Investment by the letters

CEO interview as published on Ubiquity

UBIQUITY: Tell us about yourself.

KADANOFF: I am a CEO of a pre-funded company. Maybe the first thing we should talk about is pre-funding versus self-funding. I used to think that “pre-funded” was the right way to describe a company like mine, which has raised about $450,000 from private individuals. In fact, the right term is “self-funded.” The terms are subtly different and both have problems. Pre-funded suggests, number one, that you’re definitely going to get funding, and number two, that this is just a temporary period. Self-funded suggests that only rich people can start companies — people who have made it before who are serial entrepreneurs. Of course, the dirty little secret is that a lot of the serial entrepreneurs didn’t make their money because they were fabulous entrepreneurs. They made their money because they were in the right place at the right time. So it’s very disconcerting to me that we seem to have an environment right now where it’s so difficult to get funding that the only people who can get funding are those who self-fund themselves to a certain point. I am worried about Silicon Valley and the level of innovation we’re going to see in this kind of environment.

UBIQUITY: What are the signs that there’s a problem?

KADANOFF: Among other things, if you go through the “VC Letters” of VC funding vehicles, you see that the venture capital community is still funding stuff, but if you go through with a finer-tooth comb you see that it’s mostly Series B and Series C. Series A has become the tough round to get. Some companies, if the founders have their own money, are actually self-funding Series A, and so they’re getting all the way to Series B on their own cash flow. By self-funding I don’t mean bootstrapping to bring in revenue. I mean actually saying, “OK, it’s going to take us $5 million to get to the first set of milestones, so we’ll put that in because we have it.”

UBIQUITY: Give us a one-minute tutorial.

KADANOFF: In classic terms, there are different rounds of financing. The seed round is generally before you have any real financing, before you have a corporate structure, and essentially what people do is give you money to be exchanged for stock later. The first real round of funding that you can raise in exchange for stock, preferred stock generally, is called Series A. Each subsequent round of financing is given a letter: Series B, Series C, Series D. And so Series A is your first real round, and Series B is your second round. Typically, in the past, you get Series A to take you through getting to a product. More typically today you don’t get Series A until you have a product, and so Series A is to take you from a product to the beginning of revenue. So you’ve already got much of the product built out but you don’t have necessarily the services and infrastructure around the product to start charging for it. Series B is typically to take you from, “I’ve got a product, I’ve started selling it, but I’m not on a revenue ramp yet.” Series C is mezzanine, or what some think of as interim financing, before you get to a liquidity event. Nowadays it’s well recognized that it takes about $20 million to get an enterprise software off the ground.

UBIQUITY: Is there any way of breaking that down into components? What does the $2 million buy?

KADANOFF: It really varies in terms of where the money is spent. Typically, there are four sets of milestones. The first is, “I’ve got an idea.” That’s obviously before you get any financing and oftentimes used to correspond with the self-funded or pre-funding situation. The second milestone is, “I have a product.” That’s pre-revenue but you have a product, and so typically that corresponds to Series A, although nowadays as I say, people have the expectations that you have the product done before you get to Series A. Now you have a product but you need revenue, so that’s where Series B comes in. That’s where you start to hire sales and business development people. You may hire your first professional marketing person. You’re really ramping up the business side. Up until that point, your company’s been more development focused. Then Series C is, “OK, I’ve got revenue, but now I’m on a race to profitability.” You know your breakeven point and you’re trying to build critical mass to get profitable. How the money is spread out varies so much that it’s not worth giving rules of thumb. In today’s environment, the focus is on smaller Series A, somewhat heftier Series B, and Series C can be anything. It can be the most difficult round to get if you don’t have a path to profitability and that’s why you see companies going out business.

UBIQUITY: You mentioned that the successful entrepreneurs tended to be at the right place in the right time.

KADANOFF: My point was that they might not be skilled entrepreneurs, even though they were successful. They might have only been at the right place at the right time.

UBIQUITY: Are you, as a skilled entrepreneur, at the right place at the right time?

