If All Else Fails
By bstewart • Jun 2nd, 2009 • Category: Cover Stories|
by BRIANA STEWART It should have been a sure thing. After all, Scale Eight, a Silicon Valley-based provider of scaleable storage software technologies, certainly had the resume. During its four-year run, the company raised more than $60 million in venture capital; had more than 200 employees; had offices in San Francisco, New York, Virginia, Tokyo and London; had contracts with multibillion-dollar companies like Microsoft, Viacom, and Fujitsu; and had Red Herring magazine name it one of the “50 privately-held companies most likely to change the world.” But 10 years later, Scale Eight is a shoulda, coulda, woulda. The beginning of the end It was the summer of 1999 — the height of the dot-com bubble — and 25-year-old Josh Coates had a product, a pitch and a plan. His idea? Now-patented technology that would revolutionize data storage and change it from a hardware business to a software business. So he quit his job as a software engineer at Inktomi, a California company that provided software for Internet Service Providers (and was later acquired by Yahoo in 2002), and sold his stock options there for seed money. He scrounged up $30,000 and went out looking for venture capital — developing his technology and writing code all the while.
Well, along came the investors. And the management team. And the offices. And the employees. And the clients. And the accolades. And, eventually, the problems.
“We had brilliant technology, but we didn’t have a clear business model,” Coates says.
And as he’ll attest, brilliant technology doth not a successful company make. There were, indeed, several factors that gave Scale Eight’s promising future bleak prospects. The first culprit: poor leadership.
“At the root of everything was our struggle to find good leaders,” Coates says.
And he’s not kidding. The company averaged a new CEO every 11 months.
“Hiring a CEO is extremely high-risk. It will make or break a venture,” Coates says. “No matter how strong the founder or founding team is, the CEO drives the boat. And if he doesn’t know where we’re going when the storm hits, we’re toast.”
Coates, too, felt inadequate as the CTO.
“Being so young and only having experience as a software engineer, it was a stretch for me to run the engineering department and operations. My leadership was really more soft than executive,” Coates says. “I was to blame as much as anyone, but effectively, I was the new kid — and the adult supervision failed us.”
Hand-in-hand with poor leadership was an excess of capital. In total, the company raised $65 million in funding (series A to C), and Coates says it was too much, too soon.
“Too much funding makes you stupid,” he says. “If you have an enormous amount of funding you tend to spend it. You quote, ‘Put it to work.’ And you quote, ‘Grow your business.’ There is an expectation that if you don’t spend it you’re not doing your job, and so you find ways to spend it.”
Coates says he’s not talking about lavish luxuries, but rather a lifestyle that funding-rich companies typically take on. Namely, elaborate signage, elaborate furniture, elaborate office space, elaborate marketing campaigns, and an elaborate number of engineers.
“There’s a time and place to grow like that, but it’s after you’ve figured out your fundamental business,” Coates says. “After your business machine starts working, then you can step on the gas. But if you’re not even sure your car runs, it’s not a good idea to get on the freeway.”
Looking back, Coates says the signs of trouble were there, but he didn’t have the know-how to spot them.
“I lacked the experience to measure the company against anything. I didn’t know what a successful business looked like from the inside or out,” he says. “And at the time, there was this thought that, ‘Hey, everything will work itself out. I mean, we’re chasing the future here.’”
And while they were chasing the future, the present economic environment — in all of its dot-com glory — was completely out of whack.
“This was a time when Blue Mountain Arts, a business that sends e-mail birthday cards, was sold for $800 million — and they had no revenue to speak of. It was an absurd time,” Coates says. “We had real technology and real customers, but the fact of the matter was that we were spending more than we made every month. We needed to get back to basics.”
During its second year, the company shifted the strategy and bifurcated its resources. Rather than simply operate in “software as a service,” the company productized its technology, which, according to Coates, ultimately led to its demise.
“There’s an old adage: One business, good business. Two business, bad business,” Coates says. “The bifurcation split our resources, which meant we had one business that was small, but worked, and another business that could have been huge, but was too little, too late. Trying to keep them both as a priority didn’t work.”
By the end of the third year, the future wasn’t looking any brighter.
“When the fourth CEO decides to change the company logo and colors for the fourth time, that’s when you know it’s over,” Coates says. “It’s like rearranging the deck chairs on the Titanic.”
Coates and his board of directors looked for an out — a buy-out, preferably. But there weren’t any takers.
“No one wants to buy a car if it doesn’t run,” Coates says. “People with money don’t shop for such things.”
By that time, Coates was relatively hands-off and spent most of his time working on a home theater in his basement. The board of directors was running the ship, but as the founder, Coates wasn’t getting a lifeboat anytime soon.
“Being the founder, you have to go down with the ship. It’s a sad process; a sad story,” he says. “But the second time around, everything was different.”
New beginnings
Coates sold his patents to Intel — “The only thing that ended up being valuable was what we started with,” he quips ironically. “That was neat.” Coates worked at a non-profit organization for a year and then moved his family to Highland.
“I wanted to get out of Silicon Valley,” he says. “I decided to take a year or two off here in Utah and just hang out and do some research on my own.”
Coates calls it his “detox” period.
“The worst thing that can happen after failure is to blame everyone else and not take the time to be introspective and identify your role in the collapse,” Coates says. “Sure, it’s fun to be bitter for a while, but at some point you have to move past it. And the only cure is to succeed next time around.”
Enter Mozy, a provider of online backup data solutions in Pleasant Grove — and the exact opposite of Scale Eight.
“I did everything differently,” Coates says of the company he founded in 2005. “I found a very specific, high-value service with a rock solid value proposition. I did my homework and took the time to come up with the right model. I raised very little money. And I drove the boat myself.”
And he drove it home.
