Start Up. Cash Out. Repeat.
Time was, founders and their companies couldn't be separated except by force. Your company was your bid for immortality. Not anymore
Sprawled in a San Francisco cafÉ, dressed in a T-shirt, frayed shorts, and retro sneakers, Mark Pincus fidgets like an anxious adolescent, interrupting his monologue only long enough to hold a water glass for his American bulldog, Zinga, who primly perches on her own chair. "I feel like we're still kids," says the 32-year-old cofounder of FreeLoader as his dog laps water from the glass. "I get off on thinking that, you know, we can compete in the grown-up world and not have to play by the same rules." Pincus's 33-year-old former partner, Sunil Paul, an electrical engineer by training, competes to get a word in edgewise.
The story they're telling, about the Internet start-up they launched together, contains all the elements of an archetypal entrepreneurial tale. Armed with an idea, which had been rigorously tested in a neighborhood bar, the pair originally set up shop in Pincus's Washington, D.C., kitchen in October 1995. They began luring accomplices with little more than the conviction that their product--an off-line Internet browser that would download information automatically to computer desktops--was going to become the "next big thing" on the Internet.
Within a month, FreeLoader moved into a 1,500-square-foot space that it practically outgrew upon arrival. With 18 employees crammed into a one-room office in Georgetown, and Pincus shouting directives at programmers, whose techno-pop-blaring headphones tuned him out, "FreeLoader was completely insane," remembers Jamie Hamilton, the company's first hire. The founders felt such urgency about their mission that they once had computers delivered to employees' homes during a company-closing blizzard. "We've got competitors," explained Paul. "They're all in California. They don't have snow."
Charging at hyperspeed seemed compulsory. FreeLoader's biggest rival, PointCast Inc., based in Sunnyvale, Calif., was rumored to be six months ahead in its development of a competing "push" technology, a means of delivering information from the Internet to the desktop.
"In our world, we started saying from day one that three months is a year," says Pincus. "That means you live life like time is moving at that pace. Three months is a year; a week is a month; a day is a week." As aggressive as that sounds, "Internet years" have become a standard way of keeping time in high-tech circles. "It used to be that a week was a 'Web year," quips Ridgely Evers, former CEO of Inquisit Inc., a competitor of PointCast. Whatever the time frame, notes Pincus, "my attitude was that if we didn't win in the short term, there would be no long term."
Pincus and Paul did indeed win in the short term. In June 1996, just eight months after founding FreeLoader, they unloaded it for a staggering $38 million.
Although that sum is uncommon for such a young start-up, FreeLoader's founders are hardly the first entrepreneurs to create and cash out of a company quickly. According to VentureOne, a San Francisco-based research firm, 21 venture-backed companies founded in 1996 either merged or were acquired in that same year. How long that flush world--where larger players are scooping up technology-producing start-ups for seemingly absurd sums--will remain intact is anyone's guess. Nobody suggests that the fierce bull market, or the ever-evolving Internet, won't eventually settle down. By then, though, folks like Pincus and Paul may already have changed what it means to be an entrepreneur.
Their style of building businesses--moving fast, pumping up brands, networking a path to riches quickly and repeatedly--is already infiltrating companies far beyond the Internet. You'll find pockets of it in hot industries, in which quick exits are more viable than ever, made possible through a hyperactive market for initial public offerings, rampant consolidation with large companies viewing technology start-ups as R&D labs, or downright confusion about the industry's future. Chaos, to entrepreneurs like these, means opportunity.
It's not what you know--it's how you spin it
Back in 1976, Steve Jobs and Steve Wozniak had the luxury of assembling what became Apple's first computers far away from the public eye, in a garage owned by Jobs's parents. Start-ups today angling to strike it rich in a public offering or a strategic sale face a more heated environment. They must elbow aside swarms of like-minded entrepreneurs. Every nanosecond counts.
To get FreeLoader up and running in the fall of 1995, Pincus and Paul tapped everyone they knew who could help. Pincus's Harvard Business School degree and stint on Wall Street and Paul's experience as America Online's Internet product manager boosted the pair's credibility. Two acquaintances from a local multimedia company built a prototype of the FreeLoader software at night. Paul's friends from a government agency managed focus groups that tested the prototype in the recreation room of Pincus's apartment building. "The prototype wasn't much," says Paul, "but it was enough to get us some money."
