Transcript – This Grasshopper Learned Well
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John Warrillow: Okay, so what are the numbers on your company’s dashboard? My guess is, you look at your company’s revenue and profitability. Which are two great metrics to track, but there are another eight key drivers of the value of your company that go well beyond just revenue and profitability, that are the things that acquirers want to know about.
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John Warrillow: I think you’re in for a special treat today. David Hauser built, along with his partner Siamak, a company called Grasshopper. You may have seen some of their advertising. They did telephone services, if you want to use the broad definition. He sold the company for $165 million dollars in cash, and $8.6 million dollars of stock. He and his partner were the majority shareholders, along with a management team, they owned 100% of the company. They never went for venture funding.
John Warrillow: It just is truly an incredible story. One of the things I want you to listen for, in particular, was his positive cash flow cycle. I know this sounds kind of boring, but it I think was the secret sauce to get him to where he was, so that he didn’t have to give up equity. So many technology companies of course have to sell multiple rounds of equity in order to fund the kind of growth that David enjoyed. He in fact didn’t have to sell any equity, because they used a positive cash flow cycle, so listen for how he did that. I think there’s some great lessons there. Thirty million dollars of revenue, sold for $165 million dollars of cash, more than, if I’m doing the math right, almost six times top line revenue. To tell you the whole story, here’s David Hauser.
John Warrillow: David Hauser, welcome to Built to Sell Radio.
David Hauser: Hey John, thanks for having me.
John Warrillow: You’re like a hero in the world of entrepreneurship. Two companies, Grasshopper and Chargify. I want to ask you about both, but let’s start with Grasshopper. What does this company do, for folks who don’t know?
David Hauser: Yeah. It’s kind of funny when people ask me that, because I spent so much time at Grasshopper, more than 12 years, and I never really was good at explaining what it did, because I wasn’t that kind of salesperson. The simplest answer is a virtual phone system for entrepreneurs. Press one for sales, two for support, on-hold music, transferring, all that, just totally virtual. No physical lines had to be anywhere. You could use your cellphone, your landline when we started, or voice over IP over time. We just didn’t care. Core customer one to two companies, so micro SMB.
John Warrillow: Got it. How did you sell to those guys?
David Hauser: We did a lot of what I would say is just traditional B to C marketing. Even though we’re SMB and selling to B to B, all of our marketing was very much B to C, so print, radio, direct response online, Adwords and things like that. Then a ton of branding.
David Hauser: Unlike other typical B to B plays, we did a lot of branding. At least 10% of our marketing budget was dedicated to pure branding spend which was not direct response.
John Warrillow: What was the billing model? How did you charge customers?
David Hauser: We billed people just like kind of like a cellphone, so based on consumption or minutes. You would prepay for your plan and then post pay for your minutes if you went over it, but it came in packages, and then we had an unlimited plan and some mix and match stuff. What’s really interesting is when we started we were able to charge people like ten dollars to access the system on the web. We’re talking 14 years ago now. We charged ten dollars a month just to access it online. Obviously that went away over time, but that was a great revenue stream for a while.
John Warrillow: I would think so. I would think so. You said the we. I understand you had a partner in this business. Tell me about him.
David Hauser: Yeah. Siamak, my business partner, we started together. We were both at Babson College. He was a year ahead of me. We actually didn’t know each other really well. Mutual friends introduced us.
John Warrillow: Did you study entrepreneurship at Babson?
David Hauser: Yeah, I did. Great school. Loved it.
John Warrillow: Because Babson is known as the place to learn entrepreneurship, and I wonder, do you think entrepreneurship can be taught?
David Hauser: I don’t think it can be taught, but I think Babson does a great job of providing a lot of the underlying skills that you need. If it’s accounting, marketing, operations, human resources, interpersonal skills, all those things can be taught and learned. Understanding how to read a balance sheet and income statement properly and format it and do it. That’s a skill you can learn. I think any good entrepreneur needs to do that. But the actual passion to be an entrepreneur, I don’t think you can be taught. I would say Babson is more about teaching business skills than teaching entrepreneurship, but they’ve branded themselves very well in the entrepreneurship space, and that’s why I went there.
John Warrillow: Got it. Okay. You build up Grasshopper. You mentioned it was, did I write that down, to say 14 years from startup?
