How I Turned My Company Around When The Dot Com Bubble Burst

While you may know Eric Kuhn as the creator of FoundersCard, a members-only community for leading entrepreneurs and innovators, I think you need to hear how he turned around his previous company.

In 1997 Eric founded Varsity Books, and reached a height that few entrepreneurs achieve. He took the online college book seller company public. But soon after, the internet bubble burst and his stock price went from $10 per share to 13 cents per share.

In this interview, you’ll hear about the rise, the fall and eventual phoenix-like recovery of Varsity Books. And you’ll hear about his current business FoundersCard.

Eric Kuhn

Eric Kuhn


Eric Kuhn founded FoundersCard, a relatively new but quickly growing members-only community for entrepreneurs and innovators.



Full Interview Transcript

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Andrew: Hey, everyone. I’m Andrew Warner. I’m the founder of, home of the ambitious upstart. How would you recover from a major public blow? Joining me is Eric Kuhn. In 1997, he founded and got to reach one of the heights of entrepreneurs. He took his company public. But soon after taking his company public, the Internet bubble burst and his stock went from $10 a share to $0.13 a share. In this interview, you’ll hear how he got there and how he recovered. It’s an impressive story. I can’t wait for you to hear it. We’ll also talk a little bit about Eric’s latest company, which is FoundersCard, a member’s only community for leading entrepreneurs and innovators.

Andrew: Eric, welcome, it’s good to talk to you.

Eric: Thanks, Andrew. It’s great to be here.

Andrew: When you take your company public, I’ve obviously never taken a company public, when you take it public on NASDAQ you get to go in that big room with the screens behind you. Right?

Eric: For us, is was a little different. When we were going public, it was towards the tail end of dot com mania. It was almost every week these dot coms were going public. We were the end of that, so the hype was kind of coming to an end. You could tell something was a little bit different. We never, when we went out on public, I think our stock went out at something like $10 a share. It went to maybe $12 or $13. We never had the $100, $200 share price. That being said, it was the incredible excitement of taking your company public in almost record time. It was something like 18 months from when we first raised money to when we went public and actually had started the company. It was an absolute sprint to be able to get out and be public. We never opened the NASDAQ, but we did get to do that interestingly about five years after we went public. This is after we were delisted and then relisted. We’ll get to that, I’m sure, in a little bit. It was an extremely exciting time when we went public in early 2000.

Andrew: What did you do, I do want to go all the way back to the beginning and go through this story. What did you do the day that you went public?

Eric: The day that I went public, my co-founder and I, we actually went to a restaurant in D.C., where the company was based. We went to a bar. We were probably drinking beers watching CNBC and watching our stock go on the ticker. Probably not the brightest thing when your company is going public, in retrospect maybe we should have been back at the office and kind of continuing to focus everyone. At that point, I was 28 or 29 years old, it felt like the right thing to do to celebrate. We just wanted to experience it firsthand and take it all in.

Andrew: I could imagine that I would be doing the exact same thing. I could take a day off from work for that. I couldn’t take it off if I got the flu or a cold, but if I got to go public, I would definitely take the day off and make sure to fully absorb what I had just done.

Eric: Exactly.

Andrew: All right, Eric, what I was starting to tell you before the interview started is that one of my frustrations is with your story is . . . after listening to some interviews with you recently, is that the interviewers didn’t do enough research. I love them. They did a good job talking about FoundersCard, but they didn’t do enough research on VarsityBooks. VarsityBooks was an incredible, incredible story. I want to get the whole story out there especially the fact that you did go down to $0.13 a share. I remember people feeling depressed at that point and never personally recovering from it. You not only personally recovered, as anyone who could see you right now on camera can agree with. The company recovered. You financially recovered. Let’s go back in time and find out how you got there and how you did it.

1997 you had this idea for a company. What was the original vision that sent you off marching towards this business?

Eric: I’m sitting in there, in my law office, I was a junior associate, thinking about how am I going to transition from junior associate to entrepreneur. At that point, there were relatively few dot coms that were certainly public or very large brands out there. I was trying to focus on how could I change an industry by bringing it online and to do something that never had been done before leveraging technology, realizing that as a 27-year-old, if I wanted to build and start a national brand, it was going to be through a web-based brand.

At that point, I hadn’t done many things in my life. But one of the few things that I had done was spend a lot of time in college bookstores and a lot of money buying those textbooks. I thought to myself, there’s got to be a better way. Amazon was focused pretty much just on general interest books. They hadn’t yet gone to selling everything there is to sell online.

I said someone should take this textbook industry and make it a lot better for college students. That’s what we did. We created a website to be able to convert and revolutionize that textbook industry and take it online. This was in ’97. I had to figure out how we were going to get the books. I struck a relationship with one of the world’s largest book distributors who was able to pick, pack, and ship the books directly to our customers. I had a website built, sort of doing the typical things an entrepreneur does when they start a company. I had 18 balls up in the air, juggling them all at once. Trying to get to market with an idea and, of course, trying to raise money around this and build a marketing plan, all of that simultaneously.

Andrew: You then, from what I understood, got funding. I can’t tell who it is who gave you the original million dollars but I did read an old Washington Post article that said it was a relative of Warren Buffett.

