Andrew: Hey there, freedom fighters. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart.
Hey, today I’ve got a guest for you who I was going to introduce him as a guy who’s gone up against giants and done really well for himself, but he’s also worked with giants. This interview is going to focus on one of the companies that he helped build. It’s called Kobo. It is an early eBook reader. In fact, it’s still available now in the App Store and it’s got tons of raving fans. So, it’s still surviving, still doing well and it’s a company that he launched, he built, he sold. I invited him here to talk about it and I invited him here to talk about what he’s working on now.
His name is Michael Serbinis. He today is the founder and CEO of League, which helps people find and book top preventative health professionals and helps them build personal plans and stay healthy every day. And this interview is sponsored by HostGator. Later on I’ll tell you why if you need a host company, you’ve got to check out HostGator.com/Mixergy. And it’s sponsored by Toptal. If you need a developer, you’ve got to check out Toptal.com/Mixergy. That’s Toptal.com/Mixergy.
Michael: Hey, great to be here.
Andrew: Hey, you worked with Elon Musk, Bill Gates. Let’s talk about them and what you learned from them before we go on to the companies you built. You actually got to talk to Bill Gates and meet him directly. How does that happen?
Michael: So, I got to work with Bill, I guess I would have been 18, 19, so just fresh into college. I had worked at NASA doing some jet propulsion work in high school. So, that work kind of led to an opportunity at Microsoft. I got invited over to Building 9 at the time. It was Microsoft research. I gave a talk to all the Microsoft research guys about what I was doing for NASA. And then Bill came in, asked a phenomenal question and that was how we connected.
Andrew: Why do you remember the question that he asked?
Michael: Because the room was probably a room that filled, I don’t know, 100 people, and most of the guys in the room were guys that looked like researchers. And then there was a guy at the back that kind of came in late and just the question was so incisive. Like, he clearly was well-read and possibly even an expert in the space that I was talking about.
Andrew: Interesting. This was before Windows 95. Did you know how big the company was at the time? Did you know how big it was going to be? Did you have a sense of it?
Michael: You know, I…
Andrew: Let’s wait for the connection to catch back up with the conversation. There we go. Sorry. Skype is acting a little funny on us today. What did you know about the company at the time?
Michael: I knew very little. I knew about Microsoft Word. It’s what I used writing my research up at NASA. That really was about it. I got invited out there. I heard about this big company and I heard about the advent of Windows 95. What I ended up working on ultimately was around this idea that in the future, people would maybe do video calls on this thing called the internet and we’d have to route packets in a smarter, better way when there were billions of nodes in the network.
Andrew: It turns out it’s true. It’s here. It’s not fully here but it’s here. This was ’93. ’96, you were an engineer for Zip2, which is Elon Musk’s first Internet company.
Michael: Yeah. So, Elon and his brother Kimbal and another partner who’s a friend of their family, Greg Kouri started Zip2. It was funny because I got a call from Kimbal, who was, I guess, a schoolmate of mine. He was a year ahead of me. My freshman year, he was the floor supervisor in residence. So, he called me with his South African accent, which I won’t do. He said, “My brother and I, Elon, are building this company. It’s going to be all about connecting people on the internet.”
I said, “Great, what’s it going to be called?” He said, “We don’t have a name yet. We’re thinking Global Linking Information Network.” I said, “Wow, that sounds like a bad name.” I asked, “Will you pay me?” “We don’t have money. So, we probably won’t pay you much, but you can live with us. We’ll get you a place.” So, between that and Microsoft, I decided to go to California. Working with Elon was pretty intense, I would say, even though–
Andrew: Give me an example.
Michael: Elon was intense no matter what we did, whether it was late night product design sessions or it was my first ever trip to Vegas when we were staying at the Hard Rock Hotel and I guess there was about five or six of us that went–Kimbal, Elon, myself, a few other guys that were on the team. So, whether it was gambling or I remember going to like fighter pilot, just like an off-site, like a team outing, we’d go and do like fighter pilot training.
Andrew: What made him more intense than everyone else at gambling, say?
Michael: I think Elon was always prepared to kind of go the distance at perhaps the expense of everything else–the expense of a good time, the expense of maybe staying fit and healthy and doing other things. He was just always willing to go the distance.
Andrew: Do you remember one time that he did it to the exclusion of everything else?
Michael: I felt like it was all the time. So, yeah, that was who he was.
Andrew: So, he would just sit there at the gambling table, for example, and not get up until he lost everything?
Michael: Yeah, I guess so. In those days, it wasn’t much to lose. So, maybe it was easier then. But he’s the kind of guy that would get into something new, study it, try to master it and be willing to go the distance to win at it. For me, Elon was two, almost three years older than me. For me, he was, I guess, my first role model in what it meant to build and lead and grow a startup.
Andrew: You were working at Microsoft. Why leave that to go work with a few guys in their homes? This was 1996. The internet revolution hadn’t even started. What got you so interested in them that you decided to give it all up and go sleep in their houses?
Michael: Yeah. So, I think part of it was I just wanted to go to California. It’s pretty cold up here in Canada. So, I was happy to do that. But hey, it was also better weather out in Seattle. I think ultimately it was just this great advice I got from a great friend and he’s been an investor, a mentor. He introduced me to my wife several years later. That advice was just to really find something that you can really passionate about and really love and don’t worry about the money. That will sort itself out.
So, at the time, the thought of going to work for a big company versus going to figure out and build something new with a bunch of guys that I hardly knew, that seemed like the better option.