David Hauser: Yeah. it took us 12 years and we sold it two years ago, so it’s been around for now 14 years. But we were at it for 12 solid years of hard work before it was “successful.”
John Warrillow: Got it. Okay. How successful was it? How big a company was it when you decided it was time to sell?
David Hauser: When we decided to sell, we were doing about 30 million a year in revenue, and increasing, so run rate was more than that, but that was actual revenue. The other thing we were really proud of was that it was a relatively small team, so when we sold, we were under 40 people. For a company that size, I think we were very efficient, and it took a lot-
John Warrillow: You could say that again. That’s almost a million dollars of revenue per employee.
David Hauser: Yeah. If you add back in some of our call center staff, because we staffed it externally, we’re still at about 650-700 thousand dollars per employee, on a revenue basis.
John Warrillow: Wow. How did you do that? What’s the underlying economics that allowed you to do that so efficiently?
David Hauser: I wish I had a magic solution, but it’s just really simple stuff. Putting goals in place, having quarterly goals that roll down to monthly goals that roll down to weekly goals. Getting that rhythm in place. Getting the team onboard with that. Then really pushing down to the team, so decisions are bottom up instead of top down, and allowing people to take ownership. Rather than directing and saying, “Do A, B and C for me,” it was much more about, “Accomplish X,” and how do we get there together?
David Hauser: Giving ownership to the team I think did a lot. The structure did a lot. There’s a lot of books about this and people talk about them all the time. Scaling up, or traction, very similar. These are very old business practices that are being reapplied, and when we put them into our business it had a great effect, and I think the results showed for themselves.
John Warrillow: How profitable was it on 30 million of revenue?
David Hauser: We were really profitable. We never shared the profit numbers, but it was a highly profitable business with gross margins over 80%. Even if you factor in staff and other things, our net margins were really quite high. But quite honestly, we never had a lot of cash. We reinvested everything back into the business from day one all the way up until selling. The year that we sold, we had invested $12 million dollars in radio advertising. That type of expense, even if you’re doing $30 million dollars in revenue, definitely makes you cash poor, as you have to invest early for some of those payoffs.
John Warrillow: How come you didn’t have any competitors? You must have had competitors, but it seems like highly profitable, relatively big company. You weren’t in some sleepy niche doing 500 grand in revenue. You were doing $30 million dollars of revenue. You must have had competitors, but it seems like you were able to sustain these massive margins.
David Hauser: Yeah. We definitely had competitors. One of them was publicly traded, RingCentral. Started around the same time as us. I think because of their funding path. We took no outside funding. They took a lot of outside funding, so their path was very different. Ultimately what that meant was, we didn’t focus on voice over IP, we didn’t focus on physical phones. They did. Both of those lines of business are very low margin, high cost lines of business. But they bring in large amounts of revenue per seat. Because we didn’t have investors, we didn’t care about that. We cared about what was profitable and what we could sell well, so we had very high profit margins on our business lines, and stayed away from the others. I think that was one.
David Hauser: Then two, we just never really worried about competitors. People popped up here and there, little people, small, then big, and Comcast tried, or whoever, to sell into this market. I think what each person found is it’s very hard to sell into the true SMB or micro SMB market. There has been much more success selling into the fifty plus person company market, mid to whatever, still small business. We’re talking micro. Our average customer is one-and-a-half employees, so that’s why we did a lot of B to C marketing.
John Warrillow: Got it. They were businesses by name only, in a sense. In large part they were consumers.
David Hauser: Yeah.
John Warrillow: Tell me about the decision not to raise capital, because I think at the end I read something that you guys still owned something like 90% of the business.
David Hauser: Yeah, we owned all of it. Between ourselves and the management, that was 100% of the business.
John Warrillow: What was your thinking there? Because that’s pretty unusual for fast growth technology company.
David Hauser: I had raised money in the past at other companies. I didn’t love the process. I didn’t love the decisions that it requires the company to make and the speed at which we had to go. I just liked the idea of building a company that had this weird idea of made money and sold product. At the time, it was very much not the cool thing to do. We started that way, and our goal was always to build an amazing company where we loved being. We never had an “exit plan,” or any of those things. We just wanted to build something that we loved doing every day, we were passionate about, and a place we wanted to be at.
