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Successful Pivot to $5M in Revenue from Chicago: Cohesive Networks CEO Patrick Kerpan (Part 5)

Sramana Mitra: You said you pivoted and there was one product that you had to sell and the other product people wanted to buy. Talk a little bit more about how you proceeded from when you hit that realization? How did you move? How did you take advantage of the market pull that you discovered?

Patrick Kerpan: Good question. It created the opportunity where we got some other incremental funding. We needed some funding to make that transition. We were doing these flexible images where you can mix and match software components to make the virtual computer your choice.

The one missing piece of the software was message queuing. We had servers and databases. In the world of message queuing, you just had this Java component called ActiveMQ. Other than that, you had to use IBM MQ Series or something super expensive. We looked at that and said, “Somebody has to do something. If we’re going to build these Internet-based systems, what we’re going to need is a better queuing system.” >>>

Serial Bootstrapper: Oversee and Manage Founder Fred Hsu (Part 6)

Sramana Mitra: What are the milestones of this business? By how much did it scale? How fast did it scale? What kind of strategy did you follow to make it grow?

Fred Hsu: What we wanted to do at first was to basically get a good sense of the market and establish a few key customers. We all had this internal confidence that if we got the customers, we know how to go out there and get the demand. We can build the full stack and do it better than anybody else out there. It started with a simple kernel. There wasn’t an intense capital need. Computing power was already ten times more powerful at a fraction of the cost than it was back in 2000 when I started doing startups. We didn’t need a lot of outside capital.

We also didn’t necessarily need a large sales force or support infrastructure just yet. We didn’t want to get too many customers to start off with. We really wanted to focus on making sure our systems work for a small set of deep pocket clients. The business lost $50,000 in 2011. But in 2012, it generated about $2 million in gross revenue. In 2013, $18 million. In 2014, we ended up with just under $80 million. >>>

Successful Pivot to $5M in Revenue from Chicago: Cohesive Networks CEO Patrick Kerpan (Part 4)

Sramana Mitra: Let me understand a couple of things. You talked a bit about Boards and about lightly capitalized company. Can you explain to me what the capitalization of the company is?

 Patrick Kerpan: The corporation is Cohesive Flexible Technologies Corporation. It’s a C-Corp. It owns two limited liability companies. One has all the image automation that’s just parked and the other owns the network virtualization.

Sramana Mitra: Who owns the corporation?

Patrick Kerpan: It’s a series of investors – family, friends, angels, O’Connor family.

Sramana Mitra: It’s not institutional ownership? >>>

Serial Bootstrapper: Oversee and Manage Founder Fred Hsu (Part 5)

Sramana Mitra: In 2009, you were out. What did you do next?

Fred Hsu: I moved out of LA. I married and had two kids. I raised them for a couple of years and got the entrepreneur itch again. Then in about 2010, I met up with an old college friend called Kai. He was in the Computer Science program in UCLA with me. He and I had actually met the day our parents dropped us off at the dorm. We were about 17 back then in 1996 and had been very close throughout the years. We decided we wanted to do some more projects together.

In 2010, we created a company called AppBank. The concept there was to capitalize on the social wave. We allowed end users to create their own apps on Facebook. It went from zero to single-digit millions in revenue pretty quickly. It was very profitable.

Sramana Mitra: Was it a platform company?
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Successful Pivot to $5M in Revenue from Chicago: Cohesive Networks CEO Patrick Kerpan (Part 3)

Sramana Mitra: What year did you quit Borland?

Patrick Kerpan: It was sometime in early 2006. I was going to do an excellent year off. After about two weeks of me reorganizing household processes, my wife said, “You’ve got to get an office outside of the house because you’re driving us all crazy.” The co-founder of the company and the Chairman called me and wanted me to do due diligence on some company in London. One of our other founders introduced me to Alexis Richardson. Our former head of security had gone in to help a friend cleaned up and get out of high-frequency trading.

As a group of people who’re experienced, it was like the old movies where they’re like, “Let’s put on a show. My mom will make costumes.” We wanted to build a company, but we had no idea what it would do. We spent the better part of 2006 focusing on what we would be doing. We came >>>

Serial Bootstrapper: Oversee and Manage Founder Fred Hsu (Part 4)

Sramana Mitra: How many people did you need to make this equation work?

Fred Hsu: We had a peak of about 225 employees across three or four locations.

Sramana Mitra: What function required a lot of people? At some level, it sounds like if you’re doing all this by technology, it’s not probably that people-intensive but I may be missing something here.

Fred Hsu: It’s probably about 40% technology, because we have large and complex systems. It involved babysitting a lot of technical hardware, which operated at orders of magnitude less efficiently than machines today. We also had to innovate pretty heavily because the space got quite competitive. The rest is sales and administrative functions. >>>

Successful Pivot to $5M in Revenue from Chicago: Cohesive Networks CEO Patrick Kerpan (Part 2)

Sramana Mitra: It sounds like that company was bootstrapped because it’s unfinanceable given the landscape of the time?

Patrick Kerpan: What we find hard for bootstrapped companies is, ultimately if you have a mixed model and you have family, friends, and angel investors, those are discreet investors. They’re not portfolio investors. When you run into a portfolio investor, they say, “Why aren’t you growing faster? What haven’t you raised more money? Why didn’t you just shut it down?” If a VC loses money, their LPs lose money. If a VC makes money, they make a lot of money and their LPs make a little money. It’s a great game.

Even if discreet investors are grown up, there’s a part at the back of their brain that’s going to be like, “Pat owes me a million dollars.” I take the commitment to your investors to heart. There’s a commitment to your employees and customers. I go back and forth on who’s first, second, and third at any one time. It was a nice deal for the investors. Everybody got more than they put into it. I call it my $2 million MBA because there are just things that you can’t intellectually be taught. People who have more entrepreneurial experience than you can look at what you’re doing and they can say, “This is going to be a problem. You need to change this a little bit.” >>>

Serial Bootstrapper: Oversee and Manage Founder Fred Hsu (Part 3)

Sramana Mitra: Did you bootstrap it all the way?

Fred Hsu: If I were to relay anything and I could teach people, we raised money when we least needed it. We raised $150 million for Series A.

Sramana Mitra: $150 million?!

Fred Hsu: Yes.

Sramana Mitra: What were your metrics in the business that you were successful in raising that much money?

Fred Hsu: Very high gross margin, pretty defendable tech, first-to-market advantage, and a lot of others like the patent I talked about. That and good business practices got us to several hundred million in revenue per year. >>>