Five Years Too Late

July 29, 2009

Seen This Game Before

Filed under: Uncategorized — fiveyearstoolate @ 8:48 pm
Stuart Ellman

Stuart Ellman

I want to specifically congratulate Martin Tobias and Rodger Desai. They are, in order, the founders and CEO’s of Kashless and Payfone. It is not just that they have founded companies that I respect and where I enjoy being a board member, it is how they have changed in the past few years; overcoming disappointment and hardship, learning from the difficult times, and being better leaders. Most important of all, they learned the pros and cons of what constitutes overspending.

Let’s start with Martin. I backed Martin when he was the founder at encoding.com (later renamed Loudeye). Martin was a brash young CEO who wanted to do things his way. He was in a hot market and the venture (and IPO) money was flowing. Encoding had a huge staff, filling an entire warehouse in Seattle. I am pretty sure that the first thing Martin did after closing our round of money was to rent out a club and throw a huge party. Back then, this was justified as public relations. The company was busy digitizing music and videos while trying to cut deals with the record labels. The company later had a very successful IPO but the company crashed as the record labels would never sign any deals and the business model went away.

Needless to say, Martin would admit that he could have been much more careful with his spending, especially after new money diluted him tremendously. Martin later became the CEO of Imperium Renewables. I was a small personal investor here. Imperium was the leader in biodiesel production and raised hundreds of millions of dollars to build plants. Unfortunately, again, the company was spending money ahead of the market being fully developed. After input costs changes made the model unprofitable, the planned IPO had to be scrapped. Again, Martin saw his stake diluted.

Instead of turning tail and hiding, Martin worked hard with me to find a green company that was not reliant on huge capex needs. He created Kashless, a marketplace for free items using advanced ecommerce and community tools. But, what impresses me the most is how he runs the company. Having overspent in the past, he runs the company as lean as anybody I have ever seen. The office is really cheap space but perfectly nice. All of the furniture was found free on the web using Kashless. Employees are few but they are excellent and held to a very high standard. If they are not pulling their weight for their salary, they are asked to leave. The company uses free google tools (especially google docs and google talk). Martin raised one round of venture funding from RRE and is highly confident that he will never need more money. Why? He realizes that every dollar spent is a dollar that will have to be raised later. Right now, he owns a lot of the company. Having seen this game before, he realizes that it is better to make do with less and own more of the company. The essence of the entrepreneurial spirit is to create a lot with very little. Color me impressed.

I have a similar story with Rodger Desai. Rodger was the founder and CEO of Vettro where I was not an investor. He was later the founder and CEO of Rave Wireless. Rave was in a very hot market and venture money, again, was plentiful. I don’t think Rodger would deny that he could have been tighter with the dollar. The company had nice offices in NYC. They hired very talented people for many senior positions and the salary costs were pretty high. Unfortunately, much of the spending was done before the market really developed and the company burned through a lot of cash. Rodger later left the company and suffered some major dilution as well. It is worth noting that the new CEO, Tom Axbey, has done a spectacular job at Rave and the company is now going gangbusters.

But back to Rodger. I thought he was a real talent as a CEO so I gave him a conference room in my office and put him together was another talented young guy, Michael Brody. I told them to figure out a business. They created Payfone. Payfone is a global payment system utilizing mobile account balances. They company looks like it will be a huge success and I could not be happier. But it is how they run the company that impresses me the most. Every dollar has to last. Their company expense handbook is the best I have ever seen. Not only do they all fly cheap and stay cheap, everyone must supply their own computer. Hiring has been held off until absolutely necessary. They got all the work done, they just have done it with fewer people until contracts and deals have actually been signed. Their space in NYC is dirt cheap and month to month. Bravo, that is the way to really run a company.

It is almost funny. Whenever I hear about venture backed companies that close a round and start buying $2000 espresso makers and hiring design consultants, I know that it is a neophyte CEO. Hopefully, like Martin and Rodger, they will learn. Some never do. I want to back those people who do learn.

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