Andrew: Then you went and you started DocSpace. I’m looking at an early version of DocSpace right now. Here’s a line directly from the site, “DocSpace is the answer! Store, manage, deliver information and more all securely on the web all using nothing but DocSpace and a web browser.” This was like ahead of its time. If I wanted to share a big file with you, DocSpace was the answer for it, right?
Michael: Yeah. We were the first and very quickly the 800-pound–maybe 100-pound gorilla in terms of file storage or cloud storage and delivery of big files. So, this was, back then, a real problem that mostly businesses faced. Eventually it became more of a consumer problem. This idea if I was an ad agency, I was a designer, I was working on a new campaign for PepsiCo and I sent it over to PepsiCo, that was a touch thing to do.
People used to put those campaigns as big files in Zip drives, stick those Zip drives in FedEx envelopes and then send them to their clients. That not only took a long time, it cost a lot of money and it just was fraught with issues. People on the other end didn’t know what to with the Zip drive either. So we just invented a really simple way for people to move around files, which looks almost identical to what Google drive is today or what Dropbox is today.
Andrew: You sold it to Critical Path. How much did you sell it for?
Michael: We sold it for just over half a billion in the year 2000. I guess we closed about a week before the market peaked in March of 2000.
Andrew: You sold it from what I saw for stock, right?
Michael: So, we were about 80 percent stock and 20 percent cash.
Andrew: Okay. How much of the business did you own by the end?
Michael: So, it was me and four other cofounders. We didn’t take on much venture capital. So, we were all about 10 percent.
Andrew: That’s a huge exit.
Michael: I mean, for a 24, 25-year old guy at the time, it was awesome. What was more awesome is that we sold to Critical Path when their stock was $19 a share. By that summer, that same stock was $128 a share. So, what looked like a half a billion dollar transaction in March was very quickly a multi-billion dollar transaction, again, if you sold the stock.
Andrew: Did you get to sell it at that point or did you have to hang onto it?
Michael: I sold some. Unlike some of my partners at the time, I became an insider at Critical Path. I eventually became their CTO and COO running most of the business. But even at that time, while I joke I was part of the dead presidents club, Critical Path bought a bunch of companies that year. I was considered an insider. So, there are very few opportunities to sell.
Andrew: Yeah. It becomes really tough to sell at that point and Critical Path then went through a critical period.
Andrew: What did you do with that?
Michael: It was very intense. It’s interesting looking back at it now. As a young guy who, up until that point, I had the NASA experience, the Microsoft experience, Zip2, I just had built my first company beginning to end, had a great exit. Then all of a sudden, the bubble burst, telecom bubble burst, 9/11 happened.
We entered a very difficult time. I mentioned 9/11 because running about a third to half of the world’s email through Critical Path’s customers, we had an FBI investigation, CIA investigation that looked into our archives. Of course, there were all kinds of traces of email chatter on our system. So, we were very distracted for the better part of a few years.
Meanwhile, the company went through its own challenges. We had a pretty incredible growth curve. But we had one quarter where we had misstated earnings and we discovered ourselves a fabricated deal that one of our sales people had fabricated to the tune of $1 million on, I believe, a $45 million to $46 million quarter. That was at the time of Enron. And then Sarbanes-Oxley came afterwards.
So, it was a very difficult time for a guy that just had been in his 20s building things. All of a sudden I felt I grew very quickly into an old man learning how to deal with all these war-time issues and really saving that company from going bankrupt, getting it to a profitable place and moving on after that.
Andrew: I’m seeing here the class-action lawsuit that happened as a result of that. We’re talking about a really painful period. By the way, it’s so strange to go back in time to see a press release from 2001 where if you want to contact the media rep, you have to email him at his AOL email address, just to give you a sign of the time and how far back we’re looking. I think our connection just froze, right? There.
So, I don’t want to gloss over the way that you must have felt at the time. You’re a guy who went from success to success. Everything was going gangbusters, more than most people would believe is possible. Then things go really bad. Can you talk about what that was like for you so we can identify with it when we’re going through our lows and realize that if you came out of it we can too? What was that down period like?
Michael: So, it was very tough. I mean, I would say that period was probably most stressful period of my life because I stuck it out. I didn’t leave. I felt a responsibility to my team, most of which stayed, about 90+ percent stayed. I felt a responsibility to shareholders that were friends and family mostly in DocSpace and then frankly friends and family and shareholders of Critical Path Proper that I got to know.
All I could say was I knew it was bad and I had a sense. It certainly got worse before it got better. If I just kind of kept my head down and grinded it out, there were–
Andrew: Did you resent it that other people had left and did well? I know I did. I remember I was toughing it out. There was one guy. I still know him to this day. He was doing really well. He basically skated out of the industry, cashed out. At the time, I thought, “What are you doing? You’re sitting on a rocket ship. Money is pouring out of this place every day and it’s just going straight to the moon. You’re just going to skateboard out of here and just go do what with your life, just go hang out?”
And then when things got rough, he had already cashed out, so life was good for him. I had to deal with what was going on in my company where we were losing customers, how to deal with all the expenses we were still holding onto. Maybe resentment isn’t the word, but I felt like, “Why does he get to escape and have such a good life when I was looking to work harder?” Did you feel any of that?
Michael: Yeah. I think that’s a very natural response, especially for anybody that had put their blood, sweat and tears into building something and then to see all this bad stuff happened and frankly be still there holding the bag or trying to figure it out while people that were a part of it in the beginning left, made a bunch of money and weren’t dealing with any of it.
Andrew: So, how did you get your head right about that so you could do your work?
Michael: Listen, I think–this is a great lesson for any entrepreneur building a company–you can choose to focus on what’s wrong and your weaknesses and try to shore them up, try to fix those weaknesses and problems, or you can choose to focus on your strengths and all that’s going well and what you’ve got as just natural strengths.
