FAW #32: Ron Gruner of Alliant and Shareholder.com
The origins of Alliant and Shareholder.com
This is a double-dose for the last day of May to round out the final vignette of the 32-story Founder’s series. This is the last story in the book but by no means the least in terms of “wisdom density.” Ron Gruner founded two technology startups in his career after leaving his first job at Data General. Alliant Computer Systems began in 1982 and was focused on delivering high-end mainframes that could deliver more performance via parallel processing. The company thrived for a period of about three years around 1985 but was unable to adapt itself to shifts in the market and meet the development schedule necessary to keep its technology compelling enough to stay at the forefront. Gruner left Alliant in 1991 and a year later they filed for bankruptcy. Gruner’s next startup would not meet the same fate- he founded Shareholder.com on the lessons he had acquired in the course of running Alliant and ultimately sold to NASDAQ. These are the important lessons he took from both experiences.
Alliant’s rise and fall
Dave Gruner founded Alliant in 1982 with co-founders Craig Mundie and Rich McAndrew. They saw parallel processing as a disruptive technology that would allow them to leapfrog the current generation of Vax mainframes in terms of performance. They spent six months formulating a strategy for how to commercialize technology and then set about raising money. In their pitch they were able to draw technology-level and market-status-level analogies with Tandem Computer and this earned them receptivity within Kleiner Perkins. They eventually closed a first round of $4.7 from Kleiner and over the next three years raised another $26MM and developed their parallel processing computer. The market received the product well for about three years but in 1988 the wind completely left their sales.
Gruner attributes the stall to slipped release dates, commoditization of the technology and market shifts away from the mainframe to workstations. “We absolutely hit the wall… A couple things happened. We were significantly late on one of the next generations of our computers. You would think that high-performance computers designed out of the most advanced parallel processing technology, with a number of patents behind it, would be a highly differentiated product. In reality, it was just the opposite of that. High-performance computers are the ultimate commodity. The reason is that the customer comes in and says, ‘Here’s my benchmark; here’s my program. Run this on your computer and tell me how long it takes to run.’ So they wind up buying a computer based on performance divided by dollars, megaflops per dollar. It’s just like buying a tank of gas.”
We’ll likely see the same eventual commoditization of the virtualization technologies that are the enablers for our offering. For now there are a handful of vendors and products that have differentiating features but as performance and feature sets converge and more commercial and open source competitors enter to driving prices towards zero, people will care less about what virtualization technology they’re using. Decisions will be made on price efficiency and performance. Fortunately a JumpBox is agnostic of the underlying virtualization layer (currently JumpBox supports Xen, Parallels and VMware with support for MS Virtual Server and Virtual Iron coming shortly). The user experience for now is something that is an absolute differentiator - it’s the essence of our value today. This differentiator will someday evaporate as other appliance vendors figure out how to deliver a compelling user experience - such is the nature of disruption. But we will have been well under way “skating to a different area of the ice rink in anticipation of the puck” by that point.
Understanding the VC perspective of impatience in the Alliant scenario
Faced with a dry market for their offering the Alliant board was divided over which course of action was most appropriate. Gruner championed the slower, methodical transition to fixing the situation by transitioning over the course of a few years and altering their technology to meet the needs of a different segment. The VC’s on the board didn’t want to wait that long and were seeking an immediate “dice roll” to have it either work or fail immediately. Gruner learned that VC motivation is different than a founder’s perspective in that VC’s engage in ten deals at any given time and expect eight to fail, one to languish and one to be a home run. Their worst scenario is a deal that consumes years of their time and simply breaks even - they term this type of company “the living dead.” They would prefer to see an immediate failure than nurse an ailing company because it robs them of an opportunity to be scouting the next potential home run. Gruner left the company and one year later Alliant declared bankruptcy.
Lesson learned: Gruner part deux
Gruner evaluated his options for the next venture. He had specific criteria for what type of business he wanted to establish. It would need to:
a) have a recurring revenue stream
b) have no more than 2% of total involvement consumed by administrative overhead
c) be capable of being bootstraped from a small amount of capital
d) be solely owned by him so as not to abdicate control in another VC scenario.