Eric: It’s a crazy story. My co-founder was an avid golf fan. We were driving to a meeting one day. I think it was the middle of New Jersey. We see a driving range. We pull over and lo and behold we bump into someone who was in our law school class. It turns out that this individual worked at a law firm who did work for someone in the Warren Buffett family. In about a week, we were off flying to Omaha, Nebraska to pitch people in Warren Buffett’s family and then we were off to the races. I think in 18 months, this is before we went public, we did three rounds, including that initial angel round. We then did three venture capital rounds right after that and raised something like $40 million or $45 million, and it was while we closing one round we were thinking about raising the next round. It was almost a full-time job just raising the money.

Andrew: How do you go from just meeting him on this golf course or driving range to suddenly getting a million dollars or to getting an invitation even?

Eric: One of the smart things we did, we made a lot of mistakes in those first two years. One of the smart things we did was to focus on actually getting customers, generating revenue, so that we weren’t just a concept. Back in those earlier Internet days so many of the businesses were pre-revenue. We actually had something when we were pitching investors, and, of course, I mean the error was just this unbelievable frenzy of dot com mania.

We had a product that people could get their arms around and, of course, a website that was generating revenue. The other thing we did that almost from day one, I think our very first hire was to bring in someone that would be able to get us PR. This is something I would never do and never necessarily recommend for a new business, probably a complete waste of money. For us, we wanted to create an aura of a significant large company from the start. We had a number of things going at once. When we launched this, we received a lot of press and we were able to position ourselves as the leaders in a particular market. That really helped set in motion a number of things making them possible for us.

Andrew: You’re saying that when you saw him, he already knew that you guys were the leaders because you already established yourselves that way in the public eye through PR.

Eric: Exactly. Pretty early on, we were able to create a dynamic. You remember what the textbook industry, say was like, it’s still like. It’s just a handful of publishers. It’s a market that doesn’t potentially service their customers very well and a very old guard industry. We, within a very short period of time, established and created this environment in which we were profoundly changing an industry with a scary new way of doing business. A lot of people were attracted to that, and we created and sort of planted the seeds for potential investors to actually contact us. In this particular case, it was still early on in our fund raising, and I don’t want to sit here and say that it was very easy to attract financing, because each and every round was, seemed like a struggle. Each and every round was definitely in itself a . . . it took time and effort and some level of very hard work, but it was a different set of rules. It was different environment. We were able to attract quite a few individuals who were initially calling us and interested in us and this dynamic that made that happen.

Andrew: So, if the company that you were talking about as a distributor, I think is Baker and Taylor. If Baker and Taylor, is that right?

Eric: That’s right.

Andrew: So, if Baker and Taylor was going to do your shipping and you didn’t have to do the pick and ship yourself, why would you need a million dollars from the Berkshire family and then another, I think it was another $40 million that you raised total? Why did you need to raise so much money? Where was it going to go?

Eric: If you remember, those original dot coms – could name so many of them that are no longer around – the premise of the original business model, like ours, was to build a market for the first time. We were convincing people to go online, which is a completely different concept for anyone at that point, and to, instead of buying their books through the campus bookstore they were going to

We had to, in essence, educate a population that there’s now a place to go online and to buy their textbooks. That required a fairly large marketing spend to actually reach college students even though we benefited from not having to market to the masses. We, obviously, tailored our marketing strategy to college campuses and used a network of thousands of college reps. We still advertised in virtually every campus newspaper and radio stations. It was an expensive proposition to build and create a market and educate people, to tell them for the first time they shouldn’t do something they had previously been doing, they can now do something else.

Those business models required a lot of capital and that, obviously, was a huge flaw or at least a burden for early Internet companies.

Andrew: All right. And there was MTV Ads and there were all kinds of . . .

Eric: Yeah, when I contrast that with the new business that we’ll get into, Founders Card, where we haven’t spent one penny of marketing, it’s amazing now how you can build and grow a business without any kind of discretionary marketing. But back in the day, when we launched VarsityBooks, that was a core part of what we needed to do and, obviously, the most expensive part of our budget.

Andrew: Actually, I saw an article earlier today from 1999, CNET article where you said, “We’re primarily a marketing company, and we leave the inventory and shipping responsibilities to our book distributor.” That’s why you needed the money. That’s the vision of the company that you were going to market, to convince people to do something different, which is go online to get a discount for their books.

Eric: Exactly.

Andrew: Okay. Now, the discount that you offered, I think it was something like up to 40%. It was shocking to your competitors at the National Association of College Stores. I can’t imagine what it’s like when as soon as you launch a big organization like that sues you. Why did they sue you, and what did it feel like?

Eric: It was fear. Again, it was an industry that was left to themselves, doing whatever they wanted to do. Calling the shots, selling books for above list price, not serving the customer. For the first time, they had competition and competition is a wonderful thing for the consumer, but it can be an incredibly scary thing for the people that benefit from an oligopoly type situation that existed for some many years. They also were afraid of technology, the fear of the unknown.

Like, in so many industries you had the old guard brick and mortar stores, repurposed businesses with Internet strategies that’s pretty soon after we launched what happened. It created a dynamic of fear, of confusion. I remember going to these college bookstore conferences, which I dreaded going to, and sitting in the audience and they would have seminars about the Internet, this new scary thing and how it was changing the industry. No one wanted to deal with it from the college bookstore setting, and it represented just this incredible fear. How do you try to deal with fear? One way is to sue someone and say we’re going to shut this down, or we want to go back to how it used to be. We found ourselves being sued or being threatened to sue, fear of lawsuits on almost a weekly basis. I think I had a whole folder or stack of folders of cease and desist letters and all sorts of pretty comical ways that these old guard companies were going to prevent us from competing with them.

