Part 2: The Stars of Telecom
Morgan O'Brien: Never Give Up
Thank you. Back in 1987, here in Washington, DC, I was practicing law. I was a telecommunications lawyer, but I wasn't comfortable in my skin. I just knew that being a lawyer wasn't my destiny. I had tried several times before to launch a business and just had not found the right formula.
But in 1987, I had lunch with Mark Warner and I proposed an idea. Mark went from the beginning of lunch to the end of lunch and said, "Well, I'll split whatever initial money we have to put into this thing. Try not to make it too much. Let's get started."
The entire Mark analysis of the process was not even a long lunch. So, with less than $100,000 committed between the two of us, we went to New York. Actually, Mark took me to New York. And we went knocking on doors to find money. We put a team together and this team later became as close to me as my family. The members of that team, I love them. There is no way to put it more bluntly. That's the kind of relationship I developed with this team. And as a team, we then went forward with our plan. That was 1987-we had $100,000, the enthusiasm and optimism of Mark Warner, and the idea.
In 1997, that plan has become Nextel Communications which has somewhere around 5,000 employees. It's a public company traded on NASDAQ. It is both national and international in operations. We are operating currently in ten of the top 25 cities in the world and 70 of the top 100 MSAs in the United States. We have roughly 1.3 million customers and we are adding them daily at a remarkable rate. Nextel's capitalization has gone from our less than $100,000 to something now in excess of a billion dollars. That's in the course of ten years.
If I told you the whole story, of course, I would exceed my seven minutes. I could make you laugh and I could certainly make you cry if I told you what went on between 1987 and 1997. But I thought what might be more useful is to say, if you are thinking about starting a business, then my invocation to you is, "Thinking about it is not going to do you any good at all. You have to do it."
And I'm here to say that I'd be completely satisfied with tonight if one person out of this group went home and said, "I'm not thinking about this anymore, I'm going to do it, just like Morgan O'Brien did because how hard could it be?"
So, that's my mission. However, having said that-do it, don't think about it-I want to have you exercise great caution. Because my experience is that failure in business is so much easier than success. Success is not an entitlement. You are not entitled to success. Nobody is going to let you be successful. You have to make yourself be successful. A thousand things have to go right to be successful. One thing can go wrong and you'll fail. It doesn't water down my advice that you should do it, but the benefit of my experience is you have to do it and you have to be cautious.
Here are a few practical suggestions drawn from my experience. Some are from the part that would make you laugh; some from the part that would make you cry.
If you are going to start a business you have to know it, you have to be an expert in it. All the things about that business that you could know, you have to know. And if you don't know them, you have to wait until you do know them and you have to ask somebody that knows them and write it all down. Because if you're not an expert, you are not going to make it. You have got to know what you are doing.
On the other hand, I don't want to over-intellectualize it. Having gotten through the knowing-it stage, you also then have to feel that this is something you have to do. That's not an intellectual process, that's an emotional process which you must never eliminate from this whole scenario. You have to know it and you have to feel it.
You have to be a grownup. You would be amazed at the number of people in business who aren't grownups. I define a grownup as somebody who sees the world the way it is. I say that to my kids all the time. I say, "The difference between maturity and immaturity is accepting the way things are." So you have to be a grownup. You also have to know yourself. If you're not an optimist, then certainly you can't start a business because there are many times when there is no reason to keep going except that you are an optimist.
When building your business plan, you also have to understand that the future, by definition, can't be known. The future is unknowable, and you have to cope with the fact that it is unknowable. But at the same time, you have to make some informed assumptions about the future. And you say, "Well, no one knows the future so my guess is as good as anybody else's." Particularly if you are informed. So you say, "This is the future as I see it." That's exactly what we did at Nextel.
In 1991, we said there are certain things that we are just going to assume are going to happen between now and the end of the decade. These things will happen. Technology will move in this direction, the market will move in that direction. This is what will happen at the FCC. And when somebody said to me, "How do we know that?" I said, "We don't know that. We are going to be partly making it happen, but we have to put some stake in the ground."
Having said that, you have to be able to accept uncertainty and many people think they can but they can't. Can you live with not knowing where you are going to be from one day to the next or who you are going to be talking to from one day to the next or what's going to happen from one day to the next? You have to be able to accept that there are some things that are not certain and you just have to keep going.
