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netpreneur’s very last coffee & doughnets
a great time to start a business
page two of three | previous page

Mr. Steele: I would add that it's one thing going into a space that you don't know a lot about, but I think you were at least a customer of the problem. If you go into a store and realize that you have had a bad experience or if you sit in traffic and realize that it stinks, those are a pretty close experiences with the problem.

            When the three of us started the business and none of us had any transportation background, the first thing we did was to get a bunch of advisors who knew a lot about the transportation industry and who could tell us whether a bunch of other people had tried this before. That was an important part for us. Literally, the first thing we did was to go out and build an advisory board of people who had spent 30 years in transportation and 30 years in highway planning at different levels. That's critical. It's great to think that you've got the bravado and the new ideas to approach it, but, if you don't study history, you're going to repeat it. You have to understand what the other people did before you pour a lot into it.

Mr. Hudda: That's very true. We brought in an advisor, a gentleman some of you might be familiar with. His name is Paco Underhill, the author of a book called Why We Buy. He's been studying the science of shopping for 25 years. The book is published in 17 different languages and is on the business best seller lists in five countries. If there's anyone in this country who understands shopping behavior, it's Paco. We recruited him to be on a board of advisors because he's been helping businesses solve this problem, mostly through manual techniques, for many years now. That's what helped us develop our business plan and our strategy in terms the specific issues we want to address in the early years.

            Of course, since we started, we branched out a little bit. Not too much—we're still very focused on brick-and-mortar companies—but we do similar things for banks and for consumer packaged goods companies, like the Cokes, Anheuser-Buschs, and Pepsis of the world. Those are the three verticals we've targeted in the early going. Rick mentioned getting popcorn faster in the movie theater. We've been approached by movie theaters and we've sort of put that on the back burner. We've been approached by casinos. We've been approached by the NBA. Everybody is trying to understand what happens in a physical environment, and we automate the process. While we've selected two or three verticals right now, there are others that we could go after down the road. Anywhere that customers and businesses interact, there's a need to understand that interaction to the extent that it can be automated to make life a lot easier for people.

Ms. MacPherson: So, you both have built rock star boards of advisors in your segments. Was it hard to get those people to come on board?

Mr. Hudda: In our case it wasn't because it was mostly through a personal relationship. I suspect it would be difficult if you were a startup company operating in garage mode and trying to get people of Paco's caliber. He's a keynote speaker for large conferences worldwide and half his time is not even spent in this country. It was more the personal relationship in our case.

Mr. Steele: I found that getting access to the people wasn't that hard. We brought in not only traditional business people, we also have Rodney Slater, who was Bill Clinton's Secretary of Transportation, on our advisory board, as well as John Miliken, who was Virginia State Secretary of Transportation. These people weren't used to being on advisory boards of startup companies with four guys and a folding chair. Their reputation in the political arena is everything, so they don't want to get behind something until they're absolutely sure. One of the other guys we have is Tony Coelho, who was the House Minority Whip for 10 years. He said, “Politicians are great. They wait for a line of people to form, then they get in front and claim it's their parade.” They're not going to form the line, they're going to wait for the line to get going, then jump in front of it and hold up the baton, so you have to be careful with them.

            At the same time, transportation has so many political issues in terms of the way they tax the roads, the way the gas tax works, and the way they build. It's very funny. We say that Amtrak loses money every year; do you think the highway roads are making money? When we look at how the transportation industry works, there's a lot of lobbying going on by the guys who build roads, the guys who build parking garages, etc. There's a lot of business involved in the fact that the transportation system is the way it is.

Mr. Hudda: I don't know if this is a trend or just a coincidence, but both of us are creating businesses that are solving real-world problems that you see in your physical environment. I don't know if others in the audience are seeing a similar trend where the focus is back to the basics, looking at simple problems that have existed for a long time and that have very complex solutions. At some point you have to take the bull by the horns and see if you can address those issues.

