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.

Lycos gets its start

It’s extremely rare that a tech startup delivers a 3000x return for investors but Lycos did just that. Their journey began with a piece of search technology developed by professor Michael Mauldin at Carnegie Mellon University. He created an algorithm for effectively spidering and indexing the web and knew he had an important innovation. He worked with the tech transfer office of the university to commercialize the technology and through them connected with venture capital firm CMGI. They established a company and CMGI ended up purchasing 80% with CMU and Maudlin splitting the remaining 20%. CEO Bob Davis was brought in before there were any employees, customers or products- on day one it was just him and the search technology.

He spent the first month building out a team and formulating a clearer vision of what the company would be. They were entering into the search engine portal space already occupied by formidable competitors Infoseek, Excite and Yahoo. Lycos had what they felt was a key cornerstone of the search technology but they eventually ditched the pursuit of the technology and focused on being a media company. The deal they inked with CMU required that they maintain a Pittsburgh presence. Having the company headquartered in Boston and their engineering hub based in Pittsburgh created some early communication challenges in the company. “It’s only a short plane ride from Boston to Pittsburgh, but it was almost the equivalent of oceans between us, because you’re not able to walk down the corridor and say, ‘Hello. What can we do next?’ This added a substantial burden for the company.”

The Lycos brand

Davis says, “We worked very hard on our positioning and our branding of the company in terms of what we wanted it to be. We tried to be this safe, comfortable environment for folks that were just trying to figure out the Internet. We thought of ourselves as the Internet on training wheels… So we weren’t trying to be the souped-up Maserati that could go 120 miles an hour. And we weren’t trying to be a cramped up little Beetle. We liked to think of ourselves in that analogy as the family sedan, the Ford Taurus. Not the sexiest out there, but very purposeful in what we did.”

In thinking about the brand we’re creating for JumpBox, it’s very similar to the Lycos brand. We’re the reliable, quick way to get going with Open Source server apps that doesn’t require technical knowledge as a prerequisite. We have the ability for those power users that want to get under the hood with shell access to the VM and “tweak the carbs” but for the average user who just wants their application to work with as little hassle as possible, the default path is a near-zero configuration scenario. Another parallel with the Lycos story is that we developed the appliance platform technology that lets us deploy these applications as a single file that works across any OS running any of the major virtualization platforms. But that’s not ultimately our magic. As in the Lycos story, another company can and will create a similar technology- our defensibility will rest on the brand we develop. We saw the name JumpBox as being the way to refer to this type of software deployment, in the way that Xerox is often used interchangeably with photocopier. We’re certainly a technology company at this point but it’s conceivable that someday we’ll Open Source our own platform and shift to being a marketplace for others to buy and sell applications running as JumpBoxes.

The impact of their licensing deals

Arguably the strategy that was most effective for Lycos was its licensing deals. They were able to generate fast cash and expanded visibility for the brand by selling their technology to companies like AT&T, Prodigy and CompuServe and having “Powered by Lycos” buttons everywhere. Davis says, “[These partnerships] were incredibly important for us early on. We had a number of license agreements with companies that would pay us several hundred thousand to millions of dollars to use our technology. So we got a lot of cash from that and then we had a lot more visibility as well.”

The equivalent parallel in our JumpBox world would be the notion of licensing our virtual appliance platform to ISV’s for them to wrap their software offerings as JumpBoxes. We’ve discussed the possibility of attacking this from a consulting basis vs. productizing the appliance creation tool set itself and selling that to ISV’s. The consulting approach generates immediate cash and certainly helps our visibility if we license the technology to a high-profile ISV tons of customers and manage to keep our branding on the boot screen, but it also pulls us away from the main engineering effort at hand which is building out the library of apps to make it interesting. More likely is the prospect that we’ll create a provisioning tool for ISP’s that allows them to become resellers and sell JumpBox apps into their existing customer base. The prospect of hosting virtualized appliances should be attractive to any hosting provider that has grappled with supporting client requests in a shared hosting environment.

Growing pains

Lycos doubled and tripled in size each year providing unique challenges of scaling a company. Davis says, “I think how much we grew so fast surprised me, and I think the most satisfying thing for me was being able to scale the company through all of that growth. We were growing 200 percent to 300 percent a year, every year. People don’t realize that a rapidly growing company is crumbling within and feels pain every hour of every day because nothing works the way it was designed as little as a year before… things are breaking every day. The accounting system that I used in ‘95 was useless in ‘98… everything would crumble, and you needed to be one step ahead of that all the time. So amazing growth was a challenge, but it was an awful lot of fun.”

A strong exit

Lycos had the largest exit of any of the Founders stories. Following a failed merger with USA Networks in 1999, they persevered on with their business and met with a huge payout. Davis says, “We stayed with it and a year later, Terra came knocking at the door and offered us a very attractive price. We sold Lycos for $5.4 billion, which represented a return on venture capital investment of about 300,000 percent.” They still hold the record for fastest IPO in NASDAQ history (nine months from founding to offering!). Bob Davis now works as managing general partner at Highland Capital Partners VC firm.

