This article is the nineteenth chapter of The Entrepreneur's Journey, a collection of stories about startup companies and the entrepreneurs who built them. To continue reading about key startup themes and lessons learned, check out the entire series here in The Seraf Compass, or purchase the book on Amazon in paperback or Kindle format.
Moving and thinking fast are a way of life for Steve Skillings. Irreverent, and quick to make a joke, Steve has silver-flecked hair that contrasts with his lanky frame and youthful demeanor. He’s a whip-smart engineer and self described nerdy car guy. He’s also a guitar player, passionate about music. In the late morning on a Saturday in February 2008, this go-fast car guy was bombing down the left lane of a Massachusetts highway. He was mentally chewing on a challenging problem as he approached a long stretch where the highway went under some buildings. As he entered the dark shadows under the hulking concrete structure, the solution was still eluding him. By the time he emerged back into the sunlight, he not only had the solution to the problem, he had the core of his future startup’s business plan.
Steve grew up in Maine and describes himself as, “The kid who could take anything apart and put it back together, no problem.” A first generation college student, he studied engineering at Clarkson University, a well respected program on an often frigid campus, nineteen miles from the Canadian border in northern upstate New York. Given his mechanical proclivities, Steve was a natural to study mechanical engineering. And Steve had a fascination with business, so he minored in business administration. Recalling his motivation, Steve said, “In engineering you like solving problems. And the biggest, most convoluted, multivariable problem I've ever come across is business. Just when you think you understand it, external things happen to you, and all of a sudden all of your formulas are not working as before. You have to reinvent things that were once reliable.”
Right out of college Steve managed to combine engineering with his love of cars by taking a job as a product development engineer with Gates Corporation, a large manufacturer and major supplier of automotive components to the industry giants. As a management trainee, Steve quickly moved through product development, sales engineering, tooling, and account management, learning as he went. Before long, despite rising through the management ranks at Gates, Steve was ready for something new. He and his wife Marci were ready to get out of Gates’ factory in the small city of Auburn, Maine, and try a new part of the country. Steve took a job at a design and engineering firm in Portland, Oregon. He and his wife packed up and moved to the Pacific Northwest.
Even with a demanding client load, Steve wanted to push his business skills further. With his typical self deprecating humor, Steve recalls those difficult years, “I was working at the design firm, and because I'm a complete idiot, I decided it was time to get my MBA. I was working sixty hours a week, helping with a baby, and I was taking classes at night. By the time I graduated, we had two young kids in the house. I guess that's the curse and blessing of being someone who likes to stay busy.”
Having young kids reinforced the pull of family. So after five years in Portland, Marci and Steve decided to return to the East Coast. They chose Massachusetts to be nearer to their children’s grandparents. Job selection was a bit more serendipitous. Steve recalls looking up at the sleek white ceiling speakers in his MBA classroom and thinking about how cool it would be to work for their maker, the Bose Corporation. The drive to move east took on a new dimension when Steve realized Bose was located near family, in Framingham, Massachusetts. Steve applied to Bose and was hired as an engineering manager for the audio component maker. He was to start in Bose’s automotive division, which would allow him to combine both cars and music into one dream job. Steve and Marci packed up and moved back across the country.
Bose is where Steve came into his own as a manager, and, later, as an entrepreneur. His resume accurately describes him as an intrapreneur for Bose. Steve developed a reputation as an innovator and trouble shooter who would not hesitate to point out a problem then dive in to fix it. This brash pragmatism earned him a place on the fast track, but it was not always easy. Recalling awkward management situations, Steve winces. “I was willing to say, ‘This shit's broken and it's not helping our business. Why are we doing it?’ That approach doesn’t always resonate inside of a big company. But you've got to be willing to say ‘this is the elephant in the room nobody's talking about.’ I'm willing to put it out there. I think that's why I did well at Bose.”
As Steve’s rising star status and seniority grew, so did his entrepreneurial drive. At times that drive conflicted with traditional career paths. When exposed to some experimental technology Bose was working on for live music amplification, Steve had a passionate gut level reaction. “One day my boss comes in and says ‘you're a guitar player, right?’ I said yes. He says ‘there's this incredible new speaker that Bose is developing for musicians.’ So I go and get a demo. My jaw is on the floor. The sound quality was theoretically impossible.”
That was on a Wednesday. By Sunday of that week, Steve decided to leave his senior management posting with Bose’s fast growing eCommerce group to join this live music project. “I couldn’t stop thinking about it. So on Monday I go meet with the guy who is running the project. I tell him I have to work on this. I'll do anything you need.” The manager said he had no openings but Steve said, “I'll do customer support. I'll do whatever you need. I have to be a part of this.” The next day the manager called Steve up and said, “We made you an opening.”
Steve became the fourth person on the team. At this point Steve was following his passion and his transformation into an entrepreneur was nearing completion. It was a seemingly crazy move. “I left behind a staff of eighty in the corporate world. All my colleagues said, ‘You're way up in the company. Joining this crazy little group in a tiny little market is career suicide.’” Steve, who was seized more by his passion than his pragmatism, was unmoved. “For an entrepreneur, it is about solving problems and driving forward. That’s a much bigger driver for the entrepreneur than status. I jumped in with both feet.”