One day, one of our most talented early employees at Nextel quit. When he quit I was heartbroken, and I said, "Why are you quitting?" and he said, "Because you could not possibly have known that that was the right price to pay and this was the right time to buy that particular property." I said, "Well, how much more study do you want to do?" He listed all of these things that were basically unknowable.
I said, "Don't you hear those footsteps?" He said, "What footsteps?" I said, "The footsteps of everybody else that's going to be doing this idea if we don't do it now."
So I don't have all the information but we just have to do it. We just have to keep going.
Next lesson: Expect terrible things to happen. And this is serious, because if you have expected a certain budgeted amount of terrible things. . . somebody comes in and says, "Something terrible has happened!" You say, "Well, okay, I can understand that. It's bound to happen." Sometimes that can be your finest hour when something terrible happens.
Next thing: Keep moving. Most times when we look back we see that the decision, right or wrong, wasn't as important as the fact that we kept moving.
Another issue: Feelings. I talked about that before. Some feelings are good feelings. For example-and this will sound strange-but envy is a great feeling, because envy is nature's way of saying somebody else is doing something or has something that you should have, that you should be. Whenever I find myself reading the incredible press of this business and I envy something that's happened, maybe even to somebody at this table up here, I say, "Why am I envying that? What does that suggest about an action that we should take?"
There's lots of other advice I could give you, but at the end of the day, a couple of things are important. Be as lucky as I was and have a spouse-and mine happens to be sitting here tonight-who doesn't care whether you fail. She cares more if you are happy pursuing your dream. If you don't have that, you're going to be sunk. Then I have asked several people-these are other entrepreneurs-what advice I should give you in conclusion and they all said the same thing: Never give up. Never give up. Never give up. Thank you.
I'd like to introduce our next speaker, John Puente.
John Puente: There Is No Barrier Too High For A Great Idea
Morgan, there's two things I want you to know. First, thank God I was really naive when I started this business or else I would have never done it, because all the things Morgan said can happen to you, do happen to you. And the second is something, Brian said on the way up to me, "What is an Hispanic doing with all these Irishmen up there?"
MR. O'BRIEN: It was affirmative action. It was affirmative action.
MR. PUENTE: I have had the opportunity to be a part of three start-up corporations. Digital Communications Corporation (DCC) was started in 1971. It is now Hughes Network Systems with sales over $1 billion. Telecom USA, a fiber-optic-based long distance carrier, was sold to MCI for $1.2 billion. DCC started with $40,000, and we had a little more money when we started the second company. But they gave me a great deal of experience in dealing with Orion Network Systems. I'd like to discuss Orion from the point of view of overcoming high barriers of entry which all of you in this room are going to experience, and a 90-degree turn that happens all the time, in every business.
Ninety-degree turns means "What happened? Why are we going in that direction?" I was asked to become Chairman and CEO of Orion in 1987. The company consisted of a satellite application to the FCC, a single employee, Chris Visas, and $750,000 of debt. Orion had filed to the FCC for a license to launch a satellite for international communications between the United States and Europe. This was the first license request ever made to the FCC for a private international system.
The challenges for Orion were difficult. What I mean is there were really high barriers of entry in three areas: regulatory, market and financial. On the regulatory side, not only did the FCC have to approve our license, but, because of the Intelsat Treaty, the Department of Commerce, Department of State, the Executive Branch, the Department of Defense and everybody in the government got involved. Would Orion get a license?
Intelsat is a consortium of monopoly telephone companies-it still exists today-who represent their countries in the Intelsat organization, COMSAT being the US representative. Until the time of the filing to the FCC, international satellite communications was completely controlled and run as a monopoly, by monopolies.
Intelsat did not want Orion to get a license. Monopolies love monopolies. Fortunately, at that time the US was in a general mood for breaking up monopolies-AT&T, for example. After years of work, President Reagan agreed that there should be competition in the international satellite communications and the FCC issued a license to Orion, but there were some very serious market conditions.
The market barrier we had to face was this: the international market in 1980 was primarily voice traffic. Over 95% of the traffic going between the US and Europe was voice. Intelsat, being owned by telephone carriers, wanted that part of their business protected. The agreement struck with the Reagan administration had a provision that Orion would not provide economic harm to Intelsat. That is to say, don't compete in their voice business. In order to get our license we had to agree to this provision.
The ridiculous result was that Orion, a pure start-up corporation, was not allowed to compete in what was 95% of the international market against monopoly telephone companies which had revenues of over $200 billion a year. Because of this provision, Orion targeted business customers for data transmission and another applicant, PanAmSat, went after the video distribution business. The irony is that by the year 2000, data will surpass voice and transmission capacity requirements on a global scale.
