Chapter 5
Venture Capital or Bust

January 1, 1997   Dow 6813.10   NASDAQ 1379.85

For a $1 million investment, Columbia Capital wanted to own 51% of our company. That’s what the term sheet—a three to five page document that formally outlines the basic terms of an investment or acquisition—stated.

We were flattered that Columbia Capital thought highly enough of Net2000 to invest in us. And we were extremely impressed by the team at Columbia. But this valuation was absurd. We had just been offered $15 million from LCI International to buy us and now Columbia Capital wanted to put in $1 million for over half of our company. Not only were they offering us little capital but they wanted control of our company too.

Columbia Capital’s strategy has since changed, but at the time they had a controlling interest approach to investing. This enabled them to take control of the operations, including the management team. If we had decided to move forward with their offer, Columbia Capital would have had the ultimate say in how our business would run.

Personally, I wanted to do the deal with them. My argument to my partners was that Columbia Capital had achieved many successes with their portfolio companies, and that they had a particular knack for making money in the telecommunications space. They would also be significant mentors to us. But my partners thought otherwise. They refused to give up ownership of the business, regardless of the positive spin I gave it. Instead they wanted to aggressively pursue competitive offers from other VCs and raise enough venture capital to transform Net2000 from a sales agent into a full-fledged operating telephone company, or CLEC.

I was thinking long-term, though. I realized that if we took the risk and transitioned out of the Bell agent program to become a CLEC, we would have been able to turn to Columbia Capital for more money in the future. As the business grew, Columbia would provide us with a safety net. Instead of butting heads, however, my partners and I had to sit down to re-evaluate our goals for the company. This was where our partner retreats proved useful because we had independently written down our personal and company goals for one, three, and five years down the road, and then were able to compare notes.

Lesson 21: Assess Your Long-term Goals When Raising Venture Capital

There are pros and cons to any investment opportunity. The pros are many: venture capital investors open doors, they are invaluable advisors and mentors, and they provide important seed or growth capital. They also set aside additional cash for follow-on investments in the future as your business grows, or if you face obstacles along the way that require more funding, as many companies do.

The cons, on the other hand, are different. Needless to say an important consideration is the dilution of the company or the ownership stake you’ll give to the VCs. “The general pattern of financing involves a number of rounds of fund raising. As each stage proceeds, the founders and the management team end up with a smaller equity stake in their company. This is how the dilution game plays out (Venture Capital: The Definitive Guide for Entrepreneurs, Investors, and Practitioners, John Wiley & Sons, 2001).”¹

You must weigh the risk/reward against the dilution. Ultimately the confidence in your business plan and financial forecast plays a significant role in the amount of dilution you’re willing to sacrifice. In other words, if all goes well, you can own a smaller percentage of a larger company. For example, the general principle in accepting venture money implies that your aggressive business plan will be successfully executed and will make your overall equity value greater, even though your ownership stake is less on a percentage basis.

In deciding your company’s future, a valuable strategy is to think long-term. What are your long-term goals for the company; what do you ultimately want to walk away with? Weigh your long-term goals against the pros and cons. This is where it is vital to have your goals for one, three, and five years written down to review with your team.

At the end of January 1997 we had our final meeting with Columbia Capital, which unexpectedly left us with a bad taste. We had to make a presentation to all eight partners, including Mark Warner. We hadn’t yet spent much time with Mark, as he had already made his foray into politics; we had worked with the younger partners like Phil Herget and Jim Fleming. Initially Mark intimidated us. But once we sat with him for more than five minutes, we realized that he was a consummate gentleman. Unfortunately we didn’t get the same reception from a couple of his other partners.

When we considerately told the group we weren’t interested in the deal, a couple of arrogant founding partners balked at our decision. They exhibited a bitter impatience and superiority that was completely different than anything we were accustomed to in dealing with Columbia. So we walked away from that final meeting slightly deterred from raising venture capital.

LCI International, who had offered to buy us for $15 million last year, ultimately decided to hire us as consultants. They needed assistance in packaging their local services offerings and in training their sales force on how to sell local services. Their main focus was long-distance, but they had established a small local services group in response to the Telecom Act.

