning, not working towards beautiful coding Nirvana but trying to satisfy the flavor of the month of the person we were talking to and what they wanted to see. This person wanted to see it in blue before they invest. OK, let’s make it blue. Wait, they didn’t invest. What do we do now?
That was really hard and I don’t think we did a great job of it. We spent a lot of that first year trying to figure out who we were and what we were about. What I will say though, at the core, there was the tactics of reacting in the short term but there was this longer term conversation of “Who are we really? What are we really about? What’s the long term strategy of all this?”. It turned out of all the interesting things of the converging process of bringing Tom on board, who was somebody who felt accountable as the Chairman of our Board when we did, to speaking coherently about the long term strategy of the company, of bringing investors on board and needing to put together the really tight 12-slide pitch deck that I could recite from memory and here’s what the essence of our company is and the vision that we had to present about that. About how this could really be a billion dollar business. That was what really gave us the discipline to move forward.
It’s funny. In this environment, where bootstrapping is held up as such a virtue, I look back on my experience both with Sparkbuy and with Ontela and say the process of bringing in investments and the truth of having investors has been such a phenomenally positive influence on both businesses and while it’s had its issues as well, I have a hard time not recommending it as a path to go. Bootstrapping has a lot of virtues but it’s tough to underestimate the degree to which having accountability to a knowledgable outside party, a really great investor I’m referring to by the way, not just anyone off the turnip truck, can provide discipline and motivation to [??].
Andrew: I almost hate to ask this question because we are now 30 minutes into our interview and we’re still on year one but you’re telling such great stories.
Andrew: Before I even get a chance to ask, “Do you have an example?”, you do have an example and you do have a bigger message and you’re so good at telling a story, that we might end up going too long. If we do and if you have a problem with that, let me know and I’ll speed things up.
Dan: No, I’ve got some extra time. We’re good.
Andrew: Do you have an example of how having an investor helped hold you accountable to something that you wouldn’t have done otherwise or helped build the business beyond introductions?
Dan: Yeah. No, no. Introductions are great but that’s not what I’m talking about. I have a great example and it’ll jump us to near the end of the Ontela experience. Let’s see, we closed our Series B, which a fascinating story in and of itself. It took 2 months from start to end, and we pitched 90 firms, 50 of them in person and got one termsheet. We did that, we closed it right before the door slammed shut on financing, right before IREP good times. That was when we closed. Thank goodness. That was a $10.5 million Series B.
Let’s see, so we finished that. IREP good times happened. I’ll tell you and this is to my [??] and probably would have sailed blithely on by had it not been for the fact that I had a board. Because I had a board, I felt like I had to really go dig in and figure out what the change in the economy meant and how we looked at it. My first reaction was look, you know, macro-economic terms are great but we’re a little company. The forces affecting our company uniquely are more important than the forces affecting the economy as a whole and have a greater effect on us, so why worry? There was good reason to worry and so that was a small thing was I really did feel the need because I was accountable to the Board on a monthly basis to look into it and have a good explanation for why we were doing what we were doing. We were a little smarter about it than we would have been otherwise.
The example I was leading up to was January of 2009, if I’m not off by a year, when we had our first pre-loads coming through. We were seeing the first data but the pipeline wasn’t as good as what I wanted. One of the key pre-loads was being delayed. I looked and this said, “There’s a very good chance this could wind up taking longer than I forecasted and being a more risky endeavor that we planned on. This might not go like it’s going to plan.” It’s really easy to keep your head down and focus on execution and if you feel like that’s your only option, that’s kind of what you do. I think if I had not had a Board meeting coming up, it probably would have been months before I really got serious about looking at this. I think it would have just slipped by me. It would have been too easy for me to focus on the crisis at hand, which was this thing’s late and fixing it and being very tactical but I had a Board to report to. The first couple of meetings one of my investors teased me about this and then everybody loved it and started recommending their own companies do it. I said, “Here are the three things that our company needs to do,” and I put up those three points at the start of every single board meeting, every single month. The first slide was always, “Here are the three things we need to do” and that made me feel accountable to every single Board meeting to say how we were doing against each of those. I changed them about once a year when there was something really meaningful in the strategy, but that was kind of the lightpost.
