Steinberg is the quintessential analytic leader, his reliance on metrics in part a consequence of his dyslexia. Four years ago, he studied the trends at private equity firms and saw that fewer partners were investing more dollars. That translated into the pursuit of ever-larger deals: a feast of capital for bigger companies and famine for smaller ones. Steinberg saw an opportunity for a whole-is-greater-than-the-sum-of-its-parts play. He planned to build a holding company to acquire, consolidate, and invest in those left-behind firms, focusing on his specialty--Internet marketing.
Steinberg named the original version of the business Caivis Acquisition. (XL Marketing is technically a spinoff.) For funding, he called on two InPhonic investors: his longtime mentor, the former Apple and Pepsi CEO John Sculley, and Bill Landman, a partner in Philadelphia-based Renovus Capital. Both now sit on XL Marketing's board. (A fourth board member is Robert Niehaus, chairman of Greenhill Capital Partners, one of two firms that invested a total of $70 million in XL Marketing this summer.) "You always have a fond memory of a CEO that made you such a high multiple of your dollars invested," says Landman, an early InPhonic investor who profited handsomely from the IPO.
Maybe it's age; maybe it's maturity and experience. For whatever reason, Steinberg finds the prospect of starting companies from scratch less appealing than he did when he launched InPhonic and two smaller businesses in the '90s. That change in attitude, as well as market insight, guides XL Marketing's growth strategy. Although more than 90 percent of InPhonic's growth was organic, at XL Marketing that number is below 30 percent. "I like this idea of buying businesses where the management teams have taken it as far as they can go and taking those businesses to the next level," says Steinberg. "I'm really good at that."
XL Marketing--which specializes in the education, insurance, financial-services, and health care sectors--targets companies in the $10 million to $20 million range. To date, it has acquired and combined an education-industry call-center business, an e-mail and affiliate marketing business, a social-media-marketing business, an e-mail service provider, and a few much smaller companies. It also built a search business from scratch and picked up the assets of a defunct $2.5 million call center in Florida for $50,000. XL Marketing's beating heart is a 121-million-record database of consumers who have opted in for marketing messages.
Steinberg isn't just shopping for client rosters and technology platforms. He is shopping for entrepreneurs as well. To lure founders on board and anchor them there, he offers a mix of cash, stock in the parent company, and earn-outs for making their numbers. Perhaps more important, he runs XL Marketing like a collective, letting the founders continue to run their own businesses within the larger company. At a weekly management meeting, Steinberg lobs a few pointed questions but otherwise sits back munching cheese cubes and pretzels while his division heads update and debate one another. "It's very difficult to hire an entrepreneur," he says, "but they're the guys I love to work with."
Mike DiMaio became co-vice chairman and executive vice president of sales after selling his e-mail business, Spire Vision, to XL Marketing in 2009. DiMaio and his co-founder--now XL's chief strategy officer--weren't planning to sell so soon, DiMaio says. But Steinberg's vision, experience, and connections persuaded them. "David lets us keep doing what we've been doing to get to this point of success, and then rolls our energy and enthusiasm into the overall company," says DiMaio.
Steinberg wants to expand XL Marketing to $250 million to $300 million over the next three to five years while maintaining or improving margins. Although he doesn't rule out another IPO, the bad taste from InPhonic lingers. As a public-company CEO, he says, "I ended up having not enough time to run my company and had to focus most of my time on dealing with Wall Street and analysts and a lot of different shareholders. That's not something I'm anxious to run back and do again."
Sculley says that whatever XL Marketing's status, it will "continue to look better and better. This is a business with legs." As for what happened at InPhonic, he believes the experience made his mentee only stronger.
"That's the great thing about America," says Sculley. "There's permission to fail. You pick yourself back up and people say, 'OK, what did you learn? And why don't you go try again?' "
Bigger and Better
"The best thing about InPhonic for me," says David Steinberg about his failed company, "was that I learned so much about how to build something, what can hurt you, and how you take lessons from what causes pain." Here are some of Steinberg's lessons from InPhonic and how he is applying them at XL Marketing.
1. Focus on profit Steinberg sometimes sacrificed gross profit for mere growth at InPhonic. No more. He now buys only companies that are profitable or that he can get to profitability very quickly. "We're growing these businesses by 106 percent top line and 244 percent on the bottom line within six months of buying them," he says.
2. Hire big brains In the early stages of InPhonic, Steinberg was able to keep a close eye on the hiring process and assure himself that only first-rate people came on board. But as the company grew, "we didn't have a program to make sure new people were keeping with the same intelligence and aptitude level," he says. That affected the quality of his leadership bench. All candidates at XL Marketing are subject to intelligence and problem-solving tests so rigorous that only slightly more than 10 percent qualify.
3. Replace people Steinberg says some managers' job responsibilities outgrew their skills and experience at InPhonic. The financial function, in particular, suffered. Steinberg says he now continually reviews his management to make sure it is "expert in what you're currently doing, not what you were doing two years ago."
4. Keep the board small The 12-member board at InPhonic was a veritable constellation, lit up by stars like former senator and vice presidential candidate Jack Kemp. XL Marketing's board consists of just four people, including Steinberg—and he wants to keep it that way. "I have the contractual right to add two more anytime I want. But I don't want to do it," he says.
5. Get a life At InPhonic, Steinberg's 100-hour weeks had a corrosive effect on his family life. Even though he now splits his week between New York and Washington, D.C., where his children live, he spends more time with them than he did back then. "I love XL Marketing, and I love what we do," he says. "But it's not my life. It's not my entire makeup. At InPhonic, at one point, it really was."