John Warrillow: You mentioned that for the plans you charged up front, and then you billed for usage after the fact. How important was that decision?
David Hauser: Super important. That gave us a positive cash cycle, where we were collecting for service not yet provided for the remainder of that month. People had anniversary billing, so we were always collecting every day, so that helped with cash. We weren’t just collecting on the first of the month or the 30th.
David Hauser: We got all terms our vendors, so we would collect on day one and pay a vendor out between day 30 and day 90 for things that we had consumed. That gave us a little bit of leeway in the funding there. It wasn’t easy, but it definitely helped.
John Warrillow: What else did you do to accentuate or expand on the positive cash flow cycle? One thing you did was obviously charge up front and then pay your suppliers between 30 and 90 days. What else did you do to … Because growing that quickly can suck up a lot of cash.
David Hauser: I think it did two things. One, we looked for areas that we could charge money up front. If it was a set up fee, we did all sorts of testing, and we were all about AB testing everything we did, including our pricing. We tested all sorts of variants of five, 25, 50, 100 dollar setup fees. It ultimately become 25 and over time we made it as a promo you get that for free. That was a way to collect money up front.
David Hauser: We did other things like professional voice recordings. Again, we could collect $100 dollars up front for that recording, we would pay the vendors way less than that, profit margin was very good, and we’d be paying them way further out.
David Hauser: I think the other thing it really did was, it made us make decisions like what are our payback periods for marketing? If we had a ton of capital, we could sustain 12 month plus payback periods. For us, we cared about kind of three to six month payback periods, which made us be a little more efficient in our marketing, make different decisions, but also spend a ton on optimization. We optimized our all in cost per acquisition to well under $100, where we knew that similar competitors in the space were spending three to five hundred dollars in the same channels. From our data, our volume was actually higher at the lower numbers, because of our optimization.
John Warrillow: You mentioned the media, that you spent $12 million dollars on radio. Traditional media is hurting right now, particularly print, and to some extent radio. What did you do to negotiate on terms? Were you getting into pay for performance agreements with the media companies?
David Hauser: I wish we were. $12 million dollars for terrestrial or standard radio is actually kind of the minimum to do national radio, so we were not a big buyer. If you look at a big buyer like Geico, they’re spending $12-20 million dollars a month on national campaigns, if not more. We were kind of at the minimum levels. There are a bunch of breaks you get, but it’s still very much old school, based on impressions, and in market information and things like that. Not actual results.
John Warrillow: Got it. You’ve got this $30 million dollar business. You and Siamak think you’re gonna run it forever. Tell me what changed. What was the trigger that made you want to sell?
David Hauser: Citrix approached us more than a year before we actually sold.
John Warrillow: Citrix are the guys who make GoToMeeting. Am I getting that right?
David Hauser: That’s correct, and they actually sold that whole line of their business, GoToMeeting, GoToMyPC, some other stuff. A lot of their online stuff they sold to LogMein, about a year ago I believe. Grasshopper went with that.
David Hauser: They approached us and said, “Hey, we’re interested in what you guys are doing.” Kind of hinted at the idea of selling and our answer was, “We have no reason to sell. Highly profitable, we love doing this. We just invested $12 million dollars in radio. We believe in this business and we know that it’s growing. Not interested.”
David Hauser: That kind of continued over time and they just kept poking at us. We said, “Look, come back to us next quarter. Here are our goals for the quarter so you know what we’re doing. Let’s see where we end up a quarter from now.
David Hauser: The conversation happened again a quarter later, three months, and we actually blew away all of our numbers, and they said, “Wow. First of all, you’re the first company that ever said, ‘Come back to us in a quarter,’ and actually met your numbers, so congratulations on that.”
David Hauser: I think from there the conversations continued, and the only reason we considered even selling at that point was, one, Citrix keeps the brand. Unlike a lot of acquirers, they keep the Grasshopper brand and it’s Grasshopper by Citrix, LogMein, whoever owns it now.
John Warrillow: Why did you care?
David Hauser: We spent a lot of time and money on that brand.
John Warrillow: Yeah, but you’re selling the company. Why did you care if the brand went away?
David Hauser: It was like a baby to us. We didn’t want to see it thrown away. We could see it go to college. Those are two different things. I think keeping the brand allowed us to allow that to live on. They were also very open and honest about how they were going to treat our people, which was very important to us. 100% of our people were retained through the acquisition, which was very important to us, and were taken care of well beyond the acquisitions. Those were important factors that allowed us to even enter into conversation.