So, I was looking at this thing. What am I going to say about these 3 things, particularly this one about getting this many phones loaded with this much stuff at this time. Long story short, I sat down with the Board and I said, “So here’s what we found out. Here’s something that we found this month. Our pre-loads are behind and the schedule isn’t going as well as we wanted to. The conversion rate that we’re seeing is good. People are delighted with the service and they are paying for the service at the rates we expected”
But we had this accident. We had this phone where we couldn’t charge for the service because a change the carrier made to the service at the last minute and the phone was hardwired because this stuff gets burned in at the factory. The service was hardwired to use the old billing system. So we had two choices: either we could disable it entirely on the phone or make it free. Up until this point, we were deathly afraid of making it free because once you make it free, it devalues it to the carriers. They just say it should be everywhere and it should be ad-supported and we were really focused on this business model. I think it was $2.99 a month.
In this one, we had a good excuse. We couldn’t charge for it. It was on a small carrier. We figured it’s a good experiment, if it doesn’t work we could bury the bodies. The response was outrageous. I can’t remember the numbers off the top of my head but a majority of people who were buying the phone were becoming active users of the service where active meant that they were uploading something on the order of several pictures a week for months.
Dan: I mean, you know the average iPhone ap, 99% of people stop using it after the first time and here we were seeing the majority of people who bought the phone, not using the ap but bought the phone who were using it more than a month afterwards, using it actively. So, I sat down with the Board and said, “I think we need to make a significant change. I think we need to look at how we monetize these free pictures, how we monetize the pictures that people are moving rather than monetizing the ability to move them.” So, the Board said, “Okay. What do you got?” and I said, “No, no. You misunderstand me. I’m telling you that I think I need to come up with something. I have no idea how to do this but I’m going to come back to you next month with a set of answers with a proposal.”
So, we talked about that for awhile. It was kind of terrifying and it sort of violated one of the rules of Board management which is don’t bring a problem unless you have a solution, but everybody respected that we were looking at this problem. We brainstormed some great ideas and we left. When I came back [??] proposals. One of them was something organic that we’d built in-house. Two of them were tactical acquisitions and then I said I also have one completely crazy notion about what would happen if we merged with our biggest partner, Photobucket. Everybody thought that was totally outrageous and would probably never happen. But that’s what actually happened. That wouldn’t have happened without a Board to whom I felt accountable for the long term strategy of the company or it would have happened much later. We would have gotten a lot further with our heads down focusing on tactics.
Andrew: How did connecting with Photobucket solve that problem for you?
Dan: So Photobucket is and was at the time, the largest stand-alone imaging site. At the time, it was the largest imaging site. Now Facebook is bigger but if you set aside Facebook, it is the biggest site on the internet, top 50. So, with 9 billion uploaded, hundreds of millions of photos a month I believe, there was this massive desire to get pictures and media into Photobucket. So we’d done a [??] solution with them which the carriers pre-installed, a Photobucket mobile uploader product and it was by far our leading pre-load on a whole bunch of different metrics.
So, we’re looking at that saying this is a really powerful opportunity but Photobucket makes almost all of its money by advertising. It’s a phenomenal advertising business and they’ve really figured out how to extract great value while providing to the value to the customers for free. When you look at it, Photobucket is at its heart free storage and photo management features and getting that paid for with advertising was something that they’d really refined. So, they’d done this really well. They’d been bought by Fox for a reported but not confirmed $300 million. So, now they’re part of Fox and the users were really passionate about uploading these photos to Photobucket and Photobucket could make money off of them.
So, we did some analysis of our own, from what we knew and what we found that one of the strongest correlations with revenue for Photobucket was new photos uploaded. So, we looked at this and said, “What if we made it free? What if we drove massive amounts of photos coming into the Photobucket ecosystem? That would make tons of money but not for us.” How could we go and benefit from that and while there were a lot of sane ways to do that, we sort of opted for the crazy one which was to put the companies together.
Andrew: I thought I saw in my research that at one point, T-Mobile was offering a version of the photo uploader for free and had a premium version for $20 one-time fee. Did you guys try that?
Dan: We did. We played around with that.
Andrew: How did that work?
Dan: I’m trying to remember now. How did that work? What I can tell you generally is we did some really interesting pricing experiments where we checked price sensitivity at different price points. What we found was that $2.99 a month was our ultimate point, that was where people showed the best dollar-to-utility trade-off. At a $1.99, a few more people would buy it but not enough to offset the lower cost. Same thing for $0.99. At $4.99 a month, there was a huge drop in people’s willingness to pay. The funny thing was a $4.99 onetime fee showed the same willingness to pay as a $4.99 per month fee.
