|BUSINESSWEEK ONLINE : DECEMBER 4, 2000 ISSUE|
|FRONTIER -- FEATURES
Diary of a Startup
David Friend has four successful companies under his belt. Can he make a run with No. 5?
It's a cold February morning when we catch up with David Friend at the Boston offices of eYak Inc., his telecom services startup. At 7:15 a.m., he's padding about in sweats and sneakers after biking from his home in the city's Back Bay section. He looks very much the i-entrepreneur, with one exception: Friend's 52.
That maturity explains a lot about his serene demeanor, because Friend certainly has plenty to worry about. His nine-month-old company, with 20 employees, has no firm revenue model, no clear marketing plan, and no finished product. The phones aren't working properly, and the week before, someone upstairs moved a radiator that unleashed a flood into eYak's offices.
But Friend, even-keeled and even oddly placid, has been down this road before--four times. He has been starting and selling companies since graduating from Yale in 1969 with a double major in music and engineering. That year, he started a business making the first mass-market music synthesizers. Last year, he sold FaxNet Corp., a fax Internet company, for $240 million. In 1993, he unloaded Pilot Software Inc., a database management outfit, for $40 million, and in 1983 he sold Computer Pictures Inc. for $20 million.
That puts him in an elite class of entrepreneurs-- those who are no longer in business to make money. For Friend, starting a company is more like the sports he loves: running up mountains or jumping waves on a sailboard. He's in it for the action. ''It's so fascinating to take ideas and talent and money and mix them together and see what emerges,'' he says. ''Seeing people in this amazing state of cranked-uppedness...well, that's fun.''
And now comes eYak--his most ambitious project yet, and one that straddles the line between cutting-edge telecommunications and the Internet. Back in February, when frontier began following Friend's progress, the serial entrepreneur had a clear, two-pronged plan. For business customers, eYak would offer cheap, high-quality conference calling that seamlessly blended various technologies. For consumers in Internet communities, the same software would allow groups to have anonymous discussions, or let chat participants call ''talk shows'' during which their call would be streamed over the Web. ''There's endless numbers of cool things we could do,'' he says.
Unlike less experienced entrepreneurs, however, Friend harbored no illusions about the distance between potential and profit. Launching a company is a messy process, he says, in which a smart entrepreneur will change direction repeatedly and stray far from the initial plan. ''I've never made a fortune doing what we said we would do at the beginning,'' he says. There are too many technical failures and changes in the market. Backers pull out, launch dates slip, stock markets plunge. He learned that the hard way. ''I wish I'd had a good mentor,'' Friend says. ''That just never happened. So over the years I've made every stupid mistake you can make.'' But it left him prepared for anything. Failure, he says matter of factly, was not really a possibility.
The concept for eYak sprang from one of Friend's pet peeves: During conference calls, it's impossible to tell if everyone is looking at the same thing. What if, using the Web, each participant could put a document on the others' screens with a single mouse click--and talk about it on a low-cost call? That, he figured, would be a great business.
To explore this raw idea, Friend, in early 1999, turned to Jeffry C. Flowers, 46, the technical brains behind all three of Friend's previous software companies. It took Flowers only three months to come up with preliminary software for both shared visuals and for creating conference calls on cheap computers rather than expensive circuit cards.
The timing couldn't have been better for raising money: The Internet frenzy had nearly peaked. One Monday in June, 1999, Friend and Flowers made a PowerPoint presentation to Bic Stevens, a former Pilot Software board member who was now a managing director of Zero Stage Capital, a Boston venture-capital firm. By Friday, they had a commitment for $2 million.
Over the next four months, Flowers and a handful of programmers hacked away at a prototype. It was Oct. 7, 1999, when Flowers called Friend with the magic words: ''Let's put together a conference call.'' As five voices simultaneously spoke on his computer, a cheer went up. ''We felt like Alexander Graham Bell,'' Friend recalls.
The prototype proved a magnet for money and influence. The next round of financing, $15 million in total, came from three firms: Zero Stage; the Rockefeller family's New York-based Venrock, another past investor; and Bain & Co., the Boston-based management consultants, which put in its partners' own funds. At a wedding, Friend met Clayton M. Christensen, a Harvard Business School professor who had written a book on ''disruptive technologies.'' The next week he joined the board. Adding more star power, Friend recruited former Federal Communications Commission Chairman Reed E. Hundt, a former Yale classmate, as both an investor and a member of his advisory board.
By the end of 1999, as eYak's team dreamed up more uses for the technology, revenue projections ballooned and strategy began to shift. Now, Friend thought he would need to raise more than twice the $25 million to $30 million he had planned.
