The Great Persuader
Each February, Inphonic CEO David A. Steinberg holds a poker party for his top executives at Washington, D.C.'s Historic George Town Club. As a reward for their long hours, his executives are treated to scotch and cigars as they bluff and bet with members of InPhonic's A-list board of directors -- top venture capitalists, famous politicians, and John Sculley, the well-known former CEO of Apple and Pepsi. The tradition feels bigtime and established, the kind of ritual befitting a company that keeps stern oil paintings of past CEOs in its wood-paneled boardroom.
But InPhonic, which is in the very modern business of selling mobile phone handsets and services over the Web, is no such firm. It has existed for the grand total of five years and sports a founding CEO of the ripe age of 35. Instead, the annual poker night is one more way Steinberg creates the image of success and carefully guards it until, like wet cement, it sets and becomes real. Steinberg, says Sculley, "does a wonderful job of making you feel like the company is bigger and further along in its life than it is at the moment. It sort of felt like we were all grown up and we were only two and a half years old."
David Steinberg has created 350 jobs, raised $85 million in venture capital, completed an IPO, and bought his biggest competitor. The next challenge: profitability.
In five short years, Steinberg has taken Washington, D.C.-based InPhonic's annual revenue from zero to almost $200 million (making it the fastest-growing company on the 2004 Inc. 500 list). Moreover, he's created 350 jobs, raised $85 million in venture capital, completed an IPO that took in $160 million in November 2004, and bought his biggest competitor, A1 Wireless, for $20.9 million. The company's recent market cap: $950 million. In a sign of its market dominance -- or perhaps the return of an Internet bubble -- the company managed to go public even though it has yet to turn a profit. According to the Yankee Group, the prominent technology research firm, even before the purchase of A1 Wireless, InPhonic was the biggest seller of wireless phones on the Internet, with between 20% and 25% of the Web market -- which means it accounts for almost half of the Internet phone sales not made directly by the carriers. Overall, InPhonic was the fourth largest activator of phones in the U.S. in 2003.
Steinberg's tale is the story of a relentless salesman, a young man in a hurry who doesn't care so much what he sells or how he sells it as long as he's selling. Now he faces his next big test: the quotidian grind of running a public enterprise. But his mentor, John Sculley, doesn't describe Steinberg merely as a guy with impressive business skills; he compares him favorably to Bill Gates and Steve Jobs. So what is it about Steinberg that has inspired so many to buy shares in his dream? And for a man with such enticing visions, can selling phones be enough to fill an ambitious life?
David Steinberg has a lanky 6-foot-3 frame, supersized like so much of what he does, and he dresses in an unwavering workday uniform of light-brown pants and a custom-made blue patterned shirt. He looks as if he could be a distant cousin of actor Daniel Stern, and has always struck people as an old soul. "When I first met him," says longtime friend Kenny Albert, who's the son of sportscaster Marv and about the same age as Steinberg, "I thought he was five years older than me. I made him produce his driver's license."
Steinberg's interest in business was shaped by his relationships with two very different men: his father and his stepfather. He describes his father, Richard, as the quintessential Ivy League corporate guy of the 1960s. He had an M.B.A. and worked for more than three decades at what is now PricewaterhouseCoopers, making sure that companies were audited properly. "He was totally focused on internal controls and governance," Steinberg recalls, "and that led me to become a numbers-focused sales guy." (It's almost as if he has "a calculator built into his head," says a longtime employee.)
But a greater influence was Irving Siegel, Steinberg's degreeless, serial-entrepreneur stepdad. Siegel had made a fortune when he sold his last business, Getting to Know You, the country's largest homeowner-welcoming company, for $100 million in 1995. Although Steinberg lived with his father on Manhattan's Upper East Side for 13 years after his parents divorced, he was more fascinated by the entrepreneurial path Siegel had taken. And because he was precocious (not to mention 6-foot-2 by the time of his bar mitzvah), he was able to follow through on his youthful ambitions. "His mentality, his composure, his social graces, were years ahead of his age," says Siegel.
At 12, Steinberg started hanging around the Saddle Rock Grist Mill in his hometown of Great Neck, N.Y., offering unofficial "guided" tours to visitors. Four years later, on one of his biweekly visits to his stepfather's beach house in Westhampton, Steinberg discovered that the Polo Club -- the area's hottest nightclub the previous summer -- was empty. Although he wasn't even old enough to get in, he offered to promote parties in return for a share of the proceeds. The owner agreed and Steinberg pulled in $400 the first night. By the end of the summer, he was making $1,500 a week.