Working his financial connections, Pincus met with big-time Internet and media players to create marketing and distribution partnerships. He persuaded HotWired, for instance, to distribute FreeLoader's software. In exchange, users got a version of FreeLoader's software that automatically subscribed them to HotWired. In return for adding various search engines, such as Excite, to its software, FreeLoader saw its banner popping up on millions of computer screens every month.
From the start, they had a single message for all who'd listen: the next big thing has arrived, and its name is FreeLoader. The pair employed a public-relations firm--owned by Pincus's dad--to position the company as an industry leader. Even before they'd finished developing the product, they were barraging the media with press releases, spending $1,500 a month to publicize their idea. By February the company would hop to a New York City agency, upping its spending to $10,000 a month. Wisely, FreeLoader targeted wire services, like Reuters, knowing that other publications often pick up their stories. In addition, Pincus courted reporters, peddling his exciting tale about an off-line-browser war in the making. Pincus can spin a story like Clinton spin master James Carville. Lacking much to report about his own young company, he ingratiated himself by sharing what he knew about the still-under-wraps product to be released by PointCast, soon to be the industry leader. His efforts apparently paid off. In January 1996 a story appeared about the industry in Interactive Week and named FreeLoader as a top contender. "The way to get real mind share is to realize that the media is a gigantic wind tunnel," says Pincus. "It's a black hole that can never get enough content to suck through it."
The story spread. "In one two-week period, FreeLoader was in U.S. News & World Report, Newsweek, Investor's Business Daily, and InformationWeek," recalls Bennett Kleinberg, who orchestrated FreeLoader's publicity assault. "No one else was feeding the market so aggressively. What we did there defined how other campaigns we do now take place." Charles Lax, general partner in SoftBank Technology Ventures, one of the venture firms that put money into FreeLoader, recalls, "It was positioned as a savvy, happening company in a hot space." During the company's life span, publications ranging from Rolling Stone to the Wall Street Journal wrote about it. "Public relations makes more of a difference than anything else," asserts Andy Sernovitz, president of the Association for Interactive Media, a trade association based in Washington, D.C. "The ones with better press are getting big bucks, acquired, or venture-capital backing. It bears no relationship to the quality of the product or the quality of the team."
Entrepreneurs like Paul and Pincus are often the only experts available to the press. Few can contradict them. "No one knows about the new technology except the people who created it," Sernovitz says. "It's a really twisted business," comments Seth Ferguson, managing director and head of the technology mergers-and-acquisitions group of BancAmerica Robertson Stephens in San Francisco, the investment bank that represented FreeLoader in its sale. "The new-media business happened so fast that there were no experts. The consultant you hire from McKinsey & Co. learned about the Internet the same day you did."
The buzz paid off big. "It was amazing how they quickly set up a company, said they were the leader, and they were," says Fred Wilson, a venture capitalist in New York City, whose previous firm, Euclid Partners, invested $250,000 in FreeLoader in November 1995. "There was very, very good marketing and public-relations activity." So good, in fact, that Wilson agreed to kick in another $1 million in February and help get SoftBank's venture-capital arm, a major investor in Internet start-ups, to pony up $1.6 million in March.
Begin with the end in mind
The road to freeloader's acquisition began in February 1996--just a few months after its founding --when the company employed a consultant to introduce it to potential marketing and distribution partners. In mid-April, with the help of then-consultant Julie Chapman, Pincus met with Yosi Amram, the founder of Individual Inc., then a $24-million news-retrieval service (which recently merged with Desktop Data Inc. to become NewsEdge Corp.). Over dinner with Amram, Pincus says, he quickly realized that the CEO fancied FreeLoader as more than just a strategic partner. Amram informally offered $25 million to buy the company that night. Viewing it as his ticket to greater cyberspace, Amram recalls that "FreeLoader had a unique technology and brand that I thought could get us into the market much faster than developing things internally would."