KADANOFF: I think now is a great time to start a company because four years from now it’s got to be better than it is today. We certainly feel like we’re at a local trough, if you will, in terms of the numbers and the financial markets. The notion that it takes four years to create a credible company is a return to the days prior to the new economy.

UBIQUITY: What was the four-year plan for creating a company?

KADANOFF: I’ve been in the Valley now for over 15 years and in the old days it always took four years to build a company. The first year was all about product, the second year was about getting to revenue, the third year was about getting on a revenue ramp and getting closer to profitability, the fourth year was profitability, and somewhere between year four and year five you typically have a liquidity event. It’s only been in the very recent past that we’ve had these “six months and you’re ready to go public” phenomenon. I feel like I’m in the right place at the right time because there’s a real return to basics. The companies that get funded now clearly have jumped through major, major hurdles to get there, and I think they’re going to be very successful companies.

UBIQUITY: You’re still in stealth mode, but tell us what you can about your company.

KADANOFF: Sure. We are like a lot of companies that are coming up these days. We have some real assets, one of which is that we do our development offshore in Bangalore, India. The reason that’s important is because it gives you a much lower breakeven point. Salaries and operating costs have escalated in Northern California a great deal so it’s harder for a company to get to profitability here. By doing offshore development we can reduce our burn rate dramatically and get to profitability that much faster.

UBIQUITY: What is the name of your company and what does it do?

KADANOFF: The company is called Firewhite. We’re focusing on the remote access problem for the enterprise using small format devices over a wireless connection. How does somebody using a PalmPilot or a Pocket PC or a Blackberry dial in and get more than their e-mail? There are solutions that are fairly well developed to get e-mail and to synchronize with your calendar, your contacts, and your task list. But enterprise computing needs so much more. How do I get access to my documents, my co-workers’ documents, or to transactions that I need to take through the big enterprise system? That’s what we’re focusing on.

UBIQUITY: How did you get the name for the company?

KADANOFF: Firewhite comes from a Carl Sandburg poem from 1917 called “The Four Brothers” and he’s talking about wireless. Of course, he’s talking about wireless radio, which was not that new. Radio was developed in the 1800s. But he’s talking about the allure of wireless at that time. And it’s a URL that was available and easy to spell, so that’s the name.

UBIQUITY: Is the key to your business plan the idea that enterprise computing and enterprise communications needs are qualitatively as well as quantitatively different?

KADANOFF: There is a lot of discussion and talk about the post-PC era, the era of pervasive computing where you can do your computational tasks, or I should say check in with your office, from anywhere at any time. What the enterprise is interested in doing is deploying these very low-cost devices, such as a PalmPilot or a Pocket PC or a Blackberry device from a Canadian company called RIM, Research In Motion. We’re interested in deploying those for two reasons. The first is that they can reduce the dependence on laptops, because laptops turn out to be very expensive relative to desktop computers on the total cost of ownership basis. The second is they can get the productivity gains that come when your employees can do business from anywhere at any time. And the third, compelling advantage that’s coming, although I wouldn’t say it’s here yet, is be able to leverage public infrastructure.

UBIQUITY: What new networking technologies do you find interesting?

KADANOFF: We have two new networking technologies coming up: one on the LAN side and one on the PAN (personal area network) side. On the LAN side this year you’re really seeing wireless ethernets, sometimes called WIFI or 80211B standard, becoming very ubiquitous. Because of the standard where you can use any wireless ethernet card, you can go into a Starbucks say that’s running wireless ethernet, plant yourself down with your small format device and a wireless ethernet card, and sit and drink coffee and be online and get your e-mail. With our technology you’ll be able to communicate in a very free and easy manner with your enterprise resources on the enterprise LAN. What that means is that when you’re at Starbucks you’re taking advantage of their infrastructure. They have a DSL connection and have chosen to share it with their patrons. That’s very compelling to enterprise because it’s essentially free and enterprises like shifting their infrastructure costs onto other people.

UBIQUITY: What is the other new networking technology?