Steinberg was helped in this endeavor by Michael Masri, who grew up around the corner in Great Neck and who describes the complementary attribute to Steinberg's relentless ambition: competitiveness. "He's extremely, extremely competitive," says Masri. "When you would play tennis with him, even if you were just hitting, he'd want you to call the lines. He just drills that ball and he comes up to the net. He's always won and he always lets me know."
Steinberg graduated from Washington & Jefferson College in 1991 with an economics B.A. and average grades -- he is a dyslexic who mangles words -- "anecdotally" becomes "antidotally" -- but makes up for it with acute interpersonal skills. At first, the budding entrepreneur took an internship clipping newspaper items for Sen. Ted Kennedy's Judiciary Committee as preparation for his father's suggested career path: the law. But within months, Steinberg grew bored. One day as he clipped articles, he came across an employment ad for the Pennsylvania Life Insurance Co. "I told my father that I was going to take another year before law school and sell insurance door-to-door," says Steinberg, "and he flipped."
Then Steinberg talked to stepdad Irv. The conversation went like this:
"Will they pay you any money?"
"Will they teach you to sell?"
"Yes, they will."
"Take the job."
And so it was that Steinberg hawked insurance for 18 months, during which time he was promoted to branch co-manager, won awards for his cold-calling skills, and made plenty of money. He'd found his calling, it seemed, until one day he came across a bright-yellow coupon for a free mobile phone. Intrigued, he drove to the phone store with a friend. There was a woman behind the counter, and Steinberg began quizzing her about how the business worked. She told him she got paid about $300 per phone activation and the phones cost her about $150 each. "It was like, 'Wow, you make $150 each time you give away one of these for free?" Steinberg says. As he walked out, he turned to his friend:
"I am in the wrong business."
At the time -- 1993 -- the mobile phone industry was in its infancy and the phones were still "bricks" that were installed in cars by professionals. But Steinberg saw potential. Never one for modest gestures, the first thing he did was ask his stepdad to give him $50,000 to start a cell phone business. Siegel turned him down, suggesting that he should work for a pro for a few years to learn the ropes. "But he didn't have time for that," says Siegel. "He had to be his own man fast."
So Steinberg started the business anyway. Because he couldn't afford a physical store, no carriers would sign him up as a dealer. Instead, he turned to subcontracting for another dealer (Siegel did vouch for Steinberg's creditworthiness so that the dealer would front Steinberg phones to sell). Working out of his own basement, Steinberg and five friends he recruited from his insurance job went door-to-door to D.C.-area businesses and soon were selling more than $300,000 a month -- more than the dealer they represented. Results in hand, Steinberg convinced Siegel to co-sign a lease and opened a store selling phones for mobile carrier Cellular One. "Very ballsy," says Siegel. "He was only 23 or 24."
Within six years, Steinberg had built the company, Sterling Cellular, into a 58-location chain. Already, his brashness and relentlessness were in full bloom. At the time, his friend Brad LaTour was considering starting his own business in sports marketing, but over one of their regular lunches at a Chinese restaurant in a Maryland strip mall, Steinberg appealed to LaTour to put his own ambitions on hold and join Sterling Cellular. "He said, 'If you take this job, I will make you a success," LaTour recalls. "I made him write it down and sign it. I still have that napkin hanging in my home office." LaTour, who started working for Sterling three days later, is now InPhonic's vice president of direct sales and customer service.
As Americans grew more comfortable with cellular phones, Steinberg and LaTour worked on cutting the one-on-one aspect out of sales. As soon as everyone had bought their first cell phone, the partners figured, consumers would need less handholding. When people bought their second and third phones, they'd worry more about price. The sales cycle could be more and more automated, which would drive down costs. Telemarketing -- not brick-and-mortar stores -- seemed the most effective way to sell mobile phones. They tested it, and it worked. "We found that someone would buy a phone in 4.5 minutes over the phone as opposed to 45 to 60 minutes in a retail store," Steinberg says.
Sterling's move to telemarketing was made easier because he'd seen that the forces that would sweep the cell phone universe were already rocking the travel industry. In that business, thousands of mom-and-pop agents were struggling while Internet clearing-houses, like Expedia, were thriving. So, in 1999, Steinberg broke Sterling into three parts -- a retail chain, a telemarketing company, and a behind-the-scenes operation that activated and shipped phones. He spun off the retail and telemarketing groups and kept the back office, which would become an Internet empire -- the "Expedia of the mobile phone industry," in Steinberg's words.