The evolution from intrapreneur at Bose to entrepreneur running his own company started, oddly enough, on the sideline of his son’s soccer game. It was a bright, crisp, colorful fall day. A fellow parent was describing the challenges his son was having finding band practice time at their condominium complex. Steve’s first thought was that the neighbors must be good sports to let them practice at all. But, what he blurted out was how sad it was that a kid with musical passion could only practice two to three hours a month.
This really bothered Steve, and it was still bothering him on the highway on his way home as he went under that overpass. The solution that occurred to him during those fleeting overpass shadows was the world’s first silent rehearsal studio for musicians. Steve’s vision was to build a console that members of a band could plug their electric instruments into. The console would allow musicians to blend their collective sound so each could hear a perfect mix of the band on headphones.
Steve was certain he could build it, and was told that it could solve one of the biggest problems in music retailing. Steve said, “I was told once, ‘The industry was good at building tennis racquets and bad at providing tennis courts. This could be our tennis court fix.’” You cannot sell instruments if people don’t have a place to play them. Steve’s JamHub device would open up a whole new world of silent practice spaces for the industry.
As soon as Steve had his highway epiphany, he was obsessed with it. “It's crazy. I go straight home and I run past my wife. She is yelling ‘What are you doing? How was the soccer game?’ I tear upstairs to my home office, grabbing an engineering pad and a pen. I start sketching the product and diagramming the electrical schematic. Before that weekend ended, I had most of the engineering, market data and most of the business plan.” Steve was soon out of Bose on his own and into the treacherous world of startups where the entrepreneur's dreams and interests for his products aren't the only ones that have to be considered.
Hardware startups like JamHub are difficult because they require significant amounts of capital. You need capital to build and refine prototypes, set up manufacturing, create and maintain inventory, and find distributors and retail space. After getting things off the ground with savings and some important support from friends and family investors, Steve knew he needed to seek out more professional angel investors to provide additional working capital.
With professional investors come complications. Steve’s JamHub startup was no different. Right out of the gate the company’s situation tested the new investors’ patience. A massive recession hit at the end of 2008, just a few months after closing his $1.1 million preferred stock seed angel round. Starting with incredible promise and industry accolades, the company booked $3M in orders in its first eighteen months. But due to the recession, it soon found itself awash in returned, unsold inventory. As the recession deepened, it became clear the high build price and resulting retail price point of this non-essential hobbyist device was going to be a problem. Distributors and retailers began slashing orders and returning previously purchased units.
In the face of slower than expected hardware sales, Steve accelerated the company’s software plans, and began casting about for additional investors to keep the company afloat. Steve’s software vision was bold. He envisioned a cloud-based recording and editing platform called BandLab that featured support for multitrack recordings from the JamHub unit, and powerful social features for collaboration and discovery. Bold though the software vision was, it did little to assuage the anxiety of his angel investors who were already badly shaken by the sales reversals and thinking about how they were going to get out of this company whole.
Steve’s search for more capital led him to follow up with an Asia-based investor who was the son of a very successful industrialist. The investor, whom we’ll give the pseudonym Bayu due to the requirement to protect his privacy, learned of the product at a music industry conference. He immediately saw huge potential in the BandLab product. Bayu seemed to have nearly limitless resources and wanted to make a very significant investment in the company.
Faced with the prospect of this infusion of fresh capital, existing angel investors felt a mixture of relief and concern. They felt relief because the company was going to have badly needed resources. But they felt concern because of the significant ownership dilution the deal would create and because of the extent of control Bayu wanted. These angels felt they had seen this movie before and began asking Steve whether it was possible to be bought out as part of the deal. Steve was in no position to press for that since he did not want to send the wrong message to Bayu. The company needed the money for working capital purposes rather than to fund secondary sales by shareholders. The angels had little choice but to agree to the deal.
The experience was very eye opening for Steve. He was still passionate and enthusiastic about the company, but his angel investors were scared. This was Steve’s first tangible lesson about the need to drive your company not just for success, but for a good exit outcome for your investors. Until that moment he had an operator’s mentality. He was focused on the day-to-day process of running the company. The angel investors’ expectations were an attention grabbing reminder of his overall goal for the company.
Soon after making the initial investment, Bayu suggested the company move its software efforts to Asia. This seemed logical to all involved, but it soon became clear there were downsides, at least for the angel investors. Bayu ramped up the software effort and it rapidly consumed the company’s resources. Bayu was willing to provide more money, but naturally required more ownership in the company in return. Given the company’s rising expenses, Bayu was the only investor willing to put more money in. He was effectively in the driver’s seat. When the angel investors took stock of the situation, they again asked Steve if he could come up with a way to protect them from steady dilution straight into oblivion.
Steve and the company’s board knew if they were going to take care of their investors, including friends, family and dozens of angels, they were going to have to intervene and try to make something happen. After much analysis, the board proposed splitting up the company. Bayu would take 75% of the BandLab software business, and early investors would take the hardware business and inventory, plus retain a 25% stake in BandLab. The assumption at the time was the investors could sell off the existing JamHub hardware inventory for operating cash flow while they sought a buyer who could acquire the entire business and return cash to all the investors.