Anne Bingaman, the newly hired President of their local services division, was our go-to person. Prior to her LCI position, Anne had been appointed by President Clinton to head the Department of Justice, Antitrust Division; her husband, Jeff, is a U.S. Senator from New Mexico. Her expertise is in law, but she switched gears to spearhead the local services division. Anne is an incredibly bright, assertive, and well respected attorney. She was characteristically direct and tough, and very likeable as a person. She would later become an investor in Net2000 and serve on our Board of Advisors.

Cory and I first went to New York, and then out to Costa Mesa and San Francisco to train LCI’s sales force on local services. We only provided two days of sales training in each location, which wasn’t much time. This only reinforced our belief that Net2000 could effectively become a CLEC because we were more experienced and knowledgeable in local services than many of the other aspiring CLECs—LCI’s staff received two days of training, while we nearly had 10 years of on the job experience.

While in Costa Mesa, I dropped in to see Eric Geis. I had recently met Eric when we purchased software from his firm Quintessential, a provider of telecommunications pricing and optimization software. Bruce and I had established great rapport with Eric. He was a polished professional and wore glasses that exaggerated his dark eyes and gray wavy hair. Standing tall and thin, Eric had an ‘executive’ look. And his credentials were impressive. He was a middle aged gentleman and had worked for over two decades in telecommunications at large and small companies. Most notably, he had founded a company and led it to an IPO. Now he was CEO of Quintessential Solutions, Inc., a small private software company.

The time had come when we decided to form our Board of Directors. Having outside board representation is a key ingredient in ensuring your company receives the highest degree of unbiased and honest direction. “Corporate boards should have a majority of outside directors because a higher proportion of outsiders can strengthen a board’s independence, provide greater breadth of knowledge and experiences, and enhance the effective functioning of the board,” wrote Jia Wang in the Journal of Business Ethics. Additionally, these outside directors can “better monitor and control the opportunistic behavior of the incumbent management,” and thus maximize shareholder value.² So I asked Eric if he would be the first to join our Board. With a long track record of entrepreneurial successes, Eric was the model board member, able to offer us his wisdom in the telecom world with a balanced and objective perspective. Like many of our senior advisors, Eric had great contacts to assist in broadening our Rolodex for the strategic moves we planned to make.

Although we continued to be profitable, our overhead costs were increasing daily. We continued to bring in more employees, we were forming our board of directors, and there were whispers about expanding Net2000 into other regions. We needed more cash.

The talks about opening new locations came to fruition when we decided to open sales offices in Richmond, Virginia Beach, Long Island and New York City. The overhead to expand into new markets wasn’t too costly, but we decided to seek immediate relief nonetheless. We negotiated an Accounts Receivable (A/R) Line of Credit from Riggs Bank for $750,000. And we would also start avidly looking for venture capital so we could continue growing the company (we had decided against the Columbia Capital offer).

An A/R Line of Credit was ideal for a fast growing company like Net2000. The line of credit required little collateral, minimal paperwork and could be in place fairly quickly. It was a form of lending that utilized our unpaid invoices as collateral, transforming accounts receivables into cash.

There were talks in the media that Bell Atlantic and NYNEX had consummated the merger of their two mega-companies. The proposed merger was announced on April 22, 1996, and a year later was becoming a reality. The merged corporation would retain the name Bell Atlantic (later changed to Verizon). “The combined Bell Atlantic will be the U.S.’s second largest telecommunications company behind AT&T, and will have combined assets of more than $50 billion. The company will also be the largest of regional Bell operating companies (RBOCs),” reported Newsbytes.³ I had tremendous respect for Bell Atlantic Chair­man and CEO Ray Smith, and after seeing his extraordinary attempt to merge with TCI Cable come unraveled several years earlier, he had pulled off a juggernaut with the NYNEX merger. Clearly, Ray’s attempt to merge entertainment, content, and telephony via the TCI deal was truly visionary; and more than a decade ahead of its time, as that promise is now coming to fruition.