IN THE MONEY
Aiming for a May launch, Friend began to concentrate on fund-raising in March. And for the first time, he seemed nervous. He had never raised more than $25 million at a shot, and he had no experience with Wall Street. It was an awkward relationship for Friend, who preferred taking ideas to investors himself.
But as he trooped from one New York investment house to the next, Friend discovered that the bankers saw ''voice enablement of the Web,'' not teleconferencing, as the Next Big Thing. Friend, with his telecom background, hadn't quite seen it. Now he did. ''There's no substitute for testing a product against the market,'' he says, in this case the capital market. He and Flowers briefly discussed dropping teleconferencing altogether, but his other financiers--the VCs--insisted eYak had a bright future there. So Friend agreed to proceed on two tracks. The new plan: eYak would provide voice technology for free to Web portals, such as Lycos Inc., and sell audio ads on the sites. He gave the staff a week to come up with revenue estimates.
The idea didn't last even that long. Friend would have to build an ad sales force to make it work. Why do that, his board asked, when Web sites already had relationships with advertisers? Friend again changed his business model. ''We need to provide Web sites with a vessel that can carry advertising,'' an audio ad server, he said. Revenue Model No. 3: Charge Web sites a set fee for the service or have customers pay for chat time.
With still more application ideas flowing in, Friend felt ''overwhelmed.'' He mentioned his dilemma to Christopher J. Zook, the head of Bain's e-commerce practice. Before long, Bain launched a five-month, $750,000 ''quantitative analysis'' job, aiming to pare a list of 28 possible products to those with the most commercial potential.
HERE WE GO AGAIN
They had just gotten started when a real earthquake hit--the collapse of the Nasdaq in April, which threatened to take down the entire e-business sector. ''This has happened to me at least two or three times,'' Friend says philosophically, recalling that the 1987 crash occurred while he sought financing for Pilot Software. He now worried the slump would cut the amount he could raise. Fortunately, investors still had lots of new cash they had to invest. They might demand more equity than before, but Friend could live with that.
The bigger problem was strategic: While Wall Street bankers liked Model 3, they wanted to see contracts. ''I need the marketing guys to come in with some relationships with Web sites that I can wave around,'' he told frontier. In truth, though, he had nothing to show. ''Lycos wants a demo in two weeks and we're not ready,'' he said. Finally, the unflappable Friend, exhausted from the fundraising, seemed truly agitated. The short-staffed engineering group was behind schedule on the ad servers for the Web site voice products--and in June, as several investors came by for a demonstration just before committing, the servers crashed. The engineers, unaware of the guests' appointment, were updating the system that day. ''You can imagine my panic,'' Friend says. ''In situations like that, you stay calm in front of the investor, then scream.''
That, too, passed. Friend not only got offers to raise the money from Donaldson, Lufkin & Jenrette Inc. and BT Alex Brown Inc., he was able to turn them down. VCs--led by UBS Ventures--came through. On June 30, he gathered the staff, passed out paper cups of champagne, and announced--to the cheers of the now 80 employees--the completion of the $62 million financing.
THE MORE THINGS CHANGE
One question remained: Just what were these backers backing? By the end of July, Bain had judged six applications most likely to succeed. Commercial teleconferencing now clearly had the most potential, followed by a new one--distance learning. Other products would include eYak live events (similar to talk radio); Buddy Yak instant messaging; live auctions; and Yak Club Network free teleconferencing with friends and family.
But the question wouldn't die. Management wanted to pursue only conferencing and distance learning, because ad revenue and fees wouldn't cover costs on the others. Bain countered that they needed a mass-market Internet product to impress Wall Street for a future IPO. Friend chose instant messaging--hardly a unique product--as the simplest to execute.
In the buildup to the launch, which staff shortages had pushed back to November, another strategic shift took place. A number of foreign phone companies expressed interest in buying eYak's technology outright rather than its services. Some U.S. telcos had the same idea. Suddenly, it looked like Friend could make old-fashioned deals, complete with big, clearly defined payoffs. Plans are now afoot to build platforms in Europe and Asia next year.
Has Friend finally hit on the right strategy and product? He's still not sure. Getting to that point is always a nerve-racking process, he says, and the last nine months have been par for the course. ''The first two or three years of a business, it's just so exciting,'' he says. ''The next few, I fulfill my obligations to investors.'' And then he's gone. So if eYak ever does get on an even keel, you can be sure Friend won't be on board much longer.
Let David Friend answer your questions about starting a business. Send an e-mail to firstname.lastname@example.org
By Hilary Rosenberg
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Contents for Dec. 4, 2000 issue
Diary of a Startup
RESUME: David Friend
TABLE: Friendly Advice
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