KADANOFF: The other kind of connection we’re going to see a lot of is called a personal area network, and it’s enabled by a technology called Bluetooth. Bluetooth enables you to do a very ad hoc form of networking where you don’t have set IP addresses and you don’t have to be a techno-genius. You can just walk up to any IP addressable device – it could be a printer, a monitor, or a workstation — and connect just for one purpose. What that means is that you’re going to not need to lug around, say, a whole projection system just in order to make a presentation. Instead, you’ll be able to connect to a monitor on the wall. That’s going to be very compelling for the enterprise because it’s going to reduce equipment costs and hassles, and also allow mobile employees to leverage infrastructure at their clients, at their vendors, at their suppliers, and at their trading partners. Again, the enterprise loves being able to leverage somebody else’s infrastructure whenever possible. So we’re very excited about those two trends.

UBIQUITY: What other trends are you excited about?

KADANOFF: We’re also seeing a whole rise of service providers for fees so that you’ll be able to go into a laptop LAN and take advantage of their infrastructure for a very low cost in business hot spots such as airports. The infrastructure isn’t all there from a software perspective, but it’s a great idea, which is don’t lug your laptop. Take advantage of the fact that we’ve got Internet cafes or for-pay places — hot spots where you can use PCs and access your data through a remote access connection.

UBIQUITY: You said that this was a great time to start a new company, but do you not worry that the mood of Silicon Valley and the tech mood has been deflated?

KADANOFF: What’s interesting about that is that it’s not a bunch of kids, all of whom want to make over six figures and work out of the most glamorous offices in the world, which was what we saw over the past three or four years, at least in San Francisco. Now we’ve got a return to basics and the people in technology companies are there because they want to be in technology companies. They love the pace. They love the innovation. They connect with technology. They’re willing to get down on the floor and scrub the grout in the bathroom if that what it takes to get the company off the ground. I think that it’s a good thing, not a bad thing, and it doesn’t worry me at all.

UBIQUITY: You mentioned earlier that many of your people are in Bangalore. Is the programming done in Bangalore?

KADANOFF: Yes, all our development’s done in Bangalore.

UBIQUITY: That’s certainly part of a much larger trend. You’re not the only one.

KADANOFF: Yes. A lot of these technologies allow us to do business from anywhere. You can submit code into the source code control system located in Mountainview, and your developers can be located in Bangalore. You can do development around the clock if you set up your R&D centers properly from a geographic perspective. More importantly, we can’t hire enough qualified Java engineers here. We simply don’t have the talent base, which is why you see a flood of people coming from other countries, including India, getting their H1s and working here for technology companies. Even so, we have a net shortfall even with the kind of economy we have today. It’s exciting to be able to set up an R&D facility in Bangalore. Not only do we have access to the talent there, but also there is a whole group of people who want to stay in India. They don’t want to be forced to go the United States in order to find compelling work. At some level, companies that create offshore development facilities are doing something good for the societies there, creating jobs there as opposed to creating jobs here.

UBIQUITY: Thinking about that global trend, do you foresee that 20 or 25 years from now the whole industry will shift toward other countries, that Silicon Valley will be a memory?

KADANOFF: I am worried about the fact that if only repeat entrepreneurs can start companies, then that’s going to give a bias towards Silicon Valley. I think what we’re going to see, as we’ve seen in the United States, is a great leveling effect. It used to be that real estate was very expensive on the two coasts, and in between the coasts, because there weren’t jobs and because there wasn’t the demand for housing, real estate prices were quite soft. We’re now seeing that real estate prices are starting to average out and be much closer all over the United States. I think that’s because you can work from anywhere. All of the sudden you have somebody who used to live in Northern California moving to some little town in Illinois and they’re driving the real estate prices up in that little town. I think you’re going to see the same phenomenon, which is, as we get a more global workforce and people can work from anywhere, pricing is going to go up, and so Silicon Valley will not be the most expensive place on the planet to hire engineers. There’ll be lots of other expensive places as well and all of the sudden you won’t have the cost advantage that you get today from offshore facilities. So I don’t worry about Silicon Valley at all. I do worry about our ability to attract and retain young people because it’s gotten so expensive, but I think this is something that will shift back in the other direction eventually.

