John Corcoran 10:59
It’s crazy to think I mean, you know, it’s not that much of a leap for you to choose magazine subscriptions. Right. Lots of people had magazine subscriptions back then, as you said, there’s a high high margin, you know, and yet to have one foundational decision, the right to choose magazines versus some other form of media has such a big impact on its ultimate success.
Dan Engel 11:20
It did. And I think, you know, in retrospect, we should have done more of a market validation study. That’s not something I would have heard of back in 1997 98, but have very much seen since. And I think, you know, the main issue is that there’s all this confusion, if you subscribe to a magazine to an internet website with a newsstand. What is that going to mean? For the thing that falls out of the magazine or what you’re getting in the mail, there’s kind of this conflict between different channels that you’re communicating with the magazine in terms of your renewal or getting a new subscription.
And I think people just weren’t ever comfortable to any large degree. I mean, certainly there were some sales happening. But not it did not scale. It’s not ever become a good category. Amazon eventually wanted to get into it. They looked at buying us; they didn’t end up doing that. And then they got rid of it. I haven’t looked for years. But I would imagine if we went to Amazon, they might not have a section anymore that says magazine newsstand, but they were well,
John Corcoran 12:18
it worked out okay, in two regards. One as you met your wife through that, and another is you ended up landing on your feet with IDEA labs. So for those who don’t know what IDEA Lab is, and you are an entrepreneur in residence, what were those two things?
Dan Engel 12:36
Well, so Idealab was the first generation of what is now Company Y Combinator that’s pretty commonly known for incubating companies or building companies or seeding companies. Idealab was equally super successful. At the time of its peak during the.com era, Bill Gross, the CEO was as big as Bill Gates was to computing. He was on the cover of the entrepreneur magazines. He was the guy. So for me, it was quite an honor and a dream job to be asked to come in and build companies for Bill and for Idealab. And my focus was in the wireless internet Bluetooth space.
Now unfortunately, it didn’t last long at my dream job. As I found, I’ve found over time, I’ve learned sometimes gene jobs don’t turn out quite as lovely as they seem. We went through the.com crash not far after I got there. So you know, offices were shut down, layoffs and all that is in the 2000 -2001 timeframe. But it was quite an honor to be able to build companies and try to IPO them and that’s what Idealab was great at doing. They did that with like, I don’t know, eight different companies in a really short period of time, many of which became household brands, some totally failed in the.com. A few crashes made it big and survived.
John Corcoran 13:58
And one of them that was incubated there was Picasa, which became Google Photos, which you came back to a couple years later, we’ll get to them. We’ll get to that in a second. But first before I get to that, I imagine there was some deliberate intention behind it. Like how did you get to IDEA Lab? Was there a person there that you sent one of your letters to that you reached out to or how did you get that opportunity at 24 years old to be an EIR at Idealab?,
Dan Engel 14:26
Yeah, the way I got that opportunity was there was another incubator in Boston because this was the Boston Idealab office. And it was called REACH ventures and it became an accelerator reaching Cuba, you know, depending on how the trends were changing at the time. Yeah. And that thing totally collapsed. And we got laid off and I was at Wireless World 2000. I don’t even remember where it was. Larry and Sergey were there.
I remember that and the guy who was the CEO of RIM was there. And the guy from Idealab was there who was like the CEO of Idealab, Boston. And we started talking. And then he asked me if I would come over. The timing was good, since thanks for kindly ending it, the other, the other incubator, and I had been at that other incubator, and EIR and wireless. And so now I was going to do the same thing. So I kind of set myself up to switch from a kind of no name incubator to the premier one that I wanted to be. So that’s how that happened. Yeah, and, you know, as the times now.
John Corcoran 15:32
After that, there’s an upcoming company called GoToMeeting. GoToMyPC, eventually acquired by Citrix. In Santa Barbara, I think this is what first got you to Santa Barbara. So how does that opportunity come around?
Dan Engel 15:48
Well, what got me to Santa Barbara, other than the palm trees and potentially living in paradise, was the huge tech community here. Even though it’s small, it’s vibrant, even back then. Even back then. Yeah, when the.com era I wouldn’t say so much, you know, three years, you know, before the.com era. So in your time when you graduated, not quite as much.
John Corcoran 16:09
But yeah, cuz I graduated in 98. And they were just maybe I also was an English major in college. So I probably wasn’t as plugged into what was actually happening.
Dan Engel 16:17
Yeah, that probably didn’t help but being an English major out and 20 minutes away at UCSB. But now it really was more 99 2000 2001. And so first, I worked on a photo software venture, not Picasa, but a different one that we sold to Broderbund, which was a big software company in the 80s that became owned by The Learning Company. And then I worked with John Greathouse on my PC. And we really hadn’t gotten anywhere yet. And it took us a while to figure it out. But eventually we did. And it scaled big time, to the tune of spawning GoToMeeting and eventually going from scratch to I believe, at the peak $800 million of ARR for that product line of Citrix Online, which after we sold it to Secretary Citrix, which John played a major role in by the way.
John Corcoran 17:11
Yeah, I believe we talked about that in my interview with him. And, you know, this really, you can’t really understate the significance of that company, because before going to my PC, you couldn’t remotely access a computer that was somewhere else. And this before, way before the cloud even really took on, right. So it’s a pretty revolutionary idea at the time.
Dan Engel 17:35
Well, what was different was that it was internet based fully, it was web based fully, there was this whole product called PC anywhere, which was kind of legacy old school. Yeah. And then Microsoft had something built in called, like, remote procedure, PC. But like a lot of what was in Windows, nobody knew about it, nobody was using it. So even though it was free, right? Nobody knew about it. And it was technical. And everything was so technical. So we were trying to come up with something that was just for the everyday person that wanted to work on their computer, when they’re not at their computer, especially when they’re at home.
And they’re without smartphones and whatnot, there wasn’t a way to do that. And so you’d go on your laptop, and you’d pull up a web page, and it would then show you your computer screen at the office, even though you’re at your house. And that was challenging, because data speeds weren’t that fast. So how would you see it and be able to move so quickly? Just as though you were in front of your computer at the faraway office? Well, we’re able to do that because it was a difficult technical challenge.