Next item was the financing barrier. How do you finance this? Because of the regulatory and market barriers and the fact that deregulation had not yet begun in Europe, that is to say, allowing Orion to carry traffic into Europe, we had a financing situation that was very questionable. We put together a financial team of Merrill-Lynch, Flemings (a UK banker) and Drexel Burnham. The sum needed to launch a satellite, buy the insurance and cover the debt was approximately $350 million. The financing plan included equity capital for investors, transmission capacity guarantees, people who said they would take the capacity, bank debt and a high yield bond.
That was the structure of the financing. Equity capital and corporate guarantees were to be obtained from strategic investors-people who really wanted to get into this business with us who also joined us in a partnership with Orion as a general partner.
British Aerospace was our first strategic investor, for which it received the construction of two satellites. In all, there were seven partners. We now had partner equity investment plus guarantees that these partners would purchase enough capacity over the spacecraft to cover our bank loan.
Just as we were about to work on the fourth element, the high yield bond with Drexel Burnham, a strange thing happened. Michael Milken got into very serious problems with the Securities and Exchange Commission. I can tell you I was at the airport to meet with Michael Milken when I was told he wasn't in his office and wouldn't be there for a while.
This was really a major setback because we were looking for a $250 million high yield bond. It caused us an additional year delay. We lost a partner we had to replace. Our partners eventually took up the slack in our financing with corporate guarantees in addition to their transmission capacity requirements. The FCC approved the partnership structure and we proceeded to build Orion I, which is up and operating now.
In 1995, we issued an IPO after a previous failure. We actually went out earlier and we had to pull it because the market wasn't ready. In 1996 we went to the market with a high yield bond offering $350 million for our next satellite. Here's where luck really plays a part of this whole game, and luck is, I think, part of every entrepreneur's success. The bond market was hot and we were vastly oversubscribed. The bond actually yielded $720 million. Now we had sufficient capital for our next two satellites which are currently under construction.
These were very high barriers to entry which all of you will face in one way or another. You can overcome all of those barriers with good strategic positioning of your company, hard work, tenacity, some luck and you can't get discouraged. Never give up, I agree. Just never give up because there is many a time you want to walk away. You just can never give up. Become creative and you can win.
Finally, as you may know, after we did all of this, we announced two weeks ago that Orion was acquired by Loral Corporation. The closing should be complete first quarter next year. These startups all started in the Washington metropolitan area which I believe is slowly but surely being recognized for investors and biotech also. So dive in. Get started. I wish you every success. And remember one thing, there is no barrier too high for a good idea. Thank you.
I'd like to introduce Brian Thompson, who has done one incredible job at LCI International.
Brian Thompson: The Courage To Be An Entrepreneur
Am I glad I'm not an entrepreneur! I wouldn't have the ability to put up with the things these guys have.
I can't clear my throat in seven minutes, so I'm going to apologize in advance to Esther, but I'm liable to run on a little bit.
There are a lot of stories I could tell you about John and some of the other people on the podium, but I'll leave those for questions and answers later on. When I first met John, he was wearing a lab coat out at COMSAT Labs back in 1969, I think it was, and it's been a long and interesting relationship.
I'm very pleased, and I want to make this public, to serve on the Board of Trustees on a small college out here called Capital College, which is turning out really hard-driving young people that are taking part-time education, full-time education, and are becoming classic telecommunications engineers as well as technical specialists as a result of John Puente's work with that college over the past decade. It is something to behold and it's right here in this area.
I once heard somebody say that the way to become a leader is find a parade and get out in front of it. I have been very fortunate twice to have been able to do that. The first time was pure happenstance and it was one of the great things that can ever happen to people. You know, in your life, if one good opportunity comes along and you are very successful as a result, you should be very thankful. I have had the great fortune to have that happen a couple of times, but the first time was when I had the great fortune to join a crazy Irishman named Bill McGowan back in 1981. His company had just finished winning a case with AT&T and thought that they were in fat city, but they weren't because $1.8 billion never did materialize out of the antitrust suit. But I joined Bill in 1981.
