Frontier Home Business Week Home Contact Us Business Week Archive
Frontier
Advice and Columns
Navigation
 
 
ENTREPRENEUR PROFILES

7.28.99  
A Tale of Two High-Tech Tightwads
How GoldMine's founders built a $52 million company without loans or investors

Penny Pinchers At a time of overflowing venture-capital coffers and instant stock-option millionaires, it's instructive to look back at what life was like at a high-tech startup at the dawn of the New Economy, oh, 10 years ago. Back then, the question high-tech pioneers asked themselves wasn't: How high will they bid? It was: How much chutzpah do I need to survive? Here's the tale of one company that made it big without loans - even from friends and family -- or investors, GoldMine Software. Their secret? Extreme, long-term penny pinching. The payoff: a huge piece of equity that reaped them a fortune when it came time to sell.

Back in 1989, Elan Susser and Jon V. Ferrara, then 25 and 28 respectively, were stuck. They were pioneering accounting software for networked computers -- at a price small companies could afford. Word was starting to get around. A fortune beckoned. Right then, however, they desperately needed a third phone line in the San Fernando Valley apartment where they lived and worked. They were only allowed to install two lines per unit. They'd spent most of their $5,000 in startup capital on their first day in business, so moving was out. Mustering all their charm, they called on the nice retired lady next door: Could they drill a small hole through to her bedroom and pull through a wire...Please? Amazingly, she consented. "We were just really sweet," says Ferrara.

What had Susser and Ferrara so charged up? The two, once computer-science classmates at California State University at Northridge, saw networked computers as the future. They were determined to get in on it early by developing affordable software aimed at small and midsize businesses.

Unfortunately, all they had to fund their dream was Susser's $5,000 in savings from his two-year-old computer consulting business. Neither had business training. Not knowing any better, they ran everything on revenues alone -- no loans or outside investors. The alternatives became obvious from 1993 on, when venture capitalists and trading houses dangled money in front of them. They stuck with their strategy, though: "We were worried about outside people funding the company and dictating its direction," Susser recalls. "We preferred to wake up in the morning and make our own decisions."

That stubbornness meant months of macaroni and cheese and years of minimal salaries, but it paid off handsomely: Some 10 years later, Susser and Ferrara still had 90% equity (employees had the rest). In April, when GoldMine merged with another industry leader, the two hauled in $83 million and still kept a significant minority stake in the company.

What's the lesson for today's hell-bent-for-IPO entrepreneurs? GoldMine's founders don't pretend that their strategy is for everybody. Tech product cycles are much shorter now -- one reason venture capitalists pump so much cash into their young charges. "If you're entering a marketplace like today's with timing that forces you to be aggressive, it might make sense to bring in venture capital," says Ferrara. Then, there's the misery factor: "It took us five years to become a serious company. If we had funding, it would have taken us one or two years," says Susser. But they do credit the shoestring tactics with a good measure of their success. "It was because we created the company on our own revenue stream that we were forced to do things intelligently and profitably from the beginning," Ferrara contends.

Absent cash, the two figured out fast that they'd have to rely on illusion to lure customers. About $4,500 of their initial $5,000 disappeared the day they began, paying for a server, a hard disk, and rent. Much of the rest went into business cards, stationery, and packaging, which they designed on their PCs. "That's how you get big -- you take every dime and put it back into the perception, because perception is reality," says Ferrara.

They noticed that the bigger the company, the more understated the business card, so they emulated that. They paid for huge displays at trade shows, and wore khaki outfits with a tasteful pocket logo that looked like corporate uniforms.

coast

What kept them going that first year? A postcard with a sweeping view of the Santa Monica coast on the fridge. "Every day, when we'd go reheat our macaroni and cheese, we'd look at it and visualize it as the view from our future office," says Ferrara.

From a desk teetering on stacked books, Ferrara sold by day and worked on the documentation at night. Susser did customer support by day and developed the software by night. Susser also wrote software to help them keep track of their customer contacts. They had a moment of truth at a 1990 trade show, when they went to their computer to retrieve a vendor's phone number. "People started congregating and wanting to know what it was, and that's when we realized we were on to something," Susser recalls. Software already existed for stand-alone functions such as E-mail, telemarketing, and client contact, but theirs integrated all the functions into one package. "Back then, you couldn't find that kind of technology in a program of any price, and people saw a new way to work," recalls Ferrara.

