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operational challenges for startups
blocking and tackling
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Mr. Britton: At first it was a matter of just finding a customer who would believe in us enough to go forward with it. That's pretty much what we started and limited our growth to. Luckily, we were able to convince our first customer—someone that I had worked with for quite awhile—to come on over and try us out. From there, we just started building outward to see who else we could find that would take the chance with us. It was mostly based on their relationship with me and the trust they had that I wasn't going to let them down.

          From there, it was a matter of looking at all the customers we had and asking: What do the majority of our customers have in common? What industry are they in? We grew from there, but, in the very beginning stages when I came up with the concept, it came more from working in public accounting and seeing the industry as a whole with all of the different options and choices out there. It came down to getting that first customer to trust us, building that relationship, and taking as much care of them as you can. Then they start becoming evangelists for you and helping sell your product.

Mr. Robertson: Let's move on to the third category, building a team in the early days without any or very little money. How do you attract the right talent and incent them? How do you decide which talent to pick from the start versus later on down the line? I think it's a nice transition because it's that team that's going to allow you to serve those customers. I would be curious as to where you started in terms of building your teams. I'm thinking particularly about Alba, where a group of you formed this company, and Duke, where you started out with five individuals initially. Why don't we start with Duke?

Mr. Chung: When we started the company there were five of us and we were all very technical. We were all in school, and I think that sort of gave us an advantage. We all knew each other and we had either worked together before on a project or were good friends. In the beginning, it was the old story of sitting in a coffee shop and throwing around ideas with somebody you know, whether it's a business partner you've worked with before or a friend or acquaintance. It started that way, and it was important for us to find the right people to make it happen. Of the five people who started the business, everybody could do something very well. I think that five was a very good number for us to start with. I've seen different business management teams that started with two or three or four. For us, the number five worked out well for several reasons. We were building a product and we had members who were very, very technical and could sit there all day and all night just coding and building out products. A week later, we would have a beautiful product that we could deliver to our customers. We had other people, myself and another partner, who would travel all over the East Coast, meet with investors, listen, and pitch our idea to different venture capital groups. We’d get feedback and their opinions and a free assessment. If you can get in front of an investor or a potential buyer of your product, it's a matter of taking advantage of that free advice. The five of us are still here today; in fact we share a very clear vision of where we want to go down the road.

          We also realize that starting a business without having a lot of money means that the only incentive you really have to keep everybody engaged is either distributing the equity so that everyone feels like they're very important in the business, or finding some other ways to keep them attracted and focused on the business model, like sharing the long-term vision with everybody to make sure that they're with you. It's critical in a startup that the people who join you in the beginning share that vision and are with you from day one until you can at least get to the next phase, then you constantly reevaluate your situation.

Mr. Robertson: Alba?

Ms. Alemán: This might seem a little harsh, but in our experience the people who start with you are not necessarily the people who are going to be with you for the long haul. The people you can afford on day one in your basement with the crickets and spiders, they need a job. They're not looking at your vision because you're very charismatic, they're with you and they believe in you. They just are coming in and they're running payroll; bye-bye at the end of the day.

          The people we have attracted today, $10 million later, are very different people. I'm hiring vice presidents from Fortune 500 companies left and right. They're knocking on our doors right now because of the aggressive growth that we have experienced. They've bought into the vision. It was so difficult for us to do this, but don't be afraid to let go of the fact that you want everybody that started there in that basement to be with you today. “We're getting there. It's going to get better,” we told them. We wanted them to believe.

          It's like the resources, the tables we could afford back then and the chairs, and the computers. How we agonized over every expense back then! We only had a certain amount of funds to spend and we could not afford the very best in overhead positions to run the infrastructure. In billable positions, we got the hired guns, the mercenaries, the very best because that was our first foot in the door at the customer's site. There was a difference in our business model and the types of people we would hire, but those hired guns are out for themselves. They're not interested in your vision. I had two or three of them that came on board as hired guns and have completely changed their tune. They're on board, they're my best, my very most loyal folks. They surprised even me.

          Don't be afraid when you realize that not everybody that starts with you will last, other than your partners. Your partnership has to be intact. As Duke said, you've got to have a vision and everyone has to have bought into that vision. That's critical. The core team that starts the company, whether it's one or two or five, has to be bought into that vision. Don't assume that everybody else is going to know and understand the vision for quite some time. It's not until things start to evolve and you start to gain success and momentum that light bulbs start to go off in other people's heads. Some people may never catch on. You'll be at a spot where you will outgrow people in your organization and you're going to have to make a very tough decision. Am I going to hold back the rest? Am I going to sacrifice the whole for one individual? Those are tough decisions. The tough part of owning a business is that you have to make tough calls that affect people's lives. Do you want to sacrifice 40 people for one individual who’s not performing or has no desire to?