Dan: Which is just insane. We used to joke that in the mobile world the “per month” is silent. This is a little less true now than it used to be but in terms of stuff that is on your carrier bills, people would tend to sign up for it looking only at the price without considering the per month ramifications, which is just stunning. That’s why you see carriers selling so many things for $0.99 or $1.99 per month. So, that $20 thing was a short term compromise and the premium went nowhere whatsoever but that wasn’t really a surprise for us. It was something where for various reasons, they needed to have a premium offering, they needed to have a free offering and they couldn’t do monthly billing at the time. So that was our compromise until we could get something more long term worked out.
Andrew. I see. So, even with the big uptake, you couldn’t get enough revenue from $2.99 to make it all worthwhile and not need Photobucket in advertising?
Dan: So, we could. That is for any given pre-load it was tremendously lucrative and successful. What happened was I drew this bar graph for them. Actually, here. Let me see if I can create it for you. I’m going to cheat a little bit.
Andrew: [laughs]. Oh good! We’re going up to the whiteboard.
Dan: Yep. We’ll go to the whiteboard here.
Andrew: I’ve got to have that set-up too. The [??].
Dan: This is fantastic. Giant Post-It Notes. Not enough people use these things. So, I got whiteboards in the background. I drew this graph for them and it looked something like this. I said, “Okay. This is the number of people who have bought our service. This is the number of people who tried our service out, who bought the phone and tried the service but didn’t ultimately convert. This is about [??] higher than this one which means a 10% conversion rate which is fantastic.” I said, “This is the number of photos that we sent,” and it was this massive number which was a hundred times or a thousand times as big as this. I said, “If we keep doing what we’re doing with the pre-loads and at the rates we’re going at, here’s what our revenue will look like and we’ll hit our exponential but it’s going to be a way’s out. We may even have to do another financing round. It’s going to be close.” I don’t know what number I came up with but if we made half a penny of each one of these pictures, which is the number sent by these users before we turned them off and I showed what the numbers for that would be, that would be amazing. We could do that immediately and it would be easier to do because now the product is free so it’s easier for us to get the distribution and the pre-loads.
We were talking about it but everybody’s eyes just kind of kept going back to that slide. This massive number of photos that people wanted to send and were sending using the service but we weren’t ultimately send and use because we turned them off after two weeks and try to convert them. That just became the pulse of the conversation. How do we monetize the big bar instead of the little bar?
Andrew: I see.
Dan: So, that was what ultimately drove that conversation.
Andrew: Even now, years later looking at that, that’s moving for me. I see it completely right there. You actually for the first time made video worthwhile for the audience. Up until now, it’s just two heads talking and nothing to show for it.
Dan: [laughs]. Right. Right.
Andrew: I’m going to ask you in a moment about that ear piece too and about some of our pre-interview conversations because I think that shows an aspect of you that I can learn a lot from. Let me move on with the story and ask you why you didn’t want to just duplicate Photobucket? Why partner up with them instead of saying we’ll build our own website? All of our photos are going into this website anyway. We could monetize the way Photobucket does. We’ll create our own brand.
Dan: You know, we looked at that. I mentioned that we had a couple of ideas to get started and that was exactly one of them. There were a few reasons we decided not to do that. First was we realized that the hardest part of what Photobucket did wasn’t the technology, it was the monetization, that monetizing free photos well is excruciatingly hard. A second related point is that we’d seen back in 2005 that we were competing with three or four photosharing start-ups. Great companies. Pictsense, which I believe is still around. A few whose name escape but who were all sort of chasing after the same problem. Most of them were building their own destination sites and what we saw is that they were failing. They were failing on monetization. They were failing on brand. People didn’t want to trust their photos and memories to a site they’d never heard of. You just couldn’t monetize these photos without the deep experience that Photobucket had developed, the ad sales teams, and the scale.
We ultimately thought that was a really risky maneuver to try and replicate that ourselves.
Andrew: How do you monetize photos well?
Dan: So, what Photobucket has done is created a really phenomenal ad sales team, so their own in-house ad sales team. I remember they did a great Wall-E takeover when that movie was coming out of where Wall-E is rolling over the Photobucket logo. That means they’re going to major brands and saying you can do this. You can do creative things like photo editing is very popular thing on the Photobucket site and so at one point I believe it was Lego Indiana Jones sponsored it. So, not only did you have the Lego Indiana Jones frame but you could put little whips and hats on the people that you were working with so you could interact with the images. So there’s working with brands to come up with creative ways to interact with the experience that don’t alienate your users too much. We’ve also done studies on load times and intrusiveness of ads and we need to trade those things off against each other.
