Andrew: I’ve been doing these interviews for a little over a year. And you know what? They keep improving over and over, and I’ll tell you why. One of the big reasons is that I use a WuFoo.com contact form. I make it easy for my audience to contact me, and to give me feedback on my interviews. Use WuFoo on your website. Just create one of their contact forms for free, put it on your website, get feedback from your audience, and see how your business improves. There’s more to WuFoo than that. You can customize the information that you collect from people. You can create great graphs to illustrate the information you’re collecting. Check out WuFoo.com for all those features. For now I’ll just tell you, I’ve used them. And you can see, if you look back over my work over the last year, you can see a noticeable improvement, thanks to WuFoo.com.
Grasshopper.com is my second sponsor. And I use Grasshopper.com to travel around the world, actually mostly South America, and still stay in touch. If you get a phone number from Grasshopper.com, you will see why they’re the virtual phone system that entrepreneurs love. They’re the phone system that you can manage online, and you can get today, at reasonable prices. And by the way, I’ve talked to an entrepreneur here in Buenos Aires just the other day, and he said that he loves Grasshopper because it makes his business seem bigger, because when people call him, he can create all the extensions he wants to give them the impression that his business has all those different departments. Check out Grasshopper.com. And at a very reasonable price, meaning very low price, you’ll be able to get all those features and more. Finally, I want you to know about Shopify.com because you should be selling something online right now, even if it’s just an experiment. And Shopify.com will get you up and running with your own store within minutes. And within days, you’ll start to see people interacting with your store. You’ll be able to improve. You’ll be able to start making sales, in addition to giving you all the features that you need in order to run your store. Shopify.com also shows you how to make sales, brings experts to teach you how you can build your business. Check out Shopify.com, and you’ll see why I’m so proud to have them as a sponsor. All right.
Here’s my interview.
Hey, everyone. It’s Andrew Warner, founder of Mixergy.com, Home of the Ambitious Upstart. And today I’ve got with me David Pakman. He is a, Pakman, I keep thinking of the video game whenever I introduce your name. Is that too immature for me?
Interviewee: No, not at all. I mean I was a child of the 80s, and I was a big video game freak. And it was good to have that name back then.
Andrew: [Laughs] All right. I’m saying to myself, I’ve got a partner with Venrock here, a well-known venture capital firm, backed a lot of impressive companies. I’ve got to be at my best, and here I am, in my head, I’m thinking of the video game. Why don’t we start off this way? Can you tell people about some of the companies that you guys have backed? And I know you’re new with Venrock, but maybe we can talk about over the years who’ve they’ve backed.
Interviewee: Yeah, sure. We’ve backed more than 450 companies over 4 years. It includes Apple, Intel, Freecom, Checkpoint, some great companies in the ad techspace, like Doubleclick and MediaMetrics, a lot of important companies in the health care and biotech space, health care IT, like Athena, Heta Health. And out of 450 companies, we’ve had more than, I think, 140 IPOs, and more than 125 successful M & A transactions. So it’s been a long, fruitful four years.
Andrew: OK. And you’re an entrepreneur who turned investor. My vision for this interview is to talk about the transformation, talk about your history, how you’ve built businesses, how you’ve worked for businesses, and what you’re doing now. But, as I said earlier, you’re new with Venrock. Why did you decide to start with Venrock? Why did you decide to go to the other side?
Interviewee: Well, I had been an entrepreneur for about 12 or 15 years or so. Worked in at least three start ups, some of which I founded, and had just a great run building companies. I love it. But I did some angel investing in between some of those companies, and I enjoyed working on more than one project at one time. Maybe I just got itchy or I liked the fact that we got a huge amount of opportunity out there, but as an entrepreneur, you can really only pursue only one thing at one time. As a start up CEO, it’s 150% focused on one thing. And so the opportunity to come to a venture firm where by its very nature you can enjoy your ADD and pop between lots of different companies in sectors you think represent broad sets of opportunity, I think, was very appealing to me. So, I was lucky enough to be afforded that opportunity at Venrock. It was one of the best venture capital firms in the history of venture capital. It’s got an incredible track record and an amazing team, and it was looking to expand in New York. That worked out really well for me.
Andrew: I was doing an interview with Paul Grand, the investor who founded Y-Combinator, and asked him how being in Y-Combinator was different from starting a startup. He said the hours were much better, that at this stage in his life, he’s not ready to put in the old hours that a guy in his early 20s might in order to launch a new company. How are you finding the hours? What are your hours now?
Interviewee: You know there’s a misnomer. I was terribly misinformed. I thought that BC’s, you know, worked three or four days a week, come to a couple board meetings, take a bunch of time off, ski, surf. It’s the total opposite. BC’s wear red eyes like they’re a badge of courage. In this firm, it’s not uncommon for someone to do a minimum of one redeye a week. The hours are just as long, if not longer, than when I was running a music class. One of the reasons is aside from your day job of, you know, looking at more than 1,000 deals a year, you become essentially members of companies that you invest in. And you’ve got almost a full time job with each one of them, not to mention that, you know, you’re constantly networking. So, I’m having a minimum of two meals a day, you know, with people that aren’t my family trying to continue to build that network. So, it’s brutal. It’s a lot of work and it’s the total opposite, I think, of what most people’s impression of BC life is like.
