How I Created A $350 Million Software Company Knowing Nothing About Software
I’ve always wanted to make a lot of money, have people pay a lot of attention to me and do a lot of exciting things. I just never knew how.
Many of my friends who are founders of their own companies tell me how they exhibited the entrepreneurial spirit as a kid — they sold candy out of their backpacks, had a landscaping business during the summer, etc. They created value and learned the virtues of hard work early on.
But that wasn’t me. I created a horse-racing simulation game in Applesoft BASIC in Manhattan Beach Middle School’s computer classroom and ran a small gambling operation. I mean, who could blame me? The teachers left that class completely unattended during recess and lunch, as if they couldn’t fathom how any kid could get into trouble playing with those large calculating typewriters.
However, making a few dollars to buy an endless stream of Atari games and learning how to collect from the bigger 8th graders didn’t teach me anything about building a tech company. By the time I decided to move to San Francisco, I was completely and totally clueless.
Just as bad was my sense of timing. By the time I entered the job market the dot-com bubble had burst, leaving scores of smart people unemployed and a wave of VC firms bust. A lot of people were leaving the Bay Area to go back to wherever they had come from, but I was too stupid to know anything about the logical decisions people made.
The discount brokerage firm where I clerked gave us all two weeks of training in how to execute online stock trades at one of their call centers in San Diego. That’s when I had my brilliant idea (except it didn’t turn out to be brilliant until I changed it a few times).
The call center manager who monitored our training was in his late twenties and had a smug grin on his face all day, every day. “This call center system I’m teaching you costs $30,000 a person,” he mentioned, several times. He smirked a lot and I despised him.
It struck me that if I could build cheaper call center software, I could make my own software company — and have revenge on The Smirker.
The stars must have been aligning for me because shortly thereafter, my college roommate, who I nicknamed “The Fro” (I give nicknames to everyone for whom I have a deep affection), called to tell me (brag) that the call center software startup he worked for had been acquired by Cisco.
He hadn’t made much as a late-stage employee, he admitted, but he had a taste for what could be, and encouraged me to fly to Boston to discuss creating our own startup. “After all,” he said, “you’re good at selling shit.”
I wasn’t sure that was a compliment, but I bought the plane ticket.
After a weekend of discussing dreams and man-feelings, we got each other excited enough to decide to quit our jobs the following Monday. I gave my two weeks notice.
Believe that even if you do something stupid like quit your job without a clue, somehow you’re going to figure it out.
Then something odd happened. The Fro wouldn’t answer my calls all day that Monday. On Wednesday he finally called me and said sheepishly, “Brooo. You know what Bro? I decided that it’s not a good idea for me to quit my job right now. Seriously. I’m so sorry.”
I had $5,000 in my bank account, and I seriously thought of spending $1,000 of it just to fly back to Boston to punch him in the face. Instead, I hung up the phone and punched the wall. Maybe a few times.
Then I called him back and asked him, as calmly as I could, if he knew of anyone else at his newly acquired startup that might want to create a software company with me. I reminded him that I was good at selling shit. He introduced me to “Tooter,” who, it turned out, was heading my way to go snowboarding in Tahoe.
When we met at Heavenly Ski Resort I discovered an obviously brilliant guy who disliked corporate life and had an unbridled affection for activities that may not have been fully legal in the state of California. But hey, we all had issues.
He explained to me that he and The Fro had worked at a startup that created software for call centers, an ages-old industry they had revolutionized by adding a .com to the name of the company.
Because I was an entrepreneur (unemployed) now, I told him that we should just recreate that class of software, and he agreed. To his credit, and somewhat to my amazement, he sent an email to his boss and quit that night. A few weeks later he sold his house in Boston and bought a new one in the Bay Area.
But what made him such a risk taker and brilliant programmer also made him a supreme asshole at times. Knowing nothing about software companies, many of my questions were met with a question of his own, his favorite being, “Are you a fucking idiot?”
There were so many depressing nights alone that often I would watch my favorite movie, The Shawshank Redemption, over and over, mindlessly. Maybe seeing Andy Dufresne enduring so much shit made me feel better about my own situation.
Clearly, I needed help (therapy), so I asked my former boss at the discount brokerage firm if he knew of any angel investors.
Thankfully, he introduced me to his favorite day-trader client and explained to him that I was a promising entrepreneur and that Tooter was an amazing engineer, which he absolutely was. I explained to the investor as passionately as I could that I was going to build a successful software company or die trying, and that I was into self-preservation, so…
The day trader pointed to a picture of a small jet on his office wall and said, “I want you to help me buy this.” He then wrote us a check for $150,000 on the spot, and we were officially funded.
We then hired “The Machine” (Engineer #2) and I moved in with him into an apartment in the Twin Peaks neighborhood of San Francisco, mostly so I could harass him into programming day and night. And as my two engineers built a beta version of our call center software, I started dialing for dollars and calling call center owners with the pitch and promise of something cheaper.
After so many rejections, I wanted to reject myself.
After what must have been more than 2,000 cold calls, I finally reached a receptive voice on the other line. Joe owned a small but successful call center in Provo, Utah. He called my bluff and said that he knew we didn’t have anything solid yet, but he trusted we could get it built — but it had to be half the price I quoted him.
