By Larry Sivitz, Seattle24x7
If you missed the TechViews 2001 October Investors’ Forum, you missed an evening of uncommon common sense with Rob Ryan, the entrepreneur, author (and board chairman of at least seven companies) who, after selling Ascend, the networking organization he founded, to Lucent for (not a typo) $25 billion dollars, retreated to the simpler things in life on his Montana ranch. Ryan’s is no ordinary ranch, though. Rather, it’s a boot camp for budding entrepreneurs. And simplicity is a relative term. Take sunflowers, for instance. Ryan relies on something he calls the sunflower principle to identify investment -worthy companies, companies that are pushing the envelope in, among other things, 3-D viewing hardware, medical record keeping, and Web-based operation systems support.
You can read Rob Ryan’s down-to-earth (yet groundbreaking) approach to business and capital formation in his new book, Entrepreneur America. And you can preview it right here where Rob shares his insights on everything from what it takes to ascend the rites-of-passage on his Montana ranch, to the success of eBay (an early investment opportunity he woefully passed up), to Microsoft (which is running things pretty much according to the Ryan plan) and Amazon (“a lousy role model”).
Seattle24x7: Your new book for entrepreneurs emphasizes the importance of doing your homework and having the cornerstones in place. Why do you think that so many mistakes get made at the ground level?
Rob Ryan: That’s an excellent question. To me these things are incredibly common sense and I’m always befuddled as to how many entrepreneurs don’t seem to get it, 90-95%. You’ve got a product or a service, (at least you think you do). What’s the application? Who’s the customer? Does the customer have any money? Is there any value proposition? All of these things to me are incredibly common sense, but, believe it or not, most people don’t investigate them well enough. They understand their product and they know how to build it, but they wave their hands on the rest of the exercise. I’m a firm believer in doing your homework up front, and only raising the money to launch the business when you can answer those questions.
Seattle24x7: Is that what you work on back at the ranch in Montana?
Rob Ryan: Absolutely. A typical scenario is that I meet an entrepreneur and the entrepreneur has some idea. If I have any kind of affinity to the idea, I’ll generally give them a first homework assignment which consists of going out and talking to any customers and coming back with a ‘Why?’ Why do people like it? Why do they dislike it? If they come back (and 80% don’t!), we’ll work on something we call the “sunflower analysis” which is taking a look at the core technology and what is it that they really do well, so we can investigate other market applications where they might make money. What I find is that 70% of entrepreneurs come in with ideas that have nothing to do with the business that they eventually end up in. They come in with “x” and we end doing “p, q, and r” by the time they’re done with the modelling out at the ranch.
Seattle24x7: What happens next?
Rob Ryan: Then I send them out on another homework assignment, to test our hypotheses that we can make better money with “p, q, and r.” They come back and say, “Yes, you’re right. We’ve got a huge order for p, q, and r.”
Seattle24x7: You mentioned that half of your companies right now are bootstrapped companies with very little money. Do you feel that bootstrapping creates discipline in the entrepreneur?
Rob Ryan: I think the answer for the most part is yes. The bulk of the entrepreneurs that have enjoyed getting a lot of money don’t have that discipline. They start building an organization as if they were a real company, but in fact they don’t have a company because they don’t have the customers. I think I enjoy my bootstrap companies a little bit more that I do my heavily funded companies.
Seattle24x7: One of the points you make in the book is that, in the race for success, having an idea is basically akin to finding your sneakers. It’s not even getting to the starting line, let alone running the race. You heavily recommend building the demo. What about service concepts, like eBay, for instance. Can you demo or prototype a business service model?
Rob Ryan: Oh sure, I met with [eBay’s founders] Pierre and Jeff several times at my house in California. When they came to me they actually had a business, they had the Website up, they were doing a couple hundred thousand in revenue at the time. The primary thing that was being auctioned back then was these Pez dispensers and Beanie Babies. That threw me off. I didn’t think through carefully enough the underlying applications that could occur. The second thing that really distressed me was that there was no barrier to entry. Their whole exercise was a few months worth of work for Pierre. And if it was a few months for him, it would be a few months for any other engineer. As it turned out, the reason why that didn’t happen, why no one else jumped into it, is because no one took it seriously (the Beanie Dolls and the Pez dispensers), and by the time they took it seriously it had gained enough momentum and visibility towhere it was hard to catch up.