There was, however, a problem. While some websites were advertising phones, no one was selling them effectively on the Web. This meant that when Steinberg went to raise money, he had to sell an untested idea, fronted by an unknown 29-year-old CEO, to dubious investors. Steinberg realized he would need big patrons. In a confluence of luck and salesmanship, he attended a Young Presidents' Organization conference at the Washington Hilton in the fall of 1999 where John Sculley spoke. Afterward, about 100 eager entrepreneurs surrounded Sculley and peppered him with detailed questions about business trends. Some of the more brash owners pitched him ideas. Steinberg stood back at first. He wanted to make a distinct impression. When the opportune moment came, the CEO of InPhonic -- all 6-foot-3 of him -- leaned in and asked Sculley a question: "Did you see Pirates of Silicon Valley?"
The reference -- to a cable TV movie that chronicled Apple's early days -- caught Sculley off-guard and engaged him. The tech titan stopped talking to the other YPOers, focused on Steinberg, and offered 10 uninterrupted minutes of film criticism. InPhonic never came up. Only later that afternoon, when Steinberg saw Sculley in the lobby, did he tell him about his business. Sculley was intrigued enough to tell his personal assistant, "When David Steinberg calls, give him a meeting."
"David has incredible self-confidence," says John Sculley, the former CEO of Pepsi and Apple. "Every bone in his body is an entrepreneur's."
A few weeks later, Steinberg took a seat in Sculley's office on the 20th floor of a Park Avenue tower. The meeting started promptly at 9:45 a.m. "I have 15 minutes," Steinberg recalls thinking. But Sculley kept him there for hours, mostly brainstorming about InPhonic. By the end of the day, Steinberg left with an agreement that Sculley would be an investor (putting up some $500,000 in total) and would sit on the company's board. What had the veteran seen in the youthful executive? "David has incredible self-confidence," says Sculley. "Every bone in his body is an entrepreneur's."
Signing up Sculley was a crucial breakthrough. He could get Silicon Valley CEOs on the phone in a heartbeat, and when Steinberg stumbled in his first meetings in California -- the hard-charging East Coast salesman "came on too strong," Sculley says -- Sculley tutored him on the soft sell. Steinberg also leveraged Sculley's name to recruit an all-star team of advisers. First he signed up Jack Kemp, the former Buffalo congressman who ran for Vice President beside Bob Dole in 1996. Then he landed Terry McAuliffe, the Clinton consigliere who is the outgoing chairman of the Democratic National Committee. "They each have Rolodexes you can't imagine," Steinberg says -- including, for example, Bill Clinton's number. In 2003, Steinberg got McAuliffe to wrangle the former President to speak at a dinner of 30 InPhonic employees, carriers, and partners. "That was one of the most memorable experiences of my life," says Don Charlton, InPhonic's executive vice president of strategic development.
But even with Sculley onboard, Steinberg still had some selling to do. First, he approached a series of Web companies with a simple proposition: If they would fill their unsold ad space with banners offering cell phones under their own brand, InPhonic would pay them a per-customer finder's fee and serve as the invisible hand that completed the transactions and shipped the phones. In turn, InPhonic would collect its own finder's fee from the new customer's phone carrier. The Web companies bought it.
Then Steinberg had to convince wireless carriers to let InPhonic sell their services. "The hardest thing to do," says Steinberg, "was to get carriers, some of the biggest, most important companies in the United States, to trust a company that didn't exist with their brand on the Internet." For six months Steinberg shuttled between Florida, New York, and D.C. as he cajoled contacts at AT&T Wireless to sign InPhonic. "He called me weekly to try to get the deal going and I held him at arm's length," says Rick Personette, who worked with AT&T at the time. "I was getting called every day by people who thought they were going to make a ton of money on the Internet, and the best way to get rid of them was to say, 'Send me a business plan.' They wouldn't have one, but David sent me a detailed plan." AT&T signed in late winter 2000.
By May of that year, 32 websites had signed up as affiliates, guaranteeing InPhonic 476 million ads a month. By year-end, the company had sold $499,000 in phone activations (it keeps about $350 per activation; those commissions represent the bulk of the company's revenue). By the end of its second year, revenue had swelled to close to $10 million. At no point, however, has success prompted Steinberg to relax. One of his deeply held beliefs is that a business has to change constantly to survive. In the company's short history, Steinberg has fired one COO and demoted another. "You have to turn the ship every 12 to 18 months," he says. "You have to try new things, or you will never win in the long run."
On a train to New York one spring day in 2002, Steinberg and Don Charlton were kicking around the fact that 45% of the people who were applying for mobile phone service plans were turned down by the carriers because of poor credit. It was a huge untapped market. But what if there were a way to tap it? Within six months the company had put together Liberty Wireless, a "virtual" wireless company that bought airtime from Sprint and resold it to people with poor credit who were willing to prepay.
In its first year, sign-up and monthly fees from Liberty's prepaid service brought in $5.6 million on top of the $49.2 million InPhonic got from its original business selling AT&T and other name brands. By 2003, more than a quarter of the company's $136.1 million in revenue was coming from Liberty, which, with hundreds of thousands of customers, is now the third-largest U.S. virtual wireless carrier.
