The Third Wave: An Entrepreneur's Vision of the Future (3 page)

BOOK: The Third Wave: An Entrepreneur's Vision of the Future
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At the time, one of the concepts we were testing was home delivery. This was 1982, and though pizza was popular, delivery wasn’t yet universal. We were also working on ways to make pizza more convenient and more portable. We spent a lot of time trying to figure out if calzones or pocket pizzas could work as a carry-out option for people on the run. It’s funny to think, looking back on that year, that the things we were focused on—convenience and portability—would become such crucial parts of the company I would later help build. So would our desire to keep things simple and focus on the basics.

I only lasted at Pizza Hut for a year. My obsession with Toffler hadn’t subsided; it had intensified. I wanted to be part of his vision. I needed to find a way in.

MY FIRST STARTUP

I found my opportunity in 1982 when my brother told me about a startup called Control Video Corporation (CVC), which was trying to take the growing electronic gaming industry online. By now, Dan had moved on from CEO of Case Enterprises to up-and-coming investment banker in the Silicon Valley. Neither of us had lost that passion we first explored in childhood. I was still the ideas guy. He was still the one trying to figure out how to make it all work. When the firm he worked for, Hambrecht & Quist, was considering making an investment in CVC, Dan asked me to review the business plan and give him my impressions. I was impressed, I told him. And interested in being a part of it. H&Q did end up investing, and within months, I became a part-time consultant at CVC’s headquarters in the suburbs of Washington, DC.

It was there that I met Marc Seriff, a straight-talking Texan and a brilliant engineer. He had been part of the early team that helped create the Internet in the 1970s, and he was a real visionary with incredible technical skills. Later that decade, he connected with an idea-a-minute entrepreneur, Bill von Meister, and they worked together on building a couple of companies. Von Meister had been a telecommunications pioneer, having founded one of the first online services, The Source. Along with Seriff, von Meister conceived of a business called Home Music Store. Nearly two decades before Napster (and nearly three decades before Spotify), the two were trying to
offer digital music to the masses. The idea got a lot of attention in the music industry when it was announced, but they struggled to secure the rights they needed to launch. And some early supporters, like Warner Music, ended up backing out of an agreement to license music for the venture. “Delivering music directly into people’s homes via satellite and cable,” the Warner Music executive argued in 1981, “would completely shut out music retailers, literally choking off their money supply.”

“Retailers are threatening to throw our records in the street!” he exclaimed.

It was clear that there was no budging Warner Music. But they did have a deal with Home Music Store, and they wanted to find an amicable solution. Warner Music suggested that Marc and Bill focus on using their technology to deliver video games instead. “Talk to Atari,” the executive advised. “They’re a division of our same parent company—Warner Communications.”

So the fast-moving von Meister pivoted, and turned his attention toward building an online gaming service called GameLine. The idea was to make a game cartridge, much like Atari’s, but with a cord to connect it to a phone line so you could download and play games for a monthly fee (a primitive Netflix for games).

By January 1983, Marc and Bill were fully in the video game business, and ready to announce their new service. They did so at the Consumer Electronics Show in Las Vegas, tethering a massive hot-air balloon to the roof of the Tropicana, emblazoned
with the GameLine logo. I joined the company full-time nine months later, just as the product was coming to market.

It was an utter disaster.

Atari video games turned out to be a fad. After a few go-go growth years, interest in Atari products plummeted. Retailers canceled their GameLine orders. Inventory piled up. (One weekend, we quietly disposed of the tens of thousands of unsold GameLine modems in a dumpster behind our office.) GameLine’s revenues were 95 percent below forecasts, so the CVC board decided to slash costs. Most of the staff lost their jobs. I went from being the youngest person on a seven-person marketing team to being the only one left in the department—mostly, I suspect, because I had the lowest salary. My parents were pretty worried. I’d had three jobs in three years, and now it looked like I would soon need another.

