Milestone Group Quarterly: April 2009

Articles

• Face to Face: Patrick Grady, CEO of Rearden Commerce 
• Investment Viewpoint: Jason Green, General Partner, Emergence Capital
• By Invitation: Chunka Mui and Paul B. Carroll, Co-Authors, "Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years"
• Milestone POV: Enterprise Software is Dead - Long Live the Enterprise! by Marc Friend, Milestone Group Consulting Partner 

Face to Face:

Patrick Grady, CEO, Rearden Commerce

Milestone: Tell us about Rearden Commerce.

Grady: This is not a new idea. The dream of building a technology-based "Personal Assistant" has been a bit of a "Holy Grail" quest in the technology sector for decades. For a variety of reasons, all of the other large-scale attempts, both pre and post Web, have led to spectacular commercial and financial disaster. Web-based initiatives include HP's e-Services/e-Speak initiative and Microsoft's .NET/Hailstorm/Passport program.

I launched Rearden Commerce in Q1 2000 because I believed that the need was more acute than ever (for knowledge workers and busy consumers alike), the various technologies required to deliver on this vision were finally emerging and I believed that the network-effect based business model that I was developing would fuel the adoption of the platform.

To put it into context, thanks to Moore's Law, Gilder's Law and the Disc Law - the proliferation of new sites, devices and applications has been breathtaking. However, we've reached a state of diminishing returns - as a user now spends hours and hours each week trying to manage and coordinate scores of user names, passwords, applications, calendars, devices, etc. in a manual and time-consuming fashion. The Web is terrific at aggregating all of this information, but it remains inherently impersonal and not terribly intelligent.

We set out to harness all of this innovation by leveraging Web services to integrate a user's applications, devices, payment mechanisms, calendars and contacts into a single, personalized application that approximates a Personal Internet Assistant. Like a great "analog" assistant, the Rearden Personal Assistant understands a user's identities and preferences, knows their location and the context of their day and helps to manage their life in a much more personal and integrated way.

For example, a simple trip to New York may require visiting dozens of sites to research and schedule flights, hotels, cars, dinner reservations and tickets to a game or show. Once these reservations are made, the user then cuts and pastes the information into their calendar, sends out emails and/or invitations to friends or colleagues regarding their itinerary and then must check to ensure that there have not been delays or cancellations.

The Rearden Personal Assistant essentially mashes up all of this in a single, highly personalized site, schedules and purchases everything for you, updates your calendar, invites friends or colleagues, notifies you and others of any changes to plans and makes intelligent recommendations for you.

In order to build such an application, we've had to build a highly scalable, general purpose commerce and application platform that is now being taken advantage of by our customers, scores of distribution partners and 3rd party developers. For an investor, this holds the promise of being as uniquitous as search is today with myriad revenue streams and much higher relevance in a user's life. 

Milestone: How is this any different than the travel aggregators?

Grady: We simply don't think of ourselves as a travel company. While the Personal Assistant adds tremendous value in scheduling and purchasing flights, hotels and car rentals, these capabilities represent a small fraction of the functionality and breadth of services we address in the platform and application.

Specifically, with regard to travel, we provide the same content and transactional capabilities of Expedia, Travelocity and others (unlike a Kayak, which provides only search capabilities).

On the B2B front, The Rearden Personal Assistant not only makes individuals more productive, but it saves companies money each time a user schedules or purchases something by applying corporate policy at the point of purchase based upon the user's identity and role in the organization. For example, it can distinguish between and Manager and a VP and ensures that the Manager can only fly coach as opposed to business class or can only ship a package two-day ground vs. next day. Documented savings are as high as 20% as a result.

Milestone: Rearden had a terrific 2008. Tell us how that growth continues in 2009.

Grady: 2008 was a tremendous year for the company. We closed the year with more than 4,000 corporate customers, 2,000,000 subscribers and 60 partners/resellers. We made two acquisitions: ExpenseWire and Global Ground Automation.  

We were fortunate to close major distribution deals with Paychex, TRX, Orbitz for Business and Chase, who selected us to power a new customer loyalty platform for their millions of consumer credit cardholders. In 2009, we have already seen exponential growth from our expanding ecosystem of subsidiary companies, partners and trusted resellers - especially those we signed in 2008.  We anticipate adding additional large-scale partners in 2009 across the travel, card and BPO segments. 

We also launched our mobile application that seamlessly integrates with the online Rearden Personal Assistant, finally giving customers access to critical information while on the go. Since the beginning of 2009, we've more than doubled our mobile user base.

Milestone: Given the substantial contraction in corporate travel in the past six months, how has this affected your business?

Grady: Given that the value proposition in the B2B space is centered on hard dollar savings, lower TCO and better business process and supplier management agility, we have yet to see a deceleration in sales cycles. In fact, within the enterprise market segment, we've seen a bit of an acceleration. Remember, we offer more than travel, so we're seeing tremendous growth in areas like conferencing and shipping services. Travel may be down, but the need for collaboration between and among companies hasn't stopped.  

Milestone: In the current struggling economy, in what way, if any, have you changed the focus of Rearden?

Grady: We're watching every penny on the cost side and we're funding the most important product initiatives. There is a benefit though, to this environment, which is the opportunity to acquire innovative SaaS companies that don't have the balance sheet and distribution channels that we have. I suspect we'll be looking at potential acquisitions more aggressively this year than last.

Milestone: Rearden has raised a massive amount of capital to date. When do you forecast to get to profitability?