Six Apart comes together

Mena and Ben Trott are the husband and wife team that co-founded Six Apart. They were both bloggers in 2001 and were recently laid off from work and dissatisfied with the blogging tools available at the time. They wrote a piece of software called Movable Type to “scratch their own itch” which they gave away on their site. They acted as consultants for awhile delivering customizations on Movable Type. The product gained steam and generated decent consulting revenue but they decided rather than be consultants they wanted to productize it and sell it to consumers. That started them down a long road of taking funding from Neoteny, writing an entirely new hosted version called “Type Pad,” acquiring Live Journal and then ultimately developing a blogging community platform called Vox that incorporated a social networking component.

Made possible only through their own inexperience

Like other founders, the Trott’s lack of experience actually propelled them through difficult times because they didn’t know it couldn’t be done. Mena says, “We always had an ambitious, ‘we want to win’ attitude, but we never had the stakes so high, because it never occurred to us that we could do it. I think that’s one of the good things, too: since it never occurred to us that we could do it, it didn’t occur to us that we couldn’t do it. We just had to put our minds on it. And that has been really key to what we’ve done. The lack of experience made us think, ‘Why can’t this just be done?’”

Fortunately they did have an experienced CEO Barak Berkowitz who helped coach them through some of the basics in setting the business strategy and doing the things that needed to be done like establishing the basic operational infrastructure and negotiating a lease. In Ann Winblad fashion, he allowed them make small mistakes and “find the edges” themselves. “If it wasn’t for Barak, I don’t know where we would be now. We knew what we knew, which was the product. But there were all these little things that you just have no clue about. It was incredibly overwhelming. But if you think about it too much, then you don’t do it. You almost have to not know what you’re getting into to actually do it.”

On why there aren’t more female founders

Of the thirty-two vignettes in the Founder’s series, only three interviews were with women. When asked why there aren’t more female founders, Mena replied, “I think one of the reasons happens to be that women aren’t always necessarily that motivated to prove themselves in the way that men are. It’s not saying that they don’t have ambition; it’s saying that there’s something in our makeup that makes us be confident more in what we are and what we’ve accomplished independently without having to say, ‘I’m a founder, I’m an entrepreneur.’”

I disagree that there’s a gender-specific personality trait responsible for the scarcity of women founders. I believe it’s much simpler than that: in college (at least when I attended) women tended to gravitate towards the social sciences and away from the engineering degrees. Nearly every founder in this book had exposure to some critical element of the engineering side that allowed him to make the quantum leap of innovation that became the essence of the business. I would argue that it’s a simple numbers game and the scarcity of women founders in tech startups is purely a function of the low relative number of women with backgrounds in engineering. It’s not that they “don’t feel the need to prove themselves” as Mena suggests, it’s that they lack the critical precondition of exposure to the engineering to have the current failing and the innovation opportunity that facilitates the business.

Six Apart continues to run as a private company with a stable of four compelling blogging products.

The birth of Firefox

Blake Ross and his friend Dave Hyatt started Firefox in 2002 out of frustration from their work on the Netscape browser. Ross had interned at Netscape when he was just fourteen. By the next summer when he returned, he found development on the Netscape browser had become a depressing exercise and they were essentially directed to sacrifice the user experience in order to monetize the browser and become a promotional vehicle to support the Netscape.com portal site. Ross and Hyatt started a side project they called “Phoenix” at the time to “rebirth a new browser from the ashes of Netscape.” They forked the Mozilla open source project and worked on the code privately with a small team. What’s interesting is that most people view Firefox as a response to the IE browser. In reality it came as a response to the ailing Netscape browser and wound up stealing market share from IE.

It succeeded because it didn’t have to

They say it’s always easiest to raise money when you don’t need it. Firefox began as a hobby side project and was never intended to become a business- they were merely trying to fix the browser experience. For the same reasons that money is easier to raise when not under a deadline, Firefox met success because it operated in a vacuum free from financial pressures. Ross says, “Companies usually worry about competition for financial reasons, but when we did Firefox, money was just always sort of there. There were donations, seed money from AOL; we eventually got this Google deal, but it wasn’t a source of fear for us, because we knew if it didn’t make money… It wasn’t even supposed to make money - it was a hobby, right, so we didn’t really care. I was in school. It didn’t have to succeed.” They sought to escape the politics and poor decision making that plagued the Netscape browser by keeping it a hobby instead of a business. And that allowed them to keep the experience pure which in turn attracted more users and more loyalty.

Open Source for non-gearheads

One of the more challenging aspects of the Firefox project was satisfying their early adopter group. They were doing an Open Source browser designed to be usable for a non-technical audience. Much of the early feedback came from people that were downloading the nightly builds and suggesting “alphageek power user” features and not seeing the project from the perspective of trying to keep it straightforward for grandma Matilda. Ross says, “‘We’re making a product for mom and dad. You still have a voice here, but some of the features that you think we should add may not be the ones that they want tot use. So you have to take our word for it that, even though 500 of you want something right now, you may actually be in the minority of a much larger group that we’re pursuing that’s going to be silent during this phase of development.’”

