Anatomy of a startup: how top technology exec Ken Coleman developed a novel software product and used his business network to launch a revolutionary enterprise in Silicon Valley.
So when he retired three years ago, industry insiders assumed he would head to his Maui retreat, sip Mai Tais, and relax for a while. When he eventually resurfaced, many believed he would follow the path of other former Silicon Valley titans and do the corporate board thing--at least that seemed like the plan.
Fast forward to summer 2004. Coleman is seated at the head of a table in a Mountain View, California, boardroom, flanked by his executive management team. His left foot propped casually on the edge of the table, Coleman rocks back and forth, eyes squinting at the PowerPoint presentation, mind racing. He asks a question or two, but it appears that he has already discovered the answers and simply waits for everyone else to catch up. This is typical Coleman. He's never still.
The marathon session is a pivotal one for his tech startup, ITM Software. He and his team are discussing strategies to advance the company. They're also buzzing about ITM Business Suite, an innovative collection of software applications that promises to improve information technology management for chief information officers. The mood in the Yosemite Room, the largest of several corporate meeting areas, is 'intense, not. tense," jokes Willie Hooks, ITM's chief business strategist. Intense is a word frequently heard at ITM. The adjective seems fitting since today's dialogue, like hundreds of other conversations since the company's inception, focuses on yet another make-or-break scenario.
The meeting is symbolic of Coleman's transition from a top executive at a corporate monolith to founder of a bootstrapping software company. It's the story of a retired executive performing the second act of his business life. For the tech veteran, the venture would test his ability to acquire financing from skeptical venture capitalists burned by dot-bombs. It would also require assembling and developing a crackerjack team. His company was the entrepreneurial David trying to snatch business from corporate Goliaths. If that's not all, ITM represented something else: a rare tech startup launched by an African American with significant investment, counsel, and management expertise from other blacks in the industry.
MAKING THE TRANSITION
Why did Coleman leave the calm waters of retirement for the rough waves of entrepreneurship? It boiled down to the strength of a new idea--and the opportunity to profit from it. He was driven by the need to solve a nagging business problem. As SGI's executive vice president, he says he was often frustrated by the inability of chief information officers to comprehensively integrate the information technology function into a massively complex business comprising hundreds of employees, thousands of vendors, and multimillion dollar budgets.
Coleman consulted with Steve O'Connor, the former chief information officer at SGI. Both men recognized inefficiencies with the information technology process: Managers have difficulty making quick decisions because they have to manually review reams of complex spreadsheets. Ironically, while information technology uses integrated business applications for customer relationship management, chief information officers still use rudimentary management tools.
Coleman smelled opportunity. He thought about developing integrated business management applications for chief information officers and information technology organizations so they could better manage costs, identify redundancies in various departments, and develop strategic partnerships within a given company. Coleman believed his groundbreaking software product could work. And by enlisting O'Connor, former SGI employees, and other tech veterans, he had a team that could build a rock-solid organization and execute his business strategy. But in a business environment marked by a weakened tech sector, economic uncertainty, and the fallout from corporate scandals such as Enron and WorldCom, some may argue there couldn't have been a worse time to launch such a venture. But Cole maintains, "A downturn is a good time to start a new company. Expectations are lower, you can find good people, and rents are cheaper."
Besides. Coleman was inspired to prove that he could develop a tech company that was devoid of the dot-com hype: e-companies with flawed business models and inflated valuations. He asserts: "I wanted to demonstrate that I could start a company the old-fashioned way--a real company rather than a financially engineered one."
THE CAPITAL CHASE
The newly minted entrepreneur still had to find a way to fund ITM. Common wisdom suggests that he could receive funding because he's, well, Ken Coleman. According to Fred Gibbons, a member of the ITM advisory committee and a startup coach who boasts the founders of Yahoo! and Google as former proteges: "Ken is very fundable because of what he knows and who he knows."
Over the years, Gibbons maintains that Coleman had been his "consigliere," guiding him in the startup of his own firm, Software Publishing Co., and its eventual sale. When Coleman and O'Connor approached Gibbons with their plan for ITM, Gibbons treated them like any other budding entrepreneurs. "When people come to me with ideas, the first, hurdle I want to see them get over is [whether] they know what they're talking about. So in the case of Ken, the answer was easy, and Steve was an information technology manager. So I said, 'OK these guys know the customer, they know the problem they're trying to solve.' Then I wanted to have some sense of whether they were late to the party. Had the problem already been solved? Were they climbing a hill, were there a lot of giants waiting to crush them?" After the grilling, he "had a sense that there was a clear opportunity there."
