InPhonic's Missed Connections

Why being No. 1 on the Inc. 500 and selling more cell phones on the Internet than anyone else wasn't enough.

In retrospect, the high point for InPhonic might have been the day it went public -- the day when its potential was supposed to just begin to be realized.

Founded in 1999 by an up-and-coming entrepreneur named David Steinberg, the Washington-based business was one of the first online sellers of mobile phones, plans, and activation services. At the time, Steinberg, a salesman at heart, had already made an imprint in the industry. In 1993, he had started Sterling Cellular, a third-party distributor for Cellular One, and within six years, the company had expanded to 58 locations. In 1999, Steinberg split Sterling into three parts -- a retail chain, a telemarketing company, and a back-office operation that activated and shipped phones, according to a feature in the March 2005 issue of Inc. Then, when he decided to move the activation and distribution unit onto the Web, he used a chance encounter with former Pepsi and Apple CEO John Sculley to pitch his idea and get him on board. The new company, InPhonic, started out selling phones and plans through sites it created and managed for online businesses, national retailers, member-based organizations and associations. Companies like BestBuy and Amazon would eventually become partners. In 2003, it launched its signature site, Wirefly.com, which earned immediate praise as a one-stop comparison-shopping destination for cell phone plans, phones, and accessories. In Steinberg's words, he had created "the Expedia of the mobile phone industry."

By the end of 2003, InPhonic had achieved a three-year growth rate of more than 23,000 percent, earning it the No. 1 ranking on the 2004 Inc. 500 list of the nation's fastest-growing private companies. With a board that included Sculley, venture-capital heavyweight Jay Hoag, and 1996 vice presidential candidate Jack Kemp, InPhonic didn't exactly lack for star power either. Even surrounded by this all-star cast, it was clear from the start that Steinberg was the main catalyst for success. In a story published in October 2004, Sculley told Inc. that Steinberg reflected the best traits of Steve Jobs and Bill Gates. Steinberg, Sculley said, had "the ability to motivate people to believe in what he believes in" and was "one of the best deal creators, negotiators, and closers I've ever worked with."

Early on, Steinberg had been able to raise $85 million in venture capital. That helped the company's annual revenue skyrocket from $499,000 in 2000 to $136 million in 2003, but it was the potential for continued growth that allowed InPhonic to go public in November 2004 without ever having turned a profit. Its dominant status in the online wireless marketplace was enough to raise more than $100 million in the IPO and its market cap would climb as high as $850 million -- which Steinberg figured to put to use, continuing a strategy of buying up smaller competitors. In 2002, InPhonic had purchased Simplexity for $20 million. In May 2003, when InPhonic had acquired Avesair for $7 million, it had marked the company's seventh acquisition in the preceding 14 months, according to an article at the time in RCR Wireless News.

But with the growth came additional pressures, and buried in the company's IPO prospectus was a caveat that would ultimately prove prophetic. "We have grown rapidly," a heading on page 13 reads, "and we must manage additional growth and the demands on our resources and personnel in order to be successful."

It was almost three years to the day after that Nov. 16, 2004, filing that the company would make news with a filing of a different sort. On Nov. 8, 2007, InPhonic filed for Chapter 11 bankruptcy protection after learning that an affiliate of the private-equity firm Versa Capital Management was interested in buying the beleaguered company. InPhonic said the bankruptcy would help facilitate the sale. Under Chapter 11, a company gets a chance to reorganize its business and debts. In late December 2007, a judge approved the sale after Versa had worked out an agreement with the company's creditors. Claudia Springer, attorney for the official committee of unsecured creditors, says the sale to Versa was the best -- and really only -- result that would allow some creditors to recover their debt. "There was not really any other interest from someone that actually put an offer on the table," Springer says.

Throughout the bankruptcy process, InPhonic continued to do business, but not with great success. According to spokesman Tripp Donnelly, the company is still "the largest online retailer of cell phones and products." While this may be true, lawyers for Versa said in court papers that the company has been losing more than $3 million a week.

Thus far, none of InPhonic's principals have been willing to discuss publicly what went wrong. Most of the all-star management team, including Steinberg and Sculley, did not return calls seeking comment or declined comment for this story. But by talking to competitors and industry experts, it is possible to piece together some of what happened.

Looking back, one of the first public indications that the company was suffering growing pains -- and might have a flaw in its business model -- came in 2006, when InPhonic found itself at the center of several lawsuits. In June of that year, the District of Columbia's Attorney General's Office sued InPhonic, claiming that its rebate practices violated the district's consumer protection law. The lawsuit alleged that InPhonic "imposed restrictive conditions on the rebates on their cellular phones that prevented many consumers from receiving the promised savings." Substantial rebate offers are common on InPhonic's websites and offer consumers a way to save substantially more than they could at brick-and-mortar stores.

Jason Del Rey

Senior reporter Jason Del Rey covers technology, branding, and company culture for Inc. magazine and contributes to the From the Reporters daily blog. Before joining Inc., his work appeared in Newsday, The (Newark) Star-Ledger, and the Staten Island Advance, and on ESPN.com. He lives in New York City.