Andrew: I want to start off by going back to when you were at Apple and building your career til now but I’ve got too many questions based on what we’ve talked about so far, starting with who are you networking with? You’re new in this business, you want to go out there and meet the right people the way many, many entrepreneurs do when they’re getting started. Who did you go to?
Interviewee: Note, the BC game really is a game of picking the very best entrepreneurs and they may not have demonstrated yet that they are the very best entrepreneurs. In many cases, they’re first time entrepreneurs. So, the job, in my view, is primarily about creating the opportunities to meet the best entrepreneurs, which is a lot of networking. You know, so fortunately I’ve been in the New York tech community for a long time. I’ve been in the Internet tech community as long as there’s been one. And so I’ve been renewing old connections and making new ones. I’ve been at it for about a year and a half now. And my network has grown tremendously just in a year and a half.
Andrew: What was your strategy? I talked to Mark Suster who’s in a similar situation as you. He was an entrepreneur, started two companies, went on to work at GRP as a venture capitalist and he was talking about what his system was for getting out there. And one of the things he said he did was he talked to lawyers who represented start-ups and he said, ‘I will tell your guys as honestly as possible what I think of their companies.’ And as a result many of them sent entrepreneurs to him. What about you? What are some of the techniques you’re using to meet people?
Interviewee: The answer’s really everything but just a few that might be worth talking about. I went right to the entrepreneurs I know. I mean I think one thing entrepreneurs are really good at doing is building networks to help them grow their companies because a lot of growing a company is based on partnerships. You can’t do everything yourself.
So, within tech communities whether it’s the Valley or New York, there’s always a tight group of people that are the entrepreneurs themselves. So, I went to them, people that I knew that have been building companies and said, ‘Who are your favorite entrepreneurs?’ Who have you angel invested in? Who have you seated? Who have you made introductions to in terms of other firms? What companies do you think are interesting? And that’s really where I started, going to the interesting companies and the great entrepreneurs and building out networks from there. But, what I’ve done all the same things that you’d expect that others, I’m sure, do. You talk to all the lawyers, talk to the investment bankers, talk to other firms. You know [inaudible] has a very proactive strategy. We have certain thesis areas that we think are emblematic of very large shifts or disruptive moves from one industry to the next or from analog to digital. And so our view, generally, as we build these thesis areas, we go very deep into them. We try to meet absolutely every company in this space whether we think they’re interesting or not, and know every entrepreneur in this space. And so that’s another way to build your network, and one of those is Adtech which is, you know, very strong in New York. I’m lucky that [sounds like Benart] has a great portfolio there. I’ve contributed to that a bit. So, you know, that takes up a lot of time to meet the 400 Adtech companies out there.
Andrew: I saw that you blogged about Adtech and I saw how significant it was for you in getting to know companies. But how are you figuring out ñ you’re going out and you’re meeting every entrepreneur at Adtech and you’re getting to know them and you’re finding out about all their businesses?
Andrew: Really. How deep can you go on a company? How hard ñ cause the reason I ask is I see when a company is new, it’s hard for them to get their message out there. It’s hard for them to communicate what they do. And for you to go in and get to know everyone of them and start to absorb these complicated messages and how that all makes sense in your head seems like an impossible nightmare. How do you do it?
Interviewee: Well, you know, you start with a map. This is an Adtech map of sort of every company and every sort of space or little micro vertical, and then you start networking through meeting with them. Look, and you meet with them for an hour, an hour and a half
minute 10 to minute 15
Interviewee: ÖYou meet with them for an hour or an hour and a half, and if a company can’t tell you what they do within that amount of time, it’s probably too complicated a story. So, I’m not saying we spend a full day with every company, but we certainly spend all of our time with companies that we’re considering an investment in, but just to get to know the space. We try to meet every CEO and we try to be helpful, too. ‘Hey, maybe you would consider a partnership with this company, which is in our portfolio. Would you like an introduction?’ Or, ‘Hey, maybe we’re not interested in investing but we know this firm might be, so can I make an introduction there?’ We try to be helpful so that it’s not just a one-sided relationship.
Andrew: About this first strategy for an entrepreneur who wants to eventually get funded or, at least, get to know people like you or get to know you? Whenever they see that there’s a new investor in town or somebody knew at Venrock or somebody who starting to angel invest in a city, go out there and offer to introduce that person to as many entrepreneurs as possible. Would that have been something you would have taken me up on if I came to you as soon as you got the job and said, ‘Hey, can I introduce you to maybe 10 or 15 of my entrepreneur-friends in town?’
Interviewee: Actually, I would love that. I want to meet every entrepreneur who’s good.
Andrew: How do you know who’s good and who’s just going to waste your time?