I think that it's fair to say, without exaggeration, that the reason that we are all sitting in this room tonight is due in great measure to Bill McGowan's crazy idea. He paid $50,000 in 1968 to buy a half company which thought it could take on AT&T. From that-from a move to Washington, DC in 1974 because that was where most of the decisions were being made that would affect the communications industry-came a company called MCI, a feisty, irreverent group of people that never gave up, never said no, always took on the difficult if not impossible task. It was a terrific experience to be a part of a team of people that did that. I did it for about nine years. But learning at the feet of one of the masters in entrepreneurship-somebody who is one of those rare entrepreneurs who can start a company with nobody in it, build it to a very large organization and then manage it into a huge worldwide enterprise-that's a rare case. I had the rare opportunity to spend some time with Bill in various stages of sobriety and various stages of success. It happens when you are Irish, and it goes with the territory.
What we did, from 1981 to when I left in 1990, created some very formidable change in this telecommunications business, so the first thing I would encourage you all to do is recognize that the telecommunications industry is a unique opportunity. It's unique because it was a monopoly. It was a de facto monopoly (that was the beauty Bill McGowan found out) rather than a de jure monopoly. Therefore, the long distance portion was something that had never been granted to anybody. By pursuing it relentlessly, the result was the break-up of AT&T and the creation of a vast outflow, not only of new technology coming from places other than Bell Labs, but the development of whole new means of communications and opening up the eyes of the regulatory people that there may be something to competition.
So, we are blessed in the telecommunications business by having on the one side a monopoly that is being broken up-over a long period of time I might add, and still remains to be broken up in many ways. But the great opportunity is that entrepreneurially-oriented people with desire can jump in and grab a piece of that $150 billion market. It is unique. So I encourage you entrepreneurs to do that. Some of us are too old to be entrepreneurs.
A quick story about what did happen, though, with LCI, because I think it does bear some scrutiny. In 1990, after I left MCI-it was because MCI bought this company that John Puente convinced them was a fantastic opportunity called Telecom USA-after leaving the company I did some investing in various things and tried to be an entrepreneur. I found out one thing you want to do as an entrepreneur is look for money. Find money someplace. Everybody on this table has found a way to find the people who have it. I know Morgan found me about four times.
MR. O'BRIEN: You kept saying no.
BRIAN THOMPSON: I was smarter than I thought. What you need is money. I had located this company called Warburg Pincus in New York and they were successful in venture capital operations. But when somebody told me they had a billion and a half dollars of cash, they suddenly became very good friends. We started an organization to invest in telecom, but a funny thing happened. They had this little company in Ohio that they had started as the equity investor in a leveraged buyout that was done in 1988 by none other than Michael Milken. So you have heard it twice here tonight. I have to say Michael Milken was instrumental in MCI becoming what it was but this was much later in the process. They had done a senior debt offering for this company and equity was taken by Warburg Pincus. Unfortunately, the debt was at 11.75, but that was okay.
The following year they decided to do two acquisitions and they got another trench of junk bonds that Michael put in that was 16.5%. And that was a PIC preferred stock that actually grew to $70 million. Then in 1991, as Warburg owned the company and as the company unfortunately saw its revenues going south at about 15% a year and its first cash interest payment on all of this debt coming due in June, the chief financial officer in a parking lot after a board meeting in May said to one of the board members, "Oh, we didn't mention it in there, but at the end of June, we have this interest payment that we won't be able to make because all of our accounts payable are at 120 days, and we are paying, unfortunately, very large penalties and we don't have any cash."
Now, this was a $260 million company with $302 million of debt. An annual interest payment requirement of $32 million. When I came back after Warburg said, "Would you like to help us?" and I said, "No." And they said, "Oh, please." And I said, "No." And then one night this horse's head landed in my bed. And I said, "I'll take four months and tell you what you should do with this company." And we did.
But the fact of the matter is if you have had the experience, if you have been sitting at the knee of one of the great entrepreneurs of all time, if you have spent a lot of time in your life dealing with the issues of our industry, it is a challenge that's hard to turn down. We went out there and we took this thing on. We had to lay off about 25% of the people in the first six weeks. Actually we did it in two weeks. We turned the company. We came back to Warburg about two months later and said, "Here's the deal." They thought we were going to tell them how we could sell it, package it up. I said, "If you turn the strategy of this company around and if you are willing to come up with another $38 to $40 million even though you have already put a lot into it, we think we can probably get this ship turned."
Shortly after that, our bankers, who were owned in part by Warburg, decided to put us in the workout division. But the fact of the matter is they came through with $38 million over the next six months. We were able to make the change that was necessary by having a strategy that was clearly understood by everybody.
