A startup tale from the crypt

Some of you have been around long enough to remember the web 2.0 movement. That seems like a long time ago. One theme of web 2.0 was "social telephony". This was the notion of using phones for more than talking or texting, and doing so in new or specialized ways. This article in USA Today talked about some of us. Many focused on cheap (or free) long distance, some focused on celebrity voice mail numbers and widgets, some focused on voice-based SMS. My company planned to focus on a platform for phone privacy (make calls or texts without exchanging real phone numbers...for dating, selling stuff online, etc), personalization (personalized IVR, i.e. call me and press 1 to leave a message, press 2 for poker night, and press 3 to hear my favorite song), and convenience (we didn't quite figure this out). We started with privacy in order to focus, and we stayed there for the better part of three years. 

The company I co-founded and ran from 2005 to 2008 was called Jangl, right smack in the middle of web 2.0 and at the origins of phone apps and smart phones. If this company started today, it would surely be an iOS and Android app (and would surely be questioning whether the mobile-first approach made sense), but in those days it was about the web.

For context, it was a time when it was still more expensive to start a company; it was still common to raise a couple million dollar series A with slides and a vague half-working prototype; it was very common for investors to require senior management teams at early stages; it was very common for investors to replace the founding CEOs with professional CEOs to de-risk the investment; and it was certainly a time when startups where an inside baseball thing and not real transparent (I may have, on this very blog been among the first to do so, with a lot of play by play).

The first plan was to launch a web-based beta version of Jangl (which was initially called Buzzage), which would have simple account signup, and you'd get a phone number in any area code. That phone number wasn't your real phone number. It was a Jangl phone number. You could post it on a dating profile, a Craigslist ad, an Ebay auction, a flyer, whatever. When people dial that number (much like Google Voice but before Google Voice), they have to state their name, and while they wait the phone service finds you. You answer the phone and you're connected and talking. All the while, the caller never gets your real number. You could also block that caller to discontinue access. We didn't support text at the beginning, because texting hadn't blown up yet. Plus it wasn't really even possible quite yet. Anyway, the plan was to get this first version to beta for about 1000 users, and then in parallel try to get a pilot to integrate a partner-centric version with a more established web property. Between these two paths, we could get some validation and some indications for how to go forward. 

The beta went well, we got some usage and what felt like the beginnings of a cult user group. But the big question was that of customer acquisition. That's where the parallel plan of a partner came into play. The partner targets were Friendster and Ebay, but the most ideal would be a big dating site like Match.com. Online dating was no longer taboo, and some of these sites had tens of millions of paying users to tap for additional services. And what better place to implant a technology service than in someone's pursuit of sex? And wouldn't ya know it, Match.com agreed to a pilot. We had pre-defined pilot success so the moment we achieved it, we pressed Match.com for a nationwide rollout. They agreed. They sold the service for an additional $9.95 per month and we were going to share in that revenue after our costs. 

So within three months of funding we assembled a team, rolled out a beta, and rolled out a partner pilot - and then six months later had a revenue generating business on our hands. So far so good. We even closed a 2nd round of funding based on the traction and momentum. While the partner-centric approach generated revenue, we knew we couldn't build meaningful value without a direct-to-consumer business. We needed to find a way to get millions of users, because that's where value was attributed at the time. So with every partnership we landed, we tried to find angles to own the user. We found it never worked in premium environments like Match.com, but it did work in the new platforms that were emerging such as Facebook and Open Social. 

In Facebook we created an app called Phonebook, which provided a list of all your Facebook friends, and auto-provisioned Jangl numbers for each of them. By then we'd figured out how to do text over Jangl numbers, so you could either text or call any Facebook friend on Facebook. Even if they didn't have a Jangl account already, your voice mail or text would be emailed to them in Facebook. When they clicked to get your message they'd install the app and get Jangl numbers for all of their friends. It was a good loop. We managed to acquire about 8 million users that way. And millions more in other social networks such as Myspace, Tagged, Bebo, and others.

In parallel, we did a huge deal with FriendFinder Network, which essentially auto-installed us in many tens of millions of user's profiles. Though we were installed, not everyone used the service, but enough did to quadruple our revenue. 

Then we launched an enhanced version of Jangl called "Call Anyone", which was a web service which allowed anyone, anywhere, to enter an email address and get a Jangl number for them. Like in Phonebook, they call or text a message, then we email the other user with that message, and once they receive the message they get a Jangl account too. It wasn't viral, but it did have network effects. As we grew the service, we did a lot of analysis on developing a premium version. We didn't have enough evidence that users would convert to premium quite yet. There's usually a time and a place for that, and we weren't there. So we started piloting audio and text ads in calls and texts. That sounded promising, but we'd need to get well beyond test budget levels to make it happen. We definitely had the inventory for it. 

