It's impossible to pick up a magazine or newspaper these days without
reading about the spate of Internet start-ups that are receiving venture
capital money. The articles always mention one number -- the amount of
money invested. But they often fail to mention the most important number,
the crucial part of the equation to anyone who is out pounding the paveme=
nt
raising funds: the percent of the company that had to be handed over to
investors in exchange for those millions. That number is attainable only =
by
calculating the start-up's valuation, which is one of the most closely
guarded secrets in the world of privately-held companies.
If that second, more important, number were published, then readers would
see a far more accurate picture of what is going on with Internet start-u=
ps.
Most of the time, investors end up with ownership of much, even most of t=
he
company. A $10 million dollar VC investment looks a lot less impressive w=
hen
the founders had to give away 60.percent of the company's outstanding sha=
res
to get it. And when the big liquidity event happens, it is the investors
rather than the founders and employees -- as in, the people who actually
built the company and its products -- who cash in most. That is why it i=
s
inspiring to find the rare exception to the rule: The people who manage t=
o
build and even sell a successful and profitable Internet company without
taking a dime of venture capital.
One such person is Andrew Sather, founder and CEO of San Francisco-based
e-commerce consultancy Adjacency Inc. Having founded the company out of h=
is
basement with three college buddies at the University of Wisconsin at
Madison in March, 1995, Andrew eventually sold it to IT-solutions and
services provider Sapient Corporation four years later. He now serves as =
a
senior vice president at Sapient, and works along with the same people he
employed prior to the deal at a profitable and successful, publicly-trade=
d
firm. What was remarkable about Andrew's sale of Adjacency to Sapient was
not the sale price of $54 million, a very respectable sum for a 60-person
Web design and development shop. Rather, the fact that every dollar of th=
e
sale proceeds went to employees of Adjacency, and none to outside investo=
rs,
was truly remarkable. Even though I have known both Andrew and Adjacency =
for
several years, and I even did some consulting work for the company way ba=
ck
when, I didn't learn that he managed to keep the company wholly
employee-owned until very recently. How did Andrew pull that off? I calle=
d
him up to ask. The following is some of what I learned from one of the fe=
w
who beat the system.
Q: Most people these days immediately turn to outside investors when they
start a company. Why didn't you do that with Adjacency?
A: I don't do the VC thing. In creating Adjacency, our greatest fear was =
for
things to be going great, and then having these creepy people coming in a=
nd
slapping us on the back, saying, "How are my Web kids doing? Are they mak=
in'
me money?" The worst case scenario was that you manage to build the thing
that you care about and then the investors come in and make it something
else. And then you don't have control to deliver on promises to your peop=
le.
Q: But without any outside investor money, how did you manage to get the
company off the ground?
A: We aimed high. We did great work. We didn't spend money that we didn't
have.
Q: What's the story behind that?
A: I was finishing up my final year at University of Wisconsin at Madison=
,
studying graphic design, creative writing and art history, and I evaluate=
d
my career options. One was to work at an ad agency, creating toothpaste
branding campaigns in a stuffy closet-sized cubicle with no windows. And =
the
other was to start my own boutique-y graphic design firm, working on meta=
l
fabric corporate identity programs. But then I discovered the Internet. W=
hen
I went online to look at corporate Web sites, the few that I saw looked a=
s
if stalkers had made them. They had some affinity for the brand but they
didn't look officially sanctioned. Instead they looked as if someone with=
a
lot of information about the subject had created them without permission.
>From a branding standpoint, they were creepy. The reason for that is that
there were not creative people working on them, they were technologists. =
It
was the makings of a graphics design crusade. We maxed out our credit car=
ds
and got busy.
Q: So then how did you land your first client?
A: Most people in the industry at the time made the mistake of aiming too
low, taking whatever clients they could get. But I thought that the best =
way
to do it was to make a list of my ten favorite brands, and then go get th=
em.
We started with Patagonia. I wrote them a letter, explaining what the
Internet was, then doing my best to demonstrate that I knew who they were
and what their business objectives were. We came up with a mantra -- the
company needed to create an Internet presence that informed, engaged and
empowered their customers. Patagonia called the day they received the
letter, and sounded pretty excited. That's when I then had to admit that =
we
were a few college students in my basement. They got a little nervous, so=
I
asked them to give me the weekend to show them that we could build them
something great, a six or eight page demo site. Monday came, and we had a=
26
page site that was very brand appropriate and had killer functionality. T=
hey
loved it. The first check we received was $7,000, and it felt like a lot =
of
money to three kids in the basement, two of whom had maxed out their cred=
it
cards. To cash the check we had to incorporate because it was addressed t=
o
Adjacency, Inc., and we were not yet officially a corporation. We had jus=
t
put that on the letterhead we made at Kinko's, where I worked the night
shift.
Q: Then how did you scale up?
A: Our whole business model was based on hiring smart passionate people a=
nd
then giving them more responsibility than they would get anywhere else. I=
t
works, and is surprisingly rare. It is no coincidence that Patagonia was =
our
first client. Yvon Chouinard (their founder and chairman) was a pioneer i=
n
creating businesses with flat organizational charts and egalitarian
workplaces. We wanted to create a true meritocracy and give everyone a st=
ake
in the company. And you cannot do that if you sell your soul to venture
capitalists.
Q: But what about your larger competition?
A: We set out to build a profitable business that created value for
everyone, and we succeeded. It really amazes me the degree to which
start-ups -- even service companies -- don't focus on profitability. Ther=
e
were all these other companies in our space who were out there raising mo=
ney
from investors. They would receive it, burn through it in a year, and the=
n
die. Or else they would go out and acquire 40 companies. We are best of
breed and wanted to stay that way, and there are simply not 40 best of br=
eed
companies in this space. One of those things that we dreamed about is tha=
t
all of our VC-funded competitors would go out of business and we could go=
in
there and buy their furniture for cheap. They always had these Aeron chai=
rs,
that cost about $800 a piece. When start-ups have those, you have to wond=
er,
what is their priority? It was obvious that those guys would die off, but=
I
never figured out how to get those chairs.
For those that did succeed, the roll-ups, we had to wonder: What had they
built? Had they built anything truly viable? Or had they built something
that simply takes advantage of the wackiness of Wall Street at present? A=
nd
if that is the case, what is the honor in that?
Q: Then why did you sell to Sapient?
A: We finally found a company that was as good at what they do as we were.
The acquisition has created real value for everyone involved, including o=
ur
employees, who are ultimately the ones responsible for our success. And
that's the way to do it.
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335