But not every venture capitalist in the Valley wanted to bite. Some maintained that Coleman's idea sounded too big and complex. Others said the idea and the market were too small. "Raising capital is a most painful process. You're begging for money," says Coleman.
He narrowed his search for financing to venture capitalists who understood the problem of information technology management and had serious questions for him about solving those challenges. Still, if Coleman were to get his venture off the ground, he needed those venture capitalists to say yes.
First-round funding eventually came from Technology Partners, a Palo Alto, California-based venture firm that manages more than $400 million in capital. Its Technology Fund VII, L.P. anted up $3 million. Coleman and his team were able to raise the capital in less than 90 days--something unheard of at a time when the industry was taking a beating. "They [critics] told us it couldn't be done," Coleman muses. "They said we were crazy, that nobody was getting funded during that time."
Like Gibbons, Darryl Wash, managing partner of Ascend Venture Group L.L.C., an African American-owned venture capital firm in New York, agreed that ITM was fundable, largely due to Coleman. In fact, Ascend wanted to be part of the first round of investments in ITM but had to be content with waiting until round two. "This is a significant market opportunity that is geographically boundless," says Wash of the
information technology management space. "[ITM] has an experienced management team and a business model that we think will be able to scale and generate financial profitability in a relatively short time."
Despite the Coleman name, Wash says the fund looked for specifics about the company's marketing strategy, customer service apparatus, and competitive advantage before making a capital commitment. Says Wash, "When they pitched me over two years ago, this solution was needed because technology was under pressure. So many things were bought and cobbled together. People didn't know what they had or how to get their hands around the challenges of information technology management. This has become even more difficult now that we've gone through the accounting and corporate scandals. When I became aware of ITM, we hadn't yet had an Enron or Worldcom."
Besides a tough tech climate and naysayers, Coleman admits that he had his moments of doubt. He consulted his mentor Price Cobb, author of Cracking the Corporate Code (Executive Leadership Council; $17.99) and mentor to numerous black executives. "I used to talk to Price all the time and say, 'Should I do this?'" says Coleman. "I'd never raised money before and I wondered, 'Would venture capitalists give money to an old black guy to sell a product that's never been sold before'?' [But] Price kept pushing me. He said, 'Why would you second-guess yourself? You have a track record; you have experience; you have good ideas."
At the end of the day, Coleman realized that he had nothing to prove, and as a high-profile corporate executive, he had nowhere to hide: "I hadn't burned any bridges and I knew what I was doing. [This venture] reinforces to me every day that you plant the seeds of your success or failure based on your track record."
His prospective investors agreed that the business model was sound--and potentially lucrative. By May 2004, ITM raised an additional $12.8 million, bringing total invested capital in the firm to $15.8 million. Ascend Ventures ponied up $3 million in the second round while other remaining funds came from Technology Partners, ITM's initial investor; InnoCal Venture Capital, an early-stage venture firm in Southern California; and New Vista, a private equity fund operated by two African American tech vets, Frank S. Greene and Michael Fields, both listed among BE's Top 25 Blacks in Technology.
African American participation was extremely important to Coleman, who enabled some to invest as little as $50,000--an unusual move for a tech startup. "There were some people who wanted to invest in the company, but couldn't spend a lot of money," he says. "I wanted to allow some African Americans to put some money in my deal." He also gained significant black participation in governance and strategic issues, tapping tech powerhouses such as James I. Cash, a former Harvard Business School professor and another member of BE's Top 25 Blacks in Technology, to sit on ITM's board as well as John Thompson, CEO of Symantec, the security software juggernaut, and BE's 2004 Corporate Executive of the Year, to serve on his advisory committee.
Make no mistake about it--launching, funding, and running a startup is no easy feat. Not everyone is cut out for the task. Could Coleman, a corporate exec, make the transition to entrepreneur? "Ken historically has been incredibly successful at running big companies, but the classic knock against these guys has been, 'Can they scale down to do a startup? Can they do the hand-to-hand combat that a startup requires versus managing and building teams?" says Gibbons.
Some might wonder what would possess Coleman, who had "paid his dues" in the industry and could simply retire comfortably, to tackle a tech startup--a process as notorious for its success as its failure. After all, Silicon Valley is littered with the bones of big ideas, killer apps, and cool companies that imploded or simply faded away after all the hype.
The challenges didn't keep Coleman and company from hitting the road and looking for new clients and, in the process, taking on competitors such as enterprise software leaders Siebel and Peoplesoft and making pitches to potential customers. So far, the company has snagged a quality roster of customers including SGI, Intuit, the State of New Jersey, and LifeScan, a wholly owned subsidiary of Johnson & Johnson and the nation's leading manufacturer of self-monitoring blood glucose meters for diabetics.