At this point we had a growing branded business with a potential ad business and a profitable white label business. Three years in and I felt we were just warming up and had a lot of foundation to build from. Then a handful of companies started sniffing around with potential acquisition interest. We spent a good deal of time and had some close call wins, but we were happy to keep building. Facebook was working well for us, and iOS was getting hot too so we began building an iPhone app. There was lots to look forward to.

So far so good right? Sound about right? Ok, let me tell you how it all unwinds. But I have to rewind a bit. This is kind of like when you're watching Lost, and then they go back to another place in time... Sorry. 

When we first began to fund raise, we got a $5 million series A term sheet, and it was within like the first 10 days. The lead investor committed to funding half and we were required to bring a 2nd investor to the table with the other half. We spent nearly four months trying to find a syndicate, and finally found one. But since so much time had gone by, both investors lost confidence in the big raise and presented new terms. The new terms were $2 million series A, half from the lead and half from the follow on investor. However, of that $2 million, they were only willing to invest a portion up front, until such time that we reach beta with at least a few thousand users, obtain a pilot as a partner integration, and hire an experienced VP of marketing the board approves of. We did all that, and got the rest of the money. They wanted us to have a VP of finance too, so we made that hire. Then they wanted an more experienced VP of engineering, so we made that hire. We did all of it. 

Unfortunately, none of those hires worked out. They were later stage folks, with higher income requirements, and larger team and budget requirements. So what seemed like "de-risking an investment" to our investors, was in fact poison to our company. It slowed momentum, reduced team morale, and our financial runway. I ultimately had to fire them all.

We in fact burned through a handful of VPs of Engineering actually. It wasn't because we were bad at hiring necessarily, but rather that we had to have investor buy in on the hires, and they had things they were looking for that we weren't. I finally pushed back with investors on the issue and took it over myself, and hired a mid level entrepreneurial guy that did a perfectly fine job. (Ironically, running product development groups emerged one of my core competencies).

Later, and at the right time, I hired a solid, startup-oriented, entrepreneurial VP of marketing. He was great. He had all kinds of great customer acquisition methodologies and tactics. One thing he did was buy Facebook app installs for $.25 each, through Zynga (before they were called Zynga). We'd never heard of a lower cost per customer add before. He was helping us move the needle. Unfortunately that experienced VP of Finance I had to hire... he thought it was bad business practices, and had never heard of such things, and ran behind my back to tell the investors he was beholden to. That led to a lot of unnecessary scrutiny and bloodshed, because the investors themselves weren't hip to emerging customer acquisition practices either. I had to earn back investor confidence and fire their boy at the same time! But the snowball was just getting started.

The investors always had it in mind to replace me as CEO. I was considered too young and inexperienced at the time. A board meeting never went by without that topic surfacing. If we had a shitty quarter, "let's start recruiting a CEO", if we had a terrific quarter, "let's start recruiting a CEO". Even when I closed the Match.com deal and got us to revenue within 9 months, "now's a good time to start thinking about a CEO". The "team issue" they perceived wasn't real. It was completely manufactured by their requirement and perception that an older, experienced team was needed to break this new kind of business through. My argument then, as is my argument now, was that no one had done what we were doing before, such that there was no better team than the team that was making it all happen, to make it happen! And yes, of course, when we achieved some particular level of validation and scale, it would obviously make sense to bring in more help to reach new inflections. But we weren't there yet. Of course, nowadays investors in startups tend to favor the founding teams and younger ones in particular more, and for longer - and that's a great trend. 

When we raised our 2nd round of funding, we got a new lead investor that believed in us, in what we were doing, and how we were doing it. The original investors followed and maintained their level of ownership. So by then the board make up was each investor and myself, and we had a plan to get an external 5th board member. The new lead investor spent more time with us, really enjoyed us, and really enjoyed building. This was a complete night and day difference compared to the other investors, and it rang true in board meetings. Before too long, each board meeting became a pissing contest. It was the new investor and I against the other two original investors. It felt like we were trying to build and the others were trying to kill it. But that's what it feels like where there's a misalignment of interests and broken glass all over the place.