If the sudden offer raised Pincus's pulse, he hid it well. Double that number, he coolly shot back, and we'll talk. "Mark's a very persuasive and impressive guy," comments Chapman. "He knew that the opportunity was there to come up with an idea and essentially flip it very quickly." If that was indeed FreeLoader's intention--both Pincus and Paul contend that their goal was to build a company, not to sell it quickly--the strategy worked. Over the next couple of weeks, Pincus and Paul estimate that they heard from Amram five or six more times. Still, they refused any kind of deal. Negotiations with BancAmerica Robertson Stephens to underwrite a private placement boosted the boys' bargaining power. During a meeting with Yahoo! Inc. to discuss a proposed marketing partnership, as Pincus and Paul recount it, they just happened to mention their offer from Individual. According to them, Tim Koogle, president and CEO of the Internet navigational service based in Santa Clara, Calif., also expressed interest. "We said, 'We have a firm offer, so your offer has to be $45 million or better," recalls Pincus. "He said he might be interested." (Through a spokesperson, Koogle says he doesn't recall discussing numbers and adds that Yahoo! gets approached by lots of companies.)
While mulling over their prospects--real or imagined--with Yahoo!, Pincus and Paul used the opportunity to notch up the stakes again. Pincus took the liberty of telling Individual they had another potential acquirer waiting in the wings--a bit of a stretch considering Koogle's sketchy recollection of the meeting. But Amram bit, offering $38 million for FreeLoader, partly in cash. He also promised to keep FreeLoader's company name and to invest millions in advertising and building a serious subscriber base.
Amram describes the negotiations with FreeLoader as "kind of a mad rush," more a bidding war than anything else. "FreeLoader was talking to us about an acquisition. Yahoo! found out about it and made them a counteroffer that was significantly higher. And two other companies offered investments to keep them independent." Bob Lentz, Individual's chief financial officer at the time, has a similar recollection: "We knew there were other offers on the table and others coming in. The whole Internet market was wild. FreeLoader was clearly the leader. They had very good brand recognition. They were a cool, young company. Its owners had goatees. They had to be wild and with a name like FreeLoader...they met all the Internet specs. I think we thought it was good for our business. We were willing to do a deal."
What made FreeLoader worth so much? According to AndrÉ de Baubigny, who worked on FreeLoader's prospective private placement and is now heading up Morgan Stanley's Internet practice, it was a combination of good timing, entrepreneurial chutzpah, and Individual's panicked state. "I think FreeLoader could have raised money, but it would have been at a different number. It was Individual's desperation that got them to $38 million. Push technology was very hot, and Individual needed an answer. Here were two guys with good technology and very good brand awareness. The secret to all of this is they built a big name in a new space very early and cashed out before anyone had figured out the space."
After a month of negotiations, Pincus and Paul agreed to sell FreeLoader to Individual under the terms of a very grown-up deal. Pincus and Paul say (and Lentz confirms) that their personal share of the total $38-million sale price was $8.5 million: a third in stock guaranteed at $18.50 a share, the rest in floating stock. On top of that, if they stuck around for three years, they would each get a million-dollar bonus. "Thirty-eight million dollars is a lot of money for a company that doesn't have any revenues," reflects former FreeLoader director of content Jeff Hosley. "You have to spin a really good tale for that."
The deal meant that FreeLoader's investors, who owned 45% of the company, saw their money grow more than fivefold in less than five months. Employees who owned 11% of the company--some of whom had only been around a couple of months--rejoiced. Indeed, the money had come to the young founders so quickly that they didn't know what to do with it. Shortly after rising to millionaire status, Pincus listed everything that he wanted to buy. The shopping list included a "big-ass" TV, a new couch, and a leather interior for his sport utility vehicle, which displays three "I'm a FreeLoader" bumper stickers plastered on the back. Total cost: $18,000.
You'll get it right next time
Starting companies isn't much different from playing a game of cards. Sometimes you win; sometimes you lose. But you get better every time you play the game. "Taking risks is rewarded, even if you have an utter failure," says Paul. "In this world, going through the experience of failure is valuable."
