SM: Did you get any investors to help you get started?
SP: We raised money from investors after a year. Initially we raised $150,000, and then $700,000.
SM: How did you find your investors?
SP: I was never afraid of cold-calling people. I read an article about Jaime Diamond, who was the CEO of Chase. The article was a year after he was pushed out of Citigroup and indicated that he was still looking for his next gig. I was a 22-year-old entrepreneur, so I figured he was available and I would call him. I dialed 411 for New York City and asked for Jaime Diamond’s phone number and they connected me to a phone number. A man picked up the phone and I asked, “May I speak to Jaime Diamond?” and he replied, “This is him”, at which point I went, “Uhhh”.
I realized I had 60 seconds to say something, so I made my pitch. I don’t remember exactly what I said, but I told him something about building the next operating system that was going to drive the web and that I would love to meet him in New York to explain more. He ended up being one of our angel investors.
In another meeting with Crosspoint Venture Partners there was an associate partner named Adam Dell. I did not put two and two together. I went to the meeting and made a joke: “You must be related to that Michael guy” and he replied very seriously, “Yes, he is my brother.”
Crosspoint passed, but he really believed in our idea. He was leaving Crosspoint to create his own fund so he invested $100,000 as one of our first angels. Ultimately his fund, Impact Venture Partners, put in $2 million.
SM: Was this in 1997–1998?
SP: This was in 1999. I ran the company for just over three years.
SM: And you never sold it?
SP: We raised $10 million and it was a great experience to go through. I learned so much from what we did right and wrong. The term sheet came in November of 2000, and we were in the Financial Times. The actual closing happened on April 2. The market crashed on March 26.
SM: I had the exact same experience with a startup I was doing.
SP: I was so stressed. I wanted to get the money wired from the investors and close the deal. One of our angels was a lawyer who had put in $25,000, but he caused a lot of issues. He wanted the same rights as the big investors. That was an important lesson about who you choose.
The market crashed and at that point the lead investor, Grotech, had invested in USI. They took USI public nine months after they founded the company and they had zero revenues with a $7 billion market cap right before the crash happened. That company wanted to buy us, but the market crash changed everything. The opportunity for investors to exit did not happen as planned.
At the time I still had enough ownership and capital of $5 million. I figured that probably the best thing to do would be to return the money and auction the software. If the investors were not interested in it, my co-founder and I would participate in the auction and buy the software. We kept the software going for two years on our own dime. That software is now HyperOffice, which is cash flow positive. It is doing very well and is a multi-million dollar revenue company. I learned so much from that experience.