The other piece of it is funnily enough there’s remnant advertising in any business. The sort of standard banners and so on and so forth. I would not have believed this until we joined forces but Photobucket actually employs a full-time person to handle that inventory. I always thought that was one of those things you hand off to some agency and let them go but no. It’s an optimization opportunity just like any other. The rates that we get are meaningful better than lots of other companies because we’ve got somebody who full-time works with all the different ad networks to be sure that we’re getting the best inventory, the most appropriate inventory, the highest converting inventory and switching those out. That’s his full-time job and the numbers speak for themselves in terms of the revenue that creates. That’s not an area where I had an any expertise or knowledge. Cloning Photobucket or building a bunch of those features would have been really fun and a completely futile exercise because that’s not where the value came from. It came from the brand, the scale and the ability to monetize those photos.
Andrew: Wow. You know what? It’s so easy from the outside to miss those aspects of a business. Interesting. What else did I want to know about Photobucket? Actually, I think that’s it except for why you’ve moved on? I know you’re still involved.
Andrew: But you’re not day-to-day. Why?
Dan: That’s a great question. So, as we went through the process, what we were actually doing was spinning Photobucket out of Fox and merging the companies. Fox went up with a meaningful ownership stake at the resulting company, board seats, the whole thing and they wanted to be sure Photobucket was in good hands. Now good hands is a relative thing and without passing any judgment, they felt that having a founder run the company, did not qualify as good hands. So, when we talked about this, they said, “We want somebody who is a known quantity as a CEO. I don’t know if they used the term “gray-hair”. They might have. [??] who is running this thing. Not the entrepreneur who created it and built a vision from scratch.”
That was hard. It would have been a really neat opportunity to lead the combined company and it would’ve been a fun opportunity but another part of me felt very, very relieved. I’d been working on Ontela for more than 4 years at that point. I loved the early stage stuff and kind of missed it and so saw an opportunity to step away a little bit, learn from somebody else and bring somebody else in the CEO role, learn from them and see where it grows. At first, I’d said “I’m just going to step away from this. Let’s just do a great exit plan”. My investors said, “No, no. We’re not doing the deal unless you’re a part of it.” So, I agreed to take on a CTO role and actually this amazing CFO guy named Tom Monroe, who’d been CFO at 2 companies that had IPO’d, a dozen M&A transactions and a really thoughtful, brilliant, phenomenal senior guy and had been part of the office as a CEO. I said, “What about this guy as an interim CTO?” and Fox agreed to that, thought that was a great idea. So we put him in as interim CEO. He’s also a good friend. He’s a fantastic guy.
After a couple of months, Tom was kicking butt. I was on the Board and helping him as sort of the board seat and I was looking at this goofy CTO role because I have something of a technology background but it was just the useful name to give to the founder who was still hanging around. It was clear to me before and maybe this was self-fulfilling but after a few months it became clear to everybody that I wasn’t going to be able to earn my keep in that role, that I was expensive as an employee. With most of the business in Denver, because it’s an 80 person company and most of the business is in Denver, I just couldn’t add enough value so Tom and I sat down and figured out a good way that I could move out from day-to-day, stay involved in the Board and start something new.
So, it’s hard to see your company go but I was described Ontela as “my first company”, not “my company” and I always did really sort of fundamentally think of it that way. So, I didn’t have that giving up the baby for adoption feeling that I think a lot of founders do. From the start it was one of what I knew was going to be a series of companies that I’d be involved and I was happy to see it in really good hands and ultimately see things move on. I’m still on the Board, involved on great terms, love the business and help anyway that I can while at the same time being really excited about my new company.
Andrew: What about this? I talk to a lot of entrepreneurs and if you hear my interviews, you hear me ask about that one moment when they signed the paperwork and it was done. It was no longer their company. Some people will say they saw the check. I think Matt from Slice Hole [SP] said that on his iPhone he saw the money go in his account but they have this clear break from the past and they get to move on. You don’t seem to have had that. You’re still connected so how does that feel?
Dan: Still own all my stock. No exit.