And that’s the early lesson I learned about entrepreneurship, or maybe it was a lesson in America itself. That after so many rejections, I wanted to reject myself, but then found someone who would mail me a check for $40,000, even during a recession, because they were risk-taking business owners themselves.
It made me realize that America was a magical place for entrepreneurs. Even the clueless ones.
With that $40,000 check we hired my former boss from the discount brokerage firm, hired a sales rep from the call center startup that had been acquired by Cisco and the five of us went to work in a small office in Walnut Creek.
We started shipping Dell machines with a Dialogic telephony board inside loaded with our call center software. It wasn’t sexy, but it sustained us enough to hire a few more people and start growing.
Then one day, for some odd reason, I had another epiphany.
Instead of building software to load on cheap servers to sell like everyone else, why not build one “mega-server” that we host ourselves and let people rent the functionality over the web?
My former boss told me, “No, that’s stupid, that’s killing the Golden Goose.”
The engineers told me, “No, that’s going to be a pain in the ass to build.” They sent me all sorts of studies from reputable analysts showing that “ASPs” (the buzzword before it was replaced by “SaaS”) was not a profitable business model after all.
I said, “Guys, what’s the alternative? You want to be the low-cost leader for the rest of your lives hustling these shit-boxes?” I pointed to the growing pile of Dell boxes accumulating in our small office.
Arguing vehemently with them for a month, I realized that on-demand software services weren’t profitable because everyone had just tried to take traditional client-server software and host it themselves.
Few others were thinking about multi-tenancy and Voice Over IP.
They hadn’t thought to build something that was truly multi-tenant, meaning building software that was solely designed to handle multiple clients and accounts as a service. That would be a critical advantage for us, if we could pull it off, as it was significantly less hardware to purchase and much easier to manage customer accounts.
But there was another problem. A handful of other startups in this space had collectively raised more than $100 million dollars, compared to our $150,000, and they were pulling ahead. Like, way ahead.
Then one day The Machine gave me a Voice Over IP telephony box to play with. We both loved gadgets and we just thought it was so cool to be able to make long distance calls for free over the Internet.
And that’s when my Eureka 2.0 moment hit me — our competitors had single-tenant solutions requiring massive amounts of hardware and operational support to service customers at scale, but they also had to double their customers’ long distance bills.
Because a SaaS call center product has to have three phone connections ongoing per each call center agent (versus the traditional two in an on-premise model), it ate into much of the cost savings a customer would experience moving to SaaS. A service based on Voice Over IP would give us another tremendous advantage in the marketplace, as customers could actually lower their phone bills.
Few others were thinking about multi-tenancy and Voice Over IP, but I was finally starting to buy clues. And I had the good fortune of Tooter, The Machine and my former boss eventually rallying around my vision with their considerable super powers. To this day, I’m so thankful for each of them.
That “fateful day” for me was at a Safeway grocery store (where I would often worry about my debit card bouncing) when The Machine called me on my BlackBerry.
“Dude, dude, dude. Guess where I’m calling from?” The Machine asked.
“Uh, our apartment?” I started reading the cover of People magazine in the checkout line. Brittany Spears was dating someone new.
“Yeah,” said The Machine excitedly, “but this is the first call I’m making from our Voice Over IP stack. Sounds fucking good, right?”
I dropped to my knees, literally floored. We faced so many obstacles still, I knew that, but at that moment, and for the first time ever, I felt supremely confident that we were going to crush it. The competitors, the doubters, everyone. We were going to destroy the industry, then reinvent it in our own image.
And that’s really how the curve in our hockey stick began. We finally figured out a way to deliver a product that was 10x better and 5x cheaper.
That Safeway Express Checkout line where I got our first Voice Over IP call reminded me of that scene in The Shawshank Redemption where the main character crawls through miles of sewage pipe before finally being able to break free.
Shortly afterwards, we officially launched (built a new website) “The Virtual Call Center” and our business kept growing at an increasingly rapid pace. Our competitors, most of whom had not replied to my previous emails asking if I could buy them lunch in the city, were suddenly stunned at how low our prices were.
We got a great office space that impressed everyone except my father .
Ironically, we did end up being the low-cost leader, something we could do because our intrinsic costs were so much lower. We got substantial VC funding from great firms who believed in us and, finally, a great office space that impressed everyone except my father — who kept asking me why I wasn’t a doctor yet.
The first year we had done $0 in revenues, the next year $900,000 and the next year $3 million. I led the company to $10 million in annually recurring revenues before I departed. The truth was, the company had become its own entity and didn’t need me anymore.
Today, the company I named Five9 is traded on the NASDAQ stock market and employs hundreds of Bay Area Californians, with an IPO that gave the company an opening day valuation of $350 million dollars. Whenever I call into a corporation’s call center that’s using my software, I can’t help but smile. Until I’m on hold for longer than two minutes.
I’m not sure if I have any sage advice for other entrepreneurs, but out of this experience I did learn one important truth. Namely, you don’t have to be an Ivy League graduate (I’m not) or have a lot of money (we didn’t). You just have to believe in yourself against all reasonable logic, as trite as that sounds.
Believe that even if you do something stupid like quit your job without a clue, somehow you’re going to figure it out. Believe that after enduring years of the prison-like toil entrepreneurial life can be, you will emerge from miles of sewage pipes to feel the rain wash the crap off your face.
And that you will disappear to a beach in Mexico with a bag full of money, meet up with your co-conspirators and have margaritas.
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