By most standards, Paul and Pincus's experience with failure would hardly be classified as such. Yet a few weeks after the pair sold FreeLoader, Individual's board effectively pushed Amram out as CEO, apparently unconvinced of the soundness of his acquisition strategy. (He remained on Individual's board until February 1998.) News of Amram's departure punctured the stock, which fell to $6 a share, a far cry from its $16.50 price on the day Individual sealed the deal with FreeLoader. Pincus and Paul watched helplessly as the value of their shares dropped 60%. Individual installed a new CEO within two months. Soon after, the word went out: Individual's future no longer held a place for FreeLoader. "We decided we needed to focus on business that was core to our strategy, and FreeLoader didn't fit in," explains Lentz.
But Pincus and Paul weren't interested in buying FreeLoader back. "In a business where three months is a year," assesses Pincus, "our technology was getting stale and we hadn't been investing in our brand." Individual had owned the company for about eight months. That was more than two years in Internet time. Buying back--even at a greatly reduced price--and rescuing the company that they had just sold for $38 million was not an appealing option. "Almost everything in the Internet world is timing," explains Paul. "When we started out, there was one competitor. By the time we were done, there were dozens of them." Two of those new market entrants were Microsoft and Netscape, both of which were incorporating off-line browsers in their technology. "If we hadn't been acquired, we would have become much more focused on getting bundled with those browsers," adds Paul.
Who knew Pincus and Paul's timing would prove so unlucky? Not only did Amram depart soon after championing their purchase, but a federal-securities class-action lawsuit against Individual followed. Filed in November 1996, it alleges that Individual's prospectus failed to disclose a rift that the plaintiffs claim existed between founder Amram and Individual's board of directors at the time of its IPO in March 1996. Individual won't comment on the court action except to say through its lawyer that a motion to dismiss has been filed and is pending.
Pincus and Paul spent FreeLoader's twilight days in San Francisco, having ditched the nation's capital for Silicon Valley four months after FreeLoader's sale, taking most of their employees with them. The crew continued working for Individual out west, even as it became clear that the mother company under its new president had lost interest. Finally, last spring, Individual shut FreeLoader down.
Ultimately, things got so bad for Pincus and Paul that they threatened to file their own suit, claiming that since Individual shut down FreeLoader, they shouldn't have to stick around three years to collect a million each. They never filed a suit, but last October, Individual paid them each $672,500, according to a report filed with the Securities and Exchange Commission.
Today if you try to visit freeloader.com, you'll land at the site of its former arch rival, PointCast, which paid next to nothing to make that happen. "That was the worst blow of all," says Pincus, standing on the balcony of the $600,000-plus home he bought in San Francisco's Cole Valley, a stone's throw from Paul's equally pricey abode.
Start up, cash out, repeat
Following FreeLoader's death, Pincus kept busy by camping, going to music festivals, and taking acting classes. "I had too much time on my hands," he concedes. He also met regularly with Paul to brainstorm about new business ideas.
Just a few months later, in September 1997, Pincus was back in business. With the help of two programmers/partners, he launched a software company in Redwood City, Calif., called Replicase Inc. Having already hired 15 employees, he says he spends most of his time "handling administrative crap," mapping out his business strategy, and, of course, networking. "So pleased" was SoftBank's Lax with his last deal with Pincus that the venture firm invested $2.5 million in Replicase. FreeLoader is already a distant memory. Reflecting on its demise, Pincus says, "It was a bummer, but it wasn't the end of the world."
Paul is also back in action. His new company, San Francisco-based Bright Light Technologies, is marketing a technology that he hopes will "end spam [junk E-mail] as we know it." With a couple of contractors and 12 new hires punching out code, Paul is busy coaxing Internet service providers and Fortune 500 companies to sign up for his service. He's also hammering out a business plan and talking to venture capitalists.
And in its short life, FreeLoader has already spawned another generation of start-up-cash-out-start-again entrepreneurs.
Take Jeff Hosley. While he may speak cynically about the sale of FreeLoader, it hasn't stopped him from applying what he learned there to Torso, the company he cofounded the day after exiting FreeLoader. Hosley freely concedes, for example, spending half his time early on schmoozing with venture capitalists, reporters, and industry players. Some, he admits, returned his calls only because "I called them 10 times." One response came from Wayfarer Communications, a push-technology company in Mountain View, Calif. After four or five phone calls, Hosley got through to the vice-president of business development and strategy, Bob Patterson. Nine months after its founding, Torso was scooped up by Wayfarer.