Wanting a piece of the action, we looked into becoming a NYNEX sales agent. NYNEX’s agent program was significantly more lucrative than Bell Atlantic’s. They paid out three times as much commission for the same products and services. In fact, their number one sales agent—CTC Communications—was a public company based on being a sales agent alone. This was a monumental step at the time. Thus, we pushed hard to become the first company to operate as a sales agent for both Bell Atlantic and NYNEX.

Barbara Berger, a sales representative for a highly successful NYNEX agent, wanted to move her family from Long Island to Richmond, VA. We were introduced to Barbara through one of our other employees, Lisa McGowan, who was also a former sales representative at the same NYNEX sales agent. Barbara was the ideal person to open our Richmond office. Both Lisa and Barbara were instrumental in educating us on the advantages, nuances, and differences inherent in the NYNEX agent program.

After Barbara went through sales training at our corporate headquarters, we had her open the Richmond office in February 1997. Cory and I had gone with her to find office space. She was in Richmond by herself for a few months while we worked on getting more employees to join her. My partners and I would go down once a month to help Barbara with sales calls.

Expansion to New York City, Virginia Beach and Long Island would be our next move into new markets. So we started to focus on potential employees and office space for those locations too.

Clyde Heintzelman became our second board member, joining Net2000’s expanding team in April 1997. We knew Clyde from Bell, where he had been a senior executive for over 25 years and was the VP of Sales for our region before becoming President of the Yellow Pages division. In his late 50s, Clyde was like a father figure to us. We looked up to him and had ultimate respect for his experience and wisdom.

At this point in his career, Clyde had made the difficult transition from large company executive to successful small company entrepreneur as President and COO of DIGEX Incorporated, an Internet Service Provider (ISP). Following a successful IPO, DIGEX was soon sold to Intermedia Communications, Inc., a national data services telecom which later was acquired by WorldCom. Clyde had outstanding credibility in the industry. He was a battle-tested veteran. His strengths were many and he enhanced our board with his mastery of running companies both large and small.

Lesson 22: Establish Your Board of Directors Early, Before Seed or Venture Capital is Raised

Conventional wisdom would have a company establish a board of directors simultaneously with, or shortly after, closing its first round of venture capital. The best time to begin building your board, however, is long before the company attracts investors. By adding a couple of high quality outside directors early in your company’s history, your business will benefit in several ways. First, establishing a highly competent, credible board of directors will assist during the capital raising process. It’s important to attract board members who have successfully managed and grown companies, and who have been through the IPO process and a successful exit. Venture capitalists will be impressed with management for having done this.

Secondly, senior management will develop experience in running board meetings before the VCs come into the picture. And rather than VCs choosing the board members, management will have picked the board members they feel are best for the company’s guidance.

For the initial two directors, I recommend those with operational experience as opposed to a purely financial background. As Howard Ross, founder of LLR Equity Partners, says in Venture Capital: The Definitive Guide For Entrepreneurs, Investors, And Practitioners (John Wiley & Sons, 2001), “You want board members in the early stage who 1) have a multitude of experiences with growth companies; and 2) have some real operating experience, particularly in the areas where you may be weak.”⁴

Now aggressively searching for term sheets from VCs, we anticipated raising roughly $1.5 million. We had about 50 venture capital firms we were targeting. This was a long and arduous process. Sometimes we were well received and sometimes we were shunned. Like many things in business, and sales in particular, it’s a numbers game—you must turn over a lot of rocks to find success.

One critical aspect of the venture capital raising process was the quality of our business plan. Clyde and Eric made this clear to us, and we saw the impact it had on our capital raising potential as well.