Andrew: What, from what I understand, they said, or at least the agreement afterwards was that if you guys are going to, if anyone’s going to advertise a book at up to 40% discount, at least 10% of the books that are advertised at up to 40% discount need to be offered at 40% discount. You can’t just offer one book at 40% discount and say all the books are available at up to 40%.

I don’t want to get so much into the details of what their lawsuit is, I wonder what you felt on the inside. You’re a young guy starting a new company. You’re about to go public and you get sued. That’s one of the first blows that you recovered from. Was it as significant to you as it seemed on the outside?

Eric: By that point, we had faced other obstacles and challenges, and it felt as if every step of the way anything that could go wrong, sort of the Murphy’s Law, would go wrong or did go wrong. Every challenge that . . .

Andrew: For example, what else, what was bigger? What was a bigger challenge that you overcame early on pre-IPO?

Eric: Pre-IPO, there was the challenge of almost on a daily basis of are we going to go out of business. I can’t remember a single day the first, I don’t even want to say two years of the company, maybe the first five years of our existence, where it didn’t occur to me, oh, my God, if this happens we’re going to be out of business. That’s sort of what an entrepreneur has to deal with. That almost happens universally among early stage companies.

Andrew: For example, what made you think if this happens, we’re going to go out of business? What was one of those things that could’ve sent you . . .

Eric: I remember the fear for the first two years was Amazon, the big gorilla, are they going to announce that textbooks is their next vertical? Every investor meeting, we were faced with, “How is Amazon not going beat you if they decide to go into textbooks?” I remember reading the newspaper, thinking every day I was going to see an article or headline that Amazon launches their textbook vertical, and we’d never be able to raise money again. Something of that nature.

That was definitely a threat or that was a perceived threat out there. But there are so many other, not necessarily specific to what we were doing in the textbook industry, just trying to raise money. I perhaps overstated the ease at which we raised money when we were talking about it a few minutes ago. It’s tough. It’s challenging. Even in an environment in which it’s easier to do so, like it is now compared to a year or two ago, it’s still a challenging aspect of building a business.

In any case, there were a tremendous amount of obstacles that we faced almost on a daily basis.

Andrew: I wonder how you were able to . . . I’m looking at quotes from back then. From ’99, someone in an online interview with you said, “Do you think that the valuation . . .” oh, here it is, someone in Los Angeles said, “What do you think of the valuations of some recent Internet IPOs? Is this a bubble? If so, when will it pop?” Eric Kuhn’s answer is, “While it may seem difficult to justify the valuations of Internet companies by traditional standards, when considering that unlike the biotech stocks of the ’80s which can be explained as a fad, because the Internet represents a fundamental transformation of industries, valuations can be justified.”

There’s like a lot of confidence there. I lived through that era. We were doing really well. I couldn’t express confidence publicly like that because I said, “Oh, what if we go out of business?” How do you express public confidence to your investors, to people in the media, to people who are randomly asking you questions from Los Angeles online? How do you express that confidence when in the back of your head you also have those doubts that, you know we could go out of business too, just as likely as we could be a huge hit

Eric: I think that is part of the makeup of leadership skills of what an entrepreneur needs to possess. One of the reasons why I always laugh when people ask to be sort of taught, how to be an entrepreneur or you see classes in colleges or high schools and entrepreneurial classes, there’ are certain skills that need qualities that are really hard to learn. You either sort of naturally have them or are able to acquire them. I think the ability to project confidence or at least a sense of I know and believe in the mission and what we’re doing. Even as challenges unfold and as we face them, this sense of confidence that we’ll somehow be able to pull together and get past them and turn these challenges into advantages.

It wasn’t so much that I felt . . . it was sort of an ability that we, as a team, would work through any challenges and create this solution, create a successful business, even if it meant and it ultimately did mean, completely changing a business model which I’m sure we’ll get into. People talk about making pivots. Well, we made a pivot right after we went public, and it was a lot more than just a little pivot. It’s just this lasting confidence or the ability to project confidence in what you’re doing.

I deeply believed in what we were doing every step of the way. Even though I was worried and on the look out for challenges and things that could compete with us or things that could interfere with our ability to execute, I had a, the team had a very strong sense of confidence that we would get past any challenge and build the business.

Andrew: So despite the fear, you just said, “I know we’re going to do well.” Did you maybe leave yourself an out? Because you know at the same time that something could go wrong. Now I’m looking at this quote again, and I read it in a totally different way than I did before when I clipped it for this interview. You say, “Valuations can be justified.” You’re not going out there and saying absolutely all these valuations are right on and in fact, maybe we’re undervaluing Internet companies, like mine. You’re saying they could justified. You’re leaving yourself a little bit of room that if things do go to pot, you can come back in and say, “Hey, I said they could. I’m an entrepreneur. I’m in the risk business. I’m not in the fortune telling business.”