Dan: One of the largest shareholders in Photobucket and I’m really proud of that because that business is doing amazing things. By the way, I just have to say on a side note, Photobucket has been around for a long time. For a long time, it was strongly tied with MySpace tarred with that brush. I would strongly encourage to try out the Photobucket Mobile client which is the descendant of that Ontela technology. Dump all your photos there because it’s a phenomenal experience but enough. Enough. Enough pimping.
Andrew: Also, I think you said on your LinkedIn profile, everyone check out Photobucket.com/mobile?
Dan: Oh, yeah. If memory serves, that’s what gets you to the ap store. That’s where you find the right link from your phone.
Dan: So, let’s see. That break happened in two pieces. The first piece was signing a piece of paper which said I’m no longer the CEO, Ontela and Photobucket are now one company, but I’m still an employee of the new company. The second piece was where I resigned and that was the one where it really felt it. We sat down and worked out a great arrangement so I had severance and could really figure out what I wanted to do next. It was about as positive of an experience that something could be but there’s the saying “A weight was lifted” which makes it sound as if it was an oppressive weight. I had a feeling like a w8 was being lifted but it wasn’t an oppressive weight. It was a feeling of responsibility, of caring, of love, of depth and it felt really positive to move on but it definitely felt like a part of me was missing. It was really an interesting transition through myself and the new business and built something new I was excited about which helped the transition move along really quickly. Yeah. I’ve still got my finger in that pie and it’s something that I really enjoy being a part of and proud that I can still be a small part as a Board member of something that really means a lot to me that I really invested a lot in.
Andrew: So months after that signing, the second signing, you go and you start Sparkbuy. What was the original idea behind Sparkbuy?
Dan: It was just one of those simple things where I needed to buy a laptop and I was so frustrated. You go to Amazon and you type in “thin, lightw8, bluetooth” and you get keyword hits for everybody who put “thin, lightw8, bluetooth”. You go [??] and you go, “Great. Okay. I want 12 to 14 inches and I want more than 8 hours of battery life. Oh wait, they don’t have more than 8 hours of battery life.” So, then you end up reading review after review after review. Right around that time, I did a trip down to the valley just to catch up with some friends down there and I booked my ticket on Kayak and I thought, “Geez. People have been innovating in travel and refining that experience for a decade now. Everybody who does a great job of it, gets handsomely rewarded. You’ve got these great UI paradigm sliders and check boxes. Why has nobody done this for e-commerce? Why has nobody done this for laptops?”
Then, I found out the answer. I thought, “Well, okayK. Let me see if I can license a data set and go build some great UI.” The problem is there’s no ITA for e-commerce. There’s no aggregator of all the flight information. There’s no data feed that hacks this in a way that you can create a great experience around, that you can create the sliders and check boxes and everything else. So, what I realized was the challenge was not just to build the great pretty website. If you go to Sparkbuy.com, you’ll see this nice website and sort of Kayak or [??]-inspired that lets you click a few things that you like, move a few things and Ta-da! There you go. The challenge was getting the data. So, the other company that you don’t see behind the Sparkbuy that you do see is over 200 researchers in third-world countries who are manually researching in triplicate every single item that’s in inventory on currently Amazon and NewEgg with about a half-dozen more stores coming soon. That was the “A-ha! moment” that led me to believe there’s really an interesting business here.
Andrew: Interesting. I went through it and I played around. Interesting. Now I understand why the first item that I saw was a laptop.
Dan: Yeah. Literally, because I needed to buy one.
Andrew: It linked me to Amazon and it made me think, “Oh, all right. I trust where I’m going to buy this stuff from so now let me go and experiment without this cloud over my head working that something would happen with my credit card. I assume then that you were just grabbing all the data from Amazon and somehow mechanically sorting through it. You’re saying, “No.” Why do can’t you just grab that data mechanically, sort it mechanically and post it to your system and allow people to use the sliders to search it?
Dan: When I was messing around with this, I talked to the Bing service team. I talked to the somebody attached to the Froogle team, talked to somebody in the Amazon team and I asked them how they got their product data. They all had the same answer more or less which was we get these manufactured product feeds and then we hire people to de-dupe and collate them. Okay. Fair enough. So, they’re all trying to do that.
Here was my experience with the quality of those results. For that first laptop, I was actually so frustrated that I paid a guy in Pakistan $50 to take a Google Docs spreadsheet and fill in 500 laptops that I found on Amazon with the specs that I wanted. Literally, every night at midnight, I’d log on and I could see a guy in Islambad typing in real time. You know, “Core I7, Real Processor”. When he was done, like I literally filter, filter sort and the laptop I found was $250 cheaper than the one I had previously been planning to buy before the exercise. Met all my needs. This was the sort of “Wow! This works!”
