Play the Best Game You Can With the Cards You're Dealt
Joseph Chung, Founder, Art Technology Group
There's no recipe for building a company that lasts—the reality is that much of it is a sequence of random events. The rest is making the most of what you do and where you are and not screwing up too badly.
Jeet Singh and I started Art Technology Group (ATG) in 1991, with just our own capital in the very beginning. Our fathers put in some money a few years later. Then we built it up as a consulting company only, so we were more or less profitable or at breakeven as we were growing. In 1995 we decided to become a product company. We started looking at outside financing, but we still had our consulting business to drive in revenue. The original idea was to raise a minimum institutionally and let our consulting operation fund the product.
It didn't quite work out that way. We got ourselves into a tremendous amount of trouble. Once the product business got going, we deeply underestimated how long it would take before product revenues became significant. At the end of 1996 we raised $3 million dollars. By the end of 1997, we were broke. Our consulting operation was still growing and doing very well, but it took a long time for our product, Dynamo, to catch on. We basically ran ourselves out of money and had to do a round of venture capital in 1997 under very onerous terms. In 1998 we did another round and raised $7.5 million, with our valuation back at $30 million or so. That was the first time that we really had cash reserves.
Learn From Tough Times
In theory, a startup should never be successful—large companies should always be able to keep you out. They have everything: money, customers, marketing, resources. To get past them and not be shut out, you really need to exploit a flaw in the market and keep opening it wider and wider, so you can force yourself into it. That takes a tremendous amount of "sticktoitiveness."
Getting through those two very difficult years taught us a tremendous amount about operating a tight ship in both expense management and controls, but more about being really focused on what we did well and what our position was in the market, instead of trying to spend our way out of problems. Hard times forced us to really think hard and place our bets very carefully.
Choose the Right Partners
Our decision to base our product line on Java, a programming language, was made early in 1996, when that was a pretty risky thing to do. It was based on the insane prediction that Java would replace C++ as the dominant programming language in our market. Programming languages have tremendous momentum, because once people get trained in a given technology in a given environment, that's what they know how to do well—they know how to make it work for themselves. But, superior technology is not enough to guarantee a superior position. Using Java turned out to be a very lucky choice, even though we did it for all the right reasons.
The technology we chose suddenly became very hot amongst a new breed of programmers—in particular, Web developers. Businesses that were implementing Web sites were companies we could build relationships with rather easily, because they were more focused on the best technology, rather than better marketing or better presence. So, we arranged to build partnerships with these younger, smaller integrators who, culturally, were a lot like us. We built a very strong and loyal following and they, in turn, took us to the customers.
Since their customers—our joint customers—were relying on these companies to make the right technology choices, they brought us a lot of credibility. But, we also earned it by making sure that everything worked. If a customer asked, "Gee, who do I call at four in the morning? Do you have 24/7 tech support?" we said, "Oh, yeah, sure." I had to wear a pager when I went to sleep, but we were able to support our partners and customers in ways our competition wasn't able to. We spent a long time defending our technology and making sure the customers felt good about it. And then the tide turned. One day we woke up and we had huge customers, like General Motors, who endorsed Java and made huge commitments behind it. So, what had been a disadvantage turned out to be an advantage.
Develop Your Growth Strategy
Our partnering strategy was really critical for us—and complementary to the technology strategy. What I've learned is that it's great if you can get a certain kind of tactic to give more than one kind of return. We went after these new Web integrators because we could, because they were convincible in terms of technology alone, but also, that gave us a huge ability to grow. Now we have a lot of other people talking about our company and our products and actually doing the infiltration.
Our growth strategy for the company fortuitously mirrored our marketing strategy. We have some 70,000 trained developers using our technologies. If ATG had had to build all those Web sites ourselves, we couldn't possibly have grown this fast. If we had to hire all those people, it would be impossible. Even so, the last couple of years have been just crazy. We went from 100 people in 1998 to a thousand employees today.
Believing that our partners would drive the company's scalability, we made a concerted, aligned effort to make our product systems-integrator-friendly. On top of that, we changed it to make it more suitable for its environment. Loosely speaking, for every dollar of software we sell, a partner probably sells $2-$4 of services, so in some respects we're leaving a lot of money on the table. But, our internal costs are falling. The cost of our software is zero—we've already invested the money. I think we did a pretty good job of crafting a strategy for growing the business, to take advantage of Java's popularity. Our revenues came to about $12 million in 1998, $30 million in 1999 and about $156 million for 2000.
Don't Blow Your IPO
People were taking a big gamble when ATG went public in July 1999. But, in retrospect, we feel that we could not have timed it better. Quite possibly, we might have missed the window. The market closed firmly around March 2000, so if we hadn't done it when we did, we would have been locked out.
We raised $15 million in the IPO. One school of thought would have said, "Go spend it! Spend it on marketing, ads, whatever it takes, and try to grow your market at any cost." At the time, nobody cared how much you lost—they only looked at your revenues. Some companies were losing twice as much money as they were bringing in. We felt that that was just not the right thing to do—for a couple of reasons. First, scratching through some very tough times helped us be a lot more disciplined. We tend to be very conscious of profitability and expense management. Once you build an organization that only knows how to spend money, not how to make money, it's hard to turn it on a dime and become profitable.
Second, being a publicly traded company had also given us more credibility. We were perceived as a long-term, stable player, and going public accelerated our market presence. We had gone through all kinds of crazy machinations to become profitable, yet that was our original plan. So, we ignored people who told us we could lose money and it wouldn't matter. Two quarters later, when something mattered, we were profitable.
Produce True Value for a Real Market
If we had missed that particular window, we would still would have been a successful company, but I guess that we would have gotten acquired. There's no shame in being acquired—there are a lot of reasons it makes sense to combine with a larger company. But, you're not going to get acquired unless you're building a viable business.
On another level, sustainability means hiring great managers and making good decisions at the management level. One of the mistakes I've seen companies make is too much wave-riding. Something's no longer hot so they jump to the next thing, whatever is perceived in the market as hot—push technology, B2B, wireless. If you can't reposition yourself in some other direction, it's going to be out of fashion, and you've lost a lot of time.
Some companies have failed because they were selling only to dot-coms, and some because people don't spend as much when the stock market craters. But a lot of companies go down because they've never built a real value proposition to meet a real, measurable need. People are looking at the Web as a gigantic opportunity, as well as a risk, and if they don't Web-enable their enterprises, they'll suffer against their competitors. That boils down to a need to buy software like ours. Getting listed on the Dow Jones Internet Index amounts to recognition that we're profitable and growing. But in terms of long-term viability, the ongoing success of ATG is really about managing growth, operations and most of all, execution.