John Warrillow: Got it. I want to come back to some of the specifics around the negotiation itself. Before I go there though, you mentioned you and Siamak were having to reinvest a lot of the profits in the business. Am I getting it right to say that, even though it was a $30 million dollar revenue business, it was hungry for cash and you weren’t living high on the hog, taking massive dividends? Am I getting that right? Or maybe correct me.
David Hauser: I think it’s somewhere in between. We weren’t really hurting for cash. We could make decisions. I think some of those decisions came down to, again, to payback period. We couldn’t go past 12 months at that point, payback period, just because of cash cycles. But both Siamak and I, as the founders and entrepreneurs, we had plenty of money to invest in a management team that ran day-to-day operations, a very expensive management team that we built over a five year period. We also lived very well. I lived in a house I wanted to live in and I drove a car. I never needed more than that, and I don’t have more than that today. My life didn’t change after the sale. But we weren’t living paycheck-to-paycheck and eating Ramen. We had a good life, but not an extravagant life.
John Warrillow: Got it. That’s helpful. Citrix is poking you every quarter and saying, “Hey, would you sell? Would you sell? Would you sell?” At what point did the conversations turn a little more serious?
David Hauser: Where do you go from dating to the next step, right?
John Warrillow: Yeah, exactly.
David Hauser: I think it started to become a little more serious when we said, “Look, if you’re interested, here, you need to put a number around this, because if we don’t even know that, there’s probably not even much sense in continuing the conversation, or even involving other people on the team.” At that point it was just myself, Siamak and one person on our management team, maybe two people a little bit further along. They put a real number in front of us, with some attractive terms, that included very low escrow amounts and did not retain me and Siamak over time, and we can talk about why that was important, both to them and to us.
David Hauser: Once we had that number in front of us, we said, “Okay, look. We know that we could run a process here and try to get competitive bids,” but it’s not what we wanted to do, and we all felt that the number was paying for value in advance of where we were today, so as entrepreneurs it came down to a de-risking question. How much do we want to de-risk our lives from 100% of our net worth tied up in a private company that could blow up and disappear, to diversifying that into a more liquid state.
John Warrillow: Got it. Thousands of questions triggered by that comment, but let me start with, what is an escrow? Folks are gonna be wondering what you mean by escrow, so maybe define it, because some people might confuse it with an earn-out or a vendor take back, so just define, if you would, what an escrow is.
David Hauser: Great question. Sometimes I forget. I went into this knowing nothing, and now after a few sales I kind of know some of these terms. A lot of this stuff is very confusing, actually, and a lot of people that make acquisitions use this stuff on purpose to be confusing, right? For first time entrepreneurs that might not have the right advice and things like that.
David Hauser: An escrow in this case really accounts for known or unknown risks. In technology companies, and if you look at comparables, these escrow numbers could be as high as 30 or 40% of the total amount, which means the acquirer holds this back in a third party escrow, and as risks come up, that could be a lawsuit, that could be something that wasn’t paid, or some other risk, they take it out of that and you never see that money.
John Warrillow: Right, so as an entrepreneur, you sell your business for $100 dollars, that sounds great, but if there’s a 10% escrow, 10 of those 100 dollars goes into being managed by a third party lawyer, and you don’t get that money until a year goes by and there are no claims against the escrow. Am I kind of distilling it down in its basic form?
David Hauser: Yeah. 100%. I think the other key point there is that the escrow can last different periods. It could be a year, it could be 18 month, it could be five years. It depends what the acquirer thinks the risk of the business is, and what things get included or not included. There’s a lot of factors there, but it can change an offer number quite a lot.
John Warrillow: You mentioned that, going through this a few times now, you’ve started to figure out how acquirers use confusing language and maybe confusing techniques to basically benefit them, at the risk of the entrepreneur, to the service of the entrepreneur. What are some other examples, beyond escrow?
David Hauser: Escrow is one of them. Obviously changing the percentage and the time periods or what’s included and not included. Another one is earn-out. You mentioned that a little bit. That could be both performance-based or not. It could require the founder to stay on. If you get a $100 dollar offer and $50 dollars of that is earn-out, that’s a high risk scenario, even if you believe you might hit the targets.