Interviewee: It’s certainly like anything else, it’s a filtering exercise. Good entrepreneurs tend to know what makes an entrepreneur good or not, and you would trust those recommendations. I’d give you an example. We have an investment in a company called AppNexus, the CEO is Brian O’Kelley. He was the co-founder and CTO of Right Media, which was sold to Yahoo for $800 million. Brian is really ground zero for ad:tech in New York. He’s angel invested in many companies. He’s given advice to tons of entrepreneurs. He’s got a great view of the space. So he’s a great magnet and great filter for saying, ‘Hey, I think these guys are doing interesting things. I think these guy’s very sharp, he comes from this background.’ So, it’s like anything else, it’s a filtering exercise.
Andrew: Ozzie(?) in the audience is saying, ‘Hey, that’s a good idea’ of what I said. I actually did that one. Richard Wolpert came in to Los Angeles and created his Mail Room Fund. Richard kind of introduced you, over lunch, to maybe 15 of my entrepreneur-friends, he loved it. He bought lunch for all those guys, I didn’t even have to do it. I think he ended up investing in one of the companies that came to the lunch. So, I’m glad that it works.
Let’s talk about what you think makes a good entrepreneur. What do you think, beyond the usual stuff, give me some of the things. I like a guy who has a chip on his shoulder. I like a guy who’s a little more aggressive than his mother and kindergarten teacher would have been happy with, but today is perfect.
Interviewee: I like thoughtful people who are just not operating from the gut. I like people that sort of like to operate in a fact-base environment. They’re looking for data, they’re looking to learn what the market is telling them. I think a key attribute of successful entrepreneur is someone who can read market signals. They’re very good at listening to early feedback and [xx]. You know, we always say we invest in team market idea. The market needs to be interested, the team needs to create fantastic. The idea is going to change seven times, every VC would acknowledge this. But, how do you know you’re changing it to the right new idea. You have to be really good at interpreting what the market is telling you.
Now, there are some people who can make markets like Apple. They don’t often listen to what the market is telling them. Their view is the market doesn’t know what it wants but we can sort of help the market see what it wants. That’s a different type of entrepreneur, and it’s an extraordinary one when you come across them. But, I think it’s important to find someone who is both confident and passionate about something, but also is able to read the markets.
Andrew: I’m going to come back now, I’ve written down confident, passionate, pivot(?). I’m going to see how many of these we can illustrate with your own career as we go back and figure out how you got here. I’m going to start off with Apple. ’91 to ’97, you worked at Apple. I’m not used to entrepreneurs having jobs for six years, at the beginning of their careers, and then going off starting a business. Why did you take a job at Apple?
Interviewee: First, I would challenge that view. I think a lot of entrepreneurs start in a company for a number of reasons. It helps build your network, you get to learn the way companies run, and you get to see market opportunities that are not satisfying by other companies. So, I don’t think it’s that uncommon. But, I didn’t have an idea for a company I wanted to start when I graduated in engineering school, and I loved the products that Apple made. So, I went in to work for a company that built great products, and it was an amazing first job. I worked with some of the smartest people in technology, which Apple always had a view of hiring, and I built great products. I had the luxury of learning how to focus on building products that were simple, elegant, and best in the class. So, I think those are really good take aways. As a result, I tend to only like companies that are building simple, elegant, and best in class products.
Interviewee: So I think those are really good take-aways, and as a result I tend to only like companies that are building simple, elegant and best-in-class products, some with a very strong product focus.
Andrew: Can you give me an example of a simple, elegant product that either you created, or a company that you angel invested in created?
Interviewee: Well sure. I can even give you a company we invested in at bedrock. In terms of a simple, elegant product that I angel invested in, there was a company called Media Code, which had a product called muse.net. It was founded by Rob Lord and Ian Rogers, both long-time digital music entrepreneurs, and they had a very simple, elegant product that let you access your music collection from where you were. I just invested in a company called Smart Link. They have an enormously innovative and simple approach to getting your website translated. Two seconds of setup and minutes later your site starts to get translated. Gorgeous implementation, very simple, sort of brain-dead, “Yes, of course I would adopt it.” So that’s definitely the key. I left Apple for a little bit, during that 1991 to 1997, I left for a few months and went to a start up, but came back to Apple to do the digital music stuff.
Andrew: You co-founded Apple Music Music group in, I think 1996?
Interviewee: Yeah, around 1995, 1996, I think it was 1995, I pitched Apple that they needed to focus more on the intersection of music and technology, and they agreed, and we launched a group and started to pursue what was really the beginning of digital music.
Andrew: What was the hardest part of that?
Interviewee: It was early, the market was just… the internet penetration wasn’t all that great. There was certainly very little broadband at the time. Companies like Real Networks were just being formed to help do audio over the internet. The infrastructure to do digital music wasn’t quite here yet, but you could see that it was coming. So I think waiting for the market to develop was the hardest part, but there certainly was no failure of imagination. A lot of activity was happening and a lot of it too early.