I think at the time, a) I had made a bunch of money. So, I wasn’t sort of cash. B) I was young. I felt like I had a lot going for me and frankly I felt like the future was bright despite this challenging period. I remained very optimistic and just kind of kept at it.
Andrew: When you said you focused on the things that were going right, how active was that?
Michael: How active was…?
Andrew: Yeah. There’s one venture capitalist who went through that period and he told me in private how he started using this self-improvement book to get past the tough times. Then he brought it over to me from his beautiful office to look at and how he filled it out. He said, “This is what I did to keep my head right.” What did you do?
Michael: I started to work out quite a bit. In fact, one of the guys that joined us at Critical Path during the turn around, a guy named Mark Ferrer–he’s currently a senior executive at SAP, works for Bill McDermott–and we would travel around the world because Critical Path customers were everywhere. We had almost every teleco, most governments. We would land and mark would want to go for a run. He’s a super intense guy, like, “All right. Let’s go. We’re going for a run.” And I think the combination of physical activity and just staying busy, that was how I dealt with it.
Andrew: That’s what did it for me too, running. I will still bring running clothes with me and frankly if I don’t have my running shoes because I couldn’t fit them in for something, I’ll just go barefoot. It helps my mind. It helps me have somewhere to channel my energy and then it makes me feel so much more positive about the work I’m going to do for the day.
Michael: I during those years developed that habit. I would work out in the morning, whether that was going for a run. I started playing hockey again. I even took up some meditation. Those habits, frankly, I still have today. They’re just part of my coping toolkit.
Andrew: I’m going to do a quick message for my sponsor and then I want to go back and ask you about this meeting you had with a woman who changed the direction of your life. But first, if you’re out there and you’re looking for a developer to join your team, you could go hire a headhunter or you could look at the freelance websites and you can see the same pain you’ve experienced every time you’ve done it in the past.
You go hire a headhunter, it’s going to take a while, they’re going to end up getting a big commission and you have to deal with when a headhunter finds someone for you, they might change your mind, want to go back to their company or use your job offer to go back and raise your salary and stick around there. It’s a tough process and it’s a very expensive one.
If you start placing ads to hire a developer, you’re going to start getting a big collection of resumes–not resumes, why am I literally blanking on this problem, Michael? Michael, you hire people. Have you ever had a challenge hiring a developer?
Michael: Of course.
Andrew: What’s the challenge that you had? I’m coming up with all these theoretical things and I’m like, “Wait, this is not what’s happening? What issues have you had hiring developers?”
Michael: My biggest challenges are during the scaling period. So, after that initial product market fit stage where I’ve got 5 to 10 developers and all of a sudden I need 100. We went through that actually at Kobo where all of a sudden I need 100, then 200 and so on. I went from ones and twos to hundreds. Going to that kind of volume, all of a sudden it becomes a very difficult process.
Andrew: What’s tough about it?
Michael: You can’t meet anybody. All of the things that you would do to assess fit, to leverage your network, they’re harder to do. Your network, I guess, starts to tap out. It’s just harder to assess fit. All of a sudden you have to start taking greater risks.
Andrew: Well, most of us are not going to have to hire hundreds of people at a time, but we are going to have a hard time hiring people and we don’t want to take risks with the people we’re placing within our company. That’s where Toptal comes in. If you’ve tapped out your network, get to their network.
Toptal is a network of top developers. They reject 97 percent of the people who are put in front of them, 97 percent of the people who want to work with them. They only pick the top 3 percent, which is why they have this incredible reputation for having the best developers in the business.
You’ve heard a competitor of theirs who I interviewed in the past has said, “We’re not really competitors. They’re way too advanced for us. Their people are way too far ahead for us to consider ourselves competitors.” That’s how high Toptal is in the business. That’s how well they’re doing.
If you need a developer, go to Toptal.com/Mixergy. They will go to their network, find the right person for you based on your needs, based on the languages you’re working with, based on the way you like to work. They’ll ask you how long do you want to work with them–40 hours, 10 hours, maybe it’s a part-time project, maybe it’s something that’s a long-term commitment.
Whatever it is, they’ll go to their network. They’ll find the right person. If you like them, you get to hire them and start very fast. We’re talking about within days. If you don’t, just let the people at Toptal know, no problem. They’ll find someone else for you. All you have to do is go to Toptal.com/Mixergy. If you toss that /Mixergy at the end, they’re going to give you 80 free Toptal developer hours when you pay for 80. That’s in addition to a no-risk trial period of up to two weeks. Toptal–really fantastic company–Toptal.com/Mixergy.
You know, before we get to this woman who changed–actually, let’s go to her. Who was this woman?
Michael: Her name is Heather Reisman, and she’s the founder, CEO and chair of Indigo Books.
Andrew: And they’re a huge bookstore in Canada.
Michael: Yeah. Think of them like a combination of Barnes & Noble and what was once Borders. Indigo has about 50 percent of the market here. I would say what I’ve come to learn after having built Kobo, by far one of the most successful booksellers in the world.
Andrew: What was it about her that made you want to work with her?
Michael: So, this all started with a friend and investor saying, “Hey, you should meet this woman. She runs a bookstore,” which I didn’t think was a very compelling intro. But I agreed to take the meeting and we had lunch. It turned into one of those lunches with a glass of wine. She was very charming and very kind of in your face. She wasn’t going to let a question go with a light answer.
We got very deep into this question of it’s been 500 years since Gutenberg, what happens to the future of publishing? What happens to the future of reading and how stories are created, shared, sold? I was impressed. So, she kind of had me.
