Keith Smith's presentation on the failure of Zango during the 2008 financial crisis and lessons he learned about minimizing the risk of failure. Given at StartupDay 2010.
Thank you Marcello. You guys are putting on a great event today. And thank you all for coming out on your Saturday.
For everyone here, your objective should be very simple. You should hope that at no time in the future when Marcello is putting this event together that he ever thinks of your name when looking to find a speaker on this topic. You don't want Marcello and team sitting around and saying, who can we get to speak about failure. Oh, you know who really blew up royally recently is Keith Smith. That's akin to having central casting bring up your name when the director is looking to cast the fat ugly girl in a big hollywood blockbuster. With that said, I did have a pretty amazing flame out, and in that process I learned far more than I did when I was successful. My failures have always been unbelievably valuable experiences. So I want to briefly tell you about my most recent failure, and then tell you about 7 lessons that I never wanted to learn.
If for no other reason than the fact that I think it makes for an interesting backdrop - I decided to tell the story of my last company, superimposed over a graph of the Nasdaq composite index. This is a graph of the 10 years we ran Zango. Tumultuous would be a good word to describe both the period as well as our company. I started Zango in 1999 with 5 close friends and we ran the company together for 10 years until its inglorious ending last year. The story of Zango can't possible be told in just a couple of minutes, but I'll try to share with you a few of the highlights and a few of the lowlights. I like to describe that decade as, &quot;utter joy, mixed with pain, covered with learnings&quot; And I wouldn't trade it for the world.
The first 3 years Zango was founded in my daughter’s playroom. In California they always talk about the “Garage Startup”. If you’re from Washington you know it is way too cold to start a company in your garage. So we settled for my daughter’s playroom. Inside where it was warm. I took every last dollar I had, sold every bit of stock I owned and used it to start Zango. Within 9 months we were out of cash and couldn’t continue. I scrambled and finally found an investor willing to give us a bridge loan of $100k until we got some real financing. When I called our attorney with the good news that we would be able to continue operations as soon as we closed on this financing, he told me that we owed him $10k already and that he wouldn’t do the work needed to close our bridge unless we first paid off our past due bill. I was stuck, I needed $10k to get $100k. I hung up the phone and walked out into my garage. The only thing in there that was paid for was my prized Harley Davidson motorcycle. I immediately picked up the phone and called a friend who worked at the local Harley dealership. I asked him how much the dealership would give me for it and he said $15k. I told him to make the check out to my attorney and that I’d be there in an hour. I dropped off the check to a surprised attorney two hours later and he immediately started working on our bridge loan docs. So at least in one way, we were a garage startup. The stock market was riding high after some previous blips, and everyone seemed to be raising capital – except us. We had no connections, no rich uncles, wealthy and uninformed friends or family to invest in us. I pitched every VC in town (and I mean every one of them), but nobody would fund us. One day out of the blue I got a call from an exec at a company called Cybergold and they wanted to license our technology – but only if they could invest in us. We had a deal and $1 million a month later, and the next day the stock market began its collapse. The Internet Bubble had burst. A startup takes an incredible toll on a marriage and mine was no different. After five years of marriage and two wonderful kids, my wife and I divorced. Nothing much seemed to be working for us, and our plight was made worse by the fact that nearly every client we had at the time went out of business. We continued to plod ahead well past when wisdom would have told you to stop. Nearly all of our receivables were suddenly uncollectable and we were over $1 million in debt. I scheduled a meeting with our attorneys to talk about putting the company into bankruptcy. My co-founder and I went to their offices and sat across the table from three $500 an hour attorneys and after a two hour meeting they concluded, “you don’t have enough money to file for bankruptcy.” We were literally too broke to file for bankruptcy. They told us to just walk away from the company and move on. We left their office dejected and being distracted by the thought of walking away from the company I made an illegal turn on our way home. Of course a cop was right there to pull me over and after 15 minutes of waiting for him to write me up he delivered me a $110 ticket. After the cop walked away my co-founder looked at me and said, “well…that’s the cheapest 15 minutes we’ve had all afternoon.”
