By SUSAN LAHEY
Reporter with Silicon Hills News
Brett Hurt, UT Entrepreneur in Residence, interviewing Josh Baer, co-founder of Capital Factory, serial entrepreneur and angel investor.
Baer’s close friend and entrepreneur-in-residence at the McCombs School of Business at UT, Brett Hurt, interviewed Baer Tuesday night for the Herb Kelleher Entrepreneur-in-Residence speaker series.
Falling Into a $10 Million Business
Baer said he grew up surrounded by entrepreneurial people and always meant to be an entrepreneur but he sort of “fell into” opportunities, rather than being driven toward a particular business. As a student at Carnegie Mellon University in the early days of the internet, he started answering questions about servers, programming and emails on newsgroups and chats and started getting hired for a little programming, mostly being paid in pizza. But then someone asked him to host their email account on his server because the customer didn’t have time to mess with his own server breaking down all the time. That was the beginning of his own email hosting business.
Baer hired his frat brothers, “which was not necessarily a strategy I would recommend” to do the parts of the business he didn’t know how to do or have time to do. And eventually it grew to revenues of thousands per month, then hundreds of thousands per year.
The growth made him the richest college kid around, but it also scared him. For a few months, he asked if he could use his mentor’s business as an umbrella for which he would pay a percentage of income. But then, Baer said, he realized he wasn’t getting any benefit out of the arrangement and he needed to just step up and create his own business infrastructure. He incorporated, got an accountant and a lawyer.
And then he did what so many budding entrepreneurs do, he screwed up. He was fudging the line between contractors and employees, not paying much attention to the rules various state labor departments and IRS have concerning that line. His advisors told him he needed to hire his contractors on as employees and start paying taxes. But he didn’t.
“Wait,” Hurt interrupted the story. “Is anyone from the IRS here?”
“It’s okay,” Baer said, “the government’s shut down.”
“Oh yeah,” Hurt assented and encouraged him to continue.
The IRS wasn’t shut down at the time, though, and Baer got a letter that he owed $100,000 in back taxes for his employees.
“I was embarrassed and scared,” Baer said. “I’d never been in trouble with the IRS. I didn’t realize it was a totally workable situation. For a week or two I was really stressing it. I felt terrible. It affects you physically. I was depressed. I wasn’t eating. It really hits you then that there are people depending on you and you failed. That was a really dark time for me…it turned out to be nothing. It was totally negotiable. We got on a payment plan and had it paid off in a few months.”
Trilogy and Capital Factory
Baer continued working on his email company, SKYLIST, even after he was hired as a software developer for Trilogy. At Trilogy, he co-founded e-commerce software maker IveBeenGood.com in three months and sold it a year later for $20 million. In 2006, ten years after he founded it, he sold SKYLIST for $10 million.
The first year after the sale was fine, he said. It was all about integrating the company with it’s acquirer. He was busy and had a role. The second year he had very little to do and even though he was living a “dream existence” his inactivity was driving him crazy.
“Selling your company is a tough choice,” he said. “It was my baby, I’d been working on it for 10 years and then you decide to lose control…selling your first company is the most emotional, hardest part.”
It was when his two-year contract was up and the housing market was starting to collapse that he decided to take the fortune he’d just made and put it into an incubator.
“It was the rising tide effect,” he said. “I thought ‘Other people aren’t starting companies right now, there’s less competition.’ Combine that with the fact that Y-combinator and Techstars had just started. I’d been through Trilogy University and it was really fun. I thought: It looks like starting an incubator is the most fun thing I could do.”
It’s been epic for Baer. Last spring, he got an email that “a senior administration official is thinking of making a trip down here” and was visited by three “people in suits,” Baer said.
“Two of them were definitely secret service,” he said. “They started planning things, ‘We need to shut down that whole street….’ They kept referring to ‘him.’ Then I was pretty sure it was the president even though they hadn’t said so. I didn’t get confirmation until a week before. They came in and put in phone lines and they were doing all this stuff. They were so nice and apologetic and we’re like ‘No, this is so cool!’”
President Obama listened to five pitches and later referenced one in a speech at Applied Materials, a feat that amazed Baer.
“Anybody who has worked on a startup pitch knows it’s really hard. Especially a short pitch, a two-minute pitch, to make sure everyone can understand what your business is.”
But Obama, in referring to his visit at Capital Factory, nailed one of the pitches not in two minutes, but in two lines.
Advice for Entrepreneurs
Baer also teaches 1-Semester Startup, now known as Longhorn Startup, with Bob Metcalfe and Ben Dyer. Asked to give advice for young entrepreneurs he had several thoughts:
- If you don’t have something you’re passionate about, find someone who is passionate and latch on. Many entrepreneurs have gotten their “big ideas” while rubbing shoulders with other people who were passionate.
- The two traits he looks for in an entrepreneur: One, the ability to make decisions with less and less information and Two, passion. Passion, he said, is compelling to anyone you want to invest in or work for your company.
- Sometimes mistakes are a sign of growth. “With my first company I was trying to make everything perfect,” Baer said. “I could be a total hard ass. Could be pretty not nice to be around. I had very high expectations and got upset when people made mistakes. But if you’re making mistakes, you have bad systems. You have to make a plan that allows for people to make mistakes. By the second company, when a problem would happen I’d be like ‘Oh, that problem! I know how to deal with that problem. Cool, we’re big enough to have that problem!”
The next Entrepreneur-in-Residence speaker is Cotter Cunningham, CEO of RetailMeNot, October 29th at the AT&T Executive Education and Conference Center.
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