Andrew: I get feeling like she’s an impressive person. What I don’t get is the next move. Why go to work for her company, for Indigo Books and Music instead of saying, “What a great woman. I’ll have her as an advisor on my next company or I’ll take this idea and I’ll go run with it myself?”
Michael: Yeah. So, great question. It’s one that I get asked about quite a bit. So, context–I had just moved back to Canada. I had also just gotten married with one daughter and another one quickly on the way. And the Critical Path years we just talked about were exhausting. So, I was just tired. When this all came up, it was originally framed as, “Come on board, help me out for a little bit. Let’s evolve this thinking on what happens when books go digital.”
So, to me, I didn’t look at it as a job. I thought of it as an opportunity to learn. Frankly, this question–it’s funny now that I’m thinking about it–I had this question, which was NASA, Zip2, working with Elon, Bill Gates, DocSpace, but then the bubble burst and the Critical Path years were tough. It was the MBA by fire. Part of me thought, “Was at all just a part of a very unique time and was that real? Will that be real going forward? Can I build one of those companies again?”
I remember thinking about it like maybe the playbook, all the stuff I had learned up to that point, maybe the playbook wasn’t real. I thought, “This will be a test. Maybe I help her out and if not, I go back and do something else. At the very least, I learn something about her and about publishing.” So, I kind of went for it.
Andrew: It did seem like the whole idea of a startup was a fraud and the real companies were companies like hers that took years to build, that were tough to run, that were setting the world on fire but not reinventing it at the same time. I get that. What I’m curious about is–and this is such a tacky question for me to ask, but it’s important. Were you a multi-millionaire after Critical Path?
Andrew: You were. So, you didn’t have to go to work. You could put your kids through school. You could still just drop out of life.
Andrew: Was it a tacky question for me to ask?
Michael: No. I don’t know. Either way, listen, it’s a decision a lot of people ask me about because it seems like such a strange move from what I was doing. In fact, if I look back now, I don’t know that I could have done Kobo to the same degree and the same level of authenticity without that 12 to 18 months of kind of learning about that business and learning from somebody that was very passionate about it that had built her company out of nothing. It’s not like she had been running Indigo or Chapters for 20 or 30 years. She had just created the company a decade before and was an outsider to that industry. It was a great opportunity, an authentic opportunity to learn about it.
Andrew: So, what did you do in that year when you were exploring ideas?
Michael: So, it’s funny. Reality struck the moment that I set foot in the office beyond the initial like shiny penny period where it’s a new guy that just moved back from California and knows something about technology. Reality struck and they had all these other technology problems and stuff to do with the warehouses, stuff to do with stores. I was like, “Wow, this is not really for me.”
But through that, I learned some incredible stuff about that business. I had no idea, stuff that the average consumer wouldn’t know and gave me a lot of insight for how I would go about building Kobo, stuff like the majority of bookstores are really warehouses. The average inventory turns on a book in most bookstores are one or less than one. That’s the average, which means if the bestsellers are selling tons of copies a year, the rest sell a copy every three or four years.
Andrew: How does that change the way you think about bookselling and publishing in general?
Michael: Well, it was already a hit business. While there is this long tail, the first 300 books you can see in the first 20 feet of the store represented 80 to 90 percent of sales. When books went online with the advent of Amazon’s store, that peak got a bit higher and a bit narrower. When it went digital, really the same thing happened. We got an even narrower peak, an even higher peak. It was really the same stuff that was front of store. It was that fiction, the John Grisham, the Patterson, the Stephen King and all those trashy romance novels that people love to buy.
So, it was very instructive and also very instructive that those businesses were huge real estate bets. So, if things actually went digital, books went digital, they wouldn’t have to go 30 percent. If books went digital to the tune of 10 percent, all of a sudden you’ve got an issue because you have 7 to 10 year leases and a lot of high-priced real estate you can’t get out of. It’s hard to fill that space with candles and other stuff. So, it really helped shape my pitch as I circled the globe talking to booksellers.
Andrew: I see. That is a big part of your strategy for getting Kobo out there. I’m looking at an early article about Kobo’s launch. Did it launch February, 2009?
Michael: February, 2009 was the pilot or early kind of product market fit stage. In fact, we had another name, Shortcovers, which is a terrible name. Never name anything short.
Andrew: Why not?
Michael: Immediately people thought it was something less valuable or less important, whereas I thought it was a very smart name. Of course, I thought that about Kobo too, but most people never got that it was an anagram of the word book.
Andrew: I didn’t either until I started preparing for this interview, but now it makes so much sense.
Michael: It’s so funny. Not being a publishing guy or an English lit guy talking to all these well-read people saying, “Here’s my new company. It’s called Kobo.” They would say, “How’d you come up with the name?” I would say, “Kobo is an anagram of the word book.” You could see them like mouthing the word. They’re like, “Oh yeah, I got it.” But they never really got it.
Andrew: I guess if they saw it, it might be easier. When I read it, it was on paper. I thought, “Oh, now I see it.” I was looking for a Japanese word in there. Now that I know to look for the word book, it was so easy to see. But you did call it Shortcovers. From this launch, I see Shortcovers will make 200,000 chapters and free excerpts available with 50,000 of them available for purchase as full digital titles. I don’t think I see the word book in here anywhere. Actually, eventually you were planning on offering $0.99 and $10 to $20 for full eBooks. But it looks like the heart of it was these chapters.
Michael: Yeah. So, this is a great lesson. I’ve lived through this process now and I’m going through it again here with League, four or five times now in my life, where you kind of start off with a problem. You have this vision for what the future will look like, you come up with a solution and you go through this phase which is initially exciting but then becomes very depressing as a lot of things don’t work. I call it the pit of despair. You enter the pit of despair and you bump around for a while until you figure out what drives customers.
