TiE Midwest – “Capital Efficiency for Growing Businesses”

Moderator, Matt McCall, Portage Venture Partners
Mike Domek, CEO, TicketsNow
Jason Fried, CEO, 37 Signals
Lucas Roh, CEO, Hostway
Hosted in Chicago by the law firm of Gardner, Carton & Douglas

Matt: How did you manage to build your business without venture capital funding?
Lucas: We try to keep the revenues greater than expense! (Audience laughter) Be aggressive, never try to outspend, focus on hiring great people. We focused on small businesses which allowed constrained growth.
Jason: Basecamp wasn’t originally built for a market. Obscurity is your best friend. It’s great to make mistakes early.
Mike: People laughed at the revenue and expenses comment, but it’s really true. Referral based business and building reputation. What can you create that nobody else has? We use other people’s money with the tickets and there is no inventory risk. We knew our ROI and we took advantage of the low CPM rates during the downturn. A lot of hard work creates a lot of good luck.
Matt: Discipline sometimes gets lost once funded; the revenue is greater than expense.
Jason: Simplicity doesn’t require a lot of money. Don’t over-engineer. It’s better to build half a product instead of a half ass product.

Matt: What were the milestones in your growth?
Mike: Maintaining profitability is critical. Understanding how our company should look like in terms of the org chart.

Matt: What were your biggest surprises and biggest threats?
Lucas: The web is changing so fast. You need to be dynamic and adaptable.

Matt: Growth during the downturn actually helped some companies.
Lucas: We were able to buy data centers cheaply.
Matt: Yes, if you manage the downside, it will benefit you.

Matt: Jason has a great quote…
Jason: There is a lot of power in small. By staying small, you ask, “What is the next most important thing?” Meetings are symptoms of problems. A one hour meeting with ten people is really a ten hour meeting.

Matt: What was the darkest period?
Mike: We realized how vulnerable we were with September 11, 2001.

Matt: How did you fund your business?
Mike: Self-funded until 2006. We haven’t done any traditional branding, branding costs money. Our growth was due to search (engine) marketing and that we have a great affiliate program. Having an affiliate program is critical. It’s advertising, but you are only paying for an action or performance. We kept on growing due to the direct response marketing. We are in a space where there is no true brand. We are not trying to compete with an Orbitz. We have the opportunity to be the player in the market. You have to look at the opportunity; we raised money to do more traditional types of marketing.

Matt: What is your long term vision for your business?
Lucas: I want to be the next Microsoft (laughter). I want to build a company. Money is not what drives me. I want to build a great company that builds a legacy.
Jason: I want 37 Signals to be one of the best companies of the next two decades. It’s not only about profits, it’s about a lifestyle. It’s about revenue per employee, rather than the number of employees.
Mike: Do you do what is best for yourself or what is best for the company. The only focus is to grow the company and to be the leader in the space. My loyalty was to growing the company, not in a family business type of way. I don’t believe in high growth companies being family run.
Matt: Really understand what you want the business to be, figure out the funding second!

Lucas: Finding good people is very difficult. The percentage of good people is relatively small. When you run across the right people, hire them.
Jason: Change is really your best friend. The more massive a business is, the harder it is to change. If someone can change faster than you, you’re in trouble. Small decisions allow mistakes to not be big. If you have constraints, you can actually do something that makes sense. Embrace them.
Mike: You have so much fun during the start up phase! You want to have fun while you are doing it. Those who have been around greatness and then there are others who can do great things. My executives have accountability. So they need to gain comfort with you and then you can let them loose. Don’t be afraid to hire people.
Matt: There’s a Silicon Valley tenet: “Hire only A people, and they’ll hire other A people. If you hire the B person, they’ll hire C or D people.”

Matt: What are the pluses and minuses of taking VC money?
Mike: Gives you access to higher caliber business people. We have access to great resources. You have a bigger in (with people), the VCs make inroads for you. It’s not just the money. The tradeoff is someone else is now a part owner in your company.
Matt: The mother of all constraints is a VC.

Audience: Who are some of your advisors?
Jason: I look to everyone for advice. I’m a fan of Jeff Bezos (Amazon), Steve Jobs (Apple), Mark Cuban (Broadcast.com, Dallas Mavericks), Richard Branson (Virgin Airlines) and Ricardo Semler who wrote two great books “Maverick” and “The Seven Day Weekend”. If people don’t hate you, you are just mediocre! I look to chefs and industrial designers as well.
Mike: I have similar thoughts. You’re mistakes are your biggest opportunity to learn. We are putting together a Board and they will serve as advisors. Being able to look at things differently is important.
Lucas: People you read about, employees. People that I know. You try to get their thoughts to solve problems.

Matt: What is it about your approach that allows you to be successful?
Jason: We just try to act like people. We think people think relate to people, not companies. We try to be simple. I look for people with good taste, curiosity and who are good writers. I’m not interested in the full feature. We want to one down the competition. The customer does not need a lot more stuff. We want more legroom and better seats on the plane, not movies and stuff.
Matt: If you have an inherently better model, your competition will blow up…
Jason: I’m scared of the small two person company that can be more nimble than my seven person company!

Matt then made closing remarks praising the difficulty of these accomplishments and the meeting was adjourned. It was great insight into how these businesses became successful.