Lesson 23: Be Certain that Your Business Plan is Effective and Realistic Before Going to Venture Capitalists

Venture capitalists are more conservative than in previous years. If you are ready to raise venture capital, make sure that you have worked fastidiously on your business plan and investor presentation. You only have one chance to make a good impression; it is absolutely critical to maximize this first opportunity. If you approach the VC community prematurely or with a half-baked plan, odds are you won’t make a sale. In their book Every Business Needs an Angel (Crown Business, 2001), John May and Cal Simmons suggest reeling in potential investors with a strong hook in your executive summary. “Start your summary with the special feature of your venture that’s going to make it a winner—you’ve got fabulous growth prospects, you’ve already landed a big customer, you have a new invention that everyone is going to want. Find something about your company that makes it shine, and push that feature out in front.”⁵

Once you’ve grabbed a potential investor’s interest with your executive summary, they are fundamentally interested in three main areas of your business plan—the management team, your financial projections, and the industry sector your product or service falls under (most VCs focus on specific industries). As I stressed in Chapter 2, venture capitalists will invest first and foremost in the management team. Gordon B. Hoffstein, former Chairman and CEO of PCs Compleat Inc. (sold to CompUSA⁶), confirms, “An ‘A Team’ with a ‘B Product’ is more likely to get financing than a ‘B Team’ with an ‘A Product.’”⁷ If your management team needs to be replaced with high-level executives who have the appropriate industry background, then put your egos aside and augment your management team.

A “hockey stick”, or overly rapid revenue growth, is something you want to avoid when outlining your financial projections. This type of miscalculation occurs when the revenue curve starts off slow and ramps up too quickly. Rapid growth like that is generally not realistic and will immediately discredit your plan with venture investors. In most cases, it’s impossible to go from zero revenue to $200 million in revenue in 3–4 years. Your financial model needs to be based on achievable milestones and defensible assumptions that can be spelled out. Historical evidence of comparable companies is a good resource to use in devising your financial projections. “If the assumptions are missing or don’t make sense, your plan will lose credibility and you won’t get funding. When it comes to financial statements, especially those that attempt to predict the future, you can never explain yourself too well.”⁸

Your sales and distribution strategy (direct, indirect, or a combination of both) and prior sales success are also critical components to attracting investors. It is beneficial to have paying customers who can be referenced to validate your business model. Even beta customers will prove useful in attracting venture capital. Customers demonstrate a need for your product or service.

In the spring of 1997 we used a lot of our pre-existing capital (profits that were reinvested and our line of credit) expanding our offices and hiring new employees, thinking we would close our first round of funding, or Series A round, in May. By now our offices spanned Virginia Beach, Richmond, and New York. The more offices we established, the more employees we hired, and inevitably, the greater costs we incurred. Yet there was still no sign of our first round of venture capital when May approached.

Then July came and we had not yet closed any venture investment. I remember the day in Annapolis, MD vividly when we held our first board meeting to discuss our options. We had to cut costs somewhere, but we didn’t know where. It tormented me and the rest of my partners. As we sat around the table, waiting for the rest of the board members to arrive, it was silent. I could feel despair in the air. We had built Net2000 up from nothing, doubled our revenues each year, and it had all come to this—avoiding awkward stares from my partners and wanting to go back to a time when we weren’t in a cash crunch. All this because we banked on receiving venture capital sooner than actually occurred. Moreover, we had just taken a huge risk by aggressively recruiting and hiring three highly talented individuals, each of whom had accepted considerable pay cuts to join Net2000. Christine Gistaro had been the leading sales person in the entire U.S. for Cable & Wireless for much of the past decade; Mike Hamm had played a significant role in the information systems department at Cable & Wireless for its back office systems and billing platform upgrades; and Chris Bennett was an incredibly bright individual who had an MBA from Wharton, a Georgetown law degree, and had worked most recently at MCI rolling out its local services offering with MCI Metro. All three of these individuals were expected to play a crucial role in leading our charge to becoming a CLEC. We offered each of them significant stock options and equity in Net2000 as an incentive to join us.

The board concluded we would have to cut some staff. My stomach knotted with guilt. I had only recently hired these people, selling them on a promising future with great benefits, and now I would have to let them down.

I knew it was the best way to cut costs, however, and I had to face the reality of our predicament. Owning my own business came with freedom and rewards, but there was also a taxing downside that ranged from firing hopeful employees to losing night after night of sleep. So I faced the inevitable and set out to terminate a group of employees for the first time ever.