So, I wound up scaling that up and hiring more people building infrastructure where it wasn’t just a spreadsheet but there were forms where instead of typing in “Core I7”, they’d pick from a dropdown and those CPUs could be separately researched so you’d numbers like performance numbers and benchmark numbers. So, I could answer questions like “Is this laptop suitable for running Photoshop?”.
So, I started doing this at a little bit larger scale and then I thought basically I’m going to use them to fill in the gaps from Amazon or other data. So I started pulling in the Amazon data. By the way, perhaps one of the broader answers to your question is I’m a better manager than developer so it was less daunting for me wrangle, recruit and train large numbers of people than it was for me initially, with no developers, to get code written to go and do this. So finally I said, “Okay. I’m going to get some code written and pull all the Amazon information, which is incomplete, right? So about only 30% of the information is there. It’s supplied by the manufacturer. So, if a laptop has great battery life, it’ll say the battery life but if it’s lousy battery life, they won’t list it. If it has a DVD-drive, they’ll say “Has DVD”. If it doesn’t, they won’t say anything.
Dan: I figured I’ll take what I can get. I basically populated the form with the Amazon ITA [SP] data so they only had to fill in what was missing. I will not forget the guy in Islamabad emailed me and said, “Hey, if I found some mistakes with the stuff that you filled out, do you want me to fix those?” and I said, “Oh sure.” I’ll pay you and I did some quick mental math, a penny per mistake you find or something like that. It turned out to be the most expensive research report I had anybody fill out ever. Something like 40% of the data there was wrong.
Andrew: 40% of the data that you were getting from the manufacturer?
Dan: From Amazon.
Andrew: From Amazon?
Dan: Which indirectly came from the manufacturer.
Dan: Now, I was using a somewhat generous definition of wrong but this was like the CPU would say “Celeron” which isn’t really all that helpful. If you looked at it, some CPUs would say “Celerons”. Some would say “Intel”. I remembered one said “Blue”. I have no idea what that meant. [laughs]. But this data was provided for listing next to the product description. Right? You have the production description and then the specs and that’s what it was meant for [??] consumption. That’s what it was meant for. If they listed the shipping weight in the product weight category, that’s not a big deal because it’s a strength because they’d put shipping weight “24 lbs.” when it was supposed to be “laptop weight: 5 lbs.” Not such a big deal if you’re putting it in the specs. A really big deal if you’re trying to filter by weight. I wound up finding that there was nobody who had high-enough quality data that we could use and that’s why we build it from scratch.
Andrew: So interesting. Okay. If I wanted to go to Amazon and find a laptop that had eight hour minimum battery life, don’t care about the price, do care about the size and do care that it does not have a DVD player, I can’t do that because I don’t think Amazon allows you to do what Google does which is insert a “-” in front of what you don’t want to search for. Right? In my GMail, I could say “Dan”.
Andrew: You can’t do “No DVD”, “No whatever it is that I don’t like about it”. Interesting. All right. I see. What about this?
Andrew: Here’s one other thing that I notice about the site. I can’t just access the site. I have to wait a moment while it loads and then I access it. Why’s that?
Dan: Yeah. That’s something we’re working on. Performance is always a huge consideration. The evolution of it was we download a significant blob of data at the beginning so you can move the sliders and you can add and subtract your priorities. You can say, “Just show me laptops that are Photoshop compatible” and you can do that right away. So, it takes us just a second to bring down that initial data blob. We’re working now on something to be a little bit more sophisticated to reduce that initial start-up time. That was one reason.
The other reason is you’ll see a little pop-up that shows you how to use the site and that was part of our [??] experimentation we’ve been getting fairly consistently. We actually do about 5 [??], probably 20 usability studies a week. Each one of thos is 5-15 minutes of some random person on the internet. We recruit through Mechanical Turk doing a screen caption of, recording of their voices [??]. We can do TVs now as well. We watch those over lunch. So the whole team sits down over lunch and watches these. That by the way has been a phenomenal driver of our product and one of the great advantages of working in web instead of mobile devices because you can’t do that with mobile devices. One of the things that came up over and over was “Give me a tutorial. Give me some sort of instructions. Give me some way to get into this.” Now, I feel like that’s cheating and cheap. I want a UI that people can figure out without me having to make them sit there and watch a 5 minute video. We took some inspiration from [??] search engine. While they’re loading your search results, they show you a pop-up with a tip on how to use the site. We thought, “Well, we do have that couple of second period at the very beginning when we’re loading up the data blob, so what if we showed a tip there?”