John Corcoran 18:34
So, We talked about customer acquisition earlier. Do you recall in this time period, one or two things that were really pivotal to acquiring customers to go to my PC at this time?
Dan Engel 18:49
Yeah. Um, you know, one of the big events that happened was, you know, my approach is kind of a spread approach to customer acquisition that I’ve learned over time, which is, don’t try to think you know, what’s going to work and what’s not in marketing? Because so many of the things that should work don’t, and so many things that don’t seem like they would work could and you really trying to find what are those few channels of customer acquisition, that totally worked for your particular product, your particular customers that hopefully also have the attribute of being very scalable, and maybe you can’t find any, maybe you can find a lot of them.
And so with my PC, we did a lot of internet advertising, we became the fourth largest advertiser after x one wireless cameras Netflix I forget who the other one was. And then we marketed the heck of this thing. Online. And then I remember going to someone in marketing, who ran part of the ad budget and saying, you know, I think we should test out radio, TV and some other offline traditional channels. And he said, Well, You know, those are direct responses. It’s not going to work. And I said, Yeah, I know you’re right. You’re right. But let’s just try it. You never know.
And we could just find a fit, we got to try things, because we’ve been so surprised so many times. So eventually, we got the Okay. And it worked out. It didn’t work out at first. But we were able to make enough tweaks and figure out this offline world enough that we became a large advertiser on television, on radio, which sounded ridiculous for an internet company at that time. But I’m really glad that we did try it out. But yeah, so that certainly is an important thing that was in terms of customer acquisition, main transition period, and something that was crucial to the success of that product.
John Corcoran 20:46
But yeah, so just trying different things being open to you know, being proven wrong, I guess, and then trying traditional media.
Speaker 1 20:54
It was kinda critical there. Yeah. Yeah. Yeah.
John Corcoran 20:58
You end up going to Picasa which had been incubated at Idea Lab. What what, How did you end up there?
Dan Engel 21:08
Well, you know, we’re having so much growth at a GoToMeeting go to my PC. It was starting to flatline a little bit. And the guys that Idealab said, you know, we’re seeing these ads everywhere. You guys are crushing it, can you show us how to do it? And eventually, they taught me to do the same thing for them. same kinds of things that I have been doing with the GoToMyPC, go to me and products, and we were able to grow the revenue?
John Corcoran 21:39
Forget something like seven times in 10 months.
Dan Engel 21:41
Thank you. Yeah. Yeah.
John Corcoran 21:46
That’s the same thing. Was it traditional media advertising on TV.
Dan Engel 21:49
You know, Picasa, we didn’t get there, you know, because nine months or so after I started doing that, we started getting our name out there and becoming a world more well known brand. We got acquired by Google. We were talking to AOL to Apple and Google and Google got us. And it actually is pretty important. I mean, Yahoo. Google Photos is a really important site and Mungus’ amount of users it’s very convoluted.
But to this day, yeah, pull, done the deal with us instead, that our product would have effectively become iPhoto for Windows, and could have potentially done for Apple what iTunes did in terms of attracting non Mac users. So I think it was a mistake on their part. And I remember Steve Jobs called Sergey afterwards and tried to figure out, you know, what the plan was, and all, but when we were talking to Apple, their attitude was, look, it’s gonna be us and Adobe. And that’s it, you guys are going to be dead. And that just just didn’t fit with our kind of culture. We were just regular nice people.
John Corcoran 22:49
And that whole like they were trying to bully you into.
Dan Engel 22:53
I’m sure that works for them sometimes. But it wasn’t our style. And we’re like these Google people are really cool. And we had a partnership with them through bloggers. We were doing the photo stuff there. And it just fits a lot better with what you think?
John Corcoran 23:06
No, this was a very competitive space at that time. There are many other photo sharing sites in this time period. What do you think Picasa succeeded?
Dan Engel 23:14
Oh, well, Picasa wasn’t a photo sharing site. It really was a desktop application for organizing pictures, digital pictures. And then we had just built web albums, web posted photos that we hadn’t put out yet. And Google very much wanted that. They didn’t care so much about the desktop photos, right? Because it’s a desktop. But they needed a way to host photos. They want it to be a main resource. And I think the reason why they became so popular is because it was from Google. And it was all kind of integrated.
Yeah, by the way, an interesting story that not too many people know. But when I got to Google, they put me in charge of all their customer acquisition for their main products, AdWords and AdSense. I noticed very quickly that they had no way to track the ads that I was buying to drive people to those products. I couldn’t believe it. But I think Google was a bit of a zoo in 2004. This is pre IPO. And they were very engineering focused. And they kind of rolled their eyes at marketing. It was an odd place. And they said, Yeah, we don’t really have a way to track our ads. What do you use? And I said, Well, we’re using this thing called urgent over at Picasa. And it’s really cool. And there’s nothing like it. So we started using urgent and then they decided to acquire it. And that today is Google Analytics.
John Corcoran 24:38
Wow Amazing. What was that experience like for you? You You didn’t last a long time, at least according to your LinkedIn here. It looks like it was maybe four to five months at Google. What was it like for you working?
Dan Engel 24:50
It wasn’t my kind of scene, you know, this big kind of Kool Aid, lots of cubicles, Mountain View situation and I was trying to do my next startup. I don’t don’t want to be, you know, it’s 3000 people at the time, and I just wasn’t drinking the Kool Aid, you know, I want to do my own thing because it was great. There were just 22 people, and I wanted to do something else. And so I had no I didn’t stick around too long. We had the IPO, there were a lot of really cool experiences there. And it was a neat place to get to be and spend some time. So I was living in Santa Barbara. My wife got doing a community.
John Corcoran 25:26
So what’s that? Were you commuting to Mountain View?