They took a deep breath and switched their focus from accounting software to sales and marketing software. It made sense: The latter divisions are often three or four times the size of the accounting division, and they need less customer support. "When you sell someone an accounting program, they call you at the end of the month and ask accounting questions," says Ferrara. "When you sell a marketing program, they don't call and ask how to close a sale."

They sold first to local businesses, then to computer stores, finally focusing on value-added resellers. Soon three more employees were working out of the apartment. They even packaged the software there, using shrink-wrap machinery so noisy that phone conversations had to be suspended.

Revenues surged in the next two years, rising from $20,000 to $200,000, as their 16-hour days and product quality paid off. They moved to an 800-square-foot office in 1991. Venture capitalists came calling around 1993. "Every year, the sums would get higher and the percentages lower," says Susser, referring to the VCs' offers and the stakes they wanted in the company. "But our growth was so fast that every year we would look back and say: 'If we had taken X amount last year, we would have given a substantial amount of the company away, and now it wouldn't cover three months of payroll.'"

Their big break came in August, 1993, when PC Magazine designated GoldMine Software the Editors' Choice in the contact-management category. "That broke our phone system and forced us to move again," says Ferrara. The software won the designation the next three times it was awarded, attracting such clients as GE Capital, Sprint PCS, Bank of America, Universal Studios, Hewlett-Packard, Toshiba, Ernst & Young, Blue Cross/Blue Shield, Apria Healthcare, and Shell Oil.

Today, the software, which sells for $200 to $500 per user, allows a company's sales, marketing, and customer-support staffs to track all contacts with clients. "No matter who in the company picks up the phone, they have in front of them a complete picture of that customer," says Ferrara. It also lets employees track sales quotas, projects, and deadlines; allows managers to automatically schedule meetings; links Internet messages to contact records; and integrates client records with inventory, production, and finance databases.

In 1995, GoldMine moved to new corporate offices in Pacific Palisades. Their reward: They finally got the coastal view on the postcard. By early 1999, the company, which had garnered 60 major industry awards, had 150 employees and revenues approaching $25 million.

Revenues have roughly doubled every year, with net profit margins ranging between 10% and 20%, says Ferrara. Staff turnover is currently 3%, with employees kept happy by profit-sharing, a stock-option plan, and 100% medical and dental coverage.

In April, 1999, after launching a search for a corporate partner, Susser and Ferrara sold control of GoldMine Software Corp. to Bendata Inc., exchanging 60% of their stock for $83 million. Bendata, a vendor of software for customer service and support based in Colorado Springs, Colo., assumed GoldMine's name. The company is now the world's largest provider of sales, marketing, and support systems to small and midsize businesses, with 1998 combined revenues of $52 million, 350 employees in six countries, and 100,000 customer sites worldwide. Bendata is 100% owned by South African-based Ixchange Technology Holdings Ltd., a public company listed on the Johannesburg Stock Exchange.

Susser is now chief technology officer and Ferrara executive vice-president -- positions that relieve them of day-to-day management functions. "The stresses and responsibilities became too great. We're entrepreneurs, not professional managers or businesspeople," says Susser. He plans to "take some time off and breathe, which I haven't done for the last 10 years." As for Ferrara: "I'm going to have more time to evangelize about GoldMine, which is what I really enjoy doing."

Neither regrets missing today's venture-capital sweepstakes. "I've seen many friends start companies that went on to become very successful, but after five years they are left with very little because they've had to sacrifice what they had for venture capital," says Susser.

Adds Ferrara: "In today's environment, there's so much venture capital that new startups just throw money at problems. They never really learn to do things profitably. But we were forced to be profitable." That's a message that many a dotcom entrepreneur would do well to heed today.


First in series on penny-pinching startups.

By Meg Lundstrom in New York

Top

RELATED ITEMS

Public Offering, Private Doubts

The Upside of Debt

A Financial Supermarket for Small Biz

Entrepreneur Profiles Archives



Business Week Home Bloomberg L.P.
Copyright 1999, Bloomberg L.P.
Terms of Use   Privacy Policy

Bloomberg L.P.