Andrew: And this was Apple, pre-Steve Jobs coming back. He came back in 1996, and 1995, 1996 is when you’re getting ready to go with Apple Music Group, right?
Interviewee: Did he come back in 1996? 1996, 1997 seems about right. I remember him coming back. I was still there when he came back, and, yeah, he was not focused on music at that time.
Andrew: Was he not focused on music the way he was not focused on the Newton, in that he saw it as just a side project that was distracting us, or did he say…
Andrew: He was. Okay.
Interviewee: Yeah. It was a distraction. I mean, look, the company had a lot of other big issues at that time. It had an OS that was broken, which is why they bought Ext, brought him back, it had a product line that had gotten too complex, its products weren’t that great… it had a lot of core issue to focus on.
Andrew: And then you went off to work for a company called N2K, which created Music Boulevard. Was that their big brand?
Interviewee: Yes. That was one of the first online CD retailers. You know, selling CDs online. This was before Amazon started selling CDs. Amazon was just a book retailer, so it was an early e-commerce play. The idea was if you got a million people buying CDs from you, you would know a lot about their musical tastes, and then you could sort of bypass the music industry and just sign artists directly, and sell music direct to fans. We also launched the first digital downloads in 1997. It was long before Apple, in 2003, started selling downloads, obviously a little too early for the market.
Andrew: Now, I’ve got a couple of facts from a couple articles I read about you at the time. By the way, you were quoted a lot, so it was helpful for me in doing research for this interview. One was, I think, from Cnet, that said that your company wanted to remake the way that music is marketed, distributed and purchased. That’s the way people talked back in 1997-99. We’re going to remake the whole package, all at once. And also, the company was founded in 1996, about a year before you joined, and went public in 1997, so a year-and-change-old company goes public, and that’s the way the times were.
Andrew: According to Linked-in, you were the business and product… “biz and product dev.” is the way I wrote it down, I don’t know the official title… how did you shape the product?
Interviewee: I came on to start doing business development, so I’d get a lot of partnerships, and eventually took over the product team, and this was the early days of e-commerce. It wasn’t clear how to build a great website in those days. Again, my sort of focus on data… I had sort of two visions there. One is that the organization needed to be far more data-driven. Decisions on whether the checkout/shopping cart button should be red or green, or whether it should be above the fold or down here
Interviewee: It should be above the folder, down here. You know, I sort of felt the customers would tell you the answer to that by doing a lot of testing. So I instituted a culture around that. And second, I really believed in one to one marketing, and very personalized shopping experiences. So, I launched a product there called, My Music Boulevard. Which was, you know, a site that wasn’t the same for everyone, right?. The home page changed, the recommended titles changed, the merchandising changed, based on who you were, what your purchases were. I know this sounds pretty mundane now, but in ’97, you know, it’s kind of a radical concept.
Andrew: OK. I don’t know how to ask this in an elegant way, but there must be something. Hopefully you can rephrase this generously in your mind, but what I’m trying to get at is; you guys sold to CDnow. You personally, how did you fare in that sale?
Interviewee: You mean financially?
Interviewee: I did OK. I mean, it wasn’t a life altering financial event for me. But the company went public, you know, and I had option to the company. I did OK; enough to want to keep going.
Andrew: OK, all right. That’s when you went off to create your own company, My Play, this was ’99. I think you sold it in ’01 to Burlesman?
Andrew: What was the vision behind that?
Interviewee: I got a phone call from Doug Campejean, [sp?] a friend of mine at Apple. And he said I’m playin’ around with this digital music stuff and it’s a lot harder than it should be. You know, it’s trying to get these MP3 players plugged into the computer and download music, it doesn’t really work well; what can we do to sort of simplify that? We came up this notion of, “Why don’t we just put all of your music out in the cloud?” Just host it out on the internet so you don’t have to worry about which computer it’s on, and that way you can listen to it anytime and sync your devices to it. An idea who, to be honest, I think is still needed today. We still don’t keep our music in the cloud, but ultimately we probably will. So, you know, we launched that in the heady days of ’99. And raised a bunch of venture money and built a really fun start-up with great culture and a really great product. But then ran into the 2001 dot-com meltdown and pulled down a little wind by selling it to Burlesman. And really invented, the best part about it was, we really pioneered this concept of a locker; of online music in the cloud. Now, it’s 10 years later, 11 years later; people are still talking about it, but I think a lot of at the time have taken some pride in sort of seeing the future, and where things are going to go and inventing it.
Andrew: And there was actually another player in the business that got sued by the record labels. They were out before you guys, right?
Interviewee: No, the company existed, mp3.com is what you’re referring to. They existed, but they were doing something very different. They were sort of like a download place for indie acts. And we launched the locker, and they copied us. But they copied us in a way that was legal. We had been careful not to be illegal. And, you know, they got sued and for, and lost, you know, handily and had to pay back $150 million of investor’s capital to record labels for violating massive amounts of copy write. It an egregious, egregious failure.