Dan Engel 25:30
They’re not real. I mean, I go every couple of weeks. And I had to keep secret that I was here, because they had other people here, and they made them all go. But I said, No, I watched getting your PhD, I can’t go up to Mountain View. I mean, I didn’t want to, but, you know, they, I like it better here. And I like our tech scene here. And I just don’t want to be part of that sort of Silicon Valley rat race. It’s really my style. But also, you know, part of it was also that Google didn’t care much about advertising and the kind of stuff that I had done for these other companies. Because their attitude was, you know, if there’s a billboard outside, on the road, that’s Yahoo’s on we’re not we don’t care.
My attitude was, well, its users we could be getting at the time. You know, what just Wasn’t that obvious where Google was headed. Everything was concentrated just in search and their traffic and their website for searching. And everything else they were trying was failing. And I just thought they should have had a little bit more attitude toward I know what what we’re doing has gotten us here. But maybe what we’re doing and sticking only to it and our ways was maybe not the best strategy indefinitely for diversifying the company over time. And it turned out they picked something and searched for it all this time. And usually that’s not how it works. You know, how to diversify your risk of it. But they nailed it as being important.
John Corcoran 26:51
This is a record that in March of 2024, questionable right now we have chatty VT and these AIs coming in, we’ll see what happens with that. Well, it’s been a long time to use it has been 20 years.
Dan Engel 27:06
But they did find some successes, you know, Gmail became popular, Android became popular. But if you remember so many things that we were doing, whether it was frugal, or orchid or social network, just one failure after.
John Corcoran 27:18
I know there’s a website, somewhere someone shared with me recently, with all the different Google starts and stops, different businesses they’ve launched, and products they’ve closed.
Dan Engel 27:27
Bless them for trying, you know, Google that. I mean, just like with customers, you got to try stuff. But luckily, the main thing, the only thing that was successful for them for so long turned out to be the best thing it could be. And unlike Lycos and Alta Vista and all the others, there’s actually last true.
John Corcoran 27:43
So grape ape had ended about 99. And here you are, after the success of Picasa being acquired by Google and then Google going public and you’re itching to start something new. And you started a couple of from this point forward in your career, you’re involved in a lot of different things. But one of the things you started with fast spring, and I’m curious, you know, you develop an expertise in customer acquisition.
And in order to get to the point with fast spring that you were doing customer acquisition, you had to build something really hard. You had to build something that was kind of like modern day stripe, financial infrastructure, which is no easy feat. So what were the early days of fast spring? Like?
John Corcoran 28:24
Slow spring? Slow? Call it?
Dan Engel 28:30
Yeah. Oh, God, it took years, you know, we thought like a lot of entrepreneurs, Oh, yeah. In six months, we’ll have a product we can sell. We kept going to customers. And they would say, okay, you’ve got a, b, c, and d now, but either missing E, F and G and it just kept having to add things to learn them away from existing legacy.
John Corcoran 28:48
Which ones? Are they using digital
Dan Engel 28:50
River, Digital River?
John Corcoran 28:52
Remember that?
Dan Engel 28:53
I don’t remember. Yeah, they’re 94 companies from 1994. They were a publicly traded billion dollar company. And basically, we were trying to take away their business to the largest extent possible by being everything they weren’t. So their customer service stunk, their pricing was too high. And their technology was for dinosaurs so we use next generation technology, far lower pricing and phenomenal customer service. But if we didn’t have enough of the features that couldn’t get the people to switch, so it took a long time. And ultimately, really, we didn’t do that well in the Windows environment. But we found eventually, an area where we did very much stand out, which is Mac software developers, independent developers on Mac.
John Corcoran 29:33
And this kind of came from a couple of key relationships, right?
Dan Engel 29:38
Yeah, yeah. Well, the first one was a guy’s name was Lauren, who was running an app called Tweety. And it was kind of the way that people use mobile phones to go on Twitter. There were some others I think, maybe TweetDeck or something a few others, but this was the main way.
John Corcoran 29:55
And Hooper Twitter had an app of its own.
Dan Engel 29:59
That’s right. If they didn’t have an app, so you had to go on the desktop, yeah, unless you use Tweety, which
John Corcoran 30:03
actually seems crazy today in the world we live in today that that didn’t exist is hard to believe.
Dan Engel 30:08
You know, mobile is prevalent now. But it wasn’t nearly as prevalent at the time. If you remember things like Uber or Lyft, those all were just Facebook apps. Yeah, there weren’t phone apps. Luckily, they transition. But, and so Lauren started blogging about his experience with us, and how much better was then I believe, Digital River, who I’d used before, and so many Mac developers looked up to him. And he ended up selling Tweety to Twitter. And it became Twitter for mobile, for iOS and Android. So that really helped us to get credibility and get known in the Mac community. And then we started developing features for the Mac community specific to them that those legacy providers wouldn’t do. And then they’re like, Hey, these are the Mac guys. And it wasn’t an easy group of people.
You know, these are, these are the Mac service providers that people are starting to use. And it wasn’t easy, accommodating that group of folks, I mean, they’re pretty darn demanding. You gotta be pretty good. And yeah, and luckily, we had such a strong team that we had four co founders that had all built companies, actually, not me, the other three had all built companies that competed with Digital River, and then they got acquired by Digital River. So we all knew very much about this business and had been CEOs individually. So we didn’t run all in Santa Barbara, right? That’s right, actually, we were completely remote. We started the business in 2005. And we always were completely remote. I think, for a long time, there were never two people even in the same office.
And the co-founders and I, the three, the four of us, together with me, went a period of about three years without ever seeing each other. Why? Well, one lived in North Carolina, one lived in Georgia, one lived in Seattle, and then I was mostly in Santa Barbara. And there wasn’t a reason to get together, or need. And we just did everything by email, texting, or whatever, you know, I am, and, and every once in a while we’d have a phone call. But it works. You know, some of them were very technical people there just didn’t love talking on the phone, just like a lot of software people are. But it totally worked. And, you know, the biggest issue or fight we ever had was picking the name. In the beginning, it was really hard. And I thought, Oh, my God, this is gonna be quite an experience these next years. And it turned out it was all kind of uphill from there. Yeah. And we worked really well together. And probably partly because we were separate from each other.