David Hauser: There’s then other things that get more into the weeds of a purchase and sale agreement, or the actual offers. Time periods, lock-ups, other stuff-
John Warrillow: What’s a lock-up?
David Hauser: Not allowing you to talk to other potential acquirers for a period of time, so it’s kind of an exclusivity deal, separate of if the acquisition goes through. This is prior to acquisition. All of these things either tie your hands or take away opportunity, which in essence changes the actual offer amount.
David Hauser: There’s also payout terms, structures, other pieces like that, that can change the value. If it’s an asset purchase and it’s $100 dollars, it’s taxed very differently than if it’s an earn-out over time, so there’s a lot of factors that are absent of offer amount.
John Warrillow: Got it. They put an offer in front of you. By the way, I should have asked earlier, the $30 million dollars in revenue, what proportion of that would be considered recurring?
David Hauser: All of it. All but like two or three percent that was like professional voice recordings and little stuff like that.
John Warrillow: Got it. Okay. You’ve got $30 million dollars of recurring revenue, or thereabouts. I understand the company sold for $165 million dollars, plus $8.6 million dollars in stock, was the number that Citrix released, which if I’m doing my math right, I was never very good at math, but it’s north of five times, almost six times top line revenue.
David Hauser: Yeah.
John Warrillow: That’s a big number.
David Hauser: Yeah. Again, this was a strategic acquirer, very different than a venture fund or a PE fund. They had very strategic reasons that they wanted to acquire the business, outside of just revenue.
John Warrillow: And what did you see those as? Or what are those strategic reasons?
David Hauser: The first was, they could only, because of their size, acquire businesses that they could get to $100 million dollars within five to ten years, so that means at minimum you kind of have to be at $20 million dollars, so that gets rid of a lot of small people they can’t buy anymore, just from a time factor.
John Warrillow: To be clear, David, that’s a Citrix at the time, a Citrix stipulation, as opposed to some other sort of generic rule.
David Hauser: Correct.
John Warrillow: Okay. Good.
David Hauser: Yeah. I think that’s pretty common as companies grow. They just say, look, it’s roughly the same amount of time to invest in a million dollar company or a $40 million dollar company, and it’s very difficult to get from one to 100 as it is to get from 40 to 100. Or whatever the target it, depending on size of company.
David Hauser: The other was, from a board perspective, Citrix had laid out and said, “We need to be earlier stage. A lot of our customers are later stage, so more mature companies, larger, more than 10 employee companies,” where Grasshopper is well under 10. That was one. Two, kind of cross sell, so what is the amount of these customers that currently buy or don’t buy across the products?
David Hauser: Then the other being that the board had laid out from their research that they also had a gap in the types of offerings to SMB’s, and part of that was voice. They had teleconferencing a little bit, but most of it was video. They had collaboration tools, they had storage tools, so when they looked at a portfolio, voice was missing. We fit into that category kind of in all the buckets that they needed.
John Warrillow: What percentage of the ultimate sale price did they offer in that first number that you and Siamak thought, okay, they’re serious?
David Hauser: The number actually did not change through negotiations down. It went up a little bit, because we convinced them of some cross sell and upsell opportunities, which we were super happy about, and definitely helped that we had advisors on our side helping us with those kind of presentations and things like that. But the number itself stayed.
John Warrillow: Help me understand that, and so you’re trying to make the case to them that there are some cross sell, upsell opportunities, and if I’m Citrix, maybe I’d just say, “Yeah, but that’s my value to capture. I shouldn’t have to pay you for that.”
David Hauser: Yeah. It’s a game, right? It’s kind of a little bit of back and forth. “Hey, look how much you could do.” “Yeah, we know we could do that much.” “But, oh, you could do more.” I think it’s a combination of presentation, but when you look at it from an acquirer’s perspective, when you’re on the sell side, I think there’s a few important things to understand. The value to be captured is only in a few areas, and if you don’t highlight those as best as possible and make them look even better than the acquirer might have thought in the past, the number’s going to go down. You’re kind of competing against a number of 100, or whatever it is, going down. We happened to push it up a little bit. Not very much. But it didn’t go down.