Ms. MacPherson: Before we ask Mario to come up, I want to ask about your contacts and your network. Your experience has allowed you to get to these people and convince them to come aboard. What advice do you have for the person who still has a day job and is thinking about starting a company for the first time?

Mr. Hudda: When I think back on my experience, the first time was a lot easier than what it has been the last couple of years. In early 1997, when we started looking to raise money to do a product-oriented business on the systems and network management side, I don't remember it being particularly difficult to get our first round of VCs. We had a solid idea and we had a nice prototype, but we were two guys who had never run a business before. It took us the traditional three to four months to get the first round done, but we pitched it to maybe eight or 10 companies. We got two to sign on. Once you have your first group of VCs, life gets a lot easier for future rounds. Obviously, things were different back then. Those were close to the height of the bubble years.

            In the middle of 2000, when I started Brickstream, we didn't go out looking for funding right off the bat. My friend and I put in the initial capital to last for the first 6-9 months. Even in 2001, and even today, we found the fundraising environment had been particularly difficult compared to the first time around. In the last three months or so, maybe four months, I’m seeing things starting to turn around, particularly for early stage. If any of you folks have access to Venture Wire, you’ll see that there are still multimillion dollar deals being done. Over the course of a quarter, across 300-400 companies, that's $2-$3 billion or more going in.

            If that kind of capital is still going in, why is it that people say it's difficult to raise money? If you analyze the profile of deals that have happened in the last 18 months or so, over 80% of the money is going as follow-on investments to existing companies that have already been funded. VCs have taken a look at their portfolio and decided which companies they think can survive—and need to survive—those that have a future. They are focusing on putting more money in those companies than they had originally planned. As a result, they have less money available for first round deals. In this environment, nobody's going to feel too bad about missing one great opportunity. In trying to catch the one great opportunity you might invest in five or six really bad ones, so they've been particularly shy about investing in first round deals or very early stage companies.

            I've started to see that change in the last three or four months. That's one good sign, more capital coming back into the very early stages. That's not to say the capital had completely dried up for early stage deals, but it had reduced significantly in the last 18 months. Now that's starting to change.

            The other thing about the economy being the way it has been in the last couple of years, there's a much bigger talent pool available. When you're looking to hire your key set of executives or even one level below that, there's more to choose from and it comes at a lower cost than you would have paid before. Whether it's in salary dollars or bonuses or equity or whatever, it's come down significantly from two or three years ago. You can get better talent at lower prices, and the challenges are ones that people have tried to solve. Those problems still exist. If you've got a good idea, there's money to be had.

            I've talked to a lot of entrepreneurs. A lot of companies are bootstrapping their way for the first 6-12 months until they can get to a stage where they can show enough traction to be able to attract that early stage venture capital. That's still possible. We've done it in the last two years in probably the worst of environments, so it's only going to get better from here.

            In terms of getting your first few customers, obviously, that has been a challenge in the last 6-12 months. Big companies traditionally are reticent to buy technology from very early stage companies. They want to make sure that you're going to be around, especially if they're spending a lot of money for large deals. That has slowed down the progress of small companies. I know of cases where big customers have been asking for balance sheets and cash flow statements before they'll sign a contract. That's difficult for a small company. Most big company executives will chase us out the door when they see our balance sheet. Now things are changing. I wouldn't say that we've seen a dramatic change in budgets or spending patterns as we've been selling in the last 6-9 months since we launched our products—we experienced a real tough environment to begin with—but, from what I'm hearing, things are getting better. It will be easier to get your first few beachhead customers, which are important to grow your business. Things are looking a lot better today than they were 12-18 months ago.

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Mr. Steele: I agree with everything Amir said from a physical support and infrastructure perspective, but I would go back to the fundamentals. If you're going to start a business, you’d better be doing it because you want to solve the problem, not because you think you're going to get rich. I don't know about you folks, but I start these businesses because I want to do something, I want to make something, and I want to make a difference. I want to build it. I don't think about the money. I think a big mistake that was happening in the bubble was that a lot of people thought, “I'll start a business because it's easy. We just get rich, right?”