So, think about digital books. We had this idea that the future of reading would be social. You would be able to get things a chapter at a time. You would have all these different ways of writing books. Kids would read books differently. But ultimately what we learned from February to December of that year, 2009, nobody wanted any of that. All people wanted was to pull out a device, press a button and magically a book would arrive in seconds. That’s what people wanted, instant access.
Andrew: How did you know that?
Michael: Well, it was, again, very depressing when we realized this whole chapter thing was way too complicated and nobody was onto it. Nobody was using it. What we did during that period is we put about a million titles, Gutenberg titles, basically the free books that are out there. What we started seeing is people would download the free books. So, download a book, that’s easy. A chapter of a book, how do I do that? What’s in the chapter? Too difficult.
What did, I guess it would have been end of summer, we figured it out and we said, “We’ve got to change this whole thing. We’ve got to simplify it. Dumb it down. This is a bookstore and we’re going to make it really easy through our app to find a book, download a book and read a book.” That’s it. That’s what we did when we launched it in December and wee rebranded as Kobo.
Andrew: So, this was 2009. Didn’t the Kindle–the Kindle launched two years before as a standalone device, right?
Michael: Yeah. So, normally when you’re launching one of these companies, you’re generally new. You’re generally first and then you’re competing against big, dumb and slow. This was not that example. My first conversation with Heather, we started talking about this opportunity that books would go digital.
There would be a shift from physical to digital, from online to digital and it would take time. It wouldn’t happen overnight. There was an opportunity to be a pure play. There would be an incumbent like Amazon. There could be another tech company that gets involved. But there was an opportunity to be the pure play, the Netflix.
So, when we went after it and we launched it, Amazon had already had the Kindle out, although the first Kindle was kind of a very difficult to use device. We used to have all these lines like, “Books don’t have keyboards. Why should your e-reader?” I remember I was touting read on any device. Bezos was quoted in I think it was a Wired article, but a widely publicized article, “No one would ever read on a smartphone.”
So, I thought there was an opportunity. I felt like there wasn’t going to be just one player. Us as a pure play with a team that had built massively scalable platforms before and done business around the world, that we had a shot.
Andrew: And that launch article that I read from February, 2009, the articles says launched on iPhone, iPod Touch, T-Mobile G1, which was their old Android Phone, Blackberrys. So, you really were thinking, “We’re going to go for the digital devices people already have and Amazon seems to be thinking they need to give people brand new devices.”
You know who was dumb and slow, at least in my opinion? Barnes & Noble. There was this company called E-Reader, really EReader.com. They created an app that worked on the freaking Trio. I know because I loved reading digital. I was one of those geeks who would read long books on his Trio. And then I got a Sony CLIÉ, which also operated on the Palm operating system, which was a nice, beauty device that you could read an eBook from E-Reader on. Barnes & Noble bought it. Nothing happened with it, right?
Michael: You got it. Barnes & Noble had been in and out and in and out of this digital space for about a decade. When we were about to launch Kobo, Heather and I actually flew to New York to meet with Len Riggio and Steve, brothers basically, chairman and CEO.
Andrew: Founders essentially of Barnes & Noble.
Michael: Exactly. We said, “Let’s do this together. We’ve got a team. Mike’s built a company before, has some experience in this. We’ll have leverage as the two biggest booksellers in North America.” At the time, they were clearly working on the Nook. They said, “We’re not interested.”
They shortly after announced the acquisition of Fictionwise, which were, I think a couple brothers from New Jersey. They had a digital, makeshift digital platform already. So, they kind of went after it alone. That’s a company that then spun out and then raised additional money and then took in money at a $1.3 billion valuation post-Microsoft from Penguin. So, they took Microsoft, Penguin money. And then a couple years out of that, I tried to buy them for $250 million.
Andrew: At Kobo?
Andrew: It would have made so much sense that they would have partnered. Why did you want to buy them at that point?
Michael: At that point, we clearly were growing internationally very fast. I had a model that I had developed that allowed me to be number one or number to in many countries. Most countries that I went to where I would partner with the incumbent bookseller, I would become their digital brand. I would be Intel Inside, Kobo by Fnac in France, Kobo by WHSmith in the UK, etc.
They kind of stayed focused on the US and kept getting beaten up by first Amazon and then later Apple entering the market and unfortunately for me, Borders went out of business. They were my partner. So, I had less going in the US. But I had great things going everywhere else. So, I thought, “Why not pick up Barnes & Noble for the US?” There are tons of synergies. Those guys were spending way too much money compared to what we were spending. We had a far more efficient model. So, it was a no-brainer from my perspective.
Andrew: Fictionwise is the owner of E-Reader and Barnes & Noble bought them March, 2009, just a little bit after you guys launched for $15.7 million according to TechCrunch.
Andrew: All right. I want to continue with this story because I think people might be assuming that this has a sad ending. It actually has very much a happy ending, which we’re going to get to in a moment. The way that you built it up is something that we can learn a lot from as we’re building up our companies.
But first I’ve got to tell everyone about this gator here, which apparently is going to one of my past interviewees, he asked for it. But first I’ve got to show it on camera here and use it as a prop for my sponsorship message for HostGator. The reason I want this is because people email me after the interview and they say, “What is that hosting company you talk about? I like it, but which one is it?” So, the alligator is a really good reminder to go to HostGator.
So, what do you get when you go to HostGator? You get hosting for just about anything you need. If you want to do WordPress, which most of us want to because it’s so flexible, so robust, got tons of plugins that you can use to do anything you want, pretty much. You could use WordPress with one-click install, but it will let you install anything you want.