David Hauser: Those three areas are one, cost savings, so if I have duplication across companies, I can cut costs. You don’t get a ton of value from this, because it’s kind of one dollar to one dollar. I cut the cost, I get a dollar back. The next is upsell or cross sell. If I have 100 customers and I can sell them more shit, then there’s a lot more value there. Or if I can just increase the total spend, because it’s a different customer base. Again, much more value in those areas than cutting.
David Hauser: Outside of that, the acquirer doesn’t get much value you can present. Obviously you have to play to strategic questions and things like that, but you can’t put numbers on those.
John Warrillow: Take me through again you’re thinking around not shopping the company. You get this offer from Citrix. It’s obviously a very fully priced offer. Did you think, “Wow, maybe we could get seven times top line, eight times top line.” Did you go through that thought process? Help us understand that.
David Hauser: Yeah, we definitely considered it. It would be silly not to. Our final decision on that was very simple, that we wanted to focus on the business, where if this fell through, and it is very likely that, lots of acquisitions at the stage we were at do fall through, early on, letter of intent stage. That we didn’t want to lose focus on the business and screw up there. Meaning, because we didn’t have to exit, or we had an exit plan, putting together a full package to shop this to multiple people would have required a lot of distraction from the business, and I felt like that was a much higher risk than the possible gain of what the value might have increased to.
David Hauser: Maybe we would have got from six to seven, but if the acquisition fell through and we had distracted ourselves from the business for six to eight months, I don’t think the return was necessarily there, compared to the risk.
John Warrillow: How did you, because the downside, not only do you maybe leave some money on the table, but again, it sounds like you got full price for the business, so that doesn’t seem like the case. I guess the other risk that a lot of people would say, associated with going proprietary, going without competition so quickly, is that the acquirer would elongate and delay due diligence.
David Hauser: Yes.
John Warrillow: How did you hold their feet to the fire and make sure it happened after LOI was signed?
David Hauser: That’s a great point. And we did experience a little of that. I think it happens in every deal, both intentionally or unintentionally. That’s one of the risks. Due diligence drags on and then deal falls apart.
David Hauser: There is risk without competing parties that that happens. We were pretty strick on our timelines, because we were open about not shopping the deal, and we said, “Look, part of that means that we’re gonna have shorter timelines on both due diligence and purchase and sale and closing and things like that.” We kind of held them to that a little bit, but you’re right, we didn’t have a direct plan, other than, “Look, we’re not gonna sell it,” which was a very viable solution for us, which that was our fallback.
John Warrillow: In my experience, all deals come to a point where one party kind of throws their arms up in the air and says, “Forget about it. I’m not doing this deal,” and they walk, and it kind of gets resuscitated. What was that point for you guys where you had to sort of walk away to show you were serious?
David Hauser: I think it probably happened a few times. Even in the early stages where, like I said, they came to us, and we said, “No, we just don’t wanna sell.” That was kind of the first, “Hey, we’re not interested,” which makes the other party more interested.
David Hauser: Later on I think it started to happen as due diligence dragged on a little bit. I got a little frustrated and probably pushed back harder than normal on some things, because we were spending so much money on radio and stuff like that, I’m like, “Look guys, at some point, we’re not there yet, but we’re getting close to where I’m just gonna say, ‘You know what? We’ve taken the risk on the radio and I’m gonna let this play out over the next 12 months.'”
David Hauser: There were kind of conversations like that, that forced the hand a little bit, but they were never to the point that we were gonna walk away, I don’t think.
John Warrillow: Got it. How did you and Siamak navigate together? Because you both obviously are partners. What was the most contentious point between the two of you?
David Hauser: That’s a good question. We were very complementary to each other, where had different skills, and over time we also changed roles a lot. I think the thing that kept us together the most was we always had the same end goal of building something great that we loved, and we were both also super passionate about our core purpose of empowering entrepreneurs to succeed, which I think just got us past all of the little things. Should we do this or not do this? We both had the same answers in the end, even though we might not have agreed. And because neither of us had an exit plan, like I need to sell this by now, or an investor’s bothering me or whatever. Again, I think we were very aligned in those things. Because of that, we’ve become very close friends, and also we’ve done 100% of our other businesses together as well. I think that’s kind of rare in a lot of cases where that happens with partners, but everything after Grasshopper we’ve done together, from real estate to tech companies.
John Warrillow: What was the trophy you guys bought?