Andrew: As I understand it, the difference was, that with them, all you had to do was put a CD in your computer and they already had the music up in the cloud. And they said, “Ah, OK, now you’ll have access to this music.” Which meant that if I just borrowed my friend’s CD for a minute, I could have all the music from him on mp3.com forever. You guys would take the bits, toss them up into the cloud, my personal bits would be in your cloud. I would be sending them up for myself, that was the difference that made yours legal. Seems like such a petty difference, but at the time, it made all the difference in the world.
Interviewee: Yeah, and that’s why the lessons of online entertainment. You know, I mean, when there are content owners involved, you have to thread the needle around legalities or you’ll, you know, suffer a failure. And so, even though the solution may not be as elegant as you’d want it to be for customers, you’re dealing with property that someone else owns, so you have to kind of abide by the law. And, you know, for better or worse, that’s the point of view we had.
Andrew: OK. So, we talked earlier about how you like entrepreneurs who have data, who follow facts, market signals. What data, facts and market signals could have told you at the time to create this business?
Interviewee: Well, you know, the idea doesn’t necessarily come from the market signals, but how you pivot and how you move around does. And, you know, we were looking very carefully at our adoption, right? You know, this was an idea, we didn’t know, had it’s time come? Were people ready to upload all their music in the cloud? I think you could argue, you know, I think we reached eight million users who had signed up. That wasn’t eight million active users, I forget how many actives we had; maybe about three million. But, you know, we never had 30 million or 100 million, and so maybe it was early to reach mass adoption. But, we looked carefully at how are consumers using it, and is this a useful product? And one of the ways we pivoted, was we saw subscription music services emerging and we built a solution to let E-retailers or brands offer customized subscription products. And we…
(25 to 30)
Interviewee: — they wanted — they wanted to have that functionality.
Andrew: That was a B2B component you said that you sold to — we talked about you selling to Burlsman, you said it was — well actually from what I saw, it was reported $30,000,000.00. Can you say if that’s at all in the Ballpark?
Interviewee: I can’t say.
Andrew: Even like nine years later, we can’t talk about it?
Interviewee: I haven’t read my confidentiality agreements, you know, how long it was for, but you know, I’d rather [xx] of proper being.
Andrew: OK. All right, how did you fear in that deal?
Interviewee: I did pretty well.
Andrew: You did? Wow, you know what, this reminds me a lot of lala.com a company that was recently sold to Apple, you had a great blog post about it, So [xx] and Rogers you linked over to that. You said you — I think Eian thought or maybe it was you who thought that it was a talent acquisition that Apple just wanted these great guys to fill the ranks of their iTunes department. Was that the same situation with you that the guys of Burlsman said, we’re starting this new system, we’re going to integrate a bunch of products together, we need to get David onboard to help us running?
Interviewee: Oh it was — it was just me per se, but I mean I think that Burlsman had a vision about how to stitch together a couple of different properties. They bought CDNOW, they bought MyPlay, they were trying to buy Napster. And they had a view that they could be attire to consumer digital music vendor both e-retailer and services provider. I mean that was a great a vision. The problem is the world melted down as they were trying to execute that and the work lost all interest in investing in internet properties. So, I think their vision was right, but some market events [xx] that. And so, I think they wanted us both for the product and for the team which is typical [xx] about acquisition. You know, sometimes you want to just [xx] but in this case they — they loved the product. We — they got a great product and that was legal and they wanted the team too.
Andrew: Just before you were acquired by Burlsman, months before there was a potential deal with Yahoo that was from what I understand way bigger then this deal and you guys didn’t make the deal because of an issue with AOL, but was it also that you wanted to keep running the company and pivoting maybe a little bit more until you nailed this market, but you had to sell to Burlsman eventually or you had to sell?
Interviewee: No, we — the — we were intending to sell to Yahoo, they believed totally in our vision, we had this view that on you My Yahoo page you’ll have your e-mail, your news and all of your media. And everything would be living in the file and they totally but into that. It was a great product team at Yahoo, we loved the Yahoo guys, I really wish that acquisition happened. I thought it would have been for the product and — and the my — product might still be in the market today, if that acquisition happened. The problem was that we had a deal with AOL that placed some restrictions on the company that AOL was almost criminally unable to — unwilling to change only to Skype Yahoo and they ended up blowing up the deal. And it was a very challenging time and it was not in AOL’s shareholder’s best interest to do what they did. And it certainly wasn’t in ours or Yahoo’s to do what they did. So it was an unfortunate end and as a result we ended up selling to Burlsman I think about — about a year later and for less money, but and also we sold to a company that wasn’t able to carry the product vision on which I was the most disturbing thing about all.
Andrew: We talked about how you felt at the time, I remember I had for my first big business I had this great buyout offer, I was ready to go and take off because my — I was exhausted and I needed the break and then, it was snatched away from me and I remember how terrible I felt. It felt like I was never going to leave this place, what did it fell like for you to have this great deal in place and then have it snatched away because of AOL?