The first problem was the inventory did not sell. The economy was weak and the hardware operating unit had minimal working capital to rebuild sales, marketing and channel relationships. Further, Steve was pulled in two directions, having to travel back and forth to Asia working as CEO of the software business while simultaneously working to sell the hardware business.
Board members Carla Grillo and John Paulos, who had been elected by the angels at the time of investment to represent the interests of the angel investors, knew they had to step in and help facilitate an outcome that worked for the angels. Carla was a former Wall Street investment banker who had been at a global tier one bank. Initially, confidence was high that a deal could be found for the company that would monetize the inventory and recoup the value of the product brand and design.
Working with a consultant hired by the company, Carla used her connections to make a number of introductions to find a buyer for the struggling business. Months were spent trying to find someone interested in the company and its aging inventory. The more people Carla talked to, the clearer it was that the hardware business was not going to be a source of liquidity to pay back all the investors. An offer for the business was not forthcoming. Eventually the decision was made to shut it down, and investor focus turned to the 25% stake in the software business as a last Hail Mary play.
Part of the reason for the renewed focus on the ownership stake in the software business was the spectacular media attention the company was receiving for having purchased 50% of one of the most famous and long-standing magazines in the music and entertainment industry. This purchase was an example of the significant money and effort expended to develop and bolster the BandLab social network. The angel investors started to regain a little hope that their rapidly diluting, but still significant stake might someday be worth something. But, by that point, both the friends and family investors and the angel investors were completely passive investors. They had little say in the business beyond Steve’s continued seat on the BandLab board.
Steve did his best to represent the investors, but the company was moving quickly. It was just one of many projects Bayu had on his plate. Under Bayu’s leadership, the board did not meet at all, nor was adequate financial or operating information being provided to investors despite multiple requests. Further, Steve was conflicted due to his ongoing management role.
It was clear to Carla and John, the original board members, that they were going to have to find a path to liquidity for the company’s angel investors. The solution was to appoint Carla, with her investment banking background, to take Steve’s board seat on the BandLab board. Since Carla was not constrained by the duality required in Steve’s management role, and had a lifetime of experience dealing with tricky corporate situations, she was able to put significant governance pressure on Bayu and the BandLab team.
This level of accountability was not easy or comfortable for someone like Bayu, but Carla kept the pressure up, knowing it was the only way to safeguard the interests of the investors. Before long, the awkwardness of the situation drove the BandLab team to broach the subject of a buyout of the remaining shares. The problem was, Bayu was not in a position to pay the kind of money it would take to reimburse both the angels and the friends and family investors. Because the angels held preferred stock and the friends and family investors held common stock, the angels were first in line. This led to an incredibly difficult situation for Steve.
First of all, he was not convinced it was the right time to sell the stake. He was closer to the business and thought it had the potential to be a big winner. But he understood the angels desire to cash out and move on. He felt a professional obligation to his angel investors who had provided the capital to grow the company. But he also felt a personal obligation to the friends and family who had believed in him and provided funds when the company was just an idea.
In deference to the wishes of his investors, Steve reluctantly embraced the idea of selling and explored every option he could to find a way to cover everyone. But Bayu had already put a ton of money into the business and was not looking to pay more to buy out the remaining stake. After months of negotiation, Steve made the agonizing decision to accept BandLab’s best offer. Given their preferred share priority, the angels got their money back and a small additional return. But there was not enough to cover all of the friends and family investors. Steve could not let that stand, however, so he used some of the proceeds from selling his own personal common stock to boost the pool for common stock shareholders.
The angels were delighted to walk away with a modest 17% return, but Steve struggled with the outcome. He said, “I was accustomed to doing great things my whole career. This was a good outcome, but it wasn’t great. Good is not what I am accustomed to doing.” But with time to reflect, Steve came to appreciate the perspective that it wasn’t just about him. “Investors are in the boat with you. Sometimes you’ve got to do what's best for the boat as a whole, not what you want. The professional investors have absorbed a lot of losses in their career, so they may be incredibly happy with a merely good outcome. I guess you have to find your joy in that. You can't let perfect be the enemy of good enough.” Carla Grillo recalls the same motivations. “It was difficult, but the angel investors were so happy at the end. That is why I stayed on the board for six years. I was not going to have my name associated with something that was not a good outcome for the investors I represented.”
In retrospect, this was a difficult business launched at the worst possible time, immediately before a major recession. The product was solid, and the team was talented. But the company struggled to find its footing, and got into a complicated situation with a strategic investor. In situations like that, investors cannot just sit at home and wait for an exit and a check in the mail. Exits don’t just happen, they have to be created. In this case, Steve’s fierce drive to protect his friends, family and early investors, combined with coaching, assistance and intervention from his entire board, was the key to staying in the batter’s box and swinging until he got a hit for his early backers.
Interested in reading more stories about key startup themes and lessons learned? View the entire collection here in The Seraf Compass or purchase the book on Amazon in paperback or Kindle format.