To date, Warburg-this is six years later-has taken out or has in their hands a value of a little over $1 billion for the $38 million that they put in, so they are not terribly unhappy. And the fact of the matter is the company is a force.
Now, let me tell you quickly, because my ten minutes are over, several things. Number one is my case is different. I wasn't an entrepreneur. I don't have the courage to be an entrepreneur. But I did take bombs apart for a living in the Navy. So for any of you who have done that, there is great opportunity in telecommunications.
The second thing is, be really dumb about taking something on and don't ask all the questions. You know, bull your way into it and then find out what the problems are. But make sure you bring along with you people in whom you have a lot of confidence. Dupe them. Tell them lies, but get them involved, okay? And believe me, if you have a team of people around you who are in it as deeply as you are, but they have upside, you are going to have a team that is going to work like hell to be successful.
We have had that. We have been very fortunate. Our company is now a fairly significant factor, at least it seems to be. And there is still a problem when you produce a great quarter like we announced this morning and the stock market says, "Well, I'm sorry but you're making earnings, so we are going to treat you badly." It's a surprise to a lot of people. But we are in unique times. You have unique opportunities.
The people on this panel are witness to the fact that, in telecommunications, as a result of change and the willingness to grab that brass ring when it comes by, you too can be very successful. Because this is a unique time and a unique industry and a unique marketplace. Thank you very much.
In 1983, a young fellow came into my office with an interesting sounding name, Thompson, and said, "This is what we are going to do." and I said, "You are going to put what out of what?" And he said "We are going to launch satellites out of a B-52." I said, "Okay." I'd like to introduce David Thompson.
David Thompson: Rebels And Pirates
Good evening, everybody. I would like to talk a little bit about my experience in helping to start and run a company. I have done it exactly once. That's all I ever want to do it, because I want to keep doing what I'm doing. Orbital was started about 15 years ago and our idea at that time was to build a company that would create space-based networks that would be so inexpensive and so easy to use that millions or tens of millions or maybe even hundreds of millions of people all around the world would, over the long-term, start to use them every day.
Well, that sounds great now, but it seemed like a really farfetched idea in the early 1980s as Brian just indicated. The original founding group at Orbital were three young guys still in their twenties who just decided we were going to start a space company. Here we are in the 1990s and due to the efforts of a lot of people like John in our little part of the telecommunications industry, satellites are indeed changing the way that many people work and live all around our planet.
To those of you who have heard of us, Orbital is probably thought of as a rocket company. Building rockets is where we started and it remains an important part of what we do. But today, the company has a considerably broader range of interests. What we really focus on is developing and operating satellites and ground systems that are designed to collect, communicate and process valuable information that we provide on a global scale and that we hope to provide at much lower costs than anybody else in the markets that we serve.
I believe this is one of the really great opportunities in business and it's going to remain so for at least the next 20 to 30 years. We have conceived satellite systems-like probably others have-as these wonderful things that we think of as information machines which convert photons into revenue. Since our raw material for these photon factories is sunlight and since sunlight is free, once our revenues rise high enough to cover our fixed costs, our profit margins really do go into orbit. The basic question, then, is how fast can those revenues rise?
I think the fundamental answer, not just for us in the satellite business but for all of us in the communications business, lies in some pretty fundamental observations about market opportunities and industry factors. The two main elements of the industry context in which all the companies up here tonight operate, and in which Orbital exists in particular, are the continuing exponential advance of microelectronics technology and the increasingly universal deregulation of communications services all around the world. Now, of course, these two trends that seem so huge are really part of something even bigger-the long wave of 25 to 50 to 100 years which much of the world is now riding and which is bringing increasing prosperity, openness and peace to larger and larger fractions of people on Earth.
Well, in the area of interest to us tonight, this means that communications is presenting unprecedented opportunities. It's like trying to run across the freeway without getting hit by a car. There are so many out there coming at us at high speeds and they are coming at us for a number of reasons.
First, communications services are increasingly going to digital wireless networks that put them on a performance cost curve similar to that of PCs. We all know what's happened there in the last 20 years. Second, computers and communications are becoming interlinked and are beginning to drive each other's growth. And third, and of great interest to us, an era of really ubiquitous connections to global information and infrastructure is beginning. So you put these together and just imagine the kind of opportunities that face the communications industry.