Eric: When I would say a quote like that and I don’t specifically remember that, but that sounds like a quote I very well could’ve said. I certainly wasn’t doing so, so that 12 years later and someone showed it to me, I would sort of the old Meet the Press kind of technique. I only was and to this day, I’m only really focused on the future. When I say things, it’s a matter of how I think about them at that moment in time, but not how I’m worried about someone showing me a quote and saying, “Were you wrong?”

I have no problem saying I was wrong about something if I feel like I was. I did not sort of answer questions in way to leave an opening in case things would change. That wasn’t really part of it. It was much more of an all or nothing mentality and mindset.

Andrew: I want to come back with Founders Card and the idea of confidence. The reason that I ask it is and I know that this is outside of the path that I set out for this interview, where I said we’ll go chronological order through what happened at VarsityBooks and then come back to Founders Card, where you are today, and find out how you built it. I’m just fascinated because I know that it takes a certain amount of confidence when you’re starting a company and building it to say to your people, “Don’t worry we’re going to be around for 10, 20, 30 years. We’re changing the future here.” At the same time, you have to acknowledge that somewhere in the back of your head, we could die tomorrow. How do you with that in the back of your head, not allow it to come out forward and lead you? How do you say to that voice, “Hey, if we fail, we’ll deal with it, but for now I need to project confidence?” I think that’s one of the big characteristics of entrepreneurs that they can do that. They can quiet that inner doubt for themselves and for their audiences and project that confidence that’s going to get people to march behind them and going to allow them to continue to work with something that, very often, shouldn’t succeed.

Eric: It’s different when you’re running a new business. You have different constituents that you need to project a certain image with. We had customers. We had shareholders. We had employees, who I was mostly concerned with as well, of course, as the customers. In a new environment, you need to project a certain sense of confidence to be able to attract and convince people to leave jobs. At that point, we were one of the first dot coms in D.C. It was a pretty proposition for people to be leaving their well-paid jobs in other settings to join a startup with zero track record.

We tried to do things to, obviously, take the risk out of that or lessen the risk. Part of it was to project a sense of confidence. It wasn’t an acting job. It was at the core a sense that I believed that even if the current business model in its current form wasn’t going to succeed, I believed deeply that we would figure out a way to build out a successful business. I think that was the nature of the confidence, not a sense of our particular business model is destined to succeed or anything of that nature.

I think projecting a level of certainty for an entrepreneur/CEO of a young company is a quality that’s very important. Otherwise if I was going to start up every staff meeting saying, oh, my god, we could be out of business because one of these three things could happen today, can you imagine? Nothing would’ve gotten done. You basically have to project that sense of certainty or at least of confidence. People feed off the energy of the CEO or the founders in a startup, and people really read the sort of confidence level as an indicator of where things are and where things could go.

Andrew: You mentioned “Meet the Press” earlier. I used to love Tim Russert and the way that he would go back and pull out a quote from somebody’s book who’s sitting in front of him and show that that quote contradicts what they’re saying today. He was doing it to hold his guest accountable to what they said in time. I’m doing it for completely different reasons when I go back in time and pull something from 12 years ago. I do it because I’m greedy, Eric. I’m greedy because I want to learn as much from you as possible. I have just about an hour with you. My audience has an hour with you. I’m so greedy that I get as much knowledge from you as possible and that they get to suck as much of your experience as possible and go build incredible companies so that they can go back and make us both proud. That’s the only reason that I do it. I can see, actually, I can tell now that we’re using video and not just doing it over the phone. I know that you can see that in me, which is why I haven’t backed down and said I’m going to take my list of charts and graphs here and pull it back here.

Let’s go through my timeline. Next thing that happens, year 2000, you go public. December 2000, the stock goes from $10, the stock that started at $10 goes to $0.13. I said earlier that I have friends who had their stock go down to nothing, to more than $0.13, and they personally couldn’t recover from it. What were you like when you hit $0.13, and then how did you recover?

Eric: It was a pretty incredible story about how it unfolded. Seemingly right after you go public, you should be on top of the world. There wasn’t any sudden point in time. There wasn’t one day that the stock went from one price to another price or it was a pretty precipitous fall in terms of the stock price and in terms of different things. I thought about it not in terms specifically of stock price but in terms of the business and the employee base and all sort of things.

Basically, what was happening in that moment in time was, and all these dot coms had raised all of these unbelievable sums of money. Some of course were public companies at that point, and in our case we had a couple of hundred employees. We had just worked incredibly and insanely hard as a team to get to that point. Shortly after, there was this sense and I can’t remember exactly one thing, but just a combination of events and things that occurred that made me sense that we would not be able to raise any more money. That our time of going out there and raising $30 million of venture capital money or being able to go public or do a follow-up round, that was a thing of the past. I guess that was sort of instinct. Many if not almost all of those other dot coms, some were able to shift, but most of them continued to spend the remaining dollars they had with that original business model.

In our case, I remember going to our board. This was about a month after we went public. I quickly put together this what I called a Going Out of Business Graph. I said if we keep spending our money at the rate that we’re spending it, we will be out of business and it was something like three months or six months, at the most.

I said that this is crazy. We have to figure out how to shift and how shift fast. That was a pretty gutsy and scary and lonely time. Because while everyone wanted to be associated with Varsity when we were at our peak and we were in the newspaper every day and all these great things were happening, the phone stopped ringing. Employees stopped coming in on weekends. The sense of invincibility or that we are part of this great unbelievable movement all evaporated.