If you go to HostGator.com/Mixergy, you’re going to find that they’re going to give you 30 percent off. How many interviewees have I talked to who said they started their first business on HostGator, that many of them are still using HostGator? There’s a reason for it.
HostGator is reliable. They’re inexpensive and today, they have 24/7, 365 tech support. That means 24 hours a day, 7 day a week, 365 days a year, there’s somebody there, a human being for you to talk to who will get tech support to you. I’ve worked with so many hosting companies who want you to use email or a ticketing system. When your site is really in trouble, you don’t have time to wait for email. A Ticketing system is too much trouble.
HostGator will have you covered. They will take care of you. They’ll make it easy for you to get started. If you need a shopping cart, they’ve got that. If you need templates to make your site look good, they’ve got that. If you’re not sure if maybe I’m overselling it, they have a 45-day money back guarantee.
Go to HostGator.com, sign up. If you go to HostGator.com/Mixergy and you sign up, you’ll get 30 percent off and they also have an AdWords offer of $100, $100 search credit from Bing, Yahoo and they make it so easy for you to get started. Go to HostGator.com/Mixergy. Do it. There’s a reason why you keep hearing me talk about them. These ads are working and people are signing up.
If you’re looking for a hosting company, sign up with them. If you’re upset at your hosting company, don’t get mad. Just switch. Go to HostGator.com/Mixergy. They’ll migrate you so that you have a decent hosting company and you can focus on your site and not on keeping your site up and running and frankly save some money as you do it.
All right. Mike, what did you think of that sponsorship message?
Michael: It was good. My thought was how are they getting that money back? That sounds like a pretty rich offer. It sounds like a great deal. I would use it.
Andrew: Good. You know what? I have to be honest with the way that I did the Toptal ad, but the way I did the HostGator was a little better. Neither one of these is my best sponsorship message. If I had to really rate myself, I’d say maybe a B. But the first one was like a C. I almost think Toptal should avoid me after that one ad. Good thing the other ones have done so well.
All right. So, let’s go back to your story. So, what we’ve got now is a product. We’ve got a vision and we have a really big giant who’s not so stupid and he’s marching towards you. But there are all these other Davids out there who are trying to fight them. You decide let’s talk to them. What’s the deal you brought to the independent booksellers or the smaller booksellers?
Michael: So, one of the lessons, I think, in building something new and trying to sell it, especially when you’re thinking about partners–so, I went to these booksellers, the biggest booksellers in every country, the Barnes & Noble equivalents, and I said, “Hey, I’ve got this great platform.” But here’s the lesson–selling with better is tough. Selling with a bit of fear is a lot easier.
So, the message or the story went something like this, “Amazon is coming,” and injecting this fear that, “This market is changing and if you’re caught flat-footed, how are you going to build what I’ve built? A, you don’t have the time, B, chances are you don’t have the technology talent. C, you don’t even know what the road map needs to look like because you haven’t been in it. I can get you up and running right away.”
“You’re my partner. You help bring your existing customers on board. We don’t have all the customers in the country that want to read or read digitally, so I’m going to go into the country with my brand and you’re going to help me build awareness but I’m going to go through other channels as well.” And one after the other, that win-win kind of–
Andrew: I see the win for you. I see the damage that it could do to Amazon. But if I’m a smaller bookseller, why am I helping you sell the Kobo where you’re going to end up funneling my customers to your business?
Michael: So, we had a relationship deal structure where we shared in the profit of the actual book sales and eventually the device sales. We would share information. So, that was important to them. What books are going digital first so we can start not stocking that stuff in store? Other information like who are these customers and how do we change the merchandising mix in our stores. Some of them were investors, so that helped. But overall, these guys were in it because they had to provide this service to their customer and providing something second rate was not an option.
Andrew: I see. So, essentially they got a share of the profits and access to the customer and in some cases access to a share of the business.
Michael: Yeah. Listen, one of the things we discovered later was they also had access to us. That actually turned out to be quite valuable because as we had booksellers around the world, we had an amazing purview of what was working where. Even Amazon didn’t have that purview because we went international faster than they did. So, we could share that learning.
All these CEOs, I would have this annual get together where I would bring the top CEOs of booksellers from around the world. One year we took them to Rio, another year we took them to Johannesburg, London another year. They found that immensely valuable.
Andrew: Why? Why were these trips so helpful for them?
Michael: For them it was just an opportunity to connect with their peers, which otherwise they wouldn’t. Most of the guys were not on the road internationally. They were focused on their domestic markets. Secondly, they started to explore and discover different strategies of how to morph their business.
Partnering with me and partnering with Kobo would them offer something digital, but when the tradeoff is you’re formally selling a $25 book but now it’s a $5 and you’re making half, $12.50 on a $25 book but now you’re making $0.50, you can’t fill that profit hole with eBooks. You can’t sell enough eBooks. So, you have to figure out what else are you going to put in your store. How else are you going to change? Are you going to downsize your real estate? So, helping you figure that out were this network of CEOs that I kind of brought to bear.
Andrew: Oh, I see. I get that. I just went on to Amazon.com as you were talking to look to see what Kobo is doing. Amazon is still selling Kobo. I think they’ve been selling it since the beginning, the device. The first person in there is someone who’s a happy customer who got the Kobo reader at half price while Borders was going out of business. So, you guys were selling through Borders. This person, Ari Finkleman, posts–he’s like three stars out of five–he got it in 2001. So, what happened when your partner started to go out of business? How did that affect you?
Michael: That would have been 2010.
Andrew: Right, 2011 is when it is.