In his time at Alliant he had observed a deficiency in how investor relations were conducted with individual investors. “There were times when the stock took a bad hit and we would get a couple of hundred phone calls. This was before email, so you did everything by phone…I remember making phone calls at 9 o’clock, 10 o’clock at night to some mom and pop in Topeka, Kansas… and I’d explain to them what was going on… So when I thought about what I was going to do next, I said, ‘This whole area of shareholder communications, it seems to me the individual shareholder is an under-served constituency.’ Institiutional investors got a lot of attention by every company, which makes sense because they’re major shareholders. I felt the middle tier and the small tier were being ignored.”
The idea for the specific innovation came from a programmer friend of his that worked for the Boston Phoenix publication. They had a voicemail interface for placing and retrieving personal classifieds - essentially a phone dating system. Gruner thought that executives could use a similar “dating” system to interact with shareholders. Gruner proposed replacing the quarterly reports for companies with a shareholder hotline that could be used to get updates. Gruner says, “Based on our analysis of your shareholder base and the demographics, we thin that will cost you about a quarter million dollars a year. So you’re spending $1.5MM now. You can take $1.25MM and drop that to the bottom line in savings. Spend a quarter million for our service, and the shareholders that are interested in getting the information can get it much faster and in a more personal form than they get it now.”
Gruner raised $276k in seed financing from friends and family. He found their proposition was an easy sell to the investor relations officer in corporations because they were typically under budgeted and over worked. Shareholder.com represented this full-service solution as well as way for the officer to defer liability for mistakes to a third-party expert that specialized in this stuff. They got a few lucky breaks, one of them being an indirect endorsement from the SEC for the notion of using a 1-800 number hotline to communicate with shareholders. Then later Sarbanes-Oxley hit and it became imperative for companies to ensure they met regulations on transparency with their shareholders. So they had essentially an endorsement that legitimized their service followed by government regulations that all but mandated it.
Their midnight run: squeezing lemonade from a lemon
Like most of the other startups, Shareholder.com had a “midnight run” that was a make or break crossroads moment for them. They had a major pharmaceutical client that printed the wrong phone hotline number on their annual report. They had printed over a million reports with the wrong number and were required by law to distribute the reports thirty days prior to the annual meeting. The 800 number listed on the report rang through to a pager number in Dallas, Texas. Long story short, though it wasn’t Shareholder.com’s error, the problem represented a potential black eye for them and they stepped up to go beyond their call of duty to remedy the situation. They hired a private investigator to track down the owner of the pager number and were able to convince him to switch his number in exchange for a year’s worth of paging service. By coming through for their client they created a massive amount of goodwill and made it clear that they offered more than a canned service for communicating with shareholders- they were concerned about protecting the well being of their clients.
Gruner says, “One of our take-aways from that was that you can almost always take a negative situation and turn it to your advantage if you work hard at it. We took something that was a very negative potential situation and made some real friends. Anytime we had a client situation that blew up - and those happen in the business, things go wrong - we would always say ‘How do we take this and turn this into a big opportunity, where the client comes back even more loyal than they were before?’” Their role evolved to be interpreters that explained the complicated SOX regulations to their clients.
Mistakes the second time around
The only semi-regret Gruner had in his second startup with Shareholder.com was that he overcompensated erring too much on the side of staying lean and rejecting investment given his negative experience with losing control at his prior company. “I think htat bootstrapping the company on a quarter of a million dollars made us a little myopic. We became so proud of that fact that we didn’t find the middle ground. I think that in ‘98, ‘99 or 2000, we could have taken a million, $2 million of capital at a very attractive valuation, and retained control and grown the company twice or three times as fast as we did. Perhaps that was a mistake, not doing that. I don’t know, because everything worked out fine. And when you only have so much money, it makes decisions much easier.”
NASDAQ acquired Shareholder.com in February of 2006 for an undisclosed sum and made it the central pillar of their corporate services.