The experience was an early lesson in market timing and managing costs, and a valuable first experience with failure. But while GameLine’s demise was agonizing and shocking, I wasn’t discouraged. My hopes for GameLine had deflated, but my conviction about the digital future remained. I was confident, perhaps naïvely so, that we would figure something out.

To stave off bankruptcy, we sought partners. As an accidental senior leader in the company, I wound up with the job of striking deals wherever I could to keep the company afloat. After dozens of fruitless conversations, we finally made a deal with BellSouth, which had just recently divested from “Ma Bell” (the AT&T Corporation) after an antitrust ruling broke
up the phone company. BellSouth provided some funding that kept CVC going for another year, but it became increasingly clear that our strategy of using a customized modem technology had been a mistake.

By the time we entered the market, our technology was outdated. What we’d engineered was a modem technology that was, in essence, download-only. We could send games to consumers, but consumers couldn’t send much data back to us—or to one another. The modems that people were starting to purchase could do both. What we thought was CVC’s core asset—a lower-cost modem technology—turned into one of its greatest liabilities. We offered a proprietary system that few wanted to adopt.

THE (FIRST) REBOOT

So we decided to abandon it and support industry-standard modem technology and the emerging personal computer market instead. We embraced the irony—a modem company with a worthless modem—and we reminded ourselves that we’d never intended to be a hardware company at all. The modem was a means to the real end: becoming a consumer online service company. So we returned to our original mission and exited the hardware business altogether. Instead, we put all of our efforts into what we were good at: crafting easy-to-use software and services that could demystify the online world.

We also decided to rethink our marketing and distribution
strategy. Rather than selling services directly to consumers, which was both costly and risky, we decided to partner with personal computer manufacturers to create private-label online services, which they in turn could sell to their customers. We’d build the software and services, they’d package and market them, and we’d share in the revenue.

In theory, it made great sense, and we were excited to get started. But as soon as we began reaching out to potential partners, we realized we had a problem. We kept getting brushed off. Some thought the appeal of getting online would be limited. And those who sensed the potential were unwilling to take the risk of partnering with a young company, particularly one that had a failed product and angry creditors and investors.

We finally found a willing ear at Commodore, at the time one of the leading home computer companies. Commodore’s founder had departed in a huff, and the remaining management team was struggling to figure out a path forward. Competition was intensifying, and they knew they needed a new act, an angle that would allow them to stand out.

Commodore’s head of strategic planning, Clive Smith, was willing to be our advocate, but other executives had concluded it would be too risky to partner with CVC.

“You guys have a ton of baggage and it’s a liability for us,” Clive said, without pulling any punches. “Everyone has a lot of respect for what you guys are trying to do here, but no one wants to get in bed with CVC. There’s just too much risk.”

I asked him for advice. Was there anything we could do to get around it? Any chance for a second shot? There was a silence on the other end of the phone. We were doomed, I was sure of it, and he just didn’t know how to say it.

“I don’t know, Steve,” he finally responded. “Have you thought about starting a new company?”

Oddly, I hadn’t. And yet it seemed so obvious once he said it. A new company would mean more than just a new name. It would mean a clean balance sheet and a clean slate. A genuine fresh start. All we’d need to do was license the software from CVC, move the team over to the new company, and dissolve the old one.

In the summer of 1985, just before my twenty-seventh birthday, we took Clive’s advice and created a new company, Quantum Computer Services. We took over the lease on CVC’s office space in Tysons Corner, Virginia, and hired most of its team. I joined together with Marc Seriff and Jim Kimsey, another CVC executive, as one of Quantum’s co-founders.

Jim was a truly colorful character. Like many of us, he had come to the company with no professional background in technology. He owned a group of bars and restaurants in Washington, DC, and had a lifestyle to match. A graduate of West Point and a veteran of two tours in Vietnam, Jim often laced his sentences with expletives and non sequiturs. He had a thing for quoting historical figures. Nietzsche was a favorite; I must have heard him say “if it doesn’t kill you, it makes you stronger” at least a hundred times. He was twenty years
older than most of us and, to the outside world, was clearly seen as the adult in the mix. Our investors referred to him as our “adult supervision.” This served an important purpose in those days, when companies with twenty-somethings hadn’t yet established themselves as a force.