Michael: Yeah, 2011. So, we started Kobo in December of ’09. Borders was an investor and partner right out of the gate. We turned them on. We launched the service for Borders that summer of 2010. Things were tough working with them, I would say. They already were in pre-bankruptcy challenges. That next summer, Kobo was a rocket ship during this period. We expected to do $10 million in sales in our first year. We did $110 million. That next year looked like it was going to be $250 million to $300 million. For a second-year company, that was phenomenal.
In the middle of that, in that second year, I needed to raise money. Part of our growth was not just eBooks, it was the devices. I needed the devices to sell more eBooks. So, I needed to finance the working capital for the devices. You had to buy all these components, buy time on assembly lines in China.
So, right in the middle of that, two bad things happened, actually three. One was Borders going bankrupt. That was a real downer. Second was Apple really getting into the book business with iBooks. Third was Google announcing that they were going to get into the business.
All three of those things, any one of them would have made the fundraising tough, but the three of them happening at the same time made it absolutely tough. I ended up raising a $50 million C at that time. Ultimately, I probably could have used another $100 million because we were seeing way more demand than when we started the fundraising. It got very tough because of that.
Andrew: I could imagine. By the way, I’m hearing dings. Does that go off as you’re working all day long? That’s Outlook, right?
Michael: No. It’s not Outlook. That’s Slack.
Andrew: I was going to say if it’s Outlook, I don’t even know how to turn the dings off for Outlook. I just had to live with it.
Michael: I do not use Outlook. It’s Slack.
Andrew: Slack. Okay. You didn’t keep that standard dice rolling sound? Maybe there’s a message coming in for you. All right. Here’s the other question I have. I actually see that Ari with his three out of five stars is unusual. A lot of people really still like Kobo and they did at the time. What was it that made Kobo better than the Kindle? Why are all these people so much happier with their Kobo than I expect?
Michael: Initially was drove people to use was we were cheap and cheerful. Kindles were $400. We introduced the first $149 device. Actually, we introduced the first $99 e-reader. Once we introduced the second generation, we were as good or better. One of our fundamental differentiators beyond at that point just having a great price and equivalent or better hardware was that we were open and they were closed. You could only read Kindle books on a Kindle. Kobo, you could read Kindle books or any other e-pubs. You could go to your library, get books for free. We were open. They were closed.
Andrew: That really is the big thing I keep seeing in here, e-pub all the time. In fact, Ari, I don’t meant to keep harping on Ari, but it turns out he found that there some e-pubs that have DRM on them or improperly formatted on them and that’s why he couldn’t get it to work.
Michael: We fixed all that.
Andrew: Sony was another player in the market. Sony was in there also before Kindle, weren’t they?
Michael: You got it. In fact, Sony was another trip I took. In fact, I took it with my CTO, Dan. We went down to San Diego to meet with the president of the Sony eBook division. I remember because he had this giant team in from Japan, who was I guess the Sony eBook team in Japan.
What I said was, “Hey, we’re going to build this company. It’s called Kobo, great name. We had this strategy. We think it’s going to work going to booksellers. We’ve got all these apps already. Why don’t you be our hardware provider and we’ll be the store.” He said, “I think you’re really wasting your time. We’re going to crush you.” It didn’t really turn out that way because right before I left Kobo many years later, we bought the Sony business for pennies on the dollar. So, we took them out of the eBook business.
Andrew: You eventually sold for how much?
Michael: So we sold to Rakuten for $315 million cash this time. So, we did that in January of 2012. It was an interesting process because I had never sold to a Japanese company before, but they were very interested in keeping their management team for a long time. They suggested they keep us for ten years. I was like, “I don’t think that’s going to happen. That’s probably not going to work.” They had all these elaborate retention designs.
I said the best way–we weren’t selling because we wanted to get out. We were selling because we wanted to assure the growth and assure realizing the vision that we had. Having a big brother as our backstop was the antidote to the Amazon threat. So, they eventually proposed something that really worked for us, which was we’re selling the company. Rakuten is buying it but then me and my founding team get to participate as if it’s a new company from day zero, a new day zero. So, we got to continue to grow that company with Rakuten as our core funder and we got to realize the upside that we created.
Andrew: But when you sold for cash you owned a share of the business. What share of the business did you end up with?
Michael: It was just under 10 percent.
Andrew: Wow. You did really well from that. You got some upside. How did you come up with this idea that it was going to be owned by another company but act like it was still an independent business owned by its management team?
Michael: Listen, I think every founder that sells–and if you’ve gone through it once, you kind of know what happens. I got to experience it in a number of different ways more than once. This idea of the retention package or the earn out–I just learned over the years I don’t like any of those approaches. In this case, we didn’t have to sell. So, I wasn’t doing this to do me and the team a favor. This was a shot at growing. So, I wanted to be aligned with that and for us to be aligned together in that objective. They agreed.
Andrew: I wanted to put the number, the exit number in perspective. So, before we started the interview, I looked up–$315 million is what you sold the business for. Indigo’s market cap, the company that spun it out, the day of the sale, their market cap was $170 million, so about half the price of this little idea that you conceived of with the founder of Indigo. Today, the business is worth as of this morning, $215 million US dollars. That’s the market cap. So, you did really well. You did better than that business did at the time and better than it’s doing today.
Michael: In fact, if you factor out the cash that they had on the balance sheet on the balance sheet at the time and then all the cash we returned to that balance sheet at the transaction, I think we returned about $150 million based on Indigo’s investment of about $20 million. Our contribution was extraordinary. Compared to the value of not only them but frankly any other bookstore on the planet, we did alright.
