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November 08, 2005

Public Company – The Prequel

During Bubble 1.0, the big money was made and lost by going public.  Bubble 2.0 is a little more rational so far.  Early stage companies and companies without significant revenues are being acquired for astronomical prices (can you spell Skype?) but they’re not going public - yet. 

This new series of posts, however, is on the process of going public and being public.  It draws heavily on my experience as the cofounder and CEO of ITXC which went public in 1999, had a secondary in March of 2000 just as NASDAQ peaked (luck, not skill), did some acquiring, was the subject of a threatened hostile takeover, and was itself acquired via merger in 2004.

It was quite a ride.  Some of the lessons from it may be useful to other entrepreneurs or wannabe entrepreneurs.  Some may just answer the question “what WERE you thinking?”  Some may be amusing – or boring.

My novel hackoff.com: an historical murder mystery set in the Internet bubble and rubble draws on the same material.  But it’s fiction.  The good thing about fiction is that I can leave out the boring parts and am perfectly free to exaggerate for effect.  But I can’t interrupt the murder mystery to explain or pontificate.  That’s what this blog – Fractals of Change – is for.  I will link from the blog to the blook (book on a blog) when story is a good illustration of a point I’m making.

hackoff.com, the fictional company in the novel, is in the business of protecting e-commerce sites from hackers.  Its CEO is Larry Lazard who went to prison after he confessed to hacking into bank computers and used his notoriety to launch a successful security business which eventually became a public company. 

The novel is NOT autobiography.  My prior career in other startups, at Microsoft, and at AT&T was interesting but not nearly as colorful as Larry’s. Larry is found dead under suspicious circumstances at the very beginning of the story; I’m alive to write about the bubble. 

ITXC, the real company that I cofounded with my wife Mary in 1997, was in the wholesale Internet telephony (now known as VoIP) business.  We were fortunate to found this particular company at a time when money was plentiful.  Angel funding came from the unlikely combination of AT&T (in the form of a consulting contract) and VoIP pioneer VocalTec whose chairman Elon Ganor encouraged me to start ITXC and helped formulate plans for the company.

In 1997 as the Internet began to explode, Netscape was the poster child for IPO success.  Just as now, greed induced a torrent of money.  During most of history there have been many more ideas than there is money to fund them.  In 1997 there was more money than ideas (just like now).  Venture capitalists were camped out on our doorstep.  It’s usually the other way around.

Our venture capitalists were nicer people than the VCs hackoff.com found.  One was Fred Wilson, then running a small fund and helping Chase and Softbank find investments, now a well-known blogger as well as a VC.  Another was Bill Collatos from Spectrum Equity in Boston.  Intel Ventures and the Israeli VC firm now named Pitango also invested in ITXC. 

We raised this first round of venture money in the spring of 1998 but not before we had a very close call with disaster.

As consequence of AT&T’s initial consulting contract which was arranged as I left AT&T to start ITXC, AT&T had an option to buy up to 19.9% of ITXC at whatever price other investors paid.  VocalTec had a clause which allowed them to buy enough to keep up with any investment by AT&T.  It looked like we would raise a huge sum of money at a very good valuation because each wanted to match the other.  Outside VCs were attracted by this capital from inside our industry and the connections it implied.

We didn’t hesitate to spend the money we had quickly to hire good people, acquire initial customers, and rush towards our service start date of April 1, 1998.  Negotiations dragged out with AT&T over contract esoterica but what would you expect?  Lawyer bills mounted. We thought we would close in January.  Then February.  Surely March.  Money began to get tight. Each change AT&T wanted changed our deals with VocalTec and the VCs but they were understanding.

Finally we had agreement on every word.  The press release was written.  We couldn’t plan for a party because our service launch date was almost upon us.  Mary and I were at VON (then as now the premier VoIP show).  Some insiders were already congratulating us.

April Fools!  First someone came to the ITXC booth and told Mary that AT&T had just announced a service (AT&T Global Clearing House) that sounded a lot like ours.  Then I got a call that said – in many more words – that AT&T had decided not to sign the deal we had just spent so much time negotiating.  I never really found out why.

Maybe we could have sued but we didn’t.  A deal’s not a deal until it’s signed.  We were just about out of money.  The VCs were not ready to plunge right in without understanding whether there was something substantive that had led AT&T to withdraw. 

But we did launch ITXC WorldWideExchange Service on schedule April 1. The first call went from Kiev to Brooklyn; the second from Sao Paulo to somewhere.  I’m still very proud of the team that did that. And it wouldn’t have been a very good reward to miss payroll.

We didn’t want to negotiate a new deal under the pressure of an empty treasury.  Mary, CFO Ed Jordan, and I decided to put more of our own money in.  VocalTec, Intel, and all the VCs stayed with us.  The deal did get done even without AT&T.  We didn’t raise as much as we thought we would and we gave up more of the company but we were alive!  It wasn’t long before I could say with a straight face that were better off without A&T anyway.

We didn’t imagine then that we’d be preparing to go public just twelve months later.  But those (like these) were strange times.

If you’d like to read about the fictional company hackoff.com, you’ll find its story free at hackoff.com or you can pre-order from Amazon.

There’ll be more posts in this true series on going public right here on Fractals of Change.

Both stories are sort of scary.

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