If we assume that current economic growth rates continue, that the pattern of the last 20 years is a pretty good guide to what's going to happen over the next 20, we can look forward to a long-term expansion at about 4% a year in the gross planetary product. So total worldwide economic activity will probably increase by about two and a half times over the next 25 years, meaning it will go from about $25 trillion of total economic activity this year to probably $60 trillion or $65 trillion in the year 2020. Couple this productivity-driven expansion with the fact that world population growth is actually slowing, and we see worldwide average incomes per capita likely to almost double over that 20 years. What does this mean to telecom?
I think it means nothing less than a market explosion of super nova class. Our own history in this country and in the more developed economies around the world shows that there is a very nonlinear relationship in demand for communications as individual incomes rise. This means that the billion or so of people like us who are lucky enough to live in rich and stable countries are going to spend dramatically more on cheaper mobile telephony, video conferencing, email, Internet applications and all those other things that we are beginning to take for granted. In addition, several billion more people in emerging countries are going to want and are going to be able to afford basic voice, data and entertainment-based telecom services over the next couple of decades.
The bottom line? I think a doubling of average incomes per capita may translate into a 10- to 20-fold increase in communication demands, with disproportionately large parts of that going to various types of wireless services, including satellites. The opportunities are really enormous for the kind of things in which all of us are interested.
You could say, "That sounds great, but how might a new entrepreneur get started in the telecom industry?" or, even with a crazier idea, "How so in the satellite segment?" Well, that's a tough question and I have no general answer. The best I can probably do is tell you the main formula, the main points in the formula that Orbital used during our start-up phase in the satellite business. Our strategy may not work in other areas and there may be better ones or equally good ones even in our own industry, but here's the way we did it. First, we tried to attract really superb people. We wound them up and we turned them loose. Now, there is really more to it than that as we learned over the years, but that's where it really starts.
In our case, we looked for very smart people who were also rebels or pirates who could be effective in and help us sustain the rapid growth and the imaginative culture on which we put a lot of value. We spent a lot of time, I mean a lot of time, finding and recruiting these kinds of people. Second, we tried to select small but promising market segments and we tried to get into them fast. Keep in mind that the pirates in any industry have advantages in agility and improvisation, but they also have disadvantages in resources and staying power. So in other words, if you are the industry pirate, don't pick any fights with the Royal Navy where raw firepower alone is going to determine the outcome.
And then, finally, we tried to develop early on among our key products some really powerful competitive advantages that could strongly differentiate our solution to early customers. That's especially important in situations where you have entrenched competitors who are well-established and where your customers have high switching costs or risk. You have got to wow the early adopters. A marginally better product or service just isn't going to do it.
As Orbital has grown, we have added a few new elements to this list, including some that are related to acquisitions and to financial structure, and we have also modified some of these original points in ways that are important. But these three strategies really moved the company from start-up to about $100 million in sales in about half our corporate lifetime.
There is no such thing as a "one size fits all" start-up formula. There are many things you have to consider, including the fundamental objectives that you have for an enterprise as well as factors like industry context and so on, but those are the ones that worked for us.
The first point in our start-up strategy is so important that I would like to come back to it. Everyone may not agree with this, but I believe that an "A" management team with a "B" business idea is really better than a "B" team with an "A" idea. That's been rule number one at Orbital, mainly because we couldn't find any "A" ideas for a long time. It's great if you have an "A" team with an "A" idea, but that's not always possible. In our case early on, the fundamental industry factors, the barriers to entry, the capital intensity and some of the things that John talked about earlier just really worked against us. So we went after some great people who were a whole lot smarter than we were. We got 'em charged up and we got 'em committed to the venture. That worked and it continues to today.
My conviction on this point is expressed best by an author I like and a management expert that I think has a lot of important things to say, a guy by the name of Warren Bennis who really hits the nail on the head in a book that he published earlier this year, called Managing Genius. In it he talks about the attributes of ultra-high performance work teams and the people in them. For technology entrepreneurs, or those of you who are thinking of becoming entrepreneurs, this book really ought to be on your Top 10 list. I think its lessons are especially relevant when you consider that the cost structure of a company like Orbital includes 50% or 60% of our revenue spent on our people-this year over $300 million in people costs.
In fact, when we take the knowledge and the creativity that are in those people and we sort of crack their heads open and spread it around the table and add it all up, the labor that those people put into our products cost us three to four times the cost of gold on a per pound of satellite basis. It really makes a lot of sense to staff our organization to get the highest possible return you can on those kind of things. I would just wrap up my comments with a little more practical advice. You have heard some similar points already and I'll leave you with three others.