Seattle24x7: Did winning eyeballs and users make a difference in that case, contrary to so many business models?
Rob Ryan: Well, Pierre and Jeff always had a business model that paid for itself. They made people pay and they were always cash-flow positive. There were just two of them and one Webmaster, there were three people. But they were paying their salaries off of that company [eBay]. So it was a bootstrap company that was profitable. They understood how to build a business. How to spend cash. And understood cash flow. What I missed was how it could expand to the whole universe.
Seattle24x7: Collectibles certainly didn’t turn out to be eBay’s main business line.
Rob Ryan: eBay has become the small businessman’s distribution channel and that was hard to see. Pierre didn’t understand that either at the time, it was basically a little auction site. In fact, the customers saw that before he did. But they were cash flow positive. They weren’t burning anybody’s money. They didn’t take venture capital until considerably downstream.
Seattle24x7: Seattle had a promising company named Mercata that offered a reverse-auction (volume discounting) “PowerBuy,” but unfortunately it was not sustainable.
Rob Ryan: I think eBay was in the right place at the right time. It was a nicely designed Website. Its features by which you could give scores to the people that were sellers and buyers was a very clever idea for self-monitoring, and it captured the imagination of small business people that wanted to use the Internet to get rid of their inventory. Y’know, a book company somewhere in Montana has only a limited audience. But now all of a sudden, the Internet makes sense to him. He can post a whole bunch of book that weren’t selling and hope that somebody actually sees it and buys it.
Seattle24x7: What kind of VC relationships do you have here in Seattle?
Rob Ryan: I’ve had a couple of interactions. One was with Frazier & Co., and Alan Frazier and I had done a deal with a company in Boston called PatientKeeper. But Alan is actually the co-lead investor in the deal and it’s a very interesting health information company. And there was another company that actually did come out to the ranch called KnowNow. We met several times. I just saw that they got funded by Kleiner Perkins for $13-14 million so they’re off and running.
Seattle24x7: Do you follow your companies into battle, so to speak? Are you sitting on any boards?
Rob Ryan: I’m sitting on ten boards, where I’m the chairman of seven of them. I’m very active. You can think of the chairmanships of falling into two components; I’m either a very active chairman, or I’m a virtual CEO or I’m a more passive chairman. But probably more than half the chairmanships are more active. You may know a few, such as Silicon Spice. Ian Eslick started a seminconductor company that focused on the Wide Area Networking communications market. We ended up selling the company to Broadcom for $1.3 billion.
Seattle24x7: You are famous for creating POP boxes for ISP’s. How did the technology come about?
Rob Ryan: It was a very simple idea. We went in 1990 and started talking to Internet providers, and realized that they were doubling in the number of subscribers every six months. But their backrooms, their wiring rooms, were a literal nightmare for them, because for every person dialing with a modem, they have to figure out how many modems they needed in the back room. So they had ‘n’ modems and ‘n’ lines and they were always trying to guess how many new ones they needed. When we met them they asked if we could build a box that instead id having all these modems sitting around, that high speed trunks (T-1 lines), each T-1 line could support up to 24 dial-in calls. And so we could build a box, say with four T-1 lines and support 96 dialing users with a little tiny box, instead of having ninety-six lines and ninety-six boxes. And that’s exactly what we built. It was called a concentrator type of a box and that box took us from $16 million in sales to almost one billion in sales.
If you looked inside of a “POP” — a “point of presence” in an Internet carrier, they would have three types of equipment in there. They would have routers from Cisco, they would have concentrator boxes from Ascend, and they would have switches from Cascade. We ended up buying Cascade. And we ended up buying a Router company. For some of our customers, all of the equipment in their points-of-presence was Ascend.