John Corcoran 32:43
Yeah. I was asked about that. I mean, usually, when you have a bunch of individuals that have been CEOs of separate companies, and they come together, then there can be turf wars, it might not work out. Well. Why do you think it worked out with all you guys having previously had experience as CEOs?
Dan Engel 32:57
Well, because we left each other alone to kind of run our independent areas of the business. So the product guy did that. I was on the sales side, and the CEO dealt with all those roles. Then we had one person who dealt with all the customers in terms of customer support and customer success. And then another partner who eventually got very involved on the sales side, but also worked on partnerships. And like I said, we all had been CEOs, so we didn’t need anybody to manage these people, the four of us. And then the people we hired, most of them were people that we had worked with in our past companies.
And we didn’t ever lose anybody. And a part of it was, I’m sure because we pick great people. But another big part was, they couldn’t find alternative jobs that would let them work from home, wherever they happened to be. I remember we had one woman who wanted to take care of her child as needed in Maine, like Where would she find another technology job like that in the middle of Maine, she wasn’t even in the city. But she knew someone who had worked with us. And so through that sort of, you know, connections, transitive property that we kind of knew the people we were hiring, because they all had worked together with other people.
In fact, that’s how the four of us came together. As founders, I knew one of the founders, he had worked with the other and the other had worked with the other. So that’s kind of how we did and obviously it doesn’t scale and you get a big company. But we got to a place where we were scaling, really scaling and on the revenue side, but we didn’t need to add any more people. And that was a great place to be, you know, we kind of had the bases covered. And so we started whipping out some really great profits in that business.
John Corcoran 34:34
And you only raised or you only invested $30,000.
Dan Engel 34:38
And gave 10 grand, and to the other guys gave 10 grand and then the one who was building the product, we didn’t ask him to put any money in because he was initially putting in more time than us because he had to build the product while the rest of us are somewhat waiting for the product to be good enough to sell.
John Corcoran 34:52
And there probably was a point where that guy after he built it was not as in demand as I imagined or were there other things for him. Did you at that point, I don’t know?
Dan Engel 35:01
He was always very much needed on the back side, he’s probably the busiest of all of us and the most essential. And he had, I think the second largest equity stake. And by the way, the way we built the business is a way that really matters, which was that we kind of built it not to be able to fail. But what I mean by that is we didn’t bring on expenses, we didn’t raise money, we bootstrapped it. And so the only way we could possibly fail, was really to lose interest.
If we couldn’t get far enough, soon enough, maybe one or more of us would just say, I’m gonna go work on something else. But aside from that, how would we fail? It was just a question of how long does it take us to get clients? Yeah, how many can we get? And we knew, if we kept at it, we eventually probably would get enough traction. And we did. But it took three and a half years. But there wasn’t any, you know, clock running, there wasn’t any, you know, burn problem.
John Corcoran 35:57
Is it because you each had kind of excited other businesses, you had a little money in the bank? Or did you all have like kind of side hustles that were helping you to keep the lights on.
Dan Engel 36:05
Or it’s really a combination depending on who it was. Out of the four of us, but we did it all for equity. And, and that 10 grand each. And in the end, it was sold for over $100 million to excel KKR.
John Corcoran 36:25
By the way, for you personally, you know, you had worked in photos, you worked in magazines that didn’t work out, you worked in a remote software, why fintech? What? What drew you to the financial underpinnings of the interests of the internet?
Dan Engel 36:44
Um, I guess what happened was that I had a lot of experience with this world of digital River and software payments, and small software companies, because one of the ventures I worked on was a product called Morpheus, and Morpheus, it wasn’t a p2p file sharing app, it was Morpheus for like morphing and distorting images. And in building that with my partner, who was the technical side, I was the business side, we built a whole back end infrastructure, to basically do everything I wanted to do in terms of managing the business in terms of marketing, the business tracking, you name it, all that functionality, he built the system for it. So I went through that whole experience. And I kind of thought, well, this could be useful to offer to other software companies if we could.
And I had this idea for kind of a cross selling merchandising capability if we could get into the shopping cart of other software companies. And I went to Jason Goodman, who is the CEO of Swift CD, which had never bought software in the 90s. And it asks you, Hey, would you like to receive it in the mail as a backup backup CD? That was Jason, he pretty much had the whole market. And so I partnered with him with this business, because I said, could we do this merchandising idea, he said, Awesome idea. I think it would totally work just like 40-50% of people who go through a shopping cart, take some sort of upsell or cross sell. So we could sort of pipe in cross sells and upsells of other software companies that we work with, and get a piece of it. And it would scale. And the customers are already sitting there. He said, but I don’t think we’re going to be able to get any of the big shopping cart companies like Digital River, the big gorilla, to allow us to integrate in.
So we’d have to build our own. And so then we said, Alright, what do we look at building around? He said, Well, it just so happens. I’m working with this other guy. I think his name was Steve, on building a competitor to Digital River. And so I said, Oh, well, maybe there’s something there. And he said, Yeah, let me see. There’s this other guy, I was thinking of getting involved. And he called him and then that guy said he was interested in Ken. And then we said, we put our brains together, or who the heck can build this. And Ken said, the best guy probably on the planet to build it is the guy that built reg now and sold it to Digital River. And he was the guy behind the affiliate links on download.com on CNET, which was where a lot of activity was happening in the software world back in the 90s download.com was kind of where it was.
And he was working at Starbucks at the time, just kind of taking a break. And we all came together and said, Hey Ryan, what do you think? And would you be interested? And he said, Yeah, I’ll give it a shot as long as I can do it in Java. And we said all right, if that’s what we need to sacrifice, we’ll do it. And he did it and he did it in Java, which was great in some ways and challenging or slower and others at times. And that’s kind of the story of how I got into it. And and what got our team together.
John Corcoran 39:49
and then you end up exiting that business. Oh, by the way, how did this sale come about? Were you done? You wanted to sell it? Were you proactive about finding a buyer?