            Well, it doesn't really work that way. The ones who excel and blow everybody away and change the market and create products and services that are significantly different, are people who want to solve real problems, and they're absolutely tenacious about it. What gets their blood boiling is that they want to solve a real problem. They absolutely want to make a difference. That's what makes you think creatively and that's what makes you stick with it.

            I was talking to a venture capital friend of mine. He was working with a startup company and the founders were working hard at it, but they didn't have experience. Of course, the first thing they did was to bring in an experienced CEO and give him some stock options. This experienced CEO came in and worked at it for a while, then left. They asked, “Why is that happening?”

            I said, “To that guy, it was a job. He came in to do his job. The founders, they're going to absolutely make sure this thing works because they believe in it. Maybe they've not had the right experience, but you can't lose that fundamental drive to solve the problem.”

            That's what gets me out of bed in the morning, knowing that I want to really solve a problem that's never been solved before. I want to do it because it's hard, not because it's easy. If it were easy, a big company would do it.

            About the financing, you can build a great product and start to get customers, then you go out to the finance community and your confidence gets shattered. All of a sudden, everybody's telling you you're stupid, and your customer acquisition costs are too high, and you don't have any experience, and you're going to get beat up from a million different things. You've got to push all that aside and keep believing that you can do it. I didn't have the same experience. I had run my first business successfully and profitably for about three or four years before I went to raise financing, and it still took me 50 VCs until I raised money. I kept going at it, kept going at it, kept going at it. I was convinced that we had a good idea and a good business, that we were going to make it. Every time I met with someone, I didn't go away from the meeting saying that they were stupid or that they don't get it. I would say, “Wow, that was a great point. They had these objections. Let's see what we can do to make it better and better.” You probably heard this at all the other Coffee & DoughNets, but you've got to stick with it. It's really important.

            Another point that's always stuck with me is what I call the fundamental unit of economics. A lot of people will design a business plan that says, “Once I get to 30,000 people I'll start to make money.” Wait a minute. What's the fundamental economics of your business? In our case, it’s trips. We're paying people to ride share together to do a trip. We are absolutely certain that we're going to make money on one trip and, if we make money on one trip, we'll make money on a million trips, right? Then we make sure that we keep our operating costs below our cost of sales, that our gross margins are positive, and we make sure that we can manage that. It becomes significantly easier to grow your business if you know that the unit economics for what you're building makes money fundamentally on a gross level, right?

            When it costs me 10 cents to make this thing and I sell it for 25 cents, I make 15 cents. Then you make sure that your operating costs stay below that. A lot of people I noticed built models in which their cost of sales weren't fully loaded. They said, “I can sell it for this much,” but they weren't really accounting for the cost of sales. They weren't building in strong fundamental economics. The more you do that up front, the easier it's going to be to scale because you won't have all these other cost issues that you suddenly have to start dealing with. That was the important element for me. I wanted to make sure that the economics were right as much as I wanted to make sure that the product was right. I want to make sure that I'm working on a problem that's real, that I'm hellbent on solving it, and that, fundamentally, there's money to be made when the problem is solved.

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Ms. MacPherson: I think that's good advice. Here comes our other panelist, George Pappas. Hi, George. Welcome, we were just going to wrap up this part of the program, but since you braved the ice storm, we’d enjoy hearing from you.

Mr. Pappas: Thank you. You know, the trip here this morning is a little bit like entrepreneurship—you're never sure what you're going to get when you start out but, if you keep at it, eventually you get there.

            I’ll start by offering that.

            I've had the opportunity to be part of several organizations, startups that were successful and turnarounds, some that were successful and some that were not. There are a couple things you learn about what I call the physics of starting a company.