We’re in somewhat of a similar position with JumpBox now in that most of the people that download our applications already understand the benefits of Open Source and virtualization. The burden of educating the non-technical user on the merits of OSS and virutalization at this stage would be prohibitive so we’re solely trying to satisfy the technical users that are frustrated by the usability of the typical Open Source server application. We have to be cognizant, however, of the technical slant of this early feedback and evaluate the feature suggestions against the ultimate goal of making Open Source accessible to the masses. For all the enhancements and optimizations we make to the JumpBox platform, we’re still losing half our users after download because it’s not yet to the “big red easy button” level of usability that we’d like and requires that you extract files and follow the readme. As we gradually shift focus to reaching those non-technical people we’ll bring the usability up to that level.

Their marketing tactics

The Firefox guys employed unorthodox marketing tactics for doing grassroots promotion of their browser. They launched a site called SpreadFirefox.com that allowed them to create “street teams” at the local level of people who connected and engaged in various guerrilla promos. They also raised $250k in donations to buy a double-truck ad in the New York Times to get some mainstream attention for the browser. In the first week of launching the product they contacted 100 different bloggers that had written about it and found that 85% of them were willing to display a “Get Firefox” button on their site. Whether the loyalty of their fan base can be attributed to a general anti-MS sentiment or people just liked sporting their logo, they saw strong support from many community volunteers. Ross says, “I thought marketing was something that required a degree and formal experience. It turns out that marketing is just making the product good enough that people spread it on their own, and giving them ways to do that. It’s a lot easier and more natural than I thought it would be. Now I can’t stand meeting with professional marketers who try to ‘craft’ the ‘message’ and all that junk.”

What’s after Firefox?

The Mozilla Foundation is the non-profit entity that maintains and distributes Firefox. The Mozilla Corporation is a for-profit commercial entity that is a wholly-owned subsidiary of the Mozilla Foundation and handles development and distribution of the Thunderbird email client. The corporation handles the revenue generating activities related to the Mozilla line and reinvests the profits into the foundation. Confused yet? The two companies cooperate and yet are run independent of one another.

Ross is now working with his partner Joe Hewitt on his next project, a startup called “Parakey” that is currently running in stealth. They haven’t disclosed much about Parakey yet. “We don’t know of anyone doing specifically what we are doing, but you can just feel in the air that everyone’s moving toward this kind of model.” They’re keeping things small with just the two of them for now: “We’re nervous about finding someone else, so it’s hard… There’s a question of ‘Is it better for us to spend all of our time iterating very quickly, or potentially ruin that dynamic by bringing on someone that we don’t know well?’ In short, I’m nervous about everything. If you’re doing a startup and you’re relaxed, you should be very worried.” True dat Blake. We share your healthy nervousness here at JumpBox and look forward to seeing the next world-altering technology you guys produce with Parakey.

The genesis of the idea

Tickle was a site that allowed the user to learn more about him/herself by taking various personality assessments online. Founder James Currier got the idea for Tickle after completing a Meyers-Briggs corporate personality test in his MBA class at Harvard. He noticed that the test generated more conversation than any movie or book ever had amongst the MBA students. He was looking at the web as a delivery medium and thought that he could administer these assessments online. Banking on the fact that “we are our own favorite subject” and people would tell their friends when they learned something interesting about themselves, he set out to build the site. He figured the data he collected would likely be very accurate and everyone would naturally answer the test honestly because if they’re taking the time to complete it, they want to find out truthful results about themselves.

Puppies and babies

Currier had built out a web site with a handful of useful assessments but was seeing no traffic. He says, “I remembered that advertising agencies say if you want people to remember an ad, include babies and puppies. So I thought, ‘We should make a fun test. Let’s do a test for what kind of dog are you.’ So they came up with a 15-question test that wasn’t scientific at all. We put it online and 8 days later we had a million people trying to enter our site. Our server was going down every 10 minutes.” The fun assessment with no scientific basis got them noticed and on their way. Once they had traffic courting VC’s for funding became significantly easier.

He ended up meeting with a total of forty-three VC’s before raising his money. “You have to get to these levels to attract more people, and then you hit these spark points, and in my process the spark point was getting the term sheets from the VC. People suddenly want to work with you, loan you money; PR firms want to spend your money, investment bankers want to meet you.” Currier goes on to say, “To move to step two, people have to believe that you’re already at step two so there’s no risk for them. Because they don’t want to take on your risk- you have to take it all on. And then you have to take on the risk of fibbing.”

Keeping the startup vibe

Tickle was acquired by Monster.com in 2004 for $100MM. Just like Amazon did with Alexa, Monster recognized that assimilating the Tickle employees would kill the company’s magic and so they allowed Tickle to run independently. Currier says, “If Yahoo had acquired us, they would have made us move to Mountain View , and would have made us a widget on a feature on a division of a department, and everyone would have left, and the whole thing would have died. And Wall Street would have applauded roundly.” They managed to preserve the startup feel and keep doing their thing. Tickle is alive and well today providing matchmaking data to jobseekers and employers.

Zero to sixty

James Hong and his buddy Jim Young threw together Hot or Not in 2000 as a joke to see what would happen. Their site went viral in a day and traffic shot through the roof crippling their server. From then on it was a furious game of hurry-up offense to scale the site and keep it one step ahead from going down due to the massive traffic growth. James had just graduated business school and his buddy Jim was burned out from working on his PhD - the two took a go at making their HotOrNot.com into a business. James says, “We weren’t trying to figure out what kind of boat we needed to build, we were trying to keep from drowning.”