What has ultimately given ITM the competitive edge is its ability to help customers compile data and integrate management functions quickly. In most companies, if a chief information officer wants to manage an information technology project and, say, track time, manage allocation of resources, estimate cost, and assess its progress, he or she would have to review several complex and separate spreadsheets. ITM's suite of applications allows information technology managers to bring all of this together in one place. And, just as important, each suite can be customized to suit a company's unique needs. Currently, five applications comprise the ITM Business Suite: ITM Foundation, ITM Vendor Relationship Management, ITM Project Portfolio Management, ITM Human Capital Management, and ITM Governance and Standards Management--all designed to address the range of a chief information officer's needs, from managing vendors and staff to compliance with federal standards such as the Sarbanes Oxley Act of 2002, which requires corporate officers to take responsibility for scrupulous financial reporting. (Sarbanes-Oxley compliance alone can add as much as $500,000 in additional expenses for a major corporation.)
Madeleine Fackler is LifeScan's vice president of information solutions as well as its chief information officer. She manages a budget of more than $68 million. Fackler says that despite the size of a Fortune 500 company, most chief information officers manage their information technology functions using spreadsheets, or as she terms it, "manual processes." Tasks such as reviewing hardware and software inventory for thousands of employees and performing complex analyses, for example, often involve painstaking working and reevaluation. Sometimes, she admits, you just don't have all of the information at your fingertips.
What has made ITM effective is how it has been able to access new customers. For instance, Fackler agreed to be part of ITM's beta tests in December 2002 before she signed on as a customer this spring. She was one of the 37 chief information officers that ITM initially polled to assess the needs of major corporations and government agencies. (To date, ITM has polled more than 150 chief information officers in the past 20 months to get a handle on information technology challenges.) Another strength is that the company is founded by former chief information officers. "One of the great things about having the ITM design is that it shows the interconnectedness of applications. For example, you not only know what work has been done, but how many [software] licenses you have for Europe or the U.S.," says Fackler.
She says that Coleman and his team bring another value to the table: commitment. "Steve and Ken have gotten involved [with LifeScan] in ways that have no direct benefit to them," she says. When Fackler cited her recent search for "critical open positions" at LifeScan, O'Connor sent 10 candidates her way. "That's what makes the company different and special and allows them to be successful. I was impressed by the fact that he thought about it and wanted to help," she says.
Back to the strategy session. The intensity in the meeting is about ITM's future: Is it simply a software firm or can it provide services? "We made a change in our direction," Coleman admits. "We used to say that we wanted to be a leader in developing software to solve the problem of managing information technology. We now say software services because it's clear that our customers don't want to just buy software; they want to buy the knowledge and the ability to use that software to create success."
Sounds like a tall order for a startup, but Coleman is committed to the vision of serving customers' needs. He tells his employees, "I will never apologize for telling you to stop whatever you think is important to serve a customer." Coleman, who interviews every new hire, further asserts, "If that bothers you, this isn't the company for you."
Coleman has been known to hop on a red-eye to meet with clients to ink a deal or to simply provide the comfort of a face-to-face meeting. At age 61, he amazes fans and critics alike with his boundless energy.
It's late in the afternoon at ITM. From a small conference room, the sounds of a fisherman's bell come toiling in. It's a signal to employees that the company has struck a deal. The group of 30-plus employees gather around to hear the news. And this is a significant one with a large customer. It is the second such deal completed during the course of the day, and it seems that ITM is on target to reach its goal of earning more than $10 million in revenues for this fiscal year, twice that in the next. "A year from now we should be up to 100 people," Coleman speculates. "I've set this up to say that I want to create four to five times forward-looking revenues approximately two years from now.... It's a reasonable thing to do, but it's not something I'm working on right now. What I am working on is creating a successful company that produces that option."
Wash agrees with that assessment. "We think of investing for a period of three to six years, but we normally look for the ability to achieve liquidity within that time flame," he adds.
Can, or will, Coleman be able to do this? "The winds of success are fickle; sometimes it's about timing, sometimes it's about luck," says Gibbons. "But he, in my mind, has proven himself. Never mind the fact that he's got skills. He has to [succeed] with the meagerest of resources. And he has to walk the walk."
Adds Coleman, "I don't have any energy tied up in success or failure. That's not what motivates me. I've always said that whatever I would do next had to be a big idea, global in scope, intellectually challenging, and it had to make a difference." There is no doubt that ITM has taken on a monster of a problem. But the question remains: Can it meet the next big challenge?
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|Title Annotation:||Business Of Technology|
|Author:||Donaldson, Sonya A.|
|Date:||Nov 1, 2004|
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