Interviewee: You know, the company had only been around for a year. So I wasn’t burned out at all. Right I was — I wanted to keep working, I really wanted this product to achieve mass adoption we were very focused on that. So, I was excited to be part of Yahoo be part of some bigger and to get to the finish line more quickly. But I was very disappointed when it didn’t happen because and we sort of looked, you know, when you go through an acquisition or potential acquisition its months right months of conversation, the entire company slows down, you can’t tell everyone everything. Your employees were like, what’s going on, you start losing some trust with your employees, you can’t say everything, it was — it screws the company up right, and so if you spend months doing this and it doesn’t go through, you’ve lost all momentum. And that was the biggest disappoint, I was like, now what, we’ve stopped planning for the company, we stopped moving forward and we have to pick up all the pieces and figure out what’s going on here. And — and our partner AOL just totally host us, so now we don’t even like our partner anymore. So, you know, it was tough, it was really tough it was amazing learning experience. But I was very upset, it was hard.
Andrew: Can you go deeper and more personal and talk about how you felt and I’ll tell you why? I’m looking at your resume right here, there is Hit the Apple, Hit — Hit – Hit, great Career and people are going think, well this guy has got it all made, this I think feels like the right opportunity for us to talk about really —
Andrew: This I think feels like the right opportunity for us to talk about really what was it like for you personally, maybe expose a little bit of fragility in describing how you felt at the time I want to be able to relate and more importantly have my audience relate.
Interviewee: Well you know I felt like I had beenÖ someone else played a Head better than I did. I felt like I had made some mistakes. I was the head of Business Development at my plan and I led the negotiations at AOL and they put a bunch of stuff in the agreement that didn’t have any bearing on my play at the time but were clearly designed to screw us if an acquire came along. I had spent a bunch of time with a couple key folks at AOL who I thought would do the right thing for us and they didn’t and it was a really really hard learning experience for me. Now, I am an eternal optimist and I happen to view that everything happens for the best. And theres some silver lining, I mean that I think that this was at the hieight of the boom and Yahoo! Stock was at a 130 at the time and so we would have bought with Yahoo! At 130 and we would have been locked up for 6 months. Around the end of that lockup period, Yahoo! stock was at 30. So, It would have been bought for this much, and after six months it would have been this much. What would have that emotional rollercoaster been like? And I know some friends who went through similar things and started to spend before they were liquid and had a lot of problems. So who knows what would have happened but the business learning experience was invaluable. I am much much more cynical about the motivations of big companies and sort of the impersonal nature of those and I’m much more protective of my company as a result of that.
Andrew: What do you think was the motivation of AOL? You said it wasn’t in their shareholders best interest, were all human beings running companies. What was their Human motive?
Interviewee: They were riding so high. The arrogance was so high at the company at that time. They were skirting every rule they possibly could. They got in a lot of trouble for this stuff. And books have been written about it. Some of these guys almost went to jail. Literally, some of these exact same people I’m talking about here almost went to jail and applied millions of dollars for this type of behavior. It was intentionally criminally wrong. I think they were too successful too quickly and were going to the wall. There are limits on capitalism before it become ruinous.
Andrew: Then you ran, or you worked in B music. What was your role there?
Interviewee: So that was after we sold *** and I came on and did Business Development and I also did some public policy stuff. I kind of got into policy related to digital media and I went to Washington a for a little bit and lobbied some staff members and congress people and testified in front of congress. Just to pave the way for an open internet and balance of power between copyright holders and internet start-ups. When I got to Burleson, Burleson was really venturous. These guys were really willing to do some adventurous things. They were willing to buy Napster which was exactly the right decision for the music industry at the time. They couldn’t convince some of their bretheren companies to do it so they wereÖ you know a guy named Thomas Middlehauf*** who was the CEO at the time, he was a real out of the box thinker. Andre Schmidt who worked for him, hes the one who really bought our company. I thought they were both atypical big media company executives and I was excited to work with them. Now 3 months after I got there they both got fired. For almost thinking out of the box too much and being too aggressive. Then it turned right back into a traditional stale boring media company like most big media companies are and I couldn’t wait to get out. I was locked in for 18 months. But I got time off for good behavior after Tool and I wrapped it up as quickly as I could
Again go back to your history on Linkedin. You were a consultant for Mediacode, muise.net was their product that’s the one you worked with, Ian Rodgers was a consultant. You guys sold it to Yahoo!. I’m seeing a pattern of interest and excitement about mucsic, specifically. And I read an old quote from you and you said that in addition to whatever job you were doing you’re a musician too and you pride yourself on that. What does it mean to be a musician? Do you play an instrument? Are you in a band? Are you like David Krevin of DFJ frontiers whos in a band?
You know I’ve been a drummer for 35 years and at times a very serious one, a professional at times. Its mostly been a hobby for me but I got very serious a couple different times in my life. I’ve had the luxury of playing with some great band s and working with great songwriters.