The first has to do with passion. It really helps enormously if you have a truly deep-seated passion for what you are doing because that passion would be there even if all the material and tangible benefits went away. That's what's going to get you over the inevitable disappoints and setbacks that you will bump into in your enterprise.
The second is financing. Raising money is hard. That's rule number two at Orbital. It usually takes longer and it usually costs more than you think it will, so do it as infrequently as you can. We adopted an "every penny counts" motto and we didn't know it at the time, but we were following what has since become known as the Ross Perot Theorem: money makes you stupid.
Don't forget good blocking and tackling. Not only things like "buy low and sell high," but also the corollary which works for us pretty well "collect early and pay late." Seriously, when you do have to raise outside capital-probably nobody will agree with this except the venture capitalists in the audience-as an entrepreneur, don't obsess on valuation. It's better to do a fair deal with the right people. You'll come out better in the long run.
Finally, let me talk about the downsides. Remember that entrepreneurship does have a lot of them. There is ever-present uncertainty, that Brian and John both referred to. There is risk as well as rewards, and sometimes that materializes and it hurts bad. Also, at least in my case, there is an almost certain commitment to an unbalanced life. Probably for most entrepreneurs, with some very notable exceptions up here tonight, the universe shrinks to just two things: your family and your work. Except for a very few remarkable people, things like community activities, hobbies, interests that you had when you were little, those things are gone. You are going to put those on hold for a long time.
In conclusion, one definition for an entrepreneur which I really like is "a person who relentlessly pursues new opportunities without regard to the resources currently under their control." I think that seems to be a particularly fitting definition in the telecommunications industry, in view of the terrific opportunities. There are just tremendous opportunities that we face, as well as the tremendous challenges that it presents to new enterprises. We are really in a golden age of technology entrepreneurship. We probably don't realize just how fortunate we are to be alive now, to live in America, to be in the Washington area, because-despite all the challenges and setbacks and frustrations and obstacles and sacrifices. There has just never been as exciting a time in the last 100 years anywhere on Earth to be an entrepreneur in the telecommunications industry in this part of the country. Thank you very much.
It's now my pleasure to introduce Mark Warner who is one of those very rare entrepreneurs who does manage to lead a highly accomplished and a very balanced life. Mark has been active in the telecommunications industry for 15 years. I think all of you are familiar with his founding role and his continuing leadership at Columbia Capital. He is also founder of Capital Cellular and a cofounder of Nextel. In fact, I think he and Chris Lane went to grade school together. In addition to his family and community activities, Mark has also served as chairman of the Democratic Party of Virginia and was the Democratic candidate for the US Senate last year. Mark was educated at George Washington University and Harvard Law School.
Mark Warner: To Succeed, You Must Be Willing To Fail
Thank you, David. Good evening. I've got to tell you, we have a very, very impressive panel here. I want to first to note to Morgan O'Brien that he was kind in his remarks. Morgan, I didn't understand half of what you talked about at that lunch 15 years ago.
Morgan is a true visionary. He saw the opportunity that the SMR spectrum presented long before anyone else did. John Puente is a distinguished veteran of the telecom industry. Brian Thompson, as anybody who has followed the industry at all knows, is truly one of our premiere operators in all business worldwide. And my friend David Thompson, he really is a rocket scientist.
This being Washington, we needed one other person, so I am the former political wannabe. As a matter of fact, I should have talked earlier to Mario and April. If I could have attracted this kind of a crowd last year, I might have a different title now.
David has admitted and I also have to acknowledge that I started as a lawyer. I got out of law school and went to work for the Democratic National Committee (DNC). I always had a passion for politics. As my student loans started to come due, and when I was sleeping on the couches of all my rich law school classmates, I decided to go out and try to start a business. Now, I had been working at the DNC trying to raise money right after Jimmy Carter had been defeated, so the idea of starting a business seemed easy compared to that. I took my life's savings, $5,000, and invested in and went to work for a small start-up company. I helped that company go broke in six weeks.
My second try, I went to work for a real estate company. It took me six months to help that venture fail. The third time, a friend of mine-a guy who used to serve in Congress, but I knew him as a professional basketball player, Tom McMillen-had told me about this idea of putting telephones in cars. I thought, "I talk on the phone a lot." I thought it was a cool idea and so I said, "Why don't I get into this business?"
All of my friends and all of my law school classmates thought I was the craziest guy in town. Telephones in cars? It will never catch on. I guess if I have a first piece of advice, it is: To succeed, you must be willing to fail. Although David is a glaring example otherwise, failure is a part of almost any entrepreneur's starting.