Given the rates they were seeing at the beginning, James calculated that the site would cost them $150k/yr in bandwidth. They were serving the pictures from their own server and load times were already pushing 30sec/pg. James had an epiphany that first night of launching the site that they could use Yahoo Geocities to serve the images and offload that bandwidth cost to them. They did a mad scramble that night and by 3am had done the necessary programming to push all the image hosting over to Yahoo. That fixed the image hosting issue but they were serving the site itself from their employer’s server (Xmethods). They had a Salon.com interview article coming out the next morning and knew that it would monopolize the Xmethod server and they would take flak for it. They grabbed a 400Mhz Celeron box, drove to Berkeley and plugged it into a corner in Jim’s office concealing it under a pile of books. By 5am they had the site being served from this machine and just in time to withstand the traffic from the Salon article.

Those two desperation moves helped them weather that storm but the site was prohibitively slow given the load. They researched their options for running it on a managed server and were able to talk Rackspace into a deal three days later where they would host it for free and use HotOrNot as a poster child to prove their ability to scale and handle load. They were evaluating the options for monetizing the traffic and sent a note to the founder of DoubleClick to see about running ads. As luck would have it, the first image that the DoubleClick guy saw was a naked woman. This raised the next big issue they would confront which was porn and spammers. They were forced out of necessity to develop a moderation system.

Once they got the site cleaned up they were looking at ad rates and doing the math and seeing that it was looking grim. They needed to be able to charge for something. The system they developed to combat the spammers was the “Meet me” system and was a double-match verification way of linking two people. They decided to charge $6/mo for using the “Meet Me” and found that people would pay for that as a dating service. James ran into a guy later that worked at Ofoto and related the story of how they were using Geocities to host the images. They were able to do an affiliate deal with Ofoto and convert a situation that was simply preventing them from losing money on bandwidth into a revenue generating opportunity. James says, “Again, all of this wasn’t planned or brilliant, we were just tying to survive. At this point we thought, ‘OK this deal buys us more time.”

Complementary roles

The division of labor between the two founders was interesting. It was essentially James trying to break it by increasing their traffic, and Jim trying to make it by scaling things to handle the load. “We were working like madmen, only getting 3 or 4 hour of sleep a night for a long time. It became a race between Jim and me; could I bring in people faster than he could keep up with? It was a good challenge for both of us. My job was to make a bottleneck and his job was to clear the bottleneck, technically.”

Advice to entrepreneurs: live lean and jump in front of a problem

James says, “The biggest roadblock to the entrepreneur are liabilities in your life. It’s not whether or not you can be a good entrepreneur, it’s whether you have to make a mortgage payment or support other people. Experience will come when you face certain problems and live through them. And the best way to do that is to put yourself squarely in the path of those problems.”

I would agree with both these pieces of advice. An important precondition to us being able to take the leap with starting JumpBox was the ability of both Kimbro and I to get our personal burn rates down to sub-$2k/mo. When you’re funding a company yourself in the beginning, it’s all coming from one wallet anyways so whether you reduce personal burn or reduce company burn, it has the same effect on your money pool. And certainly “putting yourself squarely in the path of those problems” as James recommends forces you adapt and find a way to make it work. Had Cortez not burned his ships upon his discovery of the new world, his men would have mutinied and retreated given the conditions. We burned our ships early on and set an irreversible course by dropping all client consulting work and committing to office space and a full-time hire for JumpBox.

James says, “And nothing ever goes according to plan. You can’t dwell on the fact that your plan didn’t work. In our case, we didn’t even have a plan, but it would have been worthless to have one anyway, since we just kept moving as fast as we could. You have to hustle; you can’t just have a plan and cakewalk it. You just have to know what direction you’re going in and run around like a rat in a maze trying to get out.”

Hot or Not continues to be privately-held and recently they ditched their entire revenue model to make the site free and attempt to grow the user base. So far they’ve already seen huge growth due to that move.

Origin of the idea

Trip Advisor spawned out of co-founder Stephen Kaufer’s frustration in trying to research a potential vacation spot that he and his wife were entertaining in ‘98. In spite of the proliferation of travel web sites where you could book a hotel, none existed that gave you a window into unbiased third-party opinions on the quality of the accommodations. Visits with multiple travel agents produced suggestions that later proved to be terrible only after hours of wading through scattered chat rooms and message boards. Kaufer realized this was a major deficiency (and therefore opportunity) but he was employed at the time. He back-burnered the idea for a year and came to a point where he was ready to leave his job. He connected with co-founder Langley Steinert and together they assembled the funding and team to tackle the opportunity. They opened their office in February of 2000.

Their goal was to create the world’s best travel-related search engine. They explored the idea of doing an automated crawler of sites known to focus on travel but it still produced too much noise v. signal. They ultimately decided to hire people that would read every travel article that was publicly available and write a short synopsis and tag it with relevant keywords. Naysayers told them “you guys are crazy- that’s an impossibly large task” and it did take them a few years to index all the articles but once they were caught up, they found it was relatively easy to keep current with all the travel publications and the net result was that they had a small yet highly relevant database of travel information. Kaufer says, “Your experience on TripAdvisor - again, this was initially, when we launched the site - was very fulfilling, because the information we found was always spot-on. We didn’t always have something, but what we had was always a match.”