The flaw in our financial planning had to do with our lack of experience in obtaining venture funding. We were not aware of the substantial lag time between receiving term sheets and actually closing the venture round. We incorrectly assumed that once we received a term sheet, the venture round would close soon thereafter. So when we received term sheets from several venture capital firms in July, we thought we would have our capital in no time. Instead there was (and usually is) a two month or longer due diligence period, continued negotiations, and the closing process. Fraught with lawyers and accountants on both sides, the process is not an efficient one.

We were wedged in between our present and our future. Our present circumstances were grim. We were operating on remnants from our bank credit line and looking at our employees with fear because we might not be able to pay them the following week. Our future, however, represented great promise and a road to becoming our own CLEC. The juxtaposition gave us strength to keep pushing forward. But by August we were in a dire financial position.

This time the founders decided to liquidate our 401K plans. We did a phased 60-day liquidation. It was our last chance to keep the company at its present size while dreadfully waiting for our funding to close. Since Net2000 was an established, successful and proven company, we justified exhausting our savings. We had been named the number one Bell Atlantic agent for the third consecutive year. It was worth risking our life’s savings for a company we confidently knew was months away from taking giant leaps forward. As Bill Gates states in his book Business @ the Speed of Thought: Succeeding in the Digital Economy (Warner Books, 2000), “You have to bet the company over and over.”⁹

Lesson 24: Be Aggressive and Bet or Reinvent the Company

In growing a business, you’ll inevitably face many hurdles. Changes in your financial stability, in the economy, or in regulatory rulings may hinder progress. Or changes in the competitive landscape through mergers and acquisitions and new product launches or innovations may put intense pressure on your company. This sea change can quickly relegate a company to second-class status and begin a downward spiral toward obsolescence. It is important to ensure that your focus, product, and/or service remain relevant—at the cutting or leading edge. Therefore, avoiding status quo and taking calculated risks is essential to maintaining your competitive position in the marketplace. Sometimes this occurs in response to your competitors, as a preemptive strike or a proactive move.

For our first round of funding, we had approached over 50 venture firms. It was advantageous to get multiple firms interested and have the flexibility to choose from the most attractive term sheets. As a result, we chose several venture firms to go with in the end.

One of the venture firms that we were interested in was operating under its first fund, which was only $25 million. Given the capital intensive nature of becoming our own CLEC, this fund wasn’t large enough to sustain our future capital needs. Blue Water Capital recognized this and, as a new fund, offered to bring in another VC that they knew well. This VC was Société Générale (SG), one of the largest banks in France, who had an office in New York that oversaw its U.S. venture investments. SG’s fund exceeded $300 million, and they offered that perfect cushion we needed to move forward with Blue Water Capital. We were drawn to Blue Water Capital’s management team because they had complementary sales and marketing ideas, and were entrepreneurial and far less arrogant than many of the VCs we had met.

The third venture firm we selected was Mid-Atlantic Ventures (MAVF), based in Bethlehem, Pennsylvania. With an office in Northern Virginia, Mid-Atlantic Ventures was investing from its second fund, which was relatively small—$40 million. The local partner from MAVF, Marc Benson, was a former CEO himself. Marc had gray hair, deep set, piercing dark eyes and rarely smiled. He was intimidating initially, but once we got to know him, we realized that he was a great guy. Marc’s operating background and MAVF’s strong history of investing success made us want to get involved with them. Additionally, Mid-Atlantic’s founder and lead partner, Fred Beste, had been in the venture game far longer than most and we thought of him as a guru.

Lesson 25: The Mechanics of Venture Funds

A Venture Fund generally forms when professionals with strong financial backgrounds come together and decide to create a fund to invest in a specific sector they perceive to represent a strong growth opportunity. These folks commonly have MBA’s from Top 10 business schools and Wall Street experience at large investment banks. Some venture capitalists have been very successful entrepreneurs and have invested their own money in the fund, thereby bringing a wealth of business operations experience and savvy to the table. The vast majority of venture capitalists, however, have not served in executive or entrepreneurial roles, and identifying those who have is an added bonus.