Mr. Robertson: Thank you. Let's move on to the fourth category, attracting customers when you don't have any. Don, besides the obvious need for cash, when do you know that you're ready for prime time? When did you know that you were ready to start with that first customer? How did you know when you were ready to go beyond that customer, in terms of infrastructure, refining your offering, and so on?

Mr. Britton: For us, it came at the beginning as a belief in ourselves. First it was us, a core team, getting on the system, using it ourselves, figuring out the flaws, and working out the bugs. Then you get that first customer who will come on board with you. It takes awhile to convince them to use the system and to use it the way that it needs to be used so that you can work out the kinks, to assure them that the bugs they're working through will all be fine, and that it will all be hunky-dory afterwards. Once that was done, we knew to go out and start looking for more customers actively. Our first customer helped us go out and find more customers. She is our biggest evangelist. Those next two customers went out and found more customers for us. It was constantly making those customers happy that grew our business.

Mr. Robertson: Did you approach that first customer in the way you described, telling them that they were a bit of a beta customer and that there would be kinks to work out? Were there extra things you did for them to incent them to be that first customer?

Mr. Britton: She's here. Basically, I worked with her for a long period of time. She was starting her own business and needed the type of service that we offered, so she was a prime candidate. It was just a matter of talking to her and convincing her that I wouldn't let her down. Once she believed in that, she came on board.

Mr. Robertson: P.V., was it the same for you? My recollection is that when you were trying to make your case to investors, you were also out talking to potential customers—some of whom you knew, some of whom your investors suggested to test these waters. How did you decide when to approach customers and who to approach?

Mr. Boccasam: You can't convince customers that they have pain. It's simple; they either have pain or they don't have pain. If you're out there trying to convince them that they have pain, they're probably not a good prospect or suspect for you. What we did very early on, and actually the first dollar that we spent of VC money, was to fly in seven or eight Fortune 80 companies, one of them was Microsoft, and we spent about two days locked up in a room. We spent the money to make them feel good, that we were a real company. We spent a lot of time preparing for it, asking the right questions, and digging out the pain. At the end of the session, the goal was to come up with our list of features and benefits for all the products we were going to build for them. The end goal was to be able to articulate the pain as they saw it.

          This may sound a little cliché or basic, but the hardest part is trying to talk to a customer about their pain the way they see it. Trust me, it's not an easy thing. To me, that's a strategic inflection point for a company. If you can go to someone and say something, and the person replies, “Yes, I see that,” and then spends more time talking about how they could use your product for their pain than you spend talking about your product, then you've actually changed the game. It takes awhile to get there, but, when you do, you'll begin spending more productive time with customers rather than having a bunch of slides that say: “Is this your pain? Is this your pain? Is this your pain?” That is just brutal for the customer as well as for the sales guy. It just kills them. A lot of the motivation around finding these customers is really around targeting the pain.

          The second thing that I think is valuable is that all pain is not equal, just like all money is not green, right? The point is that you may have nine things that your product does and you may have fallen in love with all nine, but if Johnson & Johnson and Anheuser-Busch care only about number eleven—that yellow thing that you don't care much about—if that's important to them, don't say, “Yeah, yeah, we do that, too, but look at all these nine other features.” That's what most people end up doing, minimizing the kind of pain that they address.

          We spent a tremendous amount of time doing vertical market segmentation. Different customers have different levels of pain. We became able to talk about the pain specific to those vertical customers. Whether it's healthcare, the federal space, or financial services, each one of them has their own unique sort of pain that you need to articulate. There is a level of homework that you just have to do because what they'll nod to is different from what you understand the problem to be.

          To me, that is one of the clutch factors for any successful business. Can you articulate the pain? Are there enough customers out there with that pain? Now, quantify how big that pain is. Some people might say, as one person did, “Yes, I do have that pain, and, if I had some of that, I'd pay you $15,000 for it.” That was a revealing factor. It's how they valued that pain, but that wasn't the goal. You found a customer who had the pain, but you were looking for a $500,000 contract for it. Maybe his big pain is somewhere else and you have to have a dialogue about where you can find your sweet spot.