One of his ex-partners at Torso, former FreeLoader staffer Jamie Hamilton, boasts of never having worked longer than 11 months at any place he didn't start himself. Like his peers, he is markedly unsentimental about the sale of companies he's helped create. Bouncing from start-up to start-up comes naturally to this group.
As for Pincus and Paul, having pocketed roughly $4.5 million each, the fellows who founded FreeLoader are fairly certain about what they want from their new ventures. They'd like to create products, they say, that everyone (even, says Pincus, his mother) will use. Having tasted what that would feel like, Pincus wants more. "People knew FreeLoader," he says, recounting what he regards as the high point of the venture. "I've been on a plane and seen someone using FreeLoader next to me."
His sentiments are not unique. Entrepreneurs have always wanted that kick. Still, the question remains: are these guys genuine entrepreneurs or just lucky masters of spin? One beneficiary of FreeLoader's success--investment banker Seth Ferguson, whose company profited from FreeLoader's sale--sees it this way: "Anyone smart enough to figure out that there's an opportunity, to start a company, and to sell it fast--I think that's very entrepreneurial."
Stephanie Gruner is a staff writer at Inc.
Ever the students, entrepreneurs like Pincus and Paul have learned from watching the company builders who came before them. They've seen what can happen. "Too many people forget to sell their businesses," says Barbara Todd, cofounder of Good Catalog Co., a $23-million cataloger. "Owning a business is a whole lot of fun. But you can stay there too long."
When they started, in 1992, Todd and her partners assumed that they would position the business to be sold in five to seven years, taking advantage of the industry's rapid consolidation. The company doesn't own any property, because the acquirer, notes Todd, might not want to stay in Portland, Oreg.
"I tell people that when the hors d'oeuvre tray passes, you always take the hors d'oeuvre because the tray could be empty when it comes around again," asserts Nathan Schulhof, CEO of Audio Highway, in Cupertino, Calif. Since 1978 the 48-year-old has started and cashed out of a half-dozen computer-related companies. As a result, he says, he now plans how to cash out before he even chooses office space.
His younger brother, David, 32, already on his third business, is more sentimental. "I am very attached to my company. It is like my child. It isn't easy to sell and walk away." Nevertheless, he's managed to hawk two children already, his first when he was practically a child himself, at age 19. In the fall of 1996, he founded his third company, Make It So Inc., an Internet direct-marketing service, and he's already forged relationships with potential acquirers. "My company is my product, and my customer is the company that's going to buy it in the end," he says.
Certainly not every entrepreneur in Silicon Valley is looking for a quick exit. "Very rarely do you hear about people starting a company because they want to cash out," says Howard Aldrich, an adjunct professor of management at the University of North Carolina at Chapel Hill. "They have an idea or a vision. You have to build so many commitments and relationships to move a company forward. You have to be sincere."
You also have to be realistic.
Take Aldrich's son, Steven, who sold his on-line insurance business to Intuit for $10 million nine months after its launch. "If Schwab or Fidelity or Intuit had entered the market, my bet is, we would have needed to get out of the way," reflects Steven Aldrich, now the director of Intuit's insurance-services group at the company's Alexandria, Va., facility.
"There is no room for niche players in the on-line consumer world. You either dominate the market or you partner with someone who does."
The Start-Up Game
"Some people play tennis. Some people play golf. I do start-ups," says Scott McLoughlin, who served as the program manager at FreeLoader and now owns the Adrenaline Group, the appropriately named software engineering and consulting company he cofounded with four other ex-FreeLoaders. "Time doesn't mean anything to me. It's just start-up after start-up." Echoes FreeLoader's first hire and the cofounder of Torso, Jamie Hamilton: "You're part of an elite corps of people doing something on the cutting edge. What would I do that's as much fun? Go play golf? Work is more exciting."
Part of what makes it exciting, of course, is the ever-present possibility of hitting the jackpot (as Hamilton did when he recently sold Torso)--albeit a remote possibility for most. "The probability of holding on to stock options that can do more than paper your walls is pretty small," admits McLoughlin. Then again, nobody's pledging his or her life to it. "The entity might not be around in 12 months," says McLoughlin, who currently is a consultant to nine start-ups. "It's fantastic."
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