I remember going into my office on Saturdays. We had a pretty significant office space in downtown D.C., and it used to be full of people on weekends. I think I was probably the only person that particular Saturday and thinking this is a really lonely situation. Yet, but was able to think through the challenge of it all. Not instantly, but over a period of weeks, we were able to identify a completely different business model.

While the stock kept falling, by the time it had actually fallen to it’s low point, we had shifted the business and we were no longer a dot com, a consumer facing dot com that was spending tons of money, that was burning cash at that initial rate. We had actually landed on a business that had a much stronger set of financials. Even though the public perception was that we were a company that was on the verge of going out of business, and I think the Wall Street Journal and others actually said that about us. Inside it was a very different story.

There was a strange dichotomy of being written about as a failed business model and a company that was about to go out of business, and at the same time feeling the sense of rejuvenation because we think we figured something out that was going to allow us to get profitable quickly and to be able then to scale and grow and build a significant company.

I think when the stock hit its lowest point, it probably coincided with the point in time where we had our heads down busy on building the business. We weren’t looking at what Yahoo Finance at that time or whoever else was . . . what our stock was trading at.

Andrew: Did you look for some buyer to come in and buy the assets and give you an out?

Eric: No, we looked for a business model that was going to play to our strengths and adjust to the reality of the time. We were a business that was predicated on being able to raise tens of millions of additional dollars from when we went public. We had an employee base and a marketing budget and a technology budget that all required that kind of consent fundraising.

When I sensed that we would no longer be able to raise that money and then it became a fact, no company was able to. It went from being relatively easy to raise money to being virtually impossible to raise money, I was faced with a situation of needing to profoundly change that business model. That was really the focus to come up with a business that still played to our strengths, that didn’t necessitate crazy marketing expense, essentially.

Andrew: Okay. That model came to you because before then you were getting calls from private high schools, as I understand . . . actually what was it, where did it come from?

Eric: Exactly, so a few private high schools. I didn’t realize this at the time, but if you send your kid to a private high school, not only do you get to pay for the tuition, you also have to pay for the textbooks. Unlike public school, you don’t get your textbook paid for by the state the first day of class. You actually have to buy the books.

These private high schools for years were struggling with operating their own bookstores. They would do so the first week of class out of some closet or they would have the math teacher set up a bookstore in the cafeteria. They would sell all the books. It was something that they hated doing, but they didn’t have the size, like a college or university, to convince a Barnes and Noble to build a beautiful bookstore and share profits with them. They were left doing it themselves.

A few had contacted us over the years when we were focused on the college business. When we were shifting and looking for a business that was going to allow us to get profitable a lot faster, I thought back to those, to the needs of those private high school administrators that contacted us and said, wow, there might be something interesting there.

Andrew: So, you decided that you were going to shift to them. What about the idea that all this money that you spent on MTV is now gone? What about the idea that all this brand recognition that you built with the college market through college reps that you talked about earlier is now gone? I know some costs aren’t what you’re supposed to be thinking about when you’re thinking about the future of your business. But it’s really hard to let go of some costs. How did you come to the decision where you say this asset that we built which is our name recognition with this community, we have to let it go because it’s not working for us?

Eric: Yeah, I mean, you have to face the reality as it exists today, and if you sit there and regret decisions you made to that point, that’s going to accomplish nothing.

Andrew: Did you have any conversations with your board about this where maybe one board member was trying to fight at least as a devil’s advocate for maintaining the current model but maybe scaling it back? Did you have any of that?

Eric: I remember conversations with people who were concerned that we would get sued shifting a business model so quickly after we went public . . .

Andrew: Oh, sued by shareholders.

Eric: I kept saying we should get sued if we don’t shift the business model because everything changed. So, part of what a CEO’s job and a board’s responsibility is to obviously look at the situation as it exists today and how they believe it’s going to exist tomorrow and build something and focus on shareholder value in that context. Not to look back. Sure it’s very tempting to look back and very tempting to sort of cling on and hold on to a name or to the things that you were proud of to that point. But it’s only going to injure and hinder your ability to create value for the future. It’s always a go forward thing. It’s learning the lessons of the past and being mindful of everything in the past.

Figuring out where you need to be and how to get there. For our employee base, for example, I mentioned when we went public, we had over 200 employees. We were essentially a team that was set up for a game of football, and when we shifted our business model, we were playing water polo or some other spot. We needed to dramatically resize and reshape the employee base. That is a huge challenge. Not just for the reasons of actually trying to figure who’s going to do what and get there. Downsizing a company so dramatically from a set of people in a startup environment that had worked so, so hard to get the team there, but it wasn’t going to do anyone good to continue along under this sort of disillusioned set of operating mindset. You had to quickly get in tune with the realities of the present and the future. Just immediately force yourself to leave on the table any regrets or anything from the past. It was just really critical to do that. That was a challenge because there were a lot of friendships involved and a lot of very challenging conversations that we needed to have with individuals at that point.

Andrew: If the stock price going down wasn’t the impetus for this, if the Wall Street Journal ragging on you wasn’t the impetus for this, what was it that made you say, “We have to do it”? I mean big change tends not to happen unless there’s a big motivator, a big need for it. What was the big need? Critical almost, it would have to be.