Mr. Robertson: There's an interesting balance between what you're saying and what Alba said earlier. From the customer perspective you have to understand who has pain, what it is, and the value they place on it. Yet, at the same time, you can't drift away from what you know well in terms of your ability to cure that pain.

Mr. Boccasam: Absolutely.

Mr. Robertson: Let me move to a specific question in this category. I'll just read it again. “I have designed and am beginning to develop a system that will compete with three big Internet players in the electronic messaging world. I have an extensive network of people from which I can draw talent to get up and running. What strategies can I employ to keep the big three at bay long enough to garner the amount of market share needed so that I won't get instantly squashed by them?”

          I would like to direct that towards Duke because your market of customer service alternatives can be a pretty crowded space. There are some pretty big players in it. How did you deal with that issue?

Mr. Chung: That's a good question and something we look at every day. There are a lot of vendors out there in the online customer service space. You probably know some of them, ranging from Seybold to smaller vendors who provide very specific products. When we entered the market, to be frank, I guess we didn't know which marketplace we were in. I like how P.V. worded it. We went to a customer and we realized they had pain. They were building a solution to solve it, and we went in and said, “We'll build this solution for you if you tell us the requirements to make it successful for your business.” We took that model and went after a lot of customers who had the same pain, and that worked very well for us.

          When we began to realize what industry we were in, we were beginning to develop our marketing strategies and to understand the marketplace, that's when we began to realize that we were in a fairly crowded space. We began to see competitors from different angles. That's when you have to look at your product and ask how it differs from all of the other vendors. There are several ways to do that. You could build specific things into your products that could make it stand out; you could price it cheaper—that's the easiest way to get your leverage; or you can segment it, either into vertical markets as P.V. mentioned, or into other structures, such as for enterprise, midsize, and small clients.

          You have to look at all the different perspectives and, given the capacity of your business today, ask what you can do in the next six to 12 months. Which market do you want to focus on? Can you be the leader in that one small quadrant or in one even smaller than that with all the vendors out there? A lot of companies do very well because they're a market leader in one specific niche. If you can identify that market early and have a vision to be a leader in it, you begin to mold your product and adapt it to the customers in that space.

          There's a bowling pin theory in which you build a product for one industry then you go out and find another industry that could use the same product. Then you build another product that works in both of the first two industries. You begin building your product cycle based on that model, and, eventually, you have a product line that works very well for multiple industries. It comes down to your marketing and how you approach each industry.

          A business should look frequently at who's out there doing what. Along the way, you'll see competitors who are shifting their focus. You should be constantly looking at where you may be able to get an advantage by doing something today to attack the market.

Mr. Robertson: Let me move on to our final category, the issue of capital. How far you can take your company on your own, and how do you make the decision of timing? I would like to split the conversation into two pieces—going after venture capital and not. Let's start with not. I'll ask Alba and Duke, since you did not go down that path, why did you consciously avoid it and what were the benefits to your business?

Ms. Alemán: I want to go back to a conversation we were having before the event started. My business partner was talking about venture capital and I felt at first that we were the anomaly on the panel, because we're a services company and because we're not funded externally by anyone. Then he mentioned that, well, we are VC funded, we're just internally funded. In essence, we take every penny of profit that we make and reinvest it in the people we're able to hire and retain and the benefits we offer and the things we can do for them. This year we're going to reinvest $1.5 million in the company through the people that we're going to hire. In essence, that's our venture capital right there.

          We are a cash business. It's a service for a fee so, from that perspective, we were not attractive to angels or venture capitalists. Our model was not attractive even to the banks because our money was coming to us. We didn't really need it, in their minds. For us it became a cash flow game. It became very strict cash flow management, not spending until money is received and all sorts of creative financing mechanisms to increase how quickly payments are coming in and slow down how quickly payments are going out. For 14 months the two of us did not take salaries; we lived off our savings. When you talk about bootstrapping, I don't know how many other bootstraps you can pull on. You're talking about draining and depleting your entire savings, including your retirement savings partially, on the vision, on the belief that this is doable and that it is going to return something in the end.

          We were not attractive for VCs, so we focused our energy on the cash flow model. How many people we could bring on, although we could not bring on too many too quickly because then we'd be in a situation where we needed the cash to pay people. It’s slowly growing in the beginning until there are enough reserves so you can start growing exponentially larger and larger. Then the banks are knocking on your door to give you money. That's how it started for us. 