They launched the site in October 2000 focusing exclusively on the United States and gradually rolled out the rest of the world by geographic region over the next two years. Their service was wildly popular with visitors and they were getting expansion questions requesting that they cover more locations but the reality was their business model was flawed. They had a licensing deal with Lycos and were getting a share of the revenue generated through advertising on their travel portal but it was peanuts. “The joke was the quarterly revenue check wouldn’t buy the weekly free lunch that we offered to our employees,” says Kaufer. They were stagnating through 2001 feeling the effects of the dotcom bubble and then when 9/11 hit, the travel industry collapsed and they doubly paralyzed at the intersection of the dotcom implosion and the non-existent market for travel.

The model that saved them

They slimmed down from 11 to 8 employees, took pay cuts and managed to raise a small amount of funding in a third round in spite of paltry revenues. Their own TripAdvisor.com site was starting to get a small amount of traffic directly and they experimented with running banner ads but only generated a few clicks. The thought occurred to them that what they had were highly-qualified visitors reading about a certain hotel in a certain city ready to book a stay. If they could just deep link to a reservation page on a site like Expedia and take a cut of the booking, it would be new-found money for Expedia and they would only pay for the leads that converted. They did a month’s free trial and sure enough it worked. Expedia re-upped and Trip Advisor traffic was growing so they were able to send more leads. Kaufer says, “We went from no revenue to break-even in the course of about 4 months. That part was a testament to finding a model that worked. To break even, I had to do $75,000 in revenue for the month, something like that.”

The effect they had on the travel industry

As Trip Advisor became more popular it came under fire from hotel owners that discovered poor reviews on their page. A couple of times hotels had threatened to sue if the bad review was not removed from the site but Trip Advisor cited the same precedent AT&T used in their defense for not being sued for hate speech that occurred over the phone lines they owned. By sticking to their guns and hosting both the good and horrible reviews, they had a material effect on business for the poorly-rated hotels and forced the owners to shape up and deliver better service to stay in business. Kaufer says, “The hotel owner that wants to run this crappy place, preying off of the brand that they’re under, and maybe their location as being near to something, that person has to kind of shape up, maybe take something out of their profits and put it back into providing a good service for the customers, because word is spreading.”

On Hiring

Kaufer esentially echoes Joe Kraus’ advice on hiring: “”Getting the right people - especially in that first dozen - is so much more important than getting the req filled. Unfortunately that slows down the hiring process a lot, which slows your growth a lot, which is how I circle back to say, ‘In the next company, I’d hope to have a recruiter on board within the first half a dozen people to help get the right next 12 people… [hiring the best] actually makes recruiting a little easier, because you come in, you meet the people, ‘Man, you’ve got a bunch of sharp people here.’”

Trip Advisor was acquired by InterActiveCorp in 2004 for $200MM and runs as a profitable division of that company today.

Fog Creek’s precipitious beginnings

Inspired by ArsDigita, Joel Spolsky founded Fog Creek Software with a friend in 2000 seeking to create a company that shared the same values of ArsDigita in being programmer-centric and a place where they themselves would want to work. They had zero idea of what they were going to provide; they started on a hypothesis that, “if those less-qualified jokesters can get $100MM valuations, we can surely be at least as successful.” Spolsky had spent the summer writing articles on his personal site and had established a popular software development blog called Joel on Software that commanded a significant readership. This generated the companies first consulting gigs. Unfortunately their timing was inopportune- they founded the company in September of 2000 on the cusp of the dotcom implosion. By November of 2000 their client consulting business had evaporated.

Spolsky explains why the industry-wide collapse of the consulting market was so immediate: “The consulting market is the derivative of every other market. When a company is growing, they will hire a few consultants to help them grow a little bit more rapidly. When they’re shrinking, they’ll instantly fire all consultants. If the market is even going down by 0.002 percent instead of growing - which it did, because there was a sort of dot-com nuclear winter - then the first people to go will be the consultants. So the consulting business completely collapsed, and every company in that space more or less collapsed.” With zero clients to pay bills Fog Creek shifted its focus to productizing an internal bug tracking app they had created. They polished it up and posted it and sure enough people began buying it; Fog Bugz became their first product.

They shipped Fog Bugz and saw a small yet steadily-growing sales each month. Their original plan to was to build a consulting business like ArsDigita had and from it would emerge a software product company. What they found instead was that the consulting biz disappeared and they had to become strictly a product company. Fortunately they had not amassed a huge stable of consultants on salary like the other companies (ArsDigita, Scient, Razorfish, iXL, MarchFirst) so while the others were hemorrhaging money while they were realizing the consulting market was gone permanently, Fog Creek was sustainable under sales of their bug tracking product.

Like ArsDigita, their strategy was keenly focused on creating the optimal work environment for programmers so they could attract the best talent. They observed the cube farms and poor treatment of programmers in traditional consulting agencies and swore they would do things differently. Spolsky says, “Things that to us are basic: Aeron chairs; private offices with doors that close for every programmer; letting programmers report to other programmers so that your boss will understand you. We had 4 weeks of vacation and another week of holidays, which you can move I think. For the consulting business, we had a rule that you fly first class and that you never be away from home on a weekend.” These amenities helped them attract some bright minds early on and since smart people always want to work with other smart people, they established a virtuous cycle that delivered quality talent to fuel their growth.