Typically, venture fund managers raise $50 million or more from institutional investors—state and corporate pension funds, university endowment funds, and large insurance companies, as well as wealthy individuals—to form the venture fund. Private equity funds operate in an almost identical manner to venture funds, but focus on later stage companies and/or buyouts, and often raise several hundred million to a couple of billion in each fund. The institutional investors are known as “limited partners” or “LPs” in the venture or private equity fund. The venture fund creators and day-to-day managers are “general partners” or “GPs”.

Venture fund managers, GPs, or venture capitalists are compensated as follows:

1.  Annual management fee—this fee is generally 2% of the fund. For example, a $100 million fund would pay $2 million annually. These monies are used for the partner and staff salaries, office and other overhead costs for the venture firm.

2.  Carried Interest—VCs get a 20% carried interest in the fund. This means that after the fund is invested and the portfolio of investments is liquidated—through IPOs, mergers or recapitalizations—the venture fund managers get 20% of the profits, assuming that the limited partners realize at least a “hurdle” rate of return, which is usually 8%. If, for instance, a $100 million fund grows to $200 million over seven years—a 10% annualized return—the venture fund managers split 20% of the $100 million profit, or $20 million.

It’s important to note, however, that a compensation arrangement has several nuances. For example, the 2% management fee may count against the 20% carried interest. So if a $100 million fund doubled in seven years, generating a profit of $100 million, the venture capitalists would get $20 million of the profit, less $14 million in management fees that were already received (seven years x $2 million per year = $14 million). Thus the carried interest would only yield a net profit of $6 million. This is precisely why VCs are motivated to invest the fund sooner rather than later, so the deduction of the annual management fees from the carried interest impacts the general partners less on the net compensation amount to them at the end of the fund.

As 2005 is upon us, we’re facing a situation where institutional investors have committed approximately $90 billion of capital to “alternative investments” or venture funds. Yet venture investment activity slowed in 2001, 2002, and most of 2003. Fund managers became more cautious after being burned from the market collapse and turned their attention to rescuing many of their troubled portfolio companies. Now, as the economy rebounds, venture fund managers are facing increased pressure to invest their funds or put the money to work to prevent further erosion in future returns to the general partners of the fund.

The three venture firms that Net2000 selected were Blue Water Capital, Société Générale, and Mid-Atlantic Ventures. Getting all three firms to work together in a syndication was ideal. In total, they offered to give us $3.5 million for 30% of the company—$1.5 million from Blue Water and $1 million from Société Générale and Mid-Atlantic, respectively. The percentage of the company that venture firms take is calculated as follows: they negotiate a pre-money valuation (I’ll explain how they come up with this number in the next chapter). A pre-money valuation is how much the venture firms determine your company is worth before putting their money in. Then they factor in how much money they will put into your company. Take the pre-money valuation, plus how much money they will invest, and you get the post-money valuation. Divide how much they will invest by the post-money valuation, and you get the percentage of the company the venture firms will take. For example, our pre-money valuation was $8 million and the venture firms decided to put in $3.5 million. Thus, our post-money valuation was $11.5 million. The VC’s $3.5M divided by $11.5M is approximately 30%.

Pre-money valuation + investment total = Post-money valuation

Post-money valuation / investment total = percentage of company the VCs will own after an investment

Lesson 26: It’s Beneficial to Get Capital from Multiple Venture Firms by Syndicating the Deal

Bringing in multiple venture firms for your first round (or any round) of funding is prudent. If you’re looking to raise $5 million, for example, you can spread that investment among two or three venture firms and have a better chance of obtaining the full sum. It also creates three pocket books to turn to instead of just one. Three different paths of funding sources allow you more flexibility if something goes awry, such as a downward turn in the economy or if one of your VCs becomes disenchanted with your company, the team, or business plan. With three or more VCs you expand your options, create flexibility, and have a wider safety net for future funding. Moreover, this also broadens your network of contacts. In today’s market, many VCs are actually looking to syndicate deals as a means of performing greater due diligence and mitigating risk, thereby further validating their investment decision.