Mr. Robertson: Duke, how about you? You started in that bootstrap model, then went the angel investor route instead of venture capital. Why did you make those choices and what have been the benefits?

Mr. Chung: We looked at a lot of venture capital, and there were times when we were presented with a term sheet to take on some financing. If you look back two years ago when a lot of people were blind-sided or confused by the market, a lot of people were seeing that others were taking on venture capital and built their business based on that philosophy. I agree with a lot of what Alba said, but I also think there's one difference in that Alba has a very successful services firm, whereas we have a products firm. Eventually, to build a product business up, you will need some sort of substantial capital.

          The reason I think we took angel funding is because we looked at it from a strategic standpoint. We realized that we didn't need a lot of money, but we needed people. More importantly, we needed people who could help us build the business. A lot of the venture capital arena is largely funded by a lot of angels as well.

          Ideally, when you build your business, you want to have set expectations and milestones. You want the right people to be on your board or your team to help you take it to the next level. Working with an angel, especially one that has done it before or who has experience building a startup and taking it to the next level is even more important than the money itself. I talked about our Chairman as an example. I told him, “If you can put any money in the business, that would be fine, too.” With him involved, the business is already closer to the next level.

          The other thing I agree with Alba about that is if you bootstrap a business and everybody's expectations are set, you're not paying yourselves any salaries, especially in a products business where you need to build a product to prove that it works. Then you go find customers. It's a very difficult business and you're going to be bootstrapping for a while. The most important things you learn are the fundamentals of building a business. Taking on a lot of venture capital may actually be harmful to your business because your expectations are set differently. Go back and look at the last two years and see all the venture-backed businesses that had expectations set way beyond their capacity or what they could achieve. Look at them now. Very few are able to sustain the same type of business that they were anticipating two years ago.

Mr. Robertson: Let's get some input on the flip side of this from the two people who ultimately thought that venture capital was the right answer for them. It's a little bit different in each case because P.V. went straight to the venture capital market for his funding, whereas Don took a more circuitous route to get there and decided to wait. Since you strike a balance, Don, I'll finish with you. P.V., why did you decide that the venture capital route was right for you right from the start?

Mr. Boccasam: My father once advised: Never give your brain and your money to the same person. Venture capital is two words, “venture” and “capital.” Most VCs focus more on the C than on the V. Nothing ventured, nothing gained, so you want to look for people who are willing to put out money for high risk/high reward options. Typically, you get 10X, 15X returns, if not more.

          The whole concept behind raising venture money is different, and you've got to look at it in a completely different way. If you look at it from a control aspect like we were talking about earlier, then I think it's not a good option. You've finished a fairly nasty negotiation across the table, now you want them to be on your side, right? You want the bad people to be on your side because they can be bad to other people. I think the important aspect about having VCs is that you've got to view them as business partners. It's true that some angels are limited partners and they invest in a lot of the large funds, but, typically, limited partners don't get involved in portfolio companies. They're too busy playing golf somewhere and are just minimizing the losses right now.

          The level of interaction between, say, the board of a company and the VCs is really around maximizing opportunity. We've got world-class investors in our company. If you wanted to talk to the CFO of Citibank, he's maybe two emails away from us, but the hard part is when you get to him. What do you say to this person when you've got 30 seconds? Well, in order to get that 30 seconds in front of the CFO, you’d better know what the heck you're doing. If you're in this figuring it out mode with VCs, maybe it's better if you go off in a back room, talk to a few customers, then go out and build a business. If the goal really is to build a company during an economic downturn, the whole value proposition to the VC is to say, “Look, this is the best time to build a company because I can find the best people. I don't have to go out and sell because I have nothing to sell. We can focus on the right sort of things because the DNA in the company is different and the times are different.”

          In the venture market right now, I don't know if you've seen the reports, but they're coming back. There is significant value in going the venture route if you believe that there is a significant upside opportunity for both sides of the fence. The reason why I preferred not to go to the angel route, and I know a lot of friends who have, much like Duke's company, is that, at a later stage when you do want to get VCs in, it gets a little messy. It depends on valuation. There are egos involved, people want to cash out a little bit because the big folks are coming in. It does get messy. If you want to keep it clean, there are equity issues that people worry about. At the end of the day, if you focus on making the pie bigger, I would rather have 3% of a $3 billion pie than 50% of a $10 million pie.

Mr. Robertson: Don, tell us why you chose to delay going with venture capital and why you ultimately decided it was the right answer.

[continued]

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