Dan Engel 39:58
You know, people were like Oh, Oh, Don’t you regret selling it because now, you know, when we sold it the first time, we sold it twice, which most entrepreneurs unfortunately, don’t get more than one bite at the apple, you know that you sell your company, if you sell it to like private equity, they let you or they want you or require you to keep maybe 20% of your equity, roll it over. But usually it doesn’t work out so great. In our case, actually, the second bite of the apple became worth more than the first bite. We’re very fortunate. But we had, we were concerned that there were too many risks in the business with doing payments for this kind of group, which was software vendors, because we kept us having issues with Visa, MasterCard, and we get letters about things that were you know, we’d get fines, and they started getting really big for things we couldn’t control.
Like, somehow someone had gained our system and put through orders of things that were, you know, against the policies of MasterCard, and we’d figure out a way to avoid that next time. But then someone else, you know, hacking, yeah, you know, they figured out the next hack. So we were scared that we could lose the whole thing. And so we started looking at options. And first we started looking at raising money. And then we said, alright, well, maybe we should look at m&a and test the market. And we got to a place where the pricing we could get potentially out there was enough to satisfy us when you split it out amongst the four of us. And so we hired bankers, and we went through the process. And it, we ended up having two deals fall through and then the third one worked out.
And that was over a year and a half period, which was not always fun. You know, it’s a lot of work to try to sell your company. And you know, a couple of times it pitted us founders against each other because we didn’t always agree that the right amount was the right amount for each. You know, it’s like one person’s okay with this and others no one wants to sell here. So we had a couple scuffles on that one that was probably our second area in eight years, or we had some real disagreements.
John Corcoran 42:00
So that acquisition, the first acquisition in 2013, and then the second was in 2018. Did you stick around for the second acquisition? Or did you have to move on?
Dan Engel 42:09
I stayed for like a year. I was on the board for like another year. And the guys who took over wanted to take over as CEO and do things a very different way. Turn it into a private equity attracting business, add lots of layers and infrastructure. It just wasn’t our style. We really mean we did an awful lot with very little there, you know, taking people that we had and replacing them with seven people and creating huge departments. And it was not our style. But it worked. It worked. Because they got rid of all the profit. They just started spending a lot of money. We’re like, oh, where’s our profit going? What are you doing? But you know, when we sold it, we’re doing maybe, I don’t know, 8 million in net revenue or something. And they got it up to 35 million.
Now. It’s maybe 75 or something like that. There’s like 150 people, so we sold it. We had 22 people and only 12 of them are full timers. We were doing over 100 million in revenue. So things are gross. Yeah. So very different styles. But yeah, the reason we sold I think is we were nervous. And it also had gotten to be worth enough for us to walk away with enough millions that we’d be satisfied. And also, there were other threats, like Apple came out with the Mac App Store. And that was really scary because we thought maybe all the Mac software is going to only be purchased through the Mac App Store on Mac desktops, Mac computers. And it turned out no, people still were buying outside of that store. But you know, things like that happen a lot that go through it.
John Corcoran 43:47
I mean, that’s the big issue with Spotify these days. It’s really been fighting Apple on that, because they’re taking a chunk of their revenue.
Dan Engel 43:54
Yeah, yeah. Yeah. And that would have cut us out. Totally. You know, so, you know, people look at people that make a lot of money as entrepreneurs. Oh, wow. They’re, you know, they did so well. And why didn’t I get all that money when I joined later in the cup? But look at what an entrepreneur goes through. Yeah, right. So many times this whole stress for years and years and all the stress and the struggle. And by the way, when you’re building it and you’re struggling, you don’t know if it’s ever gonna work.
You know, you’re questioning it. Other people are questioning you. Like I said, my wife called it slow spring, she wasn’t happy about this app saying, you know, success is just around the corner. I kept getting put off. But you know, you’re going through all those things that can totally jeopardize the whole business. So you kind of earn it. You know, you kind of earn the kind of pay that you get when you have a payday because it’s so hard to generate that payday. And what’s your hurry to get there with risk and struggle?
John Corcoran 44:46
At what point did you decide that? You know, it’s time for you to move on time for you to do something new. What was there any triggering point that
Dan Engel 44:56
I think we felt like the business was at risk. of not working out, after it had already been so successful. There were just some really big issues that we were dealing with, that we felt could produce all of the value of the business, essentially, overnight, and those fears drove.
John Corcoran 45:18
That’ll keep you up at night.
Dan Engel 45:20
Yeah, well, you know, a lot of businesses have those kinds of risks. They try not to think about them. But you know, if you’re dependent on somebody else for something like say, you’re tied into Amazon for your service, or Google, like, all your traffic comes from free free traffic from Google, and they make a change in their algorithm and all of a sudden you lose 90%.
John Corcoran 45:39
So that started those things, or what were those things? If you can say for fastspring, that you were that were keeping up an error?
Dan Engel 45:45
A few. One was that every so often, someone would get through all of our safeguards, and we would do transactions that were unauthorized, because somebody would trick us and vendors, merchants, and then we would close up that hole. And of course, like any good hacker, they would find another one and or figure out some other way to check our system. And when we had those violations, we would get very outsized fines from Visa, MasterCard, that didn’t really go with, you know, I remember one time, we had maybe $400 worth of transactions that were definitely violations. And we got a fine for like $200 and something $1,000. Wow. So yeah, so you can imagine a chain warehouse? Yeah, yeah. And what do you want?
John Corcoran 46:43
You’re a much larger business. But if you had been a smaller business that could have crushed you.
Dan Engel 46:49
Yep, That’s right. What would the next fine have said could have been? Here you go, you now owe 2 million or 20 million, and there’s nothing we could do about it, what are you going to do Sue MasterCard, or Visa.
John Corcoran 47:00
So, basically, they hold the cards. And there’s nothing you can do with those with those couple of players in the marketplace master, but a MasterCard and Visa.