On the flipside, if one of your VCs doesn’t contribute a significant portion of the $5 million, then they don’t have a lot of skin in the game and could more readily walk away.

The stress built up from months of negotiations had finally been alleviated. And as a bonus, we were getting more money than we had asked for without giving up too much of our company. Compared to Columbia Capital’s $1 million offer not too long ago, we felt relieved and motivated. We were also anxious to receive the money and begin carving the path to becoming a CLEC.

My partners and I started drafting a detailed plan of how our capital infusion would be deployed. To begin, the money would have to go to back office billing system expenses, operating expenses, forming our legal entities, and hiring additional personnel.

October 1997 had finally arrived. This was the month that our first round of funding would close. We didn’t have an exact date that the cash would be available, but the day was imminent. Having started interviewing potential high-level executives back in May, I went ahead and hired our first non-founder executive in light of the approaching funding and in anticipation of our transition to an operating telephone company.

After much debate and amid severe consternation among my co-founders, Mark Mendes was hired as our chief operating officer (COO). This sparked significant tension between my partners and I because Mark was stepping in to help me lead the company. For the first time, we had to make some serious decisions and honest assessments about our own managerial shortcomings and bring in more experienced leadership. The fact that all four of us were founders of the company did not necessarily mean all four of us were the right fit to lead the company going forward.

Mark had just been COO of a public long-distance carrier, US WATS, Inc., and had the industry background, technical aptitude, and managerial skills that we believed we needed to take Net2000 to the next level. His operational expertise in running a larger public telecom company, coupled with his local telecom experience, was vital to augmenting Net2000’s growing size and reputation. Mark was the same age as me. His Portuguese descent showed in his coffee toned skin, dark hair and features. He was just under 6 feet tall, had a mustache, and was portly. He was always on a “diet,” “in training,” or “getting on a program.” Although he was articulate and bright, he could be arrogant, and rubbed people the wrong way at times. Beneath his serious, stern exterior, Mark was a sensitive, nice guy, but that was often lost in the day-to-day hustle of business.

Brian Robinson, our first sales hire, volunteered to open our New York office in October. New York opened the same way our other three offices got off the ground—one employee was sent to the location and worked out of that office alone until we could get enough momentum to bring in additional hires. The office was a shared tenant space directly across the street from Madison Square Garden. On Seventh Avenue between 31st and 33rd Streets in the heart of Manhattan, Madison Square Garden houses venues for professional sports (New York Knicks, New York Rangers), concerts, conventions, and other events. Since 1970, The Garden has served as the nucleus of entertainment, and that put Brian in the middle of all the action.

On October 31st, we were rewarded with officially closing our first round of funding. The sigh of relief that we let out felt like the pressure that is released when a 10-foot wave comes crashing down. The immense stress and financial burden that had been weighing on our shoulders had finally been removed. Armed with capital now, our day-to-day activities would be different moving forward. We immediately began preparations to become a CLEC. This wasn’t going to happen overnight, so for the next year, we would operate in a dual mode as both a Bell and Nynex agent, while implementing the back office billing and regulatory framework necessary to become a fledgling CLEC.

Simultaneous with closing our first round of venture funding, we sold our consulting unit. We had negotiated for several months with Jim Duggan and Dunn Scott, two veteran information technology leaders who were now heading Vista Information Technology. Jim and Dunn were backed with $100 million from the venerable Chicago private equity fund GTCR to build an IT services company through a series of acquisitions—a “roll up.” They were attracted to our customer acquisition abilities and wanted to form a tight partnership with us—the acquisition of our consulting division was the first step toward this goal. By selling this division, as well as N2N previously, my co-founders and I were able to put some cash in our pockets. We had an agreement with our new venture investors, before accepting their term sheet, that we would keep the proceeds from the sale of this division. This also gave us additional merger and acquisition (M&A) experience, and now we had the sale of two Net2000 subsidiaries under our belt.