Maturing through the sales gimmicks

The Fog Creek co-founders both had programming backgrounds and feared they didn’t have the business experience to actually sell their product. The sought to structure a reseller arrangement like Lotus had done with Iris where they would do a 50/50 revenue share with the company that distributed their software. This idea fell flat with no takers. They tried offering a finder’s fee on the site for people that brought in sales and that too flopped. They dabbled with creating an affiliate program to pay a percentage commission on sales generated through in-bound links from other sites and, after a negligible amount of sales generated from that program, they canceled it out of annoyance from sending $19 commission checks. They tried timed coupon giveaways that expired within 72hrs and this too produced only marginal results. Spolsky says, “The one thing we learned over five years is that nothing works better than just improving your product. Every minute, every developer hour we spent on any one of these crazy things - although they had some marginal return on the work that we put into them - was nothing compared to just making a better version of the product and releasing it. If we had taken all the effort we put into these crazy schemes and put it into moving our software development schedule ahead by the equivalent amount, it would have paid off much more.”

This is valuable advice for us at JumpBox as we face a similar situation in terms of our team composition: we all have programming backgrounds with minimal actual business experience in doing deals. This realization was one of the driving factors in why we shifted from our original vision of tackling the enterprise tool set for ISV’s to be able to produce appliances themselves. Given the novelty of the technology and the massive pain it solves, at a $50 average price point, the JumpBox apps in their current form should sell themselves and require no direct sales force. They should also require minimal marketing budget relative to an enterprise offering in that they are noteworthy and remarkable enough to the folks with the current pains that they will likely talk about them as this guy did this morning. Rather than direct any energy at affiliate programs or other incentive gimmicks, we’re staying focused on rapid releases containing user-requested improvements and devoting our energy into improving the product itself and keeping a strong connection via our blog, support forums and usage surveys.

Where I disagree with Joel

Joel has a huge, loyal readership on his “Joel on Software” blog. I was fortunate to see him speak in Bethesda, MD at a CFUNITED conference in 2005. I respectfully disagree with a handful of core things he advocates, however.

All that being said, Joel is a smart guy and he’s clearly done a lot of things right. Those are just the four philosophical principles that I would argue they have completely backwards. Fog Creek continues as a privately-held profitable company selling their popular Fog Bugz and Co-Pilot software today.

Life and death of a company based on Open Source

This was probably the longest interview in the book and interesting because ArsDigita was the first company in the Founders series that established a successful business around distributing a free, Open Source product. At JumpBox, we like Open Source - every application we distribute is Open Source and we’re debating Open Sourcing the JumpBox technology itself. So Phillip Greenspun’s story hits home for us. He founded the company in 1997, grew it to revenues in excess of $20MM in five years and then had an unfortunate snafu when they chose to take $38MM in venture capital and were ousted from the board. They did an end-run around the VC’s and recaptured control of their company but the damage had been done and they eventually chose to sell their stake. The company folded shortly thereafter in 2002. This story is an interesting one because most of the others it ultimately failed. We can typically learn more from mistakes than successes however, so what we can we learn from Phillip’s roller coaster experience?

How they got started

ArsDigita emerged from a photo blog project that Greenspun started to document his travels on a road trip to Alaska. He started sending email updates and eventually published his updates as web pages with photos from his trip. He started getting decent readership and most of the questions centered around photography, so he answered them and published his answers but this correspondence generated twice as many new questions. He eventually setup a discussion forum and found that other readers would chime in and answer questions for him. A digital photography community site was born.

He had written custom software to run his community site and decided to post the code powered the site as an open source project. He began receiving calls from big companies that wanted to use the software but required customizations. Greenspun was still at MIT working towards his PhD but after receiving a string of calls with big companies offering him $100k contracts for two weeks worth of work, he decided that his paltry salary as a grad student and the rule about “no dogs at work” was enough and he put school on hold to pursue the consulting opportunity.

Their secret sauce

They started as five programmers working out of a rental house and each was essentially doing his own project working independently but sharing the improvements to the codebase. It was a loose federation of consultants and what differentiated them was their emphasis on the notion that a programmer was a professional and could carve out a name and reputation for himself. They pushed profit/loss responsibility to the individual programmers for ensuring that their project was completed to the customer’s satisfaction and then they paid massive bonuses to the ones that produced happy customers. There were no bloated teams with middle management and dark recesses of an organization in which people could hide if a project slipped. All projects had tiny teams of no more than three people per job which lead to clear accountability and transparency. They also had a strong mentorship and apprentice program - they believed in developing a programmer as an agent would develop an athlete.

Greenspun was also very much aware of the advantage of being a “craftsman vs. a factory worker” and the work alienation and quality degradation that occurs when the programmer interaction with the end customer is removed. In speaking of traditional programming environments, Greenspun says, “The programmers were in a corner doing what they were told. That’s one reason they were so easy to outsource. If a programmer really never talks to the customer, never thinks, just solves little puzzles, well, that’s a perfect candidate for something to offshore. So I said, ‘I don’t want my students to end up like this. I want them to be able to sit at the table with decision-makers and be real engineers… to be an equal partner in the design, not just a coder.”