Within two years of its founding, Mozy had acquired more than 300,000 customers, including more than 8,000 business contracts. In October 2007, Coates sold the company to EMC for $76 million.
And in 2009, he left the company to focus on other projects, including volunteering as an adjunct instructor in the computer science department at BYU.
As for that initial failure, Coates lives in a world where there are no shoulda, coulda, wouldas — at least not ones you can’t learn from.
“I wouldn’t be where I am today without that massive failure,” Coates says. “It was an incredible education.”
Try, try again
Like Coates, other local entrepreneurs view failure as a powerful teacher. But let’s not kid ourselves — it’s no easy feat.
“It’s hard. There’s no way around that,” says Rich Christiansen, founder of 28 companies — eight of which were multimillion dollar successes and 10 of which were “absolutely, totally, wonderful failures. I still struggle with it. I go through a mourning period every time I lose one.”
But he dusts himself off and picks himself up, because every time he starts a new venture, he’s smarter than the last.
“I’m really proud of my failures,” says Christiansen, who has a bookcase in his office full of failure forget-me-nots. “They’re worth every painful moment.”
Alan Hall, founder of successful ventures (MarketStar and Grow Utah Ventures, for two) and five not-so-successful ventures, is also a fan of failure.
“I could have read what I learned from my failures in a text book, but I wouldn’t have internalized them,” Hall says. “There’s no greater teacher than the pain you go through. It made me a better business person.”
While failure is a golden opportunity, it’s certainly not something to work toward. And as such, Coates, Christiansen and Hall shared with BusinessQ five common mistakes to avoid, along with five common traits to success.
Do try this at home.
COMMON MISTAKES
1. “If I build it, the market will come.”
Alan Hall’s first venture sunk fast.
The Utah entrepreneur started a company in the late ’80s that would take barnacles off of boats. The cumbersome critters pose a problem for navigation, so Hall came up with the idea to use a high-pressure water hose that would rid boats of barnacles while the ship was still under water. Millions of boats needed the service, and Hall did his homework.
Or so he thought.
Hall went down to the San Diego/Los Angeles area and scouted marinas for potential buyers. Only no one would bite. So he spoke to an old sailor and asked what was wrong with his idea. Turns out the product took off barnacles — and paint, which meant boats would still have to be pulled out of the water.
“My splendid idea had no customers. I didn’t understand my base,” Hall says. “I was land-locked. I was in an industry I didn’t understand. And it made me ripe for failure.”
The lesson here, Hall says, is to find a market first, product second.
“Most entrepreneurs build an idea and then go out looking for the market,” he says. “It’s completely backwards. You need to know your space.”
Coates couldn’t agree more.
“Lots of people aren’t willing to put forward the work and research upfront. They don’t do the ‘R’ of R&D,” he says. “They think R&D is just for the tech world, but it’s not. It’s for all business. Your company won’t fall into place by itself. So before you take people’s money, before you hire people away from steady jobs, study your market carefully.”
2. “My idea is perfect just the way it is.”
A common trait among entrepreneurs is their inability to take criticism, Coates says. Their ideas are so great, so revolutionary, they’re above correction.
“You always hear the story of the frustrated entrepreneur who cries, ‘They just don’t get it!’” Coates says. “But here’s what’s really going on: Chances are you don’t get it. And even if they don’t get it, the fact that you can’t get them to get it means that you don’t get it.”
Say that five times fast.
3. “Where did all the money go?”
News flash: Being rich in startup capital does not mean your business is rich.
“I see it every day with entrepreneurs,” Hall says. “Their expenses are too great to start with. They think they need a fancy office, when all they really need is a card table and chair in the garage. Then they’re paying themselves a big salary, and they live beyond their means. They’re not conservative. They aren’t careful with these precious dollars.”
4. “We’re the best of friends — of course we’ll make good partners.”
While partnerships with friends and family members can work seamlessly, it’s important to not go into business together solely for that reason.
“People often think that just because they play golf with their buddy, they’d make the best of business partners. But that’s not usually the case,” Christiansen says. “You and your partner need to be on the same page with your goals and plans. There needs to be a sense of balance. There needs to be a give and take. Make sure you complement each other when it comes to your skill sets. A bad partnership can ruin a business.”
5. “The business can’t succeed without me, myself and I.”
“Egos will kill your business,” Hall says.
And there you go.
COMMON TRAITS TO SUCCESS
1. Sacrifice
“Successful entrepreneurs are those who have a dream and have the ability to follow it,” Hall says. “They’re also able to sacrifice their time, energy and talent to make that dream happen. A lot of people can’t do the sacrifice part of it.”
Coates concurs.
“There are a lot of talkers and not many doers,” he says. “Successful entrepreneurs are doers.”
2. Passion
Passion — it’s an entrepreneurial buzz word for a reason.
“Successful entrepreneurs have a fire in the belly,” Christiansen says. “There is no perfect entrepreneur, but there is a common characteristic of downright determination.”
3. Salesmanship
You know all those hats you wear as a small business owner? Always have the sales cap handy.
“You have to be able to sell,” Hall says. “You have to sell your product and sell your business. If you can’t do that, you won’t make it.”
4. Luck
As luck would have it, all entrepreneurs need a little good fortune on their side.
“Anyone who says luck isn’t part of their success is delusional,” Coates says. “It’s true that we make a lot of our luck out of hard work — and we can’t be successful solely on luck — but it’s a necessary factor in every business. It’s an amazing factor.”
5. Gratitude
In business, treat every day like Thanksgiving.
“Gratitude is an important characteristic,” Coates says. “Early on as an entrepreneur you are a taker — you take everything from everyone and try to feed your venture. And if that’s not coupled with a healthy dose of gratitude, you’ll be in trouble.”
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