Zango as the Growth Machine Shortly after we left those lawyer's offices, we regrouped and took the company in an entirely new directly. We launched a new product, and the company suddenly took off. From 2002 to 2007 we grew from $1MM in annual revenue to $78MM in annual revenue We went from 4 employees to 300 and from 1 office in Kirkland to 6 offices on 4 countries around the world We built massive data centers to handle our growth, hired like crazy, built an amazing company culture and had a fantastic time Because we were so profitable we decided to &quot;take some money off the table&quot; and allow existing shareholders to sell of their shares. In this process we raised $40MM from private equity investors and one of the proudest days of my life was March 5th of 2004 when I got to see 5 of my closest friends and colleagues become millionaires. We toasted each other, took the weekend off and kept right on working. Everyone worked just as hard as they had before. We were on a roll and we wanted to continue to grow. The debt markets made debt relatively easy to get if you were highly profitable, so we borrowed money and acquired three companies in three years.
The Zango Death With our debt came strict operational covenants, and when we had a quarter that was less profitable than expected we tripped those covenants. The founding team was committed to keeping the company going so over the course of two years we personally poured millions of dollars of investment into the company. All of our investments were made junior to the bank debt – but we were still confident that we would pull through the rough patch. We’d been through much worse, we figured. This too would pass. The world was suddenly rocked by a financial crisis. There was panic in the markets and the massive uncertainty caused our lenders to call our loan and they began sweeping all of the cash from our accounts. The company was unable to operate in this kind of environment and we were forced to begin looking for a buyer. Ultimately a buyer was found and the company was sold for just slightly more than 10% of the existing debt and in so doing wiping out all of the equity holders as well as all of the investments that were junior to the banks. Breaking operating covenants in the middle of a worldwide financial crisis created a panic within our lenders that led to our death. Our company had 23 consecutive quarters of profitability, and one quarter of losses – and it was gone.
So with that as our backdrop, here are 7 things I never wanted to learn. These are not 7 immutable laws, and I can't even guarantee that all of all of these are transferrable, but I can tell you that I try to live my life by these.
Being an entrepreneur is a lifetime decision. Winston Churchill is my personal hero. He knew who he was and never stopped being that guy. When it comes to the startup world the question is; Are you an employee or entrepreneur? Being an entrepreneur isn't a gig you can just dabble in. To really have a startup you have to bet everything. All your time, all your emotions and passions - and often times all of your money. If you are willing to give up when you face difficulty or even give up after one or two of your companies fail; that is simply foolish. If you are going to take this kind of risk, you have to be committed to never stopping. After Zango blew up I had an opportunity to take a great job running a good company, working for a guy I liked. So I had to do a serious gut check to figure out if I was going to become an employee, or if I was going to keep playing the entrepreneurial game. So I did the obvious thing when one has a big decision to make; I went to a secluded Mexican beach and drank huge volumes of tequila. I ultimately concluded that I had wanted to be an entrepreneur since I was 7 years old, and stopping doing what I loved just because I got kicked in the nuts simply didn't make sense. So I turned down the job offer and teamed up with my long-time friend and prior co-founder Jeff Malek and started a company called BigDoor. It's been a bit over a year now since we made that decision, and we've since raised over $5.5 million from some amazing investors and are busting our asses trying to build a platform that powers the gamification of the Web.
You need to understand your equity class. I don't mean common versus preferred. All of that is important, but what I'm talking about is that as a startup, the stock in your company isn't liquid, so don't think like a day trader. The life inside of a startup is filled with an unbelievably up and down set of experiences and those experiences will likely drive up and down emotions. Even if you are wildly successful, the emotional roller coaster will be there. Try your best to not let the daily and hourly cycles overwhelm your emotions. You are making a long term investment, so don't sweat the daily ups and downs. Keep your eyes on the long term. And &quot;Long term&quot; goes well beyond the lifecycle of your current company. Our new investor and board member Brad Feld talks about a “career arch” that each of us has. That arch will span many companies, many successes, and many failures. That arch will be affected by, but not owned by your current company.
Have an imaginary interview in your mind with the person you imagine replacing you. Sometimes we think problems are really complex, but if we step back a bit and gain just a bit of perspective, the answer will become clear. At Zango our founding team was constantly being stretched into new areas as we grew and as we shrunk. We were always needing to take on responsibilities that we were wholly unqualified to take on, so one of our co-founders Doug Hanhart came up with a wonderful line of questioning. He would ask himself; if I hired an expert - someone who actually knew what they were doing - to do my job today, what would they do? That is a very powerful question, and the concept behind it is that if someone was freed from being responsible for all the stupid shit you've done in the past year; what would they do? Would they scrap the product you've told the entire company would become the next Google? Would they continue to invest dollars and resources into something you feel obligated to defend? The idea is not to change your playbook everday, but rather to counter balance the blinders that we can sometimes have. As entrepreneurs we sometimes (not always, just sometimes) have to go in directions that everyone else says is wrong. So being bull-headed, stubborn and persistent can be wonderful traits - but an even more important skillset is the ability to admit you were wrong and go in a different direction. It's a wonderful exercise to at least once per month get to quiet place alone, look at your current situation with fresh eyes, and honestly ask yourself what decisions your replacement would be making. If you do this well, you'll ensure you don't ever have a replacement.