Dan Engel 47:09
Yeah, that was part of it. Also, we kind of ran in this gray area that had existed for a while, but was always at threat, on and off, which was that we’re processing for others. But the way we did that was we took the flash title, it’s called. So we became an instant, on the fly reseller of every software product that we sold through our platform, through our own merchant account. And that’s only really allowed in a few industries, one of them is in software. Because you’re really, even though it’s someone else’s software product that you’re selling, you’re in full control of the fulfillment of the product. And thus, you’re in a lot of control of whether there’s refunds and cancellations and chargebacks. So because of that, those in that industry are able to kind of skate by for a while processing transactions for their vendors by sort of taking on a temporary reseller role in each transaction. But it’s a gray area, and sometimes there were threats to it.
And then also the Mac App Store came out. And that was a threat as well, because if everyone started buying, say their Mac software, just from Apple, through the Apple Store for third party software, all of a sudden, there’s no place for us to sell through websites anymore. So those are examples of just three things that could have completely ruined our business. And, you know, we wanted to sleep well at night, and a lot of our networks were tied up. We had four co-founders in this business that we had built that had already been successful after not having been for the first few years as we struggled to make it successful. But we didn’t want to lose that. So we were very interested in looking for the opportunity to perhaps sell the business for a price that would generate enough cash to the co-founders that it would be worth selling and removing that risk versus continuing.
Now, if we had held on, you know, in retrospect, none of those risks came to fruition of ruining the business, we would have made of a quite a fortune, not just from the profits growing as the business you know, we sold it, it was doing maybe 8 million revenue, and lots of that was profit millions and bottom line profit, the way we ran things. But that 8 million became what’s now you know, something a little less than 100 million. So you can imagine what kind of profit distribution there would be at this point. But you know, he looked back on it and there’s not a day that goes by that doesn’t benefit from that decision, even though it could have been more financially beneficial later. Every day I benefit from the freedom that that 10 transactions produced and the other benefits of it so I don’t regret it at least. Even though you know the math might have worked out better if I had held on and knew that in the moment, which of course, I never knew when, and when the bottom would fall out.
John Corcoran 50:05
And we’ll get into your present day as an investor. But do you think that going through that experience and realizing that the company survived that those your worst fears didn’t come to fruition? Does that give you a stronger appetite for risk? Where now, when you’re advising founders or portfolio companies that you’re, you’re encouraging them to, to keep going and to not sell? Because? Because these, you know, your greatest fears didn’t come to fruition previously?
Dan Engel 50:35
No, no, not at all. I’m still totally fearful. Well, look, we’re in the risk business, you know, people, people look at the situation as a venture capitalist or startup founder, and they say, Oh, wow, you’re so good with taking risks, you’re willing to take risks we’re not and actually know, what we hope we’re good at is managing risk and avoiding and eliminating risk. That’s really, you know, the decision may have decision making where risk fits into it, you know, how can I make an investment as a venture capitalist, but the greatest upside and the least potential risks, so no, I’m not comfortable with major risks, I’m trying to avoid eliminate them whenever possible. So you know, if a founder, if I’m an investor in a company, and the founder has the kind of risks, we had a fast spring, I would very much be looking at what kind of options there are, at the same time that I’m continuing to try to reduce those risks. If they’re that systemic, interesting.
John Corcoran 51:34
So first of all, what was the process? Like for selling the company? Was it, you know, reaching out to a zillion different, you know, private equity companies? Was it? Did you have a? Or did a buyer start materializing? Because they were already interested? What was the selling process like?
Dan Engel 51:53
Um, you know, in the old days, the way to sell your company, as well, in software, was, you know, sell to Microsoft. And in other businesses, it was sold to some competitor or sold to some corporation, and there was a very small number of them. And to get everything to align at the right time was quite difficult. These days, there’s quite a universe of potential buyers, you know, you’ve got private equity, you’ve got search funds, we actually sold the first time to a search fund, you’ve got so many different vehicles that are out there with cash, trying to buy your company for all sorts of different reasons that don’t have anything to do with whether you strategically fit in with them as a corporation, that’s trying to expand their existing business, there’s companies that just do roll ups.
So what’s wonderful is we had the opportunity to go out to the beginning, I don’t know 40, or 50 companies. But ultimately, because we had two deals fall through before we had an acquisition close. Ultimately, we went to about 150 firms. And we didn’t do it ourselves. We did it with investment bankers. And unlike us, they had all these relationships, and they certainly know who the buyers are. And I can tell you, for sure, the ultimate buyer the third time around, we would not have known about had we not hired bankers because it was a search fund. And most likely like you I’ve never heard of what that is, nor but I’ve had a relationship there. That’s who ended up being the best fit for us.
John Corcoran 53:20
Which is where a company is, is basically organized for the purpose of acquiring a company and running it right search.
Dan Engel 53:26
Yeah, it’s MBA students that raise money, sometimes it’s undergrads, one or two people that raise money to try to find a company to acquire and then they try to raise the money again, to then go acquire the company, and then they try to take it over and do it better themselves, even though they don’t know anything about the industry and just do or don’t have MBAs.
John Corcoran 53:46
And, what’s your opinion of the merits of that particular structure?
Dan Engel 53:51
I think it sounds really silly, but it works extremely well. Really? Yeah. Yeah. The track record for search funds is unbelievable. You can look up some search up some studies out there, Stanford’s done a number of them, the asset class, over 20 plus years is around like 30%, over 30%. companies, big companies have come out of it, like Asurion, the folks that give us insurance on our cell phones. Yeah, it’s incredibly effective.
John Corcoran 54:23
Yeah, there’s an interesting sounds up front, one of my past guests on the podcast, Walker Dyball, wrote the book by then build, and he makes a really compelling argument for why you should skip basically the whole product market fit stage to a business, like building from zero to a million, zero to 5 million, whatever, and just go to acquiring the company. And when you remove all of the failures that happen in that stage of growth, you actually have a much stable, much more stable period. And so maybe that has something to do with what you’re talking about.