            Probably the most important one is that you have to pay an awful lot of attention to the role of your product in your customer's hands. As people who have built products or services, it's very easy to forget about that. You're focused on building the best features, the right quality, the right functionality and all that, but, unless you spend a lot of time with your best customers understanding exactly what they're doing with it and what they'd like to do with it, you can't understand the impact it has on them. As the entrepreneur in one of these organizations, if you don't personally know the people in the positions of power in your top 5-10 customers, I suggest you do so because that's how you really come to understand.

            At Plesk, one of the ways our sales have been able to grow over the past year, in spite of the difficult economy, is that we've built add-on modules around the part that helped people migrate from other products to ours. That helped them automatically upgrade, and they are things that you never would have thought of unless you had spoken to the customer.

            The one other thing I'd add, then I'll turn it over to Mario, is that like this trip this morning, you start out with a plan and a vision. It’s kind of like a stream, but you're really a leaf in the stream because you can't know precisely what it is and how exactly it will take place until you get out there and work it. The vision that you have, the problems you expect to solve, and all those things are very important, but the way in which you solve them, how the customers will perceive them, the rate at which you'll be able to sell them, how much money you'll be able to get, all of those things are unknown.

            You have to maintain a constant ability to adapt and your own internal attitude that says, “It's okay if this changes because it's going to change.” All the greatest companies out there, if you look at their first business plan and look at what the company is today, I'll bet they’re not going to be the same.

Ms. MacPherson: Great. Come on up, Mario.

mario morino: real entrepreneurs stick

The first thing I want to say is thank you to everybody for being here. The fact that so many people came is a tremendous testament to the amount of energy that you have put into this program for five years. We get a lot of credit for doing things, but, candidly, you can't do anything unless the client is there. You have been the clients; you've been great clients, and you've been more than clients. You've been very participatory, and now many of you are friends to boot.

            This program has generated so much energy. Some people have actually called it a cult at times. If it is a cult, it's a cult of entrepreneurship. People keep studying entrepreneurship, trying to put it in a box, trying to define it. I think that's a crock. Entrepreneurship is all around us here. It comes from you.  Its your spirit, your attitude.

            After all, at the end of the day, it's remarkably simple to understand a business proposition. Rick and Amir touched on this, and George added to it:

            Number one, there has to be a buyer with a need. Without that, you have nothing.

            Two, you have to have a solution, whatever it is.

            Three, you have to have the entrepreneur who can make it happen.

            Four, you have to have enough of those things to make it worthwhile.

            Five, when you do it, you need to do it in a way that makes a profit.

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            Five points, real simple, but it's amazing how much we violate the five points.

            The part that happens early, when all of this is in someone’s head and first beginning to evolve, it’s about imagination—when you see something others have done and you have the energy and force of will to make it happen—that's what the academics can't understand. The part that people simply cannot get their arms around is this first part of the equation. It's easy to understand a business once the product and the market are there, but it's this conception stage, this creativity stage, this development stage that makes an entrepreneur shine.

            As George and Amir said, an entrepreneur is going to figure out a way to do something differently for a problem that already exists. That’s Peter Drucker's definition: entrepreneurs find a way to do something differently for a problem that already exists.

            Where I think we get confused when we talk about things like injecting professional management, is understanding what makes that early stage function. The reality is, you're going to be wrong many more times than you've been right. As Rick said, you adapt. The professional manager quits or just doesn’t drive as hard; the real entrepreneur sticks because they’re obsessed.

            Notice I said the real entrepreneur.

            I'll be candid with you. In the hallways in many of these sessions over the years, I’ve called some of you lightweights because I knew you weren't going to stick. I wasn't being derogatory; I was trying to be honest with you for your own life decisions.

            In one of the previous Coffee & DoughNets sessions we talked about the kinds of businesses organizations. You have the “mom-and-pops.” There’s nothing wrong with being a mom-and-pop; you do it for a bunch of reasons. You might do it for travel logistics, or for family reasons, or for your own lifestyle purposes. In a mom-and-pop, you're going to get by, you're going to have a nice living, and, hopefully, you’ll have a nice balance in your life, if that's your objective.

