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MONEY

A Billion Dollars, Through Acquisitions and Perseverance

Patrick Grady, founder and chairman of Rearden Commerce, talks about his company's $1 billion valuation.

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Patrick Grady founded e-commerce company Rearden Commerce just before the dot-com bubble burst. The company has since grown to 500 employees, and with the acquisitions of Ketera Network and Homerun.com, was valued at $1 billion in September 2011. Staff writer Jeremy Quittner spoke with Grady about milestones, the network effect, and Jeff Bezos.

This is my baby. I am the sole founder of the company. We launched in March of 2000, which was not great timing. I actually hired my first engineers as the NASDAQ was at an all-time high.

We've never deviated from our mission, which is to perfect e-commerce. We believe that you can bring together all of this really rich information about users and correlate that with what is available from a merchant at a certain point in time.

I raised $2 million in seed capital in December of 1999. Our two most recent acquisitions were Ketera Network, a Kleiner Perkins-backed company, and daily deals company Homerun.com. That purchase, in September, coincided wtih the closing of a financing that valued us at well over a billion dollars.

For an e-commerce marketplace to be successful, you need a network effect to take hold. You need a critical mass of buyers and sellers, which in turn brings more choice, which in turn attracts more buyers. But establishing the network and getting to that proverbial tipping point of buyers and sellers is not trivial.

It was the belief of the investors in that round that we would in fact achieve scale of tens of millions or hundreds of millions of users and millions of merchants, and that would be sufficient to drive network effect. It has been quite a journey, and I am brutally honest: We have been at this for 12 years, and it’s an extremely ambitious idea to perfect e-commerce. It is up there with Google's goal of organizing all the world's information.

Since that round closed, I don’t think we have spoken about the valuation more than two or three times at employee meetings. It is nice to have validation, but the greater validation is to see users using your products, and to see everyone in your ecosystem deriving value from what you've done. If we build great products for users and partners and merchants, then great things will happen. That's occurring now. Revenue is increasing and margins are expanding. The ecosystem is accelerating on all fronts, because we focused on the right things.

I think the single greatest tech CEO other than Steve Jobs in the last 20 years is Jeff Bezos at Amazon. The guy just focuses on the long-term. He doesn’t care about what the Street thinks of this quarter or this year. That takes courage, and that is what we are trying to do here.

We have an incredibly patient group of venture and corporate investors. We had to make sure that after the round of financing they had the appropriate expectations for $1 billion, that we shouldn’t immediately be thinking, "How do we get to $5 billion in two years and $10 billion in four years?" But I think whenever a company raises a big round at a big price you invariably get a set of inflated expectations that you have to manage.

One of the expectations for any company that raises capital at a price in excess of $1 billion is that you need to start getting ready for a public offering immediately, and I just don’t think that’s right. You must give credit to Facebook and the management team for not going public until it was generating billions in revenue.

Any entrepreneur should not really be looking at [valuation milestones]: I raised $100 million, or I got money from a certain venture fund, so now my company is worth a billion dollars. I just think those are all the wrong measures. I am old enough and I have enough scar tissue that I am pretty sure I am right about this. Be careful what you ask for in life, because you might just get it. With a significant number like this comes a very high expectation, especially from new investors: I valued your company at $1 billion and I, of course, want a big return on it. Where is my $5 billion valuation?

A year ago I had to have this talk with one of my investors. I said if I give you good news at ten in the morning, you can't tell me I need to go and file an S-1 and go public, because I can guarantee you by 2 p.m. the same day, I will give you horribly bad news, and you can't tell me at 2 o'clock that I have to cut the company in half. It is so binary for many investors: Your company is either worth billions or it is worth nothing. It is about establishing a culture of consistency and focus, and keeping your eye on the mission statement and executing day in and day out.

IMAGE: Courtesy Company
Last updated: Jan 3, 2013

JEREMY QUITTNER is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.
@JeremyQuittner




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