Andrew: I want to ask just a little bit–I know we’re running over time–but I want to as you about League. Before we get to that, I have to ask you about the summer of Mike. I really highlighted that in bold and made it big. What is the summer of Mike? That sounds perfect. I could use a summer of Andrew.
Michael: I was referencing a “Seinfeld” episode where George, I think he just got fired and he wanted the summer of George. I was nearing the end of my time at Rakuten at Kobo post-acquisition. I was just, again, nearing exhaustion. So many years of just being on the road–our booksellers were everywhere, publishers were everywhere. We were in 190 countries. I just needed a break. So, at that this point, I had three daughters. Actually, my youngest was born right after we concluded the acquisition.
So, I just wanted to have a break and have a lot of fun and do a lot of stuff not only for me but for them because I was really away most of the Kobo years. So, surfing, wakesurfing, something new I took up, just playing a ton of sports and having fun, I went to Wayne Gretzky’s fantasy camp in Las Vegas. I went to the Grand Prix in Monaco. I did a whole bunch of fun stuff until my wife said, “I think you’ve had enough fun.” So, that was that.
Andrew: So, how did you end up with this new venture?
Michael: Again, I wasn’t really planning on doing anything for a while. But I happened to be in LA. It was right after the Super Bowl and I was in LA and I heard Bill Clinton and Patrick Soon-Shiong speak. They were talking about the future of medicine. It sounded very compelling until they got to this technology slide of how it would all work.
That really triggered the idea of, “What if we turn this upside down?” The future of medicine–medicine is what you need when you get sick. What about the future of health? How do we keep people healthy? The got me going down the road of looking at healthcare. In the US, it’s 17 percent of GDP and rising. Yet, the majority of illness is chronic disease and preventable. We only spend 1 percent on prevention.
So, there seemed to be a real opportunity in the model changing. So, this idea of building a company that could empower people to be healthy every day, help employers with cheaper healthcare and better healthcare, help providers and this whole sharing economy concept of health providers and connecting them with the consumer, connecting them with the employer. That’s what kind of sparked the interest and got me going.
Andrew: I do see a lot about prevention here on the site. I’m on JoinLeague.com. It says, “We will match you with chiropractors, nutritionists, personal trainers, massage therapists.” I understand people wanting a massage therapist or a chiropractor if their back hurts, but I feel like unless there’s severe pain, people don’t seek out a new solution. Even if they need a chiropractor, they’re usually not going to look for a new solution unless they’re in such deep pain and Yelp has screwed them. How do you get people to pay attention when you’re trying to get them when there isn’t a pain?
Michael: Yeah. So, the interesting thing is when it comes to prevention, the definition is pretty broad, right? It includes wellness. It includes aspects of fitness. So, there are some things in there that people do all the time. Making those things easier, discovery, scheduling, payment, much like other on demand marketplaces, that’s really how we get people in. We’ve been successful at doing employer health and wellness days where we introduce people to the concept and with that first massage or first session.
And then they see the breadth and depth of the marketplace. So, when it’s time to do something or access something that is a bigger problem, we’re there and along the way, providing this idea of a personal health plan, access to a community that shows that getting ahead of problems, that whole ounce of prevention is worth a pound of cure concept. So, it’s just a better way.
Andrew: I see you also will keep track of their fitness using their mobile devices–phones, watch, FitBit. That’s something people do when there isn’t a deep pain.
Michael: Exactly. That’s an example of ways consumers can be engaged on their general health and wellness on a regular basis. Some people would be engaged on that several times a day. From that data, you can infer ways to make recommendations to people. “Mike, you’re 41 and based on your pattern of behavior, it might be time to go check out a nutritionist,” as an example.
Andrew: Why do you need this? I was just talking to a past guest of mine, Nir Eyal. He said every time he starts a company, it’s just a ton of work. He and his wife were talking about, “Why start another one right now?” They’re in a good space, they could just enjoy spending time with their daughter. He loves writing. He said he could sit in a café and write on his laptop. He said, “Why am I going out and doing it?” You need it even less than he does. Why are you doing this?
Michael: I come back to that advice that I got early on that made me go to California about just choosing something that you could be very passionate about and you can love to do and just getting into it and not worrying about the money and other things. I guess I’m still driven by that same advice, that while I love to do other things, clearly I love doing this the most or close to the most outside of stuff with my family. I have three kids and during the summer of Mike, it turns out that when your kids get a little older, they’re busy too. Dad hanging around doing nothing all the time is annoying to my eldest daughter.
Andrew: It’s better to have Dad doing something he’s passionate about.
Michael: Yeah. What I would say about this particular project and this particular company–I’ve done search, storage, email or communications because that turned into mobile messaging and SMS. Then I did books. I am just constantly curious. This is a new area for me to sink my teeth into. I think it’s one that’s actually important. You don’t really think a lot about health and wellness when you’re 20. Maybe a little more then you’re 30, but when you’re 40 and when you have the issues that we have with healthcare today, it’s a priority. I feel like I don’t want to wait for somebody else to work on it.
Andrew: It really is a great business to get into. It has impact on people. I’m so proud to have you on here. I did not know the Kobo story. Like I said, I knew of Kobo forever. I had the app. I didn’t know how the name came about and I didn’t realize how well you guys did because of this business. So proud to have you on here and to hear the rest of you story. Thanks for coming on.
Michael: Thanks for having me.
Andrew: You bet. Thank you all for being a part of Mixergy. If you want a hosting company, it is HostGator.com/Mixergy. My second sponsor is Toptal, Toptal.com/Mixergy. If you like this interview, you should subscribe to my podcast at Mixergy.com/podcast. Bye, everyone.