UBIQUITY: Back when you were an undergraduate at Harvard, what did you think you wanted to do?

KADANOFF: Oh, I wanted to save the world. I graduated in psychology and social relations. Then I went off to the State Department of Public Welfare, where I was a budget analyst. At the time about two-thirds of Massachusetts’ budget was spent on welfare and so I was there figuring out how to improve programs and reduce costs at the same time. I did that for three years before I went to business school.

UBIQUITY: Did you go to business school thinking of technology?

KADANOFF: That’s why I came out to Stanford. My roommate in college had the first microcomputer on campus and I was very excited. The only thing you could do with a microcomputer at that time was to program it to play Pong. Computers were huge at that point but I was very excited by that phenomenon, had done a lot of analytic work on big mainframes as part of my undergraduate thesis, and found that I was fascinated by technology. Of course, the place to go to business school was Stanford, in Silicon Valley’s backyard, and so that’s what I did.

UBIQUITY: What did you do after Stanford?

KADANOFF: I graduated in class of ’85 and wanted to go into technology, but ’85 was not a great year for a technology companies. It was another local trough. So I went off to get my “second MBA” at the Clorox Company. It’s called the second MBA because consumer products companies were known for doing a very good job of training folks in brand marketing and patch goods marketing. I was there for about two days and realized I had made a terrible mistake, that the company was not the right place for me, largely because it’s very regimented. It’s like being in the Army, and that’s fine if you’re very open to that. It’s not so fine if you rebel against those kinds of structures and are creative about getting around rules, which I am very creative at doing. I stayed there for 14 months, not loving any of it, but it was a good experience in the sense of toughing it out. I learned some great stuff and it’s good background.

UBIQUITY: But then you move on to, first, Apple, and then Sun?

KADANOFF: At the end of 14 months I was recruited away by Apple Computer where I became the marketing communications manager for the Mac II and the Mac SC, and about 200 other products that I launched over my five years at Apple. That was a very exciting time. Being at Apple is like being part of an evangelist’s mission. I met a lot of great people and my co-workers were all really smart and interesting. I stayed there for five years and then was recruited away by Sun to be first their director and then VP of marketing.

UBIQUITY: And what led you to become an entrepreneur?

KADANOFF: I had a child in the interim and decided that I wanted to start my own business. We started a business called Miller Kadanoff Directive Interactive, which was a marketing agency, built that to about $20 million in sales, and then sold it in a three-way transaction to one of the Madison Avenue holding companies. I got the startup fever as we were showing the business and went to Flycast, the first direct-response advertising network, now part of CMGI. From Flycast I went to a small promotions company in Silicon Valley called iq.com , and from there to Everypath, the wireless Web company, and now I’m the CEO of Firewhite. So that’s my career path in a nutshell.

UBIQUITY: What would you tell young people who are interested in being entrepreneurs in technology?

KADANOFF: Today I would tell them, when you graduate from college go into a big company for a few years and get the big company disciplines under your belt. Do essentially what I did, with the combination of Clorox and Apple. There’s no substitute for being in the best practices companies and learning from them. I would definitely bite the bullet and do that. It doesn’t have to be something you hate. It doesn’t have to be a Clorox. It can be an Apple, which is exhilarating and tremendously fun, but go out and get that learning because it’s going to make you a better entrepreneur. The best entrepreneurs are people who have been there, done it before, and can apply a lot of experience to the problems at hand. When you’re an entrepreneur, you’re really working without a net, and you can’t be afraid of failure. The best way to build non-fear of failure is by having been there and done it before in a safer environment. And a big company is a very safe environment, because there are typically lots of checks and balances to make sure that spending doesn’t get out of control, that you don’t bet the company without sort of management behind you, et cetera, et cetera.

UBIQUITY: And after they’ve built non-fear of failure?

KADANOFF: Then they’re ready to take on the world — and need to go do it.