We have a similar philosophy at JumpBox in that everyone answers support requests. No engineers reside in ivory towers- everybody touches the customers and gets the praise or criticism first hand so the experience is direct and tangible. There’s no game of telephone with sales people and customer support representatives to mangle the message from the customer and relay it to a programmer.

Their guerrilla marketing tactics

ArsDigita never ran ads in major publications nor did they engage in traditional PR (while Greenspun ran it). They promoted almost exclusively on an educational platform of tutorials on their web site, books in bookstores and seminars. Greenspun says, “Almost all of our marketing and sales was educational. We just thought, ‘We’ll teach people stuff, and some tiny fraction of those people will become our customers.’ It seemed to work just as well as running ads, which were a hard sell and kind of empty and a waste of people’s time. In this case, nobody could ever say that we wasted their time. I think the same percentage of people that read an ad in ComputerWorld magazine and bought something would read one of our tutorials and buy something from us.”

We’re about to engage in a similar tactic with JumpBox. The strategy will become apparent when we release the individual Open Source application tutorials soon but it’s the same notion of teaching people something useful but piggy-backing our JumpBox product on the lesson to show how it becomes even easier. Our thinking is the same that the tutorials themselves are valuable and will be transmissible for their standalone utility but they will also become an vehicle that carries awareness of our product to new potential customers. Most importantly, this tactic helps us to reach the “people that didn’t know what they didn’t know” before finding out about JumpBox. Making that leap out of the domain of people who already understand the benefits of virtual appliances is critical and is the hardest chasm to cross. But the people you reach when you do so are the most excited by what you have to offer.

They were their own biggest customer

The entire time they were customizing the ArsDigita community software for their clients, they were incorporating the changes into their own instance that was running Photo.net. So for instance if a change they had made had unforeseen performance implications that only surfaced under heavy load from users, they would know before the client’s site went down because it would manifest on Photo.net. Greenspun says, “By contrast, companies like Microsoft were still developing software for the Web as if the Web didn’t exist.”

The “eat your own dog food” approach is a recurring recommendation in startup stories. We intend to cut our public site over to be run on a Wordpress JumpBox as soon as we bring our stuff online in the new data center (right now it runs on a traditional Wordpress installation). We envision offering an entire “JumpBox Office Suite” of applications at some point and of course we’ll string together the ones we use ourselves and be our own first client. For now we’re laser focused on the march towards sales. The RC3 release we did this week brings us into the home stretch and the next thing we produce will be a sellable product.

The mistakes that led to the decline

ArsDigita was a private, profitable with $20MM in yearly revenues and $3MM in profits. They were making so much they had to look for ways to spend the cash to lower their tax basis so they would do things like pre-pay a year’s worth of rent. Unfortunately employees would read news stories of other programmers that had started some random dotcom and made millions before the bubble burst. Greenspun felt the pressure to IPO the company and when he researched the process he found that the underwriters wouldn’t even talk with him because their incentive is tied directly to the fees they collect on doing IPO’s and the time required to conduct due diligence on a company that had NOT taken venture capital made it comparatively unattractive when they could just go do deals with VC-funded companies and skip the due dilligence. Greenspun was essentially pressured into taking VC in order to IPO the company to satisfy the people that were reading all the rags-to-riches stories of entrepreneurs making it big. Greenspun was a CTO at heart who had found himself in the CEO role so in one sense he welcomed the idea of offloading this responsibility to someone who was (theoretically) a natural CEO.

The two VC firms (Greylock and General Atlantic) installed rookie members on their board, guys with MBA’s who had never actually run a company. Greenspun says, “The guys on my Board had been employees all of their lives. You can’t turn an employee into a businessman. The employee only cares about making his boss happy. The customer might be unhappy and the shareholders are taking a beating, but if the boss is happy, the employee gets a raise. By contrast, the businessman cares about getting a customer, taking his money, not spending too much serving that customer, and then selling something more to the same customer. These are totally different psychologies.”

There’s about fifteen pages of the interview dedicated to telling the story of the debacle that occurred with the VC’s, how they ousted Greenspun from the company and how Greenspun eventually snatched back control via a loophole in the agreement. The Founders book is worth reading for this story alone. Rather than recount the long, bloody tale of what went down, let’s focus on the essence of what went wrong: the puppet CEO extricated the programmers from the front lines and made the “factory floor” error of distancing the craftspeople from their end customer. Beyond all the errors of hubris, management and accounting mistakes, the core failing was in restructuring the company culture on the axis of how programmers interacted with clients and had accountability for the profit & loss of their individual projects.

The biggest lesson

“The one thing [I would have done differently in retrospect] would probably have been slightly slower growth, I guess. Not to worry so much about the competition, concentrate on getting really good people who shared the company’s vision, who could be mentored to the point where they could then recruit somebody else. Basically, just limiting growth.”

Greenspun sold his remaining shares of the company in July of 2001. ArsDigita closed its doors in January of 2002. Greenspun got his pilot’s license and now focuses on his passions of photography and being a helicopter instructor.