In December, after interviewing him for over seven months, we hired a talented finance executive to become our first chief financial officer (CFO). Bill Washecka of Ernst & Young had introduced Don Clarke to us in May. We had been reluctant to hire him before raising any venture capital, but we liked him a lot. Fortunately, he was still available after closing our venture round. Don had a wealth of experience as a financial leader in the telecommunications space. He had been President and CFO of Plexsys International Corp., a provider of wireless infrastructure equipment, prior to joining Net2000. With thick, blonde hair, Don spoke flatly and seriously. In addition to his Plexsys experience, Don had worked at Price Waterhouse and had served for five years under the late John Sidgmore at CSC Intelicom as CFO. Sidgmore had become well known in the industry as CEO of UUNet by the time we hired Don. “There was no one who could speak with more authority about the Internet than Sidgmore and his geeky sidekick Michael O’Dell. After all, they were the first ones to arrive at the commercial Internet, and they were building the biggest and the most cutting-edge network in the world!” exclaims Om Malik in his book Broadbandits.¹⁰

Lesson 27: Leave Your Ego at the Door and Build a Strong Management Team

One of the most difficult crossroads in a company’s life cycle is when the founders have to relinquish control in the best interest of the company. It’s a difficult challenge to cast your ego aside when you’ve built a company from the ground up. It’s your baby and you want to control its development every step of the way.

The reality is that in most cases there comes a time when seasoned executives with the know-how to run companies need to be added to the team. Founders are often the last people to accept or acknowledge this—after all, they had the drive, determination, and the fortitude to start and grow a successful business. But these high-level positions, such as COO and CFO, most often require expertise not present among the founder group. Put your personal interests aside and think about what is best for the company. Assemble a team of professionals who possess the suitable credentials to keep your company growing.

Hoffstein acknowledges the importance of a strong management team as it applies to meeting with venture capitalists also. He says, “You need to articulate specifically why the team you’ve assembled can succeed. If your team doesn’t have the relevant experience, you have to go find people who do.”¹¹

With Mark and Don on the team, the hierarchy in management unavoidably changed. Mark, Don, and I were now running the company and had the final say in how the company would proceed. Peter, Bruce, and Cory all took on various high-level positions. Peter was the Vice President of Internet Services, Bruce was the Vice President of Consulting and Information Systems, and Cory was the Vice President of Local Services and Strategic Alliances. The change in management introduced a high degree of politics between the founders, Don, Mark, and I, and some things were never the same going forward.                    

In addition to management changes, our board of directors also took on a new personality. Blue Water—our lead Series A investor—took a seat on the board. Lead investors generally require a board seat and this was written into our term sheet. Reid Miles, who was the Managing Director at Blue Water, filled that role. Justin Hall-Tipping from Société Générale and Marc Benson from Mid-Atlantic had observer rights, so they could attend board meetings but could not vote. The venture firms also mandated in the term sheet that we keep only two of our founders on the board, which only added to the tension that was mounting from having added Don and Mark to the management team. At the end of the year, Peter, Reid, Eric, Clyde, and I were the official members of our board.

The year 1997 provided my founders and I keen insight into the inner workings of a rapidly growing company. We not only discovered what we would have done differently, but we also learrned plenty about each other—both positive and negative. And with the ups and downs, the anxious waiting, and the strength to keep going, we made out with $4 million in revenue and another profitable year.

Published with permission from Charlie Thomas, Chief Executive Officer of NISCO Solutions. Prior to founding Claris Advisors in 2002, Thomas served as founder, Chairman and CEO of Net2000 Communications, which he led through rapid growth as the company evolved from a small, private sales agent in 1993, to a publicly-traded competitive broadband services provider.

Thomas has over 17 years of industry experience. He also served in sales and marketing positions with IBM and Bell Atlantic. In 1995 he also co-founded, grew and sold N2N Communications (an Internet provider), which later became part of Verio, and also sold Net2000’s Professional Services Division to GTCR-backed Vista Information Technology. “Entrepreneur: A CEO’s Lessons in American Capitalism” is available in better bookstores, through leading online retailers and by visiting www.selectbooks.com