David Hauser: I wish I had something interesting to say to that. I still drive the same car that I had before. Everything stayed roughly the same. I’m in the same house I was when I sold the company. But again, I wasn’t living in a tiny apartment. I was living in a nice house in the neighborhood I wanted. I wish I had some … My girlfriend, who I have three kids with, she got a minivan. I don’t know if that counts.
John Warrillow: That does not count, man. You sell your business for $165 million dollars, you’ve got to do better than a minivan. Next time we talk, you’ve got to do better than a minivan.
David Hauser: I wish.
John Warrillow: Talk to me in seriousness about the emotional impact of selling your company. Twelve hard years it sounds like. To be honest, joking aside, I’m actually kind of surprised you didn’t buy yourself a trophy, because that would have been one way to mark it and make it feel different before the sale and after. How have you emotionally handled the period after the sale?
David Hauser: Emotionally, quite honestly it was very difficult, and I had a lot of advice during the sale process from people like, “Think about this. Consider it. It is not gonna be easy.” I think it was also doubly hard for us because we were not staying on, which meant like close on May whatever it was, 16th or something, and you’re gone. Email address changes, everything is gone. Which is just very abrupt. After 12 years, your identity of, “I am the guy that started Grasshopper and runs Grasshopper.” You’re introduced that way, you kind of think of yourself that way. You’re very tied up as part of your identity, and then a day later it’s all gone. I think that was very difficult, and it sounds silly, but the idea of changing email address was very hard, because just logistically one, but two, emotionally, you’re like, it is a real thing that happens instantly, and it makes it very real. I think there was that.
David Hauser: I spent a lot of time during the sale process and then after, thinking about what I wanted to do, and the advice I heard from everyone, across the board, there was lots of differences between it, but the theme was, “Don’t rush into anything.” I took that seriously, because my natural reaction is, “Okay, done on day one. On day two I’m gonna do something else and I’m gonna jump right in, all out.” I took that seriously and tried to step back a little bit, tried a bunch of different things, spent some time advising venture funds and early stage companies, finding I don’t love doing early stage. Refined thoughts around that. Played with some of my own things. Invested in my personal health. Did a 200 hour yoga teacher training. Really changed a lot about my personal health. I’m writing a book about that now.
David Hauser: In that period, I would call it roughly 12 months, the very beginning was very hard, and then the very end was very hard. The middle was easy, because I kind of had a plan of don’t rush into anything, try lots of things. But the beginning, I wanted to rush in. At the end, I had to start making decisions.
John Warrillow: Tell me about the idea or the fact that you were not held on for the company, because when most businesses sell, there’s a period of transition where the founders stay on and help with the transition. Why was that not the case in your case?
David Hauser: I think there were two really interesting factors here. One, the acquire, Citrix had acquired over 35 companies in the past ten years, so that meant that they had a lot of founders that they had to put into kind of roles that are highly paid and kind of big title, which not always are effective and whatever, so they had a lot of people to place in the organization, so they didn’t need more of that.
David Hauser: The second factor was, we had a very, very strong management team. Siamak and I had spent a lot of time, money, effort, training, building up a management team where ultimately my time in Grasshopper, working on the business, was between five and fifteen hours a week, in the business. Because the management team was running day-to-day operations, I had a COO reporting to me, and that structure worked very well, so the acquirer felt very comfortable that the team could continue without us, because we were providing more vision than day-to-day operations, where the business would continue to operate.
John Warrillow: What advice would you have for an entrepreneur hiring their first chief operating officer, or second in command?
David Hauser: I would say, don’t rush into it, and don’t hire a COO until you really need one. We hired a director of operations when we were at about 15 million. That person happened to then grow into the COO position, which doesn’t always happen, but if we had started looking for a COO or that type of level person when we were at 15 million, we either would have had someone way too early and they would have gotten bored and it wouldn’t have worked out, and we would have overpaid, or I think hiring beyond 12 months of what you need is very difficult, and we weren’t gonna double from 15 to 30 million on 12 months. It took longer than that.
David Hauser: The first piece of advice, hire for what you need today. You can always grow that person or get a different person. Teams change over time. Then complement your skills. I love the idea of operations and operationalizing things. I don’t love the details of doing it. I needed someone that loved the details of operationalizing things and creating POC’s and doing all of those things.