Eric: The sense that we wanted to and that we were going to be able to show the world that we’re going to survive the great dot com crash. We always believed in the need to create a purpose. Initially we had this fantastic dynamic where we were out to save the poor college student from the big, bad bookstore and had a great way of revolutionizing an industry to do that, that we deeply believed in.

When that went away and we no longer had the competitors from that business model to rally against, we created a dynamic of survival that . . .

Andrew: How close did you come to failure? What were your cash reserves roughly?

Eric: Because we shifted very quickly after we went public and because we scaled down the cost structure . . . we raised our money in the IPO. Then , of course, we were burning a lot of cash on a weekly and monthly basis, but very relatively quickly we were able to cut that burn to a point where we stopped the bleeding and had a little bit of time to figure out how to identify and focus on a very different business model that would get us profitable.

Taking the pressure off of the daily and the monthly burn, that was, psychologically, a helpful thing to do. To answer your question, we always had a chunk of cash in the bank that we did a very good job of, obviously, monitoring and protecting and giving us that cushion and that ability to go out there and know that as long as that cash was there, we were going to survive.

Andrew: Okay. So, going after the high school, which wanted you, instead of the college market where you had to fight and spend a lot of money, that was part of it. The other thing I read was that you outsourced your distribution and that helped you become profitable. But what I don’t understand is, as far as ’99, you were outsourcing your distribution. What did you outsource that was new after the dot com bubble burst?

Eric: The outsourcing, you’re right, the outsourcing was done from day one, and not having to spend a dime on warehousing allowed us to transition a lot more seamlessly than it would have and, obviously, allowed us to not have to focus on spending the dollars in that respect. But it wasn’t so much the distribution. There weren’t profound changes around that.

There were two profound changes on the business model front. One was instead of competing against, as you said, an environment where they didn’t want you and working, forming exclusive relationships directly with the schools, we changed the dynamic from having to spend tens of millions of dollars every semester, in our case, to convince college students to come to our site to spending virtually nothing on marketing because the schools were not only cooperating with us, they were actually our marketing arm. They would tell the parents and students to go to VarsityBooks, find your school, and buy the books that you needed.

The second change was no longer did we have to compete on price. Those original ads that discounted textbooks pretty dramatically and gave free shipping or subsidized shipping, we were able to sell the books for essentially list price. It, almost overnight, changed the business from one that required an incredible amount of constant marketing dollars to sell a product at a very low margin to one that basically didn’t have to require any marketing dollars to sell something for a little bit of a healthier margin. A profound difference.

Andrew: All right. That’s when, as I was doing my research on you, the article stopped at one point. Then, suddenly there was these holy crap, these guys are earning a profit. They earned a small profit for a couple of years, and now boom, look at where they are now and even bigger profit. The money, the profit just kept going up and up.

Eric: Yeah, so we were the strange dynamic of this public company that basically didn’t literally become private, but essentially went underground. I mentioned the phone stopped ringing. All the analysts that had covered us dropped us, and in a very strange way that was a blessing because it allowed us to ignore everything but what we shouldn’t ignore and that’s, obviously, focus on building the business.

One of the great blessings of not being able to go public for the past several years with so many of these startups is it removes an enormous, potential distraction. We, sort of psychologically, lifted that from ourselves when we said, “You know what? Wall Street doesn’t care about us. We don’t care about them. We’re going to just focus on doing what is the right thing to do, building this business.” So, our greatest challenge, since we identified this new business model, our greatest challenge in sort of rebuilding this airplane mid-air was we went to these schools and approached them to outsource their bookstore to us. It sounded great to them. They loved the concept. We, at that point, had references and schools that we were doing a fantastic job for. But they had one question, in a world where they were opening the newspaper every day and seeing another dot com go out of business, they would ask us, “How do we know you’re going to be around next semester?”

That became the most challenging part of the sales process. Another thing we had to adapt to and be able to answer and get them comfortable with our cash position, get them comfortable with our viability and so forth. It was a blessing at that point to essentially be a company that could even in the context of still being public, really just focus almost exclusively on building the business. I stopped doing investor conferences. They probably didn’t want me anymore anyway.

In any case, it felt like a startup again. It felt like it was two guys in a garage just really focusing on how we’re going to show the world that we can succeed when everyone out there, literally, had written us off. That, to me, that period of years where we were doing that and growing that business, sort of proving to the world that we were able to build something from nothing, that was the most gratifying accomplishment in what was a series of events over that eight year period I was running Varsity.

Andrew: Now, of course, I still have more on this story that I want to get to. I want to float this theory by you. It seems to me that because you were outside of Silicon Valley and outside of the major tech hubs in the country that you had a disadvantage in trying to hire people, but you also had an advantage in that the first high schools, the first private high schools that you worked with, were all local to D.C. They didn’t have competing bookstores that all happened to have their startups here that you had to compete against. Because you were in D.C. and not in Silicon Valley, you were still getting some articles written about you by the Washington Post because they could, on two hands, count the number of tech startups that they had to cover. So you got more coverage and more attention than you would have otherwise. What do you think of that?

Eric: I think it’s right. I think, in retrospect, D.C. turned out to be a great place for us to start the business. It was relatively easy for us to navigate. It was a situation where because there weren’t a tremendous amount of dot coms, we were able to really draw from a great pool of potential employees. Very bright, potential employee base and there wasn’t a tremendous amount of competition from other dot coms at the time.