Interviewee: able to produce a few records and write a bunch of songs. And I still have a studio in my house that’s fully equipped, and I get to use it as a great way to blow off some steam, and make records there, and work with other folks. So for me, it’s just part of me. Music’s been an essential part of me since I was a little kid, and I was fortunate for a bunch of years to be able to marry some of the things I love in life with my career. And I think right now, it’s nice to actually not focus too much on music. I’m a little burnt on music as a profession. I think it’s a pretty challenged industry. So it’s kind of nice to be focused on tech more broadly now.
Andrew: Why do you think it’s challenged?
Interviewee: It’s challenged because the rights-holders are generally short-sighted, and I think have set up an ecosystem that tries to maintain the status quo at the expense of long-term evolution. And it’s destroyed the industry as a result of it.
Andrew: You went on to work at eMusic as a CEO. Why’d you take that job?
Interviewee: Well, so that was going back to this idea that I wanted to do more than one thing. I wanted to work with more than one company. I joined up with some guys who had put a fund together, that wanted to buy some distressed media assets in 2003. And so we bought eMusic, and we bought the Orchard, we bought a couple of other companies. And each of us went and ran one of those companies. So I stepped in as the CEO of eMusic, but I really was at this private equity fund trying to buy and turn around a bunch of distressed companies. And so I took the eMusic job because we owned the company, and I was most suited to run it. And also because I thought it was a great opportunity.
Andrew: This is Digital Associates, and now I understand why I didn’t find a website and deep information on Wikipedia about them. It’s a group of guys investing in companies that they ended up running. Do you have about 10 minutes?
Interviewee: Can I put you on hold for one second?
Andrew: Absolutely, yeah. Can we put hold on? Can we do Skype on hold? I think so, yeah. Hit the hold button, let’s see what happens.
Interviewee: Are you there?
Andrew: Mmm hmm.
Interviewee: Good. I just bought us 15 minutes.
Andrew: Oh, good, good. All right. Thank you. OK, so what was the opportunity that you guys saw in the market at the time?
Interviewee: Well, 2003, you know a lot of roadkill on the internet. Things were really priced very low. Digital music, digital downloads, hadn’t quite happened yet. Apple had just launched iTunes, I think in April of that year. Our view was this was the beginning of a real market developing. eMusic had been around for some time, but never really got quite the traction that we thought it could have, and it had been bought by Vivendi Universal who ran it into the ground, abandoned it basically. So we thought there was a great opportunity. It was priced low, and we thought we could build it into something meaningful. So we bought it in ’03, and it was doing about seven million in revenue at the time, I think, and losing a lot more than that. In five years, we grew it to about seventy million in revenue and able to make money. So it had a real economic model, it had some great growth, and we built it into the #2 digital music service in the world, the #2 digital music retailer next to Apple for a number of years. I don’t know if it still holds that position, but that was true up until the time I left. So it was a great run. I’m very proud. One of the things I loved about it was we were able to create a business, not just a company. You know, you look at the P&L, it was a great P&L. I mean, it had revenue, it had profits, or at least near to profits. It could have been profitable at the time. And, more importantly, had great margins and a good economic structure. So I liked that it’s a real company, not just an idea.
Andrew: I’d love to hear how you did it. Let’s start off with what you envisioned, what you thought you were going to do when you got into eMusic. What did you think would make this thing take off and ?
Interviewee: You know, we had a lot of music rights. We had licensed them from the indies. We didn’t have any music from the majors. So the bet was, can you build sort of a specialty retailer that focused on a certain segment of the music market, but not the whole music market. And it looked like iTunes was going for hit product, kind of a Walmart of music. Even though they were going to carry everything, it didn’t feel like it was going to be a long-tail retailer for sophisticated music people. So we said, could we build that? And is that ana interesting market? Could we get ten or twenty percent of the market? If it becomes an eight billion dollar market, that’s really interesting. So that was the bet. So we had to do two big things. We had to license a whole lot more music. I think when we bought it, check me on this, but I think it had about a million or a million and a half songs licensed. And might have actually been less than that. And now I think they’re up to six and a half million. But I think when I was there we reached four and a half million. So we really broadened the catalog, and the product needed a huge overhaul.
Interviewee: …and, the product needed a huge overhaul, and it was sort of a primitive web property, and it needed a vision, and it needed a vision, and the vision was a specialty retailer for adults, music for people 25 and older and once we defined that vision we were able to build a product that was more consistent with that, and appealed to that costumer base, and growth started to take off. Also, it needed some discipline about marketing. You know, if you were not a really really broad retailer but a niche one, you have to be very careful about how you spend your dollars, and I think we did we built a very strong marketing company.
Andrew: Okay, I see, and were they spending on things that they weren’t supposed to at the time?
Interviewee: When we bought them, they weren’t spending as much in marketing, because they had been, sort of abandoned, but the company was just sort of a skeleton company at the time, they weren’t doing much at the time, they were just keeping the website up, so you can’t really fault them. It just needed to do a lot of things, but I think that one of the things we brought to it was the vision of a direct marketing company.
Andrew: I see. And where were you guys wrong, what did you assume that you were able to do, but the results that you expected didn’t happen?