So, we’ve been experimenting with that. The first time you go, we show you a cycle of four rotating and you can dismiss it and subsequent visits we just pop it up and take it away. We’ve gotten mixed feedback about that so we’ll be playing around with ways to make that lighter w8.
Andrew: Okay. There are two things you said where we lost the connection. The first was being inspired by a company that was HipMonk who shows the pop-up. The second thing I didn’t catch was you said you recruited people to try out your site over . . . did you say Mechanical Turk?
Andrew: So, you just go to Mechanical Turk? You don’t even use usertesting.com or whatever that is. Why?
Dan: So, we’re really, really cheap. [laughs]
Dan: I tried usertesting. It was great. I have 2 problems with usertesting. One is the people who do it, do it all the time. There’s nothing worse than biased data. The conventional wisdom is “Any data is better than no data”. I almost think it’s the opposite. I almost think it’s better to work off of inspiration and an ideal than it is to have deeply colored data and I worry tremendously that the data of people who are doing usability testing day in and day out is just fundamentally different and who are getting paid to do it and who know they have to go through a set of questions and who are there for 45 minutes. It’s fundamentally different from somebody who goes, “Huh. What’s this? Meh,” and then moves on and I want that. I want to know what’s going through their head as they look at it and go “Meh” and move on.
So, I go to Amazon MTurk and I spend a couple of dollars and I say “I want you to go to the site and find a laptop and I want you to talk while you’re doing it and I want you to record the screencast.” That part is kind of a pain in the neck for them because they have to record everything. So, what I get is very similar to what I got when I tried usertesting.com for about a twentieth of the price and what that means is, I can do it all the time. I can do it constantly. I can use it as a core driver of our business and of what we do and that is really powerful. If it were as cheap, we could do it with usertesting too.
Andrew: What software do you use to record it?
Dan: I’m telling you some deep, dark secrets here but your users deserve to know. Screamcast-O-Matic.
Dan: It’s Screamcast-O-Matic.com. It’s a free Java applet that lets you record and upload screencasts. We use it all the time so we sprung the big money for their Pro subscription which is $12 per year.
Andrew: [laughs] Wow.
Dan: These guys are fantastic. They deserve better exposure.
Andrew: Did I just hear you say $2? They go through it. They do what you say, say “Go find a laptop that has this and that.” You watch them and you say “Talk it through”. Interesting.
Dan: Even less, we just say go to the site and use it to find a laptop that you might like to buy because I really don’t give them a minimum time. We have people who are in and out of there in 90 seconds. We have people who do it for the 15 minute limit and go “Oh drat. I have to stop now!”. Some of it is exhaustive, in-depth … we get people who are professional QA folk and most of them are just random folks. You can tell they are from all over the world because of the accents that come in. You can specify US-only or International.
I will tell you that it wasn’t until last month … we’ve been doing this for about three to four months. It wasn’t until not even just a couple weeks ago that we had the first usability video of the 20 or so that we do every month that did not result in a ticket being filed in our bug system. That is every single one of those users found something that we had not found ourselves. Whether that was something that wasn’t working quite right or a bug or needed to be changed, the impact of that was dramatic. In fact, we started a rule we follow pretty well of “We only fix bugs when somebody has found them from one of these tests” because the number of things that we find ourselves that we think are really important that nobody ever stumbles into is just huge. So, we find the bugs. We file them but we tend to not getting around to fixing them until somebody has found them in the field.
Andrew: Wow. I love how methodical you are. This is good time for me to bring up this question. First, you not only have an ear piece and I notice that you have it in your ear for this interview. There’s only one other person, Jason Fried of 37signals, who did it. You also taped it to the back of your shirt so that it positioned itself perfectly and I was wondering. I said, “How did you do it?”
Dan: [laughs]. Oh, you caught that?
Andrew: It’s not until you went to the whiteboard that I realized that. These are not the only two things where I realized that you took care of details. Before the interview started, via email, you didn’t just watch other interviews but you also said, “I like the way these guys came across but not those. How do I come across as those guys and not the others?” You know, you wanted to know what the software was and we talked about that.
Well, I don’t even know how to ask a question to get at where does this come from? How do you get to be this meticulous, this detail-oriented? Meticulous may not be the right word.