If you could convince someone to join an Internet company back then, they were going to go to Varsity because we were pretty much the only game in town.

Andrew: Okay. Just a little bit more and then I want to go to Founders Card. In 2004, you start, methodically, from what I can see cashing out. The board agrees to buy 125,000 shares from you, which is about half a million dollars. You sell on the public market another about half a million dollars a month later, in November. December you sell 192,000. You’re at about a million and a half, a little over a million and a half, that you took off the table at that point. I hate to even ask about this because now that I’m looking at this, I’m counting the guy’s money. But at that point, after struggling for a long time and nearly being out, you get to take some chips off the table. What did you do at that point?

Eric: The mindset was I had been building this business, we had been building this business for about eight years at that time. I had pretty much 100% of my net worth in Varsity stock. We had gone public. At that point, for many people it’s usually an opportunity to start getting some liquidity. That wasn’t the case, because it immediately, obviously, went from where we went public to virtually nothing and then having built the company up four or five years after that. So the board agreed that it no longer made sense for me to have 100% of my net worth in one particular asset. That’s when I started to sell some shares. But it wasn’t until I made the decision, with the board, to no longer be CEO that I then sold the bulk of my shares. Even after that first, I can’t remember the exact timing, but even after that first set of stock sales, I still had the majority of skin in the game. But I think, psychologically . . .

Andrew: You still owned 1.4 million by the ending of that year, shares at $6 a share is where they were trading. I got to get off of this because I can’t keep talking to you about how much . . . but what I’m wondering is though, I’ve talked to a lot of entrepreneurs who after the sale, they get this one big check and they know, okay, like now is safe. Life now feels different. At that point, when it’s finally in your account, what do you feel? What’s the first thought that goes in your head when you’re looking at that account and you say, “All right, now what?”

Eric: I mean, I guess there’s a little bit sense of that . . . I was under [inaudible 0:51:01] for such a long period of time. I don’t remember a moment of time. There was so much we were looking to accomplish. I was so focused on what I hadn’t sold and sort of building and the growing the business. The drive, the overwhelming sense of what I was thinking was how do we make what we started larger, bigger, better? How do we keep growing this?

I can’t even think back and remember a point in time. I probably went out and had a drink and said, “I’m not going to be homeless tonight.” But realistically, I can’t remember it changing one small thing. I probably got to work earlier the next day than ever before. It was all sort of a blur in that mindset.

Andrew: So, 2006, you are no longer the head of the company. They bring in someone else. Soon after, it’s time for you to think of what you’re going to do next. The next idea is Founders Card. I gave a short description of what Founders Card is. Can you give a more complete description of what Founders Card is. Then we’ll talk a little bit more about that.

Eric: Sure. So basically, we wanted to create an unbelievable benefits program for entrepreneurs, for founders of companies and innovators. There were so many things that occurred over my experiences at Varsity. I felt like I want to create a vehicle, a way, a company, to . . . a little bit give back but also to reward entrepreneurs, the value creators of these companies.

I remember, we just sort of talked about so many of the obstacles and challenges that entrepreneurs face, seemingly every day. I could think of so many times that over the course when we were facing these obstacles and challenges, it seemed like it would be nice if someone went out there and did something for the entrepreneur. That’s what we wanted to do.

The goal, the inspiration, the mission was to create a program that gave the entrepreneur something that previously had really only been reserved for top executives at large companies and investment banking firms. The people who really, in my view, don’t need amazing benefits, fantastic access. We wanted to create something very different and for a target demographic that we thought was really sort of needed to or deserved to get this set of benefits.

That what we did when we started Founders Card about a year and a half ago.

Andrew: I actually, I think Chris, the founder of Wistia, showed me the card. Guys who have the card love the look of it. It makes an impression right away. It’s got this, it’s solid metal on one side and then, I think, it’s like 20% of it is see-thru meshy metal. I don’t even know how to describe it. If you have a friend who has it, ask him to show you and you’ll see. Beyond the beautiful card, there’s also . . . can you give me an example of one of the specific benefits that entrepreneurs get for having the Founders Card?

Eric: Sure. I’ll give you a couple of specific examples. The concept was to through value and discounts and access to . . . approach companies, leading companies, that you’ve obviously heard of as well as hot new companies that you haven’t heard of that members are running and ask them to create offers that have never been done before. These offers are usually combinations of elite status or some sort of access and discounts.

We work with Virgin Atlantic, for example, and all Founders Card members get a special elite status as well as discounts on all routes. It’s a fantastic partnership from all sides, because what it allows our partner, in this case Virgin Atlantic, it gives them access to a demographic that’s very important to them, founders and CEOs of these venture and angel backed companies that they otherwise might not be getting to in a way that is cost effective for them. For our members, they benefit from these fantastic relationships.

We’ve done this with not just airlines but we’ve done this with hotels that we carefully selected. What we do with our hotels is we negotiate amazing ongoing rates. We don’t have flash sales of any kind. We don’t do that with any of our partners or affiliations. We ask that they give our members upgrades or value-add. We structured it in a way that was really friendly to the entrepreneur.