Seattle24x7: The telecom sector has had a pretty miserable year. What has happened to broadband?
Rob Ryan: I think it’s saturation. You get to a point where you’re full up. The CLEC’s, ILEC’s, LEC-LECs, etc., bought a lot of high speed switching and networking equipment. They laid a lot infrastructure and the applications to go down that bandwidth lagged behind. And so, they ended up spending gobs and gobs of money on their capital base, but they didn’t see that back in their revenue base. They ended up having so many competitors that they had to keep their prices low enough to attract any kind of users at all. Bottom line: they weren’t making enough money to continue to expand their networks. And so the network vendors got sick, the Ciscos and the Lucents and the Nortels.
Seattle24x7: How long is it going to take to get out of the glut?
Rob Ryan: We’ve now got a whole bunch of wildcards floating up with war and a recession. We’re bombproofing ourselves for 24 months. That means we’re trying to get our expenses in line with much lower revenue projections so even if we have to do a riff, even if we’ve got money in the bank, we’ve done riffs on companies that have $28 million the bank. Because I’m trying to make that $24 million last for 24 months. And the way they were spending it would only last for 12 months. So that’s it handle it.
Seattle24x7: What is your opinion on the way Microsoft has built its business, including its expansion into Web commerce areas like travel with Expedia, or online networks like MSN, besides software publishing and operating systems?
Rob Ryan: I’m really an advocate of the “sunflower model.” It’s really about building core competencies and attacking new product market areas, and as you’re attacking new product and market areas, you have to build new core competencies. That’s a great model to build businesses because you end up getting a lot of revenue flows coming in from adjacent markets and you leverage your core competency, and make it very hard for your competitors to compete with you. For someone who only has a petal it’s very hard to compete with someone who has the inner core and all of the other parts. So in general I think they’re doing a very good job.
I mean, if I told you what our initial businesses were after five years I could probably confuse you. We were in the video networking business, the Internet infrastructure business, telecommuting and remote access. The way I looked at it was the business was exactly the same. What supported all four of them was wide area networking hardware and software. Every one of those businesses had to know how to do dialing, with all the different kind of technologies that are in wide area networking. And that was 70-80% of the core technologies of every single one of those businesses.
So if you were a competitor of mine and you saw some of the video networking business, you wouldn’t ever think that we would pop up in your business of remote access. But we did pop-up overnight and literally overwhelmed the competitors in that field, gaining a 39% market share in one year. It’s a very explosive way to leverage your core technology and also befuddle competitors. And I think Bill [Gates] is doing something similar. He may not talk about it in terms of a sunflower, but he has a core set of competencies that he’s leveraging into different product areas. When people look at it they think, “Wonder why he jumped over there?” But to him, and probably his inner core of people, it was very obvious why they jumped over there.
Seattle24x7: The sunflower model is about having that broad base …?
Rob Ryan: You would not be able to grow a significant business with one petal. And multiple petals insulate you from the economy. As one industry sags, the other industry isn’t sagging, as the international side’s sagging, the domestic isn’t. All those things insulate you so you can rise through bad times.
Seattle24x7: Do you think Internet investors were too optimistic in demanding quicker results from businesses? Should investors have adopted a longer term view?
Rob Ryan: That’s an excellent question, and the answer is I don’t think so. I think we’re not impatient enough. I think we should’ve demanded better role models. For example, Amazon is an incredibly poor role model. Amazon and Yahoo! started out to be the role models for the whole industry. And their business models didn’t have any profits until 10 years down the stream, and they still don’t have much profit. And so we had a whole set of pygmies that followed after them that decided if they didn’t have to make money and all they had to do was spend to get eyeballs then why can’t I do that?
Imagine if they actually had started out with the discipline to grow a profitable company from the get-go? Perhaps all the others would have said, Well, I guess we have to be a profitable company, and less of them would have been funded. So I think we were too patient. I’m very impatient. I won’t even talk to entrepreneurs until I can see how they get to be profitable. If there are real customers and you have a real value proposition, it’s apparent right away, and you can test that right away. You don’t need ten years to prove it!