            Second, there's what I call “private” businesses. In private businesses you're out to solve a problem, but you don't have the desire to go into the 24x7x365 mode. You're not going to go public, you're not trying to get venture money, you're going to exist as a private company and live and fund yourself by what you earn. You can actually exist pretty well. There's nothing wrong with that; it's a different form of quality of life. You're going to work very hard, but you've made some choices.

            Beyond that, you cross the line. This is the part that everybody hates to hear, but, when you cross the line to play in the show, your life changes—if you're serious, anyway.

            It's going to be a bear. It's going to be 24x7. It's going to be 365 days a year. Unfortunately, there are personal tolls.  Some parents don’t spend enough time with their family, some relationships come undone, and you  see some marriages go down the drain. These are the challenges driven people face, and it comes down to a person having to make that call about their life. I'm not saying it absolutely has to be that way, and there are those who have safely traversed this minefield, but it is tough, really tough when you're going after that kind of business.

            We're going through a transition with the Morino Institute, and one individual is now going out on herown to create a business. She sent me an email about three weeks ago that said, “Mario, we talked about this all the time, but boy, this is tough stuff.”

            It is tough stuff.

            To the question of when's the right time to be an entrepreneur, first of all, I think it starts very simply. I'm probably on the edge with this, but I think it starts with a dream and a vision. The strongest ideas are ones with deep convictions. They come from deep experience, something in your life that leads you to say, “This is something I'm going to do. I'm going to solve this problem, and I'm going to get it done.”

            In all honesty, the greatest entrepreneurs are accidental. As Rick said, you don't go into it to make money, you typically go into it to prove a point, to accomplish something. The classic entrepreneur is one who's left the business he or she was in because they were so frustrated that the company could not see their idea. They're going to go out and show them.  Do you know how many businesses have been created that way? It's legendary. There's something in those people’s minds that can't understand why the rest of the world can't see their point of view, and they're going to show them. There's a tremendous need and they're going to fulfill it.

            They don't start the business to make money. They don't start the business for fame. They're not starting with the business plan and they don't think about a VC. Some don't even know how to spell VC. They're trying to get something done. That's the person you really want to fund—if there's a buyer with a need, if they have a practical solution, if there are enough of them, and if you can make money doing it. We come back to that basic model.

            So, is there a great time to be an entrepreneur? There is no such time. You policy wonks out there, put your hat on and tell me when is the time to be an entrepreneur? Who cares?

            We started our company in 1973 when it was just as bad as it is now. You couldn't get a dime from anybody. They wouldn't even answer your phone call.

            Here’s the thing: If you have a thousand sales people, the economy is a factor. You've got a problem. But if it's just you and somebody else and you've got to generate $2 million in revenue, don't blame the economy. The market's too big for you not to sell enough product to cover such a small bogey.

            Later today, I’ll be having a discussion with a company that has missed its numbers, and missed them again. As far as I'm concerned, don't give me the economy, it's performance. You're too small for it to be the economy. At the end of the day, forget the economy and forget market share. If you only have to close 10 contracts to get to $1 million of revenue in a quarter, well, think about how many prospects there are in the world. If you can't find 10, assuming that your product's good and solves a need, then I don't care how bad the economy is. No, I don't buy that.

            In fact, the economy could be an advantage to you depending upon your nature. The hardest times are actually some of the best times because of a theory about change, one you can accept or reject as you like. I was doing some motivational speaking once, and the guy who preceded me had a very good point. He said that real change, true behavioral change, does not occur until the process you are used to is stopped for you. Not by you, for you. There's been a death, you've lost your job, you're bankrupt, things of that magnitude. Then, all of a sudden, you change. Somehow you find a way to change your life. Without that kind of external stimuli or without remarkable inner conviction, it's very difficult for people to truly change behavior.

