David Friend defied the odds when he turned around his ailing dot com before it became another mortality statistic in an already long list of start-up failures. The 44-year-old techie-turned-entrepreneur has a strong survival instinct and the ability to know when to change direction. Many others weren’t that smart. They naively thought the technology market would rebound. When it did not, they rapidly descended into bankruptcy, adding more tombstones to the overcrowded dot-com cemetery.
Friend’s cleverly executed strategic moves can be likened to a sophisticated chess game. In 1998, he launched eYak, a Web/IP telephone company providing services to consumers and businesses. Within the space of two years, the company went through three major transformations. After capturing $70 million in VC funding, it first offered consumers free conference calling. EYak generated income by selling ads on the Web. When that business model failed dismally, the company sold its platform to telecom companies that could deploy enhanced services. But when the telecom market nose-dived, Friend abandoned this business model too.
In this article, I’ll tell you how Friend’s savvy decisions turned his ailing company around in the middle of a hostile business environment, and I’ll pass along his words of wisdom for smart business. If you’ve got any interest in starting a dot com—or any business, for that matter—perhaps Friend’s lessons-learned can provide some useful insight.
Bargain acquisition opens new market
To salvage his dying company, Friend bought Brooktrout Software, a provider of speech-recognition applications to large companies to help improve customer service. The software can understand the human voice, answer questions, and save companies a great deal of money. “Every call to directory assistance that gets answered by a human voice costs companies dollars,” Friend explains. “Industries that get heavy call volumes, like airlines and financial services, are pushing this technology. Ideally, it makes sense to use an automated system to handle the bulk of calls and use human beings for handling major problems, which usually amount to 10-20 percent of calls.”
Statistics back up the industry’s commitment to enhanced speech-recognition technology. Framingham, MA, technology advisory company IDC’s research indicates that the net voice-services market is expected to grow more than 200 percent annually from $208 million in 2000 to $16 billion by the end of 2004. In addition, according to e-commerce research company The Kelsey Group, a convergence of factors, including the Internet, advances in speech-recognition technologies, and the expansion of wireless communication, will trigger expenditures related to the voice-enabled Web and voice applications that will reach $41 billion by the end of 2005.
Working in Friend’s favor is greatly improved voice-recognition technology. Combining Brooktrout’s applications with the eYak platform opened the door for eYak/Brooktrout to help companies get speech-recognition applications up and running quickly. Based on its new direction and image, eYak changed its name to Sonexis in April.
So what went wrong with eYak? Did it miss a market opportunity or was it ahead of its time? Friend’s crisp explanation: “EYak was too telephony-centric.” It was that simple.
Now Friend’s goal is to position Sonexis to carve a lasting niche. Working in his favor is the fact that Sonexis is not a speech-recognition company. “I strongly believe the speech technology leaders want to focus on their core technologies rather than back-end systems and integration issues,” Friend explains. “Who wins in the speech recognition game will be companies with the most accurate product with the fastest response time, etc.”
As Friend sees it, Sonexis is “a master contractor for all the speech-recognition systems.” Depending on a company’s needs and goals, his company will install the appropriate software. “We use everyone’s speech recognition software,” he says. “Speech-recognition software is like a database. Our software is an independent layer that allows us to plug into the software. Brooktrout’s technology reduces the time it takes to deploy these applications. We’ve come up with an open architecture offering greater scalability, which means we can quickly adapt the software to any company regardless of location and size.”
Sonexis hopes to profit from the growth of speech-recognition application software companies. Friend expects speech-recognition companies will welcome his presence because he’ll be selling their products to his customers.
An exemplary story
Friend is an unlikely candidate for the frenetic dot-com market. He graduated from Yale with a degree in music composition and electrical engineering. For a while, he wanted to be a composer until the entrepreneurial bug bit him and he launched ARP Synthesizers in 1972. Until he sold the company in 1982, ARP Synthesizers was known for its high-quality synthesizers used by rock bands throughout the world. Then he put his technical background to good use and formed one company after another. It started with Computer Pictures, a company that made data visualization products. Two years later, he sold it and launched Pilot Software, which made executive information and multidimensional data systems. Then it was FaxNet, a company that offered simple conversion from e-mail to fax and vice versa. Friend sold it to Critical Path in 1998 for $200 million. Then the eYak story began.
After launching five successful companies, Friend is a walking business lesson. Here are a few of his tips worth remembering:
- A slow economy and a depressed technology market can create incredible opportunities to pick up troubled companies at bargain-counter prices. In Friend’s recent eYak/Brooktrout venture, he bought Brooktrout for $5 million because it was on the ropes. A year earlier, Brooktrout’s market value was $80-$100 million. “In good times, when everyone has access to capital, good deals aren’t available,” says Friend. “But, in lousy times when capital is hard to get, there are some incredible bargains, which can accelerate the growth of your business. If you can find a company that's a strategic fit, like Brooktrout was for me, you can save a lot of time and capital."
- Get used to the idea that money will run out. Friend had the good sense to put aside $40 million of the $70 million in VC money he captured when he launched eYak. The money allowed him to buy Brooktrout, develop technology, build a staff, and market his new concept. Friend employs 140 people. His customers include Nortel, Intel, and major banks and insurance companies.
- Always raise more money than you need so you have a cushion in a down market.
- Don’t get crazy about giving up equity. It’s not going to make much difference whether you make $2 million, $5 million, or $10 million. The idea is to succeed. Would you rather have an 80 percent chance of making $2 million or a 10 percent chance of making $20 million dollars? “I’d rather have the high-percentage chance of being successful,” says Friend.
- Market conditions change, which necessitates finding new strategies. It’s a fact of business life that markets dry up and mature. If you don’t change and move on, you’ll perish. Smart executives and business owners spin on their heels and adapt quickly. “You can’t hold on to old fantasies,” he says.
It’s scary to think of the number of companies that perished for just that reason.
Entrepreneurship in a down market
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