How did I get my first money? I found one of those classic angel entrepreneurs. He was a real estate developer who had a little bit of background in broadcasting. I got a hearing in front of him. I had read my three or four articles about cellular and went in and pitched him, and after 20 minutes he committed $1 million. I pinched myself. I didn't have the foggiest idea what I had just done. I didn't know how to cut a deal or how to frame my opportunity.
But what I learned from that individual, and what I have learned as an investor-it's been repeated by a number of people on the panel-is that investing in people is just as important as investing in ideas. You might have the greatest idea in the world, but unless you have the people skills and the business skills and the reasonableness-if you don't have those skills, go out and find them. Go out and bring in that partner right now
I can promise you, any investor or any investor group, whether it's an angel or a professional investor who falls into the category of venture capital, is going to look at the quality of your idea, but also the quality of you and the quality of the team you have put together.
A second piece of advice: although this will again be rebutted by Brian's success, for the most part don't try to take on the industry leader right out. With all due respect to Brian, don't go take on Microsoft or AT&T.
Let me give you a couple of examples of how my firm, Columbia Capital, has tried to approach that. In the early days of the cellular business, when everything was hot and everybody was trying to operate cellular systems around the country, what we tried to find were ancillary businesses. We made an investment in a small billing company for telecom services and that company now has become Saville Systems, a NASDAQ listed company that's got a market capitalization of about $1.5 billion. It was trying to focus one-off from where the rest of the herd was going. Take Morgan's idea of using SMR frequencies and going after that marketplace when the herd was all running after the cellular spectrum. It was also an example of one-off thinking. Find your niche. Here's a more recent example that my company has had the opportunity to be involved with. Many of you might be familiar with the recent PCS auctions. Everybody and their brothers was out trying to raise money to buy some of that spectrum. We did as well. Luckily for us, we dropped out of the bidding when the prices got too high. But what we said was, "Here are all these people trying to find literally hundreds of millions of dollars to buy this spectrum. Well, there are already existing microwave users on most of that spectrum. How are we going to relocate those existing users so that the new people who bought this spectrum can get the new PCS services onto it?"
We formed a company called Columbia Spectrum Management that has done relocation for most of the existing PCS operators, and was recently sold to a public company named P-Com. Again, if there is a theme here, it's trying to find your niche. There will be the home run examples like MCI, but there is also tremendous opportunities around the niche markets. If you are going to take on the big player, come at him from a niche or find the niche in your industry. I think that is always good advice to follow.
Another piece of advice: Try to stay true to what you know. If your passion is telecom or if your passion is information technology or if you're building a business that's got a success in a particular area, don't try to be all things to all people. Morgan and I saw countless people who, through variety of luck and skill, became multimillionaires very quickly in the early days of the cellular industry. Many of those people thought, "Well, gosh, I must be smart, let me go try to translate that into building widgets." Very few of those folks who went into these other fields have been successful. Now, in this case I have to admit, please do as I say not as I do, since I spent $10 million on a Senate race last year, invested in Russia and invested in a new movie company in Petersburg, Virginia.
I guess my final point is this, and I will make my remarks brief, because I know we want to get to your questions. This Greater Washington region is the second largest technology region in the country. It has more technology firms than Route 128 around Boston, more than the Research Triangle, more than Austin and Phoenix. We are second only to Silicon Valley and rapidly approaching those numbers as well. You are all in the right place at the right time.
If you are going to take advantage of that opportunity, one of the things I would urge you to do tonight, ask us questions, come up and talk with us afterwards. However, as important as that is, if we are going to create the kind of entrepreneurial spirit here that Mario has been so valuable in providing leadership for, make sure you find five other people in this crowd tonight and exchange cards with them. Start to build up the social fabric that will make our region realize its potential. We have the intellectual capital in this room, and in our region, to be world class. We are very quickly attracting the financial capital, as more and more angel investors arise, and more and more of the traditional venture capital firms discover what's happening here in Greater Washington. The next piece, though, is that social fabric. Meet your fellow entrepreneurs, visit with them, find those friends. Find those soul mates, even if you are in different businesses because you will have failures. Learn to live with this together.
If we do that, I think the region truly can become the convergence location where this incredible transformation that's taking place in information technology and networking truly converges with telecommunications. I can't think of a more exciting place in the country or in the world to be than right here in this room with you people, talking about how we are going to make that happen. Thank you all very much.
Part 3: Audience Questions