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.
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
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
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?
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.
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.
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.
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?
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
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
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
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.
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,
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
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.
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.
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
Come on up, Mario.
mario morino: real
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
Four, you have to have enough of those things to make it
Five, when you do it, you need to do it in a way that
makes a profit.
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
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
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
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
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
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
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
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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