Dan: Talk to my wife or look in my office, it’s not universal. I tend to be messy and sloppy and forgetful and all those other things. I think it actually goes back to the early days of Ontela, going back to year one because we did not have a lot going for us. We did not have many opportunities. We thought long and hard and I will say the worst advice we got on the scale of misleading times frequency with which we got it, by far the most destructive advice we got went something along the lines of “Triage your opportunities aggressively. Don’t spend time on things that are less important. Pick a small set of investors. Focus on those investors. Have one deck. Make it a really great deck and then use it over and over again.” It was the sort of the idea of “There’s lots of opportunities out there so focus on a few of them.” What we decided is that we had to make every single opportunity count and we had to invest in every single one. I don’t think we ever used the same pitch deck twice. I talked about our 10 slide deck. We would always go in before every pitch and say, “Who are these people? Who have they invested in? What are they looking for?” and we’d tweak the little things. Wording, the upside and how big it was, whether we emphasized billions versus a safe bet for multi-hundred million dollar exit, who we compare ourselves to.
Let me give you once concrete example. I mentioned that we pitched 90 firms, 60 of them in person, one of them invested for our Series B. Near the end of that cycle, the insane two or three month touring cycle, two months and then another month to close, we had a flight down to L.A. There were two VCs we were going to pitch there. I don’t remember who one was. One was Steamboat Ventures, a Disney company and I don’t remember who the other one was. It was an introduction from a friend that was kind of, “Oh hey, you should meet Bill Askey [SP] at Steamboat.” I’m going, “Disney? Mobile? Carriers? They have no investments. This is probably a waste.” The other that I don’t remember looks like a really valuable thing so we’ll go down to L.A. for this. The other one canceled and I was so ready to cancel this flight. I so did not want to go down to Los Angeles and I certainly did not want to go down for a pitch that I knew was going to go nowhere. I clearly heard my own voice echoing in the back of my head said, “Dammit, Dan. You have no term sheets. You chase every one. Once you’ve got one, then you can be picky.” I said, “All right. I’m going to do it,” and that was who we wound up as an investor. Incidentally, they are phenomenal in mobile and they did have investments that they hadn’t announced yet and were one of the best partners we could have had, instrumental in making the Photobucket deal work, etc.
What I would say in general, what I’ve learned particularly for opportunities where you have an opportunity to communicate with someone who is really impactful and have that move out to a broader audience, the difference of doing 15 minutes of homework and not is the difference between mediocrity and having something you can really be proud of. So, I’m looking at you now. I’m not kind of looking over here to the side. [laughs]
Andrew: Oh, that is what of the hardest things to do. So, you’re looking at the camera and not at me on the video?
Dan: Yeah. I can take a picture and email it to you afterwards but I just took a granola box and set it up on end and taped the camera on top of it and then put the Skype window box behind it, so when I’m looking at you, it sort of looks like I’m looking at the camera. It drives me nuts. Scobalt [SP] did an interview of me a couple days ago and I found myself looking back and forth between him and the camera and it just felt silly. So, yeah. It took me 15 minutes. This is just a regular ear phone thing but I grabbed it and put it into my ear but it was all over the place so I grabbed some packing tape and taped it to my back. It took me 15 minutes.
Andrew: I guarantee you that the person listening to us right now feels the difference between these with the effort that you put in and another interview. I guaran-fricking-ty you. It’s beyond the ear piece. It’s beyond the “Andrew, what do we do?”. It’s beyond the granola bar. It’s little things that maybe I didn’t mention. You actually knew what this interview was about. You knew what the site was looking for and you talked to me before the interview. You gave me, “Here’s some bullet points that your audience would be interested in”. That was helpful. You talked to me openly about what was going on before so that I knew if there was something that you weren’t going to talk about, I knew why and I understood. All right. That’s not something that I’m going to get an answer to here. Let’s drive towards something that’s going to be more valuable. It’s inspiring and I hope that somehow by bringing up the little details, I’m conveying a much bigger message about you. I know that the audience feels it. I want them to understand what they’re feeling and why they’re feeling. I want to tell you I appreciate it. Thank You.
Dan: Thanks, Andrew.
Andrew: All right. Thanks so much. Dan, Let’s be sure that we give out the website: Sparkbuy.com. Check it out. Thanks so much for doing the interview.
Dan: Thanks, Andrew. It’s been fantastic.
Andrew: Thank you all for watching.