John Warrillow: Sorry. What’s a POC?
David Hauser: Sort of like a process, in essence. It’s just making sure that the processes are documented and followed, for everything in the business.
John Warrillow: Got it. Did you have just one direct report, in other words your chief operating officer, and then he or she had everybody else reporting to them?
David Hauser: Yeah. That took a five year period to get to. At the beginning of that five year period, I had like probably about 20 direct reports, because the entire engineering team reported to me directly. It took time to fill in those gaps over time, but yes, ultimately I had one direct report and everyone else, in layers, reported up to the COO.
John Warrillow: It’s funny. I get the benefit of looking at your picture on Skype and most people won’t have that benefit, but you look like you’re 25. I don’t know when the picture was taken. But you’re obviously a relatively young guy, and you’ve been so enormously successful. I think some people listening to this might be tempted to think, “Wow, I’m not good enough. David seems like everything he touches turns to gold. What am I doing wrong?” Maybe, could you share for folks sort of that maybe a failure you had or a mistake you made, or anything that would humanize you a bit more, because right now you’re sounding pretty incredible.
David Hauser: I think also the culture we live in today of this entrepreneurial culture idolizes entrepreneurs at all levels of businesses, all the way up to like Elon Musk. We miss a lot of times the backstory and the failures and how hard it was, and it took 15 or 20 years to get where they are. I think that’s an important thing.
David Hauser: We’ve had so many failures, inside of Grasshopper and out. I think the larger ones, we lost over a million dollars thinking that we could build more companies inside of Grasshopper. We’re like, just like you said, “We start a company and it’s great and it’s easy and it’s successful,” not easy, but we grow quickly. Well, why can’t we do that in a different space? We tried four or five different companies, lost a lot of money and time and focus doing that. Even since Grasshopper sold, the feeling like, oh, it’s easy. We’ve attempted four different things. Only one has been relatively successful, and not super successful, and it’s not even in the technology space.
David Hauser: I think that we got very lucky with Grasshopper in a lot of ways. One, timing wise, where the market was, our ability to buy ads cheap, things like that. The team we put together. The market was kind of down so we got people at a cheaper rate than we could have later. Lots of things happened because of it, and we just focused on making money day in and day out, so it took us 12 years, but we did pretty well.
David Hauser: Look, even in Grasshopper, we were at days literally almost out of business the next day, because we had no cash. Can’t meet payroll, need to figure out how to get $150,000 dollars. And you struggle through it.
John Warrillow: In those days, what, did you put a lien on your house? Did you remortgage something? How did you actually get through those days?
David Hauser: We begged, borrowed, whatever we could possibly do. We pushed vendors back. We asked for terms. We did anything we possibly could. We just got through it each time something like that came up, and we learned from it and did better. We had a line of credit with Bank of America, a sizable one, over a million dollars, that luckily was not personally guaranteed, but the financial crisis hit and Bank of America said, “We’re calling all of our lines of credit.” That hurt. How are we supposed to do that? Those were difficult meetings, sitting with Bank of America and saying, “Look, we can’t pay this and we won’t pay this, because you’re calling it outside of the terms. We’re well within the terms. Just because you’ve had a change of direction and because of the financial markets.” They had all sorts of threats, but we made it through that.
John Warrillow: You did indeed, and came out the end very well indeed. David, is there an ask you have of us? Is there somewhere you want to point people to learn more about you, the upcoming book? Where can people learn a little bit more about you?
David Hauser: Sure. I have a website that I wish I updated more often. Davidhauser.com. I guess I’m not as good at writing on a consistent basis and I wish I was. But the book is coming out in early 2019. It’s called Evolve: Optimize Your Life, Mind and Body. We’ll put information on the website about that, including ways to get a free copy. For me, it’s much less about making money from this book. If we even break even, that would be a success on the book. But I want to be able to share the things I learned as an entrepreneur and the framework that I built that kind of empowers anyone to optimize their life from top to bottom.
John Warrillow: Fantastic. We’ll look out for that. Hauser, by the way, is spelled H-A-U-S-E-R, I believe. Is that correct? Davidhauser.com.
David Hauser: That’s right.
John Warrillow: We’ll look out for the book. David Hauser, thanks for joining us.
David Hauser: Thanks John.