I think it is incredibly important for any company to know their core values and to bake them into a company early on. And this process is very much like baking. Building a product is more like cooking. If you forgot to add salt in the first rev, you can sprinkle some of that in later without much difficulty. The process of building values into your company is much more like baking. If you forget to add butter, you can't pull the cake out after it's been in the oven for an hour and simply inject some butter. You have to get that stuff in there early before the cake begins to bake.
These are BigDoor's core values and here's the quick summary of what they mean. Have fun Focus on customers Technology is cool We promote based on results We’re super cheap These things are documented, communicated, lived up to and they will guide us in good times and in bad.
Build your team. Notice I didn't say, &quot;hire&quot; a great team. That's important, but it's also very different. I mean, truly BUILD your team. When we went through hell together for the last year of our company, not one member of our senior team left during all that chaos. They took huge risks to stick with the company, and they did so because they were loyal to me and to each other - not because of any potential for financial gain. Building of your team includes your investors and your board. Build relationships and trust with them before you walk through the fire. This is simply a &quot;dig your well before you're thirsty&quot; concept, applied to the people that will matter most when your company faces difficulty.
Understand which of the many balls you are juggling can be dropped. When you are in the middle of chaos, you can't possibly keep doing everything you were doing before. When the bank just called your loan, suddenly the call this afternoon with your trademark attorney isn't very important. Triage your problems. Identify which ones can kill you and then work on those in the order of those that can kill you fastest. It's not complicated or sexy, but it can sometimes become very important.
Doing what you love is more important than making money, but just barely. I'm not trying to make a value assessment here, I'm merely pointing out that if you aren't making money in your business - you probably won't be able to keep doing what it is you love to do for very long. There is one very simple reason to form a for profit company, and that is to make money. That doesn't mean that's your core motivation, and it certainly doesn't mean that all you care about is profits. But it does mean that if you are forming a company, you should figure out how to generate cash. At its most base level, the reason for this is pretty simple. Cash will give you the option to keep doing what it is you love. Lack of cash will make you rely on the kindness of strangers. And nobody loves that.
Thank you. I'd be happy to take some questions.
Dealing with Failure - Keith Smith
Keith Smith Co-Founder & CEO BigDoor
<ul><li>The story of my previous company - Zango </li></ul><ul><li>7 lessons I never wanted to learn </li></ul>What I want to talk about today…
NASDAQ Composite – 1999 to 2009 The 10 Year Zango Story A decade of utter joy , mixed with pain , covered with learnings .
Started Zango a “playroom” startup Raised Our Series A Financing Divorce “ too broke to file for bankruptcy” Raised a “bridge” NASDAQ Composite – 1999 to 2002 Zango as the Startup
“ Found” the right product NASDAQ Composite – 2002 to 2008 Raised $40MM Took on debt to buy companies Zango as the Growth Machine Hyper-growth begins
Debt covenant is tripped NASDAQ Composite – 2008 to 2009 Zango sold in (very) short sale Zango Dies Lender’s call our loan – sweep cash 23 Consecutive Quarters of Profits + 1 Quarter of Losses = Death Founders pour millions into the company
1. Make a lifetime decision “ Never give in, never give in, never; never; never; never - in nothing, great or small, large or petty - never give in except to convictions of honor and good sense”
4. Know Your Core Values <ul><li>More Fun...More Money: We have and enable fun and in doing so we help our customers and partners improve their businesses. </li></ul><ul><li>Customers Are Our Priority: We are passionate about our customers and partners and endeavor to respond to any request from them within two hours. </li></ul><ul><li>The Platform Matters: The BigDoor API is available, consistent, secure, extensible and clearly communicated. We use agile methods and continuous deployment to move quickly and prefer to use open-source and make our code open-source as much as possible. </li></ul><ul><li>Meritocracy Is Our Way: We value our employees and their results. We aim to promote and compensate based on merit by placing a premium on results. </li></ul><ul><li>Spend Time & Money Wisely: We are committed stewards of BigDoor's limited time and money and this is reflected in the frugality of our ways. </li></ul>