Dan Engel 54:54
Yeah, I know that our venture capital fund, we only come in after product market fit for those kinds of reasons. Yeah, we don’t want to have a bunch of failures that we have to offset by finding the next, you know, tick tock out there to pay for all the losing investments.
John Corcoran 55:06
Right? So, did you have a vision for you to go back to your original love, because you worked in investment management early in your career, you’ve done all those internships we talked about earlier? Is that what you envision for yourself after fastspring?
Dan Engel 55:22
I don’t know. I don’t know what I was envisioning. I think I was focused on fastspring and doing some angel investing. And that always was a fun thing to do. And then venture capital, you know, entrepreneurs look up to venture capitalists. So I think I’ve always been intrigued by it. And it is investment management, which is what my original love was. So really, I wanted to be a school teacher, but my original love after college, I would say, and I would say, I fell into it. Because, you know, actually, now that I think about it, I did go actually to John’s great house years ago, and he was doing recon Venture Partners, which is today’s bonfire. And I asked him if he was looking to bring in a third partner in their funds. So that must have been about 12 years ago. And he said, You gotta get a lot more experience as an angel investor and go through the ups and downs of all that, and I did. So I did, I guess I did have interest a while back.
John Corcoran 56:23
Well, what were the biggest ups and the biggest downs in the early days of those angel investments.
Dan Engel 56:29
Fortunately, for me, almost everything worked out. There was one that didn’t. And that was kind of a holistic retail investment, which those are much harder to pull off. And any that are going into it. They had great success in the beginning. And I think it went to their heads. And so they started spending like it. And when things changed a bit and retailers started acting like retailers, which they’re not the greatest partners to have, then they ended up with a whole lot of inventory and going out of business ran out of cash. So that would be one that didn’t work. All the others are still pretty much going. The biggest success was appeal sciences, which when I invested was a good 404 and a half million dollar valuation. And then it ran up to 2.2 billion within something like eight years. And fortunately, I was able to sell some at the top, which is great.
John Corcoran 57:33
Yeah, yeah. And actually, that’s one thing that you’ve done as a venture capitalist is you’ve taken advantage of selling in a secondary market. So explain to others what, why you would do something like that, and how that works.
Dan Engel 57:47
Yeah, so I was saying earlier how there’re all these liquidity options that didn’t used to exist. So starting, actually, with Facebook, came this concept of maybe founders could sell shares into rounds as they go, he wouldn’t really be able to do that before. And then in other not just founders, but also other people that own stock. Facebook was really the first situation that led to the secondary market where people like an executive at a company can say, well, I left the company, I’ve got all these shares, it’s illiquid, I have nothing I can do but wait, well, all of a sudden, that changed. And that sprung up a second market, and shares post. And now there’s like 20 Different platforms to sell private stock through. But there’s other ways to do it as well, it’s become such a common thing to be able to buy or sell shares from existing investors, not just from buying stock from the company.
So for example, in our Santa Barbara Venture Partners VC Fund, in the first fund, we found a few of those opportunities. One of our companies, we sold a piece of where we were able to locate an investor that very much wanted to own some of one of the companies and we had actually 10 conversations, I’d say with firms like that, that are just in the business of buying secondary shares, meaning shares that are not purchased from the company. But from existing shareholders, we’re able to produce and lock in a really significant profit. Without losing or upside, I mean, we’re still holding on to the vast majority of the company. But in the meantime, we lock in again, we send some distributions back to our investors. And now after just three and a half years of fun one’s existence, we have four exits, three of which involve cash, liquidity and distributions. But that’s by being creative combined with finding liquidity solutions, combined with the fact that there’s just a much larger set of options out there for getting liquidity in non-public companies these days. And there were five and 10 years ago.
John Corcoran 59:52
Yeah, really China changes the market. One interesting thing you’ve done is you’ve actually gone well beyond this offshore world, you’re investing, as you said, food waste and other interesting things. How have you managed to go into different industries as a venture capitalist? You know, to me on the outside, it seems like, you know, some people might play it safe and stay just with what they’ve known so far.
Dan Engel 1:00:21
Well, you know, food waste for appeal sciences, that was a personal investment of mine. So it was that first holistic company. And there’s another one I did, that’s the leading producer of non plastic cutlery and trash bags, and things like that also, not really software in traditional tech, but done personally, everything through the fund is real tech. So it’s almost always involving software. It’s not always b2b enterprise software, there’s a few cases where we invest in companies that have a software application that runs on a phone.
But it really is just within that realm, what is different, different between the companies, and where we don’t have the expertise always is, most of the time, the software companies are in different industries from one another. And there’s no way as a software venture capitalist to be an expert in 1000s of different industries, in order to be able to really master each one that you’re investing into. And so the way that we investors deal with that is we bring in or tap experts who know those industries, for example, we invested in a cybersecurity software company, and cybersecurity is one of those areas that, you know, it’s like healthcare, either you really know it, because you’ve been in it, and you get it or you don’t, and if you don’t watch out. So in a case like that, in order for us to gain comfort, we had to go through a real process to educate ourselves, but also to partner with those who knew cybersecurity really well. So we brought in a couple of firms, and they ended up participating in the round.
In fact, one of them led it that are experts specifically in cybersecurity software investments, and companies. One of them all they do is cybersecurity software. It’s called Blue ventures on this in the southeast. And so that’s one example of how one can deal with, you know, one’s weakness in terms of not being expert in every industry that one invests into. What about the flips?
John Corcoran 1:02:16
Though. It’s kind of an interesting model, business model, being a venture capitalist, because you have to find the investments. But you also are managing on the other side investors. And was it a challenge for you switching to, you know, gathering up a bunch of limited partners to invest in, you know, you as kind of a first time venture capitalists.
Dan Engel 1:02:37
It’s definitely a challenge. You know, when I did it the first time, it was 2020. And a lot of people were kind of sitting around with money. To be frank, they were bored. They made a whole lot and tak could it was a period when No, You can’t lose. That’s what it was like crypto had gone crazy. People were into all sorts of things like Metaverse, and what are those things? silly things? NFT tokenization? Or no one, it was called the NFT.