Frank Caufield, one of Jim’s best friends and the co-founder of a young venture capital firm called Kleiner Perkins Caufield Byers (KPCB), had talked to Jim about CVC. Jim got excited about the GameLine vision and bought the franchise rights for the DC region. When KPCB joined H&Q as early investors in CVC, Frank joined the board. When problems emerged with GameLine, Frank asked Jim to step in to try to stabilize the situation and protect KPCB’s investment. Jim agreed to help, even though he didn’t really understand technology—and didn’t really want to. He viewed it as more of an interim stint, figuring he’d help out for a few months as a favor. He ended up doing it for more than a decade.

Without Jim, we wouldn’t have had the ability to raise the capital to survive. And without Marc, we wouldn’t have been able to build the core technology of our product. I played the role of the strategist and hustler, coming up with the ideas, building partnerships, designing many of the consumer-facing aspects of the product, and handling our branding and message. It was the perfect combination of highly complementary skills. And we hoped it would make us a credible bet—particularly because we needed to raise some capital if we were going to pull off the pivot.

• • •

We met with our CVC investors and pitched them the plan. They were intrigued but remained skeptical of us. Having just lost their money on our previous effort, they expected a much bigger stake if they were going to take another leap with our team. They didn’t just want to generate a return on their new capital; they were also looking for a payback on their squandered investment. We didn’t want to give up so much of the company, but we knew we had very little choice. In 1985, the startup tech world was still young, and venture investors were hard to come by. If we couldn’t get a deal here, we were going to go out of business.

Our investors had all the leverage, and they used it to their advantage. They crafted a deal wherein they would own virtually all of the company, allowing management to earn some of it back over time, depending on our performance. All told, I don’t think I ever owned more than 3 percent. But it didn’t matter. It had never been about the money, anyway. It was always about the vision. I didn’t like the deal the investors imposed on us, but I was happy to keep the idea alive—and delighted to have another shot at building a business.

We were able to launch Quantum with just a million dollars of new capital, largely because we were able to leverage partnerships to minimize our marketing costs. We customized our pitch for each PC company, and we started small. First we struck a deal with Commodore to create a gaming-centric
service called Q-Link for their vast base of Commodore 64 computer users. That helped us negotiate a partnership with RadioShack to create PC-Link, a downloading service that leveraged their graphical user interface. We later convinced IBM to partner with us to create an educational service called Promenade. Each company had its own unique brand and tailored offering, but their online services would all be built and run by us.

This time it worked. We kept costs low and were able to achieve profitability in our second year of business. And while growth was modest, it was steady. We believed that the best way to jump-start our growth was to secure a major partnership—so we set our sights on Apple.

THE KINGS OF CUPERTINO

I rented an apartment in San Francisco in 1987 and showed up at Apple’s headquarters every day—for six months. I buttonholed everybody I could within Apple to try to interest them in the nascent online market. I would tailor my pitch, depending on which team I was talking to, trying to come up with the perfect reason for them to partner with us. Ultimately, the group that was most interested was probably the group that had the least power and influence within the company: the customer service group.

My pitch to them was straightforward: If you launch this service and bundle it with your computers, it’ll be a cheaper,
better way to provide customer service to Apple customers than staffing large call centers to handle phone calls. “Oh, and by the way,” I would add, “in addition to the customer service benefit, we can provide a suite of other services that will make it compelling for consumers and help differentiate Apple.”

The pitch resonated well with them. The people I was dealing with saw it as a way to be strategic, to strengthen their position within the company. On the one hand, they knew that their involvement was predicated on the partnership’s being about customer support. But they also saw that there was a broader opportunity—and that if online services took off, this was something that could transform their customer service department from being a drain to a profit center. A career-accelerating move, to be sure. So we seemed equally motivated to make the partnership work.

BOOK: The Third Wave: An Entrepreneur's Vision of the Future
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