The secret sauce

37 signals arguably wields the most influence over web developers and designers of any other company. And they’re only five people. They began as a small web development shop in 1999 focused on simple usability and clarity of messaging. I was first introduced to them in 2002 by a colleague and immediately “got it” when I read their original manifesto for how they approached design & development. Their blog Signal vs. Noise is one of the most commented blogs on the web. Their BaseCamp, Campfire, Highrise, Writeboard, BackPack and Tada List products are wildly popular. Their lead programmer, David Heinemeier Hansson innovated using an obscure language at the time and then abstracted what he had done and donated it to the community igniting a programmer revolution with his release of the Ruby on Rails framework. And their book Getting Real which is now freely available online proved that an eBook summarizing their philosophy would sell in spite of the ease of acquiring a pirated copy. These guys have amassed an enormous reservoire of loyalty from fans and customers. So how have they done it all?

The French writer Antoine de Saint-Exupery said “Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.” This thinking is the core of the 37signals philosophy. While Microsoft is busy trying to cram another feature and button into their already-cluttered interface, 37signals is working to eliminate features figuring out how to strip the application down to the barest possible form that makes it most useful and straight forward. From an excerpt of their Getting Real Book: “The best designers and the best programmers aren’t the ones with the best skills, or the nimblest fingers, or the ones who can rock and roll with Photoshop or their environment of choice, they are the ones that can determine what just doesn’t matter. That’s where the real gains are made.”

Another internal tool turned product

37s followed the path of Blogger, Hotmail and Bloglines in that BaseCamp emerged as a product after having evolved as an internal tool for solving their own problem of project management. They carved out one third of their time from client work and devoted it to refining and abstracting the application they used themselves in-house to collaborate on projects and then sold it as a subscription-based service to other developers. “It was just a flow of the application coming together and the feedback we started to get from people we respected saying, ‘I want this too!’ We thought, ‘This is something that it would be selfish to keep to ourselves.”

The value of embracing constraints

Hansson says, “We only had a quarter of a programmer dedicated to the development and no funds really for doing this… The whole constrained development model really focused our view on what we needed, and it forced us to make tough decisions about making less software all the time… It wasn’t necessarily that we were great programmers and designers, but because we embraced the constraints that forced that upon us.” This sentiment resonates through many of the stories: the scarcity of resources focuses a startup to run lean and make their offering potent with only the necessary features. Conversely, when massive teams and dollars are thrown at a problem, it produces a bloated solution that is burdened by feature creep and the confused identity of trying to be everything to everyone.

The birth of Ruby on Rails

The Rails framework was an abstraction layer Hansson created ontop of the Ruby programming language to make his own life easier. Like Basecamp, it evolved under extreme resource-constraints and therefore represented pure productivity. “I built Rails on top of Ruby to allow me to build Basecamp and drive this project in the way that we wanted to. Because we didn’t want to bring on more programmers. We wanted to keep those constraints that we had and so we just had to make tools that allowed us to do that. And I think that’s also a big explanation for why Rails is having the success that it is: it was born in an environment that was so focused on productivity and was so focused on being able to deliver within constraints. I’m building Rails while I’m building Basecamp- rather, I’m building Basecamp, and every step fo the way, I’m extracting Rails.”

We have a special place in our hearts for Hansson - our entire JumpBox platform is based on the Rails framework and has allowed our tiny team of five people to develop something that would have otherwise required a massive team of programmers. The Rails mindset is at the core representative of the JumpBox philosophy of a minimalistic, “purest productivity” approach to software.

On updating frequently

“We always give a major update within 30 days after we launch a new product. Because that’s really something that reinforces people’s feelings about the project. If they buy in on day one and then they see a major new update after 2 weeks, they’re really pleased. So for us, one of the secrets about how we market the product is to make sure that launch is not the end.”

On the tug-of-war between acquiescing to the client and sticking to your guns

“It’s good to be market-driven in the sense that you should know what’s going on, but you can’t let your customers drive your product development. You need to be able to innovate on behalf of your customers, but they often don’t know what they want.” We get pulled in various directions by requests in our support forums on JumpBox but we always view the suggestions against the backdrop of our vision for bringing Open Source apps within reach of the non-technical user. I recently wrote about this notion of “how do customers express their needs when they don’t even know themselves what they want?” Our Stone Soup Seminars and ability to deliver Innovation Games ® help us to get at this very problem.

Alone time

The concept of “alone time” was something they devoted an entire chapter to in their Getting Real book. It surfaced again in Hansson’s interview. He began working for 37s while he was still living in Copenhagen, Denmark so he had a 7-hr offset in time difference which meant there was only a small window during business hours with which he could communicate with the rest of the team. This actually proved to be a blessing in disguise as it imposed yet another constraint (communication time) that forced them to become hyper-productive with the time they had. They found that by having staggered development schedules and limiting communication to brief windows (like the Viaweb guys) they were able to get much more done.

37s continues to run as a private, profitable company though they took a minority-share private equity investment last year from Jeff Bezos, CEO of Amazon. Though it’s not entirely apparent why they took this investment, they no doubt have a plan and we can expect to see more great things to come from this tiny powerhouse startup.