John Corcoran 1:03:07
Thank you. I wouldn’t have known hearing much about any of these now.
Dan Engel 1:03:10
Yeah, yeah, that works. But it was a good, really special time to be investing. I didn’t know if that would be the case, I thought maybe it’d be a horrible time. And people were in the middle of the pandemic, people were pretty freaked out. And unemployment had gotten to 20 something percent from I don’t know, 5%. And just a couple of months. And I don’t have to remind us of all the problems, but it was a scary time. And it continued to be a really great investing climate, and relatively easy to raise for the fund. Until the market shifted, and then it became incredibly difficult.
And, you know, nothing really changed in what we’re offering, or me or our team and only got more compelling. But the environment became less and less compelling. I mean, not in reality, because actually, the prices go down. And that’s when you want to buy but in terms of people’s, you know, the sentiment. And the last thing for quite a while that investors were looking to do is put more money into an illiquid technology venture capital fund, given what they had just been experiencing with the shifts in the market. So it went from Pretty good, pretty easy to extremely difficult. And to give you a sense, like an actual, some data, emerging managers, which means venture capitalists who have funds that are on their first fund or second fund and maybe even their third fund, but not later stage.
That asset class went from two or three year period of about 70-75 billion in assets coming in from new investment to about 35 billion to last year about four or 5 billion so 70 Something to about a five what a decrease pool of money avail trouble to a VC fund. So you can imagine what that experience has been like for venture capitalists who are not you know Sequoia who are not on their fifth or sixth or seventh fund, or not big brand names. So that’s how dramatically the market changed over Yeah. Period.
John Corcoran 1:05:17
You still like it, though. Are you still passionate about it? Still interested in pursuing it, though?
Dan Engel 1:05:22
Oh, absolutely. I’m just saying that, you know, it was easy to raise money from outside investors, relatively speaking, it came and became incredibly hard. And now it’s getting less hard. Yeah, for us, it’s getting easier and easier, because we’ve had so many liquidity events and so many successful exits. So we stand out very much relative to most other VC funds, especially during this era, this period of time in tech. But no, we absolutely love it even more from an investment perspective, because prices have dropped so much we can get such better deals than we could before and they will recover. They already happened. Right? I mean, look at the public face of the market. And yeah, look at NASDAQ broken records again.
So it’s already started recovering. And so will benefit from that ongoing recovery. But, yeah, I mean, we’ve been able to pay multiples and deals that are just would have been unheard of in the past. And really, you know, the problem is that when prices drop, assuming as a sound industry, which the United States technology industry is, it will always continuously innovate doesn’t mean it won’t have ups and downs along the way. And people won’t overreact and the positive and the negative along the way, but it’s when prices go down. That’s the time to be investing. But that’s also the time that most investors run away. Yeah, they ran away screaming. We’re supposed to be buying low and selling high and being able to follow that basic premise.
But unfortunately, prices drop and everybody runs. So that’s why, you know, one has professional money, man money and investment managers to help them deal with, you know, their emotions. Yeah, yeah. Because if you’re going to be a successful long term investor, just like Warren Buffett will tell you over and over again, you can’t let your emotions drive things, right? You got to understand why you’re feeling the way you are in the Act and the rational long term investment way. And that’s not easy to do.
John Corcoran 1:07:20
And if you want to highlight some of those exits that you’ve heard, Jack pocket I think is the most recent one.
Dan Engel 1:07:26
Yeah, yeah. So Jack pocket is the leading app for buying lottery tickets through mobile. There’s really no other way to avoid going to a physical store to buy your lottery tickets and the $400 billion dollar industry is bigger than all casinos in the world combined. So it’s a wonderful space to be the leader in. And so we invested in Jack pocket and they got acquired or they announced getting acquired about two and a half weeks ago. For $750 million by UPS. Oops. DraftKings. DraftKings thank plank, sticking up FanDuel. Now by DraftKings. And so that’s a wonderful success story. We’re really excited for them. And obviously, we and the other investors have done really, really well.
We didn’t expect such a successful exit so soon. We only invested about two and a half years ago. But that’s a great outcome. And you know, there’s only so many billion dollar or near billion dollar exits out there. And we’re fortunate to have one of them and also wonderful for Santa Barbara to have yet another exit like that. And now we’ll have DraftKings in town and other wonderful companies and help us expand our Santa Barbara ecosystem even further.
John Corcoran 1:08:42
Yeah, Dan, this has been so interesting. Thank you for sharing all your lessons and your stories and everything. And I love to close by asking people about who they would want to shout out and acknowledge and, and be recognized for helping them in their journey especially peers, contemporaries, co founders, limited partners in your funds. Who would you want to mention? And thank you?
Dan Engel 1:09:06
Well, Certainly my partner Dan Hadden has been a major force in our success in our two funds for Santa Barbara Venture Partners. And I would say in terms of, you know, learning about venture capital over the years, probably John Great House, who was part of REM Khan and then bonfire and now he’s doing He’s chair of a bunch of different boards here locally for software and tech companies. He’s been a mentor to me and the other one has been Mitchell Greene from lead edge capital, who has just hit the cover off the ball for the past 20 years and now runs I think $6 billion down the street here at Santa Barbara as a really successful later stage. Software VC fund that we try to emulate if we can so I would say them and then certainly my father on the business side and finance and Entrepreneurship. But so those are some of the folks that come to mind for me that are having the most impact.
John Corcoran 1:10:07
Dan doesn’t make great where can people go to learn more about you or learn more about Santa Barbara Venture Partners?
Dan Engel 1:10:13
It’s just Santa Barbara VP like venturepartners.com santabarbaravp.com is our website. So thanks so much for the time and having an interest.
John Corcoran 1:10:24
Excellent. Thanks so much, Dan. All right.
Chad Franzen 1:10:29
Thanks for listening to the Smart Business Revolution Podcast. We’ll see you again next time and be sure to click Subscribe to get future episodes.