I remember how I use to travel. I use to think I would be in L.A. one day and then it turns out I would have to be in San Francisco. I never want to book at hotels that required me to prepay and then lose my money if I needed to change. We intentionally structured our hotel arrangements the way that entrepreneurs travel, to give them the flexibility to cancel. To give them great value and value-add, and it’s been unbelievably successful from all ends.

We have this amazing combination of very well-known partners like Equinox and companies from our own members that aren’t as well-known that are able to now use Founders Card as an opportunity to expose their product or services to fellow Founders Card members. You mentioned Wistia. We also have, we work with dozens of other companies whose founders are members and it’s been really successful.

Andrew: So, even a company like Wistia gives discounts to your members because he’s a member, I guess, he’s giving discounts to other members and he wants to recruit other founders to come and sign up.

Eric: Sure, it’s like a trusted community. Some fellow members will use it for creating a discount that they don’t do to the general public. Some fellow Founders Card members will use it as they launch a new product and they want to have sort of a test market for an innovative new product or service. Others will use it for, just a great way to expose themselves to other people who are running companies. It’s been a hugely successful part of Founders Card. Along with, of course, the benefit offerings from the companies that you would be very familiar with.

Andrew: Right, W Hotel, Equinox, as you said. One more thing about that, events. Apparently you’ve got exclusive events just for Founders Card members. I read some article online where someone said that he wanted to access to it. I guess it’s not open to everybody, and that gave him an excuse to write a whole post. What’s the deal with the events?

Eric: The other aspect of being an entrepreneur is it’s a lonely existence sometimes. Think back to that Saturday in the office. and it would have been great to be able to go to a networking event or pick up the phone or go online and talk to other founders and really interact with them but in person and share their experiences.

Obviously, other organizations for entrepreneurs have put together fantastic networking events. We wanted to do it in a way that was a little bit different. We have two main types of events. We have our larger, members only, events where we have them in cities where all the Founders Card members who happen to be in that city can obviously attend. We have also just launched, Smaller Experiences, where Founders Card members are able to interact in more interesting ways with other Founders Card members. So that’s sort of . . .

Andrew: Like kite surfing.

Eric: Exactly, you got it. Then, third, there’s now an opportunity for Founders Card members who are hosting their own events through their organizations or through their companies to post those events through FoundersCard and, of course, we ask that they give fellow Founders Cards discounts or special access or arrangements. It’s really become a community for people to not only get fantastic benefits from many of the companies they aspire to be buying products or services with, but also to be able to share and to learn from other entrepreneurs. Our membership ranges from first time entrepreneurs to serial entrepreneurs that have started some of the world’s best known companies and really everything in between. I think that’s the beauty of it is that we don’t restrict or sort of have a level necessary of criteria where you have to have X dollars in revenue or X dollars in net worth to become a member. You’re either a risk taker and an entrepreneur or you’re not.

Andrew: You know what? I’ve had a few other entrepreneurs pitch me on similar ideas to do interviews with here, but they’re all flailing. I think one of the reasons that you’re not is because there is a fee associated with this. So you’ve got the stability as a company to continue going. It’s not like an organization that’s going to work out today but maybe not next month if you can’t make the payment. I also think that you being an experienced entrepreneur yourself, being a real member of this community, helps a lot.

Eric: Yeah, there is a membership fee and, obviously, from a revenue standpoint or from a financial standpoint, that’s an important part to the business. But it has also done something for the community by virtue of the fact that members become members by referring other members and then, obviously, having to pay a membership fee. It better connects people. When people have to pay for something, they’re making a conscious decision in a way that they otherwise wouldn’t be.

I get invites all the time or referrals all the time from all these supposedly exclusive membership organizations or from all these sites, and you know there’s no cost associated with it. So you put in your name and your e-mail address and boom. Then chances are, at least for me, in 98% of those cases, I forget about those sites. I don’t even remember I’m a member of or a user of, and I don’t even think twice about it.

But with Founders Card or with other sites that you actually pay for, I think it also serves the purpose of better connecting the member, the user to the experience. One of the great surprises of Founders Card has been that a very high percent of our members come back to our site on a regular basis, many on a daily basis, and certainly most on a weekly basis. Part of that is because we’re constantly adding new benefits and events and experiences, but also I think people just generally feel more connected to something when they have a vested financial stake in it.

Andrew: Do you automatically take people in who apply?

Eric: The application process we look at many criteria. The key is really sort of evaluating making sure that this person is truly an entrepreneur and makes sense to be part of this community. That’s really the crux of what we’re looking for in the application process.

Andrew: The website is, and again, if you see Chris of Wistia, ask to see his FoundersCard, or if you see anyone who happens to be a member, ask them to check it out. Apparently it’s actually, not apparently, I saw it myself, it looks great. To make a great first impression on your members and, of course, the website gets to follow through.

Thanks for doing the interview, Eric.

Eric: It was great to be here and share some of the experiences.

Andrew: Yeah. I would love to have you back to do a whole interview just on Founders Card and how you got all these partnerships back before you had anything. You know, when you were just starting out, where the idea came from, why you decided to charge. I’ve got tons of questions. All I’ve got is questions and questions and curiosity. For now, I’ll just leave it here and I’ll say this last word, thank you, Eric. Thanks for doing the interview.

Eric: No problem.

Andrew: Cool. Thank you all for watching.

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