We fought the good fight for as long as we could, but when it came time for us to raise yet another round, it was hard to push forward. The early investors wanted to sell, the newer investor wanted to invest. But it would be hard to take on new investment without the cooperation of the original investors. The newer investor and I talked about doing a recap and moving the older ones out, but we didn't necessarily want an ugly situation to become uglier. Life was too short for that. The only way the original investors would continue to invest was if the new funding round came with a new CEO. So then we were on a multiple path plan - which if you ever find yourself on, it's a spiral... We kicked off a fund raise for a series C, an expensive recruiting search for a CEO, and a banker engagement to sell the company. Every good investor and every good CEO candidate smelled blood. In fact, one very prominent investor loved the team, loved the traction and the trajectory, and was ready to invest, until he got to the stage where he met with the insider investors. When he found out they were trying to replace me as part of the round, he ran - and he told me why. He advised me on the side to just focus on the sale and move onto my next venture. He even suggested I maybe come work with he and his firm, which was a nice gesture and piece of well needed validation at the time.

So we met with all those companies that we'd met with earlier on who had expressed M&A interest, and others too. Google had already bought Grand Central so they were off the table. Match.com weren't acquisitive. Ebay didn't think people buying and selling really wanted to talk to each other. Nevertheless, with what had now become a distressed situation, we managed to get a deal on the table with a buyer. The buyer would need to spend 21 days in diligence, but terms were decent. They were going to buy us, keep half the team, and let the other half go with 90 day packages. During diligence they saw how close to being insolvent we were, and smelled blood. They dragged their feet, and then offered lower and lower prices. They also found some potential legal risk because there had been a lawsuit with a Match.com user who claimed our technology led to stalker threats to her. We disproved her claim and it wasn't material, but the fact that it had happened didn't help matters. The buyer wanted indemnification and the board wouldn't honor it. Our board decided to walk. And then two days later decided to come back to the table. Then walk, then come back, etc. The investor board members were holding out on deal points so I was just winding and unwinding the situation, over and over. (It's as if they thought we had some leverage here. I think I always thought, the leverage they should have is that if the deal doesn't work for them, they would just continue to fund it forward). We ended up back at the table one last time. With a less optimal deal (but a deal nonetheless) on the table, we were marching toward a close. But with 5 days left of cash, the buying CEO called me and said, "I'm sorry Michael, there's just too much bad blood now. We liked you and the team, but we just aren't comfortable enough to move forward anymore."

When I got that call, it was the Saturday before a Cinco de Mayo, and I had people over the house for a well needed bender with a side of tacos. So I had to carry on the party as if everything was fine. But it wasn't. Later that night I called an emergency board meeting. I was hoping we could do an inside round or do an extended bridge to buy more time for a better landing, but everyone was done by then. I had five days to sell the company and find people jobs, or fire them and close the doors. 

I managed to get to deals on the table...both of which we'd take in favor of a wind down. But rather than choosing one, we chose both. I worked out a company and partial team deal with Live Universe, which was started by one of the original Myspace founders. They wanted to take the technology and roll it up into a super company he was forming. They wanted me to run it, but the prior CEOs that had rolled up into the venture were all disgruntled or gone. I chose not to go with the deal personally, but made the company/team deal happen. In parallel, I did a team-based deal with Jajah. They were interested in the DNA and the business deals we had in place, since they were getting deeper into managed services. So at the end of the day some people went to Live Universe, some (including me) went to Jajah, and some lost their jobs. 

The ends certainly didn't reflect the means of Jangl. There was real traction and real hard blocking and tackling going on. But there wasn't an opportunity to continue nurturing and building. The were sets of circumstances, that when combined yield failure.

There were lots of mistakes made by me and by the investors, so in no way is this a story about the good guys and bad guys. It's a story of circumstances that lead to outcomes, and the lessons along the way. I would make bullet points and write those lessons here, but I feel I've actually listed these out ad nauseam on this blog over the years. So poke around between 2005 and 2008 and you'll see what I mean. I'm sure you'll be able to correlate various posts to this story. 

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About two months later, I was in Mexico on an annual trip with my family. I got a voice mail from a top tier investor. It said, "Hey Michael, I heard what happened, I'm really sorry, I hope you're not hanging your head to much on this. Shit happens like this everyday. What do you think about building your next company with us?"

Comments

[Rohamg]

that's an unfortunate story Michael, but very well told and a good cautionary tale. good on you for sharing it.

[Tom Krieglstein]

Thank you for taking the time to write this up and share it with the world. It's filled with a lot of great experience sharing. Thanks.

[Aliyu]

I'm glad you are back blogging. Learned a lot from your past posts as I have from this one. This is the right time to continue learning from your experience especially for the fact that you are now at Vevo and Im starting a video startup http://9flix.com