Grady: It's a bit misleading insofar as it was raised over the course of nearly a decade. We raised all of $2 million before the dot.com bubble burst and one-half of the paid in capital came last year to fund our growth. 

We're not profitable yet but we're closing the cash deficit gap each month. Like any network-effect based model, we benefit from increasing returns to scale (users), breadth (content) and usage (transactions).  With critical portions of the platform and application in place, it's now a function of driving these levers via partners such as American Express and Chase that have user populations measured in the tens of millions. Revenues today are in the tens of millions annually.

We're currently making projections regarding profitability. We are very focused on becoming cash-flow positive as soon as we can, while not sacrificing strategic investments for the long term. I subscribe to the Jeff Bezos school of long-term investing.

It's widely understood that comparable attempts at this visions, such as HP's e-Speak or Microsoft's Hailstorm and Passport initiatives, burned through well over $500 million without achieving any commercial success. We are very proud of what we've accomplished with $200 million of invested capital. We have thousands of companies and over 2 million subscribers today and are entering the consumer space in 2009. We're just getting started.

Milestone: What is your view on how VC is changing and how it needs to change to support entrepreneurs?

Grady: Great question. In the interest of full disclosure, I spent my 20's trying to disintermediate the traditional venture capital structure by connecting entrepreneurs with very high net-worth and family fund investors. My thesis was that there was insufficient competition in the venture capital segment and this led to a very high cost of capital for young companies. Back then, you had a few dozen funds controlling 90% of the world's venture capital. It felt like an oligopoly in many respects.

Over the past decade, we've over corrected the other way, with an overabundance of risk capital available, chasing too few great ideas and entrepreneurs. The returns have suffered accordingly.

The venture capital business is going to go through a very painful shake-out with well over half of the funds ceasing operations. I think this is very healthy. Fewer venture funds will attract a better pool of higher quality investment professionals to them and create a more rational distribution of funds to innovative companies. It will also allow those companies to receive great assistance from these funds whereas now, so many are essentially orphaned.

I strongly believe that VC's will need to start earning their keep by helping to secure unfair competitive advantages through partnerships, etc. for their companies.

Milestone: In your view, what are some great technologies that just failed because they were too focused on the technology, not on the market opportunity?

Grady: I think you can find examples of this in every category of technology. It's never just the technology; it's the elegant integration and combination of technology and business model. Look at Google vs. Overture. The list is decades long.

In our world, both HP and Microsoft failed primarily due to a lack of focus on the business components. After HP burned through a reputed $400 million on e-Speak, Rajiv Gupta, the former GM of e-Speak, told ComputerWorld:

"We focused much more on the technology than on the customer value or on the business context within which the customer would be using it. We did not pay enough attention to usability."

In technology, it's so easy to be enamored with our creations and believe that since we have built it, they will come.

Milestone: If you weren't doing Rearden, what might you be doing?

Grady: I'm perversely attracted to solving very complex, deeply-rooted, multi-dimensional problems so it would certainly be something that's large-scale and impacts tens or hundreds of millions or more. It could be in technology, politics or policy, not-for-profit, etc. I'll be busy regardless and would hope to make an impact.

Milestone: What advice would you give to an entrepreneur who is going to jump into a new startup today? What's one mistake that an entrepreneur shouldn't make during this process?

Grady: First, it's a great time to start a company! It's always a great time if you're a true entrepreneur.

Secondly, be maniacal about keeping your burn rate low. We first rented in the Tenderloin and then moved into an industrial warehouse for a fraction of the cost of our former space, bought our equipment from auctions of dead dot.coms (i.e., Pets.com, WebVan) and had employees exchange cash for stock. During one stretch, our executive team worked for a $1.00 annualized salary and I invested $3 million personally to provide confidence to other investors. We lived payroll to payroll through nuclear winter.

Third, pick your investors as you would choose a spouse. A bad investor not only places an enormous tax on you and your team, they can serve as an existential threat at any time.

We only survived nuclear winter by recapitalizing the company and ridding ourselves of investors that didn't have the patience to be in it for the long haul. They were a second tier venture fund that had the patience of a day-trader.

Start now, keep your burn low and pick your investors wisely! 

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A recognized pioneer in Web Services and on-demand technologies, Patrick has guided Rearden Commerce to a commanding leadership position as the world's fastest growing commerce platform for goods, services and applications. With more than 4,000 customers spanning the Fortune 50 to small/medium enterprises, leading distribution partners like American Express Business Travel, and more than 2,000,000 merchants and third-party application providers, the company is fundamentally transforming the way individuals and businesses buy and sell goods and services online.

In addition to serving as CEO, Patrick is Rearden Commerce's strategic architect, guiding the company's product and technology vision. As an evangelist for the Web's next generation, he is a sought after speaker with engagements including ACTE Executive Forum, AjaxWorld, AlwaysOn, Burton Catalyst, CSFB Disruptive Technology Conference, InfoWorld Symposium, Internet World, PC Forum, the PhoCusWright Executive Conference and Supernova.

Within the B2B market, he has been recognized by Business Travel News as one of the top 25 most influential people in the travel industry in 2008. In addition, Supply & Demand Chain Magazine named Patrick one of 2007's "Pros to Know." In the broader Internet space, Fast Company Magazine named Patrick to "Fast 50," the people who will change how we work and live over the next ten years and he has led Rearden Commerce to inclusion in Business 2.0 Magazine's 2007 Next Net 25.

Prior to founding Rearden Commerce, Patrick spent 10 years in various venture capital and leadership roles in the technology sector.