Interviewee: I don’t think we were wrong about a lot. I think if you said that in 2003 that you said that you would by a company with 7 million dollar revenue and in five years grow 10x, and have forty four percent gross margins, in what many people believed to be a very challenged digital music commerce market, that would be successful.
Andrew: Okay, how soon did you get it to profitability?
Andrew: We lost the connection, and I think just before we lost it, I asked you how soon did you turn a profit?
Interviewee: It’s a private company, right, and as a result, it doesn’t have to disclose the privates of its PNL, and since I’m not there anymore, I’m not comfortable talking about the specific finances of it. Except to say that what we proved was, that there was a profitable economic model to be made around selling music subscriptions with really good margins and really good customer loyalty, and you know, I think that you were asking about the failures or mistakes made, and I think that the only thing to be critical of is that it’s not yet liquid. From a pure investor’s perspective, how does a business like that get liquid? Does it go to public, is there a lemonade transaction? That part remains to be seen.
Andrew: I see, so Dimension Associates still owns it?
Andrew: I see, so what about some of the big successes, some of the ideas that you tested and worked surprisingly well?
Interviewee: Well, I think we were very focused on customer acquisition strategies that would bring in costumers profitably, and I think we found a lot of those that you know, we had to look under rocks and bring partnerships, I think we were able to link the connection of buying physical things like mp3players and the need to fill that up and sort of bridge that. I think we did some pioneering things marketing to adults who like music. I also think we created a pretty powerful brand, and, you know, the brand existed before we bought it, but we put a lot into it to, you know, what made Rolling Stones call it “iTunes’ cooler cousin”.
Andrew: How did you do that? How did you make it into a cooler cousin of iTunes?
Interviewee: I think by focusing on building an identity, a message that was not appropriate for everyone. One of the problems with building a brand for everyone was that no one actually likes it. One of the things that I learned at apple was that Johnny Ive, who was the product designer in the industrial design group, said that the goal was always to build a product that 20 percent of the people hated, so if that was true, then you would really push the design envelope, and therefore, you would really have some people who were ravenous about it.
Andrew: Do you have an example how you did that, of how you might have turned off twenty percent of people intentionally.
Interviewee: Well sure, it was not like we were specifically trying to piss people off, but what we were saying was “how could appeal to people who were absolutely going to love this?” You know, one thing we did was to put Johnny Cash in one of our ads. There’s no 16 year old in the world who was going to find that interesting, right? But it was a powerful statement, the image was really remarkable, we put Paul Mccartney in our ads, we were trying to appeal to the adult medium.
Andrew: You said that you were working with physical players. I think I remember that when I bought an mp3 player, it was a player with a music certificate from eMusic, and I’d become a member, and well, monthly seems to have been to be part of the strategy, was that part of it before you came in, like charging per month?…
Interviewee: Yeah, yeah, what we changed was sort of some of the economics, like it was an ‘all-you-can eat’ service. So, you paid 15 bucks a month, and you could download as much music as you wanted. The problem was, that was negative gross margin. It was bankrupting the company. So, we created these sort of caps, tiers. You know, 10 bucks a month for 40 songs, and 15 for 65, whatever. So, we had these different tiers, which always provided better value than buying a song at a time, but let us build a real business.
Andrew: What about audio books? How big a part of the business was that?
Interviewee: It was never more than, I think maybe, I think it may have reached 7% of the company’s revenue. So, it wasn’t monumental, but it was a good complementary product. It did increase our ARCO. There was good overlap to people, adults who buy music for portable devices also like books. And I don’t know how well that’s doing today. Hopefully, as good or better but I think those are complementary products.
Andrew: Why doesn’t Audible have a bigger competitor? For a long time, I thought e-music would be the big competitor at Audible.
Interviewee: I might have lost you there.
Andrew: Am I still here? Can you hear me? Ah, did I lose him? Ooh, all right, I’m sorry. It looks like we lost the connection but we were about to end the interview anyways. So, I’ll end it here by saying, thank you to you for watching. David, thank you for doing the interview. And if you’re watching this,
and want to find out more about David, check out pakman.com. His last name, P-A-K-M-A-N dot com for his blog, for his Twitter updates, and for lots of different ways to connect with him. Thank you for watching, I’ll see you in the comments.
This program was sponsored by
Wufoo– The easy way to add elegant forms and surveys to your site. (I use them on my site’s contact page. When we got married Olivia and I used Wufoo on our wedding web site to collect RSVPs because their forms are beautiful.)
Shopify – Thousands of stores are built using Shopify because it’s easy to set up and manage. Tim Ferriss recently announced a contest that offers $100,000 prize for the highest grossing store. Go start your store now.
Grasshopper – Entrepreneurs (like me) love and use Grasshopper because it offers all the features of the big, expensive phone systems (like multiple extensions, music on hold and call forwarding) but it works with any phone and starts at only $9.95 a month.
[Mixergy supporter, Norm Levy, suggested this interview and made it happen. Thanks Norm!]