This past year, when the federal government finally allowed cell phone users to transfer a number from one carrier to another, InPhonic capitalized again by putting up a site called Wirefly. "If you know what's going on early, you can plan for it and maximize profits," Steinberg says, alluding to his contacts in the political world. "Lots of people thought number portability was going to be pushed back again. We knew it wasn't." Suddenly, a company that had $10 million in sales about two years ago was on its way to $200 million.
Successful entrepreneurs sometimes inspire a Stockholm syndrome-like devotion among employees; they have the skill to spin an illusion palpable enough to inspire people to make great sacrifices. At InPhonic, work and life have long since become synonymous. "You have to be prepared when you go in [to Steinberg's office] or you'll get your ass handed to you," says Charlton. "There's intense focus and pressure on achievement." Steinberg is the kind of leader, says Brian Westrick, president of another InPhonic division, who "has the ability to push you right to the edge, and then pull you back."
Everyone knows that Steinberg is making the same sacrifices. Last summer, when he took his first vacation in four years, he sealed his BlackBerry in a Ziploc bag so he could type away on the beach. On a snowy Halloween in 2003 -- which happened to be Steinberg's daughter's birthday -- he spent the day at the company's Maryland warehouse shipping phones to cover for employees who couldn't make it through the storm. "He'll get off a redeye from California and come to the office, exhausted, and work," says Westrick. "He does not ask people to do more than he's willing to do."
During the four-day trips to the annual Consumer Electronics Show in Las Vegas, Steinberg typically has 20 contract-centered meetings and negotiates each deal himself, down to the penny. "He pushes you hard and you still want to work with him," says Matt Waldie, who has negotiated with Steinberg on behalf of AT&T Wireless. "That's why he seems to get what he's after." Waldie recalls sitting with Steinberg and 10 others in the Las Vegas branch of sushi palace Nobu. The waitress delivered an astronomical bill that Waldie did not want to pay. At the time, he and Steinberg were haggling over $500,000 that Waldie thought InPhonic owed, and Steinberg turned to him with an offer. "He says, 'If you forgive the $500,000, I'll get the bill," says Waldie. "And I said, 'You got a deal.' It's goofy stuff, but it's a really good way to run a business."
Steinberg also used the prospect of IPO riches to keep his staff hungry. The company completed its successful offering -- one of the biggest of 2004 -- in November. The money raised will likely go toward more acquisitions. Steinberg mentions ring tones and phone accessories as obvious extensions, and then goes further as he imagines unrelated products, such as financial services. As InPhonic grows, of course, it will be expected to clear that most basic hurdle, profitability. InPhonic's loss over the first nine months of 2004 was $8.9 million, down from $28.6 million the year before. But, according to CFO Lawrence Winkler, the company's EBITDA has already turned positive, and what interests investors most is InPhonic's ability to manage costs. Over the first nine months of 2004 revenue rose 77.2% while operating expenses rose 29.5%. If those trends continue, the company should soon be profitable.
As Steinberg settles into the life of a public CEO, Sculley believes that he has learned the entrepreneur's toughest lesson. "The hardest thing for a successful entrepreneur who's never had a boss is to be able to recruit people who are better than he is at certain things," Sculley says. "And David now hires people who are better than him." He's also learned to delegate -- even in sales. He says that he handles "relationship management" these days, and claims to be "down" to 80-hour weeks. But Steinberg's ambition is clearly beyond the current scope of his business and his skills at relaxation are nascent at best. Can this hurried CEO settle for managing a business as it settles in, establishes, and even slows? Or will a man likened to Jobs and Gates feel stirrings to try to do more? "Those are guys who changed the world," he says. "I don't think my legacy is to change the world. When people look back on me, I want them to say that he built one of the great companies that people actually love to work at, want to own stock in, and like to do business with. I have every intention to stay here for many, many years to come -- in an executive, not a noninvolved, role. I don't really dream about the next big thing."
Angled in the corner of Steinberg's office, which is decorated with old phones, pictures of his family, and snapshots of his dinner with Clinton, sits a huge carved desk. The desk is actually a Scottish foyer table, a piece of furniture Steinberg bought in 1993 just after founding Sterling, when the 24-year-old wanted something imposing to make him look older. Michael Masri, his childhood friend, points to that oversized desk as a metaphor for Steinberg's trajectory. "It used to be funny because everything was too small for him," says Masri. "Now everything is finally in proportion."
The desk no longer seems too big for the man.
Ian Mount wrote about JetBlue's David Neeleman in Inc.'s April 2004 issue.