            So, in economic conditions like this, when people are getting laid off and benefits are being lost, people figure out ways to get by—whether it's Ithaca, New York, which basically reinvented itself, or Rochester, or other areas where there have been huge lay-offs. It’s what was going on in this region during the early 1990s with the enormous fear of downsizing of the federal government. Fear drove people to do things with business. There was a discontinuity, and hard times force us to capitalize on those points of discontinuity. Something totally unexpected happens, and you’re going to take a new look at life, go in a different direction, and, boom, someone is going to do something entrepreneurial.

            I believe that more entrepreneurs are born that way than through any classes or educational programs or early-stage funding programs. Those are all artifacts after the beast is created. It's often the hard times that drive things.  What’s that phrase? Necessity is the mother of invention.

            Back to the question of why now; let me tell some stories of people I've known or watched.

            There's a tenacity in an entrepreneur that gets them by the obstacles that stop everyone else. There are a few people here today from the old Morino Associates. We weren't smarter than a lot of people we competed against, but I'll tell you something, we worked them to death. They did not work harder than we did. We wore them down.

            I’ll tell you a story about Jim Goodnight, the CEO, founder and owner of SAS Institute in Cary, North Carolina, and one of the most successful people in our field. Talk about a person with tenacity, I would never want to get in the way of this six-foot-six-inch Southerner. He is one tough son of a gun. I remember a day in Clearwater, Florida, in the late 1980s when SAS was about to sign an agreement to license a technology for  color graphics for their statistical systems and remarket it with their line—I’m reaching way back in time. If anybody remembers, in those days there was a device called a 3279 color terminal. The vendor showed up at SAS’s user meeting. Jim was about to sign a leveraged partnership agreement to use their technology for this work. Well, the vendor made a social mistake that week, a violation of SAS protocol, and  values were a core of the SAS culture. It was a blatant mistake on the vendor’s part. Jim didn't swear much. He and I had very unusual conversations. I was always the bad guy, and he was the good guy. Anyway, I was sitting with Jim and he just began cursing a blue streak. He said to me, “I'm going to take them out. I'm going to do my own color systems.” Jim’s firm had no inherent experience in this niche field, but within weeks he had gone to Waterloo University and Tektronics, the two leaders in the world. He hired the very best people and 12 months later he unveiled an entirely new product line that eventually took an 80% market share. He did it on sheer will because he was so angry that somebody had violated his baby.

            Take someone like Steve Case of America Online. Look at the tenacity he's had. When he and Len Leader and Jim Kimsey were going out to get money, people scoffed at them, but he never gave up. He understood that it was about personal communications and his commitment to this concept never wavered. He kept pushing and pushing and he's still doing it. Somehow he keeps overcoming the odds each time.

            A guy that I don't necessarily see eye to eye with is Charles Wang of Computer Associates, but I actually admire him as well. We don't necessarily agree philosophically about life, but I admire him and what he achieves. In 1984 all he had to his name was a sort product. That was it. A sort product that didn't even sell to the “big” marketplace in 1984. By 1986, two years later, he had totally redefined the software services industry through dramatic acquisitions. Then he went on to pummel the industry. What everybody forgets is that this is a guy who grew up as a street fighter in Hong Kong. The competitors always forgot that about him. He will never get beaten, not if he's breathing. He will fight you to the last inch. That's tenacity. That's the 24x7x365 world. It's fun to play in, by the way, but be ready to play in it.

     Of course, you have to pick your time. A family member of mine is starting his own software business. I told him to slow down because right now he's at a point—and many of you are, too—when you don't have to create a business yet. When you do create it, you might bootstrap it. Look at the timing. Sometimes, as long as you know what you're going to do, it's better to take a job someplace in the market you're going to be around. Have somebody pay you for awhile while you're doing some research and learning. Be fair to them, of course, but the whole time you're positioning for your next step. You're playing a game of chess. You know exactly what you're going to do, step one, step two, step three, step four. Great entrepreneurs have a way of coming up with these life plans, whether they know it or not, for how to get where they're going. As long as you know what you're going to do, there can be many steps to get there.

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