Disrupters - Alex Kazerani, CEO & Founder, EdgeCast (Verizon Digital)
Alex is a proven tech entrepreneur, having started, led and sold multiple successful companies. Most recently he was the CEO & Co-Founder of EdgeCast Networks. EdgeCast became one of the leading global content delivery networks, carrying 5% of the Internet traffic, operating in 20 countries, while accelerating and delivering the largest and most demanding websites such as Twitter, Tumblr, Dell, Sony, and Hulu. EdgeCast was acquired by Verizon, where Alex spent 2 years helping shape the strategy of Verizon Digital Media Services.
Prior to co-founding EdgeCast, he was a Co-Founder & CEO of KnowledgeBase, a SaaS based enterprise knowledge management company with many Fortune 1000 customers, which was acquired by Talisma Corporation in 2005.
Before starting KnowledgeBase, Alex founded HostPro, an industry-leading web hosting and application services provider. In August 1999, Micron Electronics (MUEI) acquired HostPro. Alex was instrumental in helping HostPro grow organically and through acquisitions into one of the largest web hosting companies in the industry, with over 70,000 customers worldwide.
With more than twenty years of leadership experience in information technology and business operations, Alex has successfully led a number of business initiatives that include developing core technology solutions and bringing them to market, as well as managing day-to-day business, marketing, sales and support operations. For his leadership he has received numerous awards including E&Y's entrepreneur of the year award in 2014. Additionally, he has extensive application development, security and internet infrastructure experience, for which he has been awarded 23 patents.
Alex is an active investor in several venture capital funds, and has served on boards of private and public companies such as Web.com (NASDAQ:WWWW). He graduated from Tufts University and lives in Santa Monica with his wife and children.
How did you become an entrepreneur?
“I worked for an Internet service provider, and my boss was the worst manager one could imagine. I learned everything not to do.” I was there for only 3 months before quitting and going on my own. My first company was Food Mood in 1996. “My partner and I were always hungry. We wanted to see the latest menus online, and have the ability order for delivery. We hated having a stack of menus in a drawer.’ We spent nights coding, went to restaurants and tried to talk to managers. We all stayed at my mom’s apartment, and any money we made, we put into our business.” It was a good idea but too early for doing ecommerce for food delivery. Online ordering came about 15 years later, however a connection led to some amazing deals to host websites such as Caesar’s Palace, Baskin Robins, Oral-B and more….before we knew it we had transitioned to become a web hosting company.
What was the revenue model for this business?
We had a recurring revenue model. However, given the upfront cost of equipment we had a negative cash flow. Since we couldn’t get any bank or VC financing, we figured out a different way to finance the business. I call it customer financing. We offered 5%-15% discounts for customers who paid long-term subscriptions upfront. “Instead of paying $50 per month, a customer would pay $500 for the year.” Kazerani highlights, “This model only works if you are constantly growing.” After cold calling and direct mailings were unsuccessful, we grew our customer base through magazine advertising. Though magazine ads were too expensive at first, we learned how to negotiate pricing with the publications, properly position ads, having a call to action and effectively increasing conversion. The company grew at double digit percentage month over month for 3 years.
How did you sell your first company?
“Multiple companies approached us, showing interest in acquiring HostPro.’ At the time we had no outside investors, no VCs, it was just us.” So we started a formal process by engaging Investment Bankers. Bids ranged from $12M to as much as $26M. The highest bid was half cash and half stock, the second highest bid, by Micron Electronics was an all cash offer at $23M. “We were conservative and took the ‘all cash’ offer. Interestingly, within 3 months, the stock of the highest bid went up to a value of about $50M, but eventually, with the tech crash of 2000, it dropped down to zero; we had made the right deal by selecting Micron. Post-merger we went and acquired many other hosting companies. I was 26 years old and I was managing about 600 employees.”
How did you start your second company?
“In 2001 we started a Software as a Service company called KnowledgeBase. At the time, companies were outsourcing their call centers to Asia, however there was a pain point in how you manage knowledge. We built an amazing software, and landed some large customers such as Dell, AT&T, and United Airlines. But it was a niche, and too small of a market.” Kazerani points out, there are only so many call centers in the world. To convince people why they needed the software and edge out the competition, they bought the first slot on Google’s AdWords, which sold the search engine’s first two results. “It took us about three months to close deals, where it took the competition nine months.” We were one of the first people to use Pay Per Click advertising to sell enterprise software.
Who is the core of the team?
“James Segil, Phil Goldsmith, Lior Elazary, Jay Sakata……with every company our core team grows as well. Phil is our head of sales—I met him first day of college. Some of the people you are meeting now while in college will become part of your core team in the future. James Segil is an amazing marketer and business development guru.” Lior and Jay are our tech partners who focus on various aspects of technology. Our core team is treated equally in terms of salary, bonus, and annual equity grants. We also try to get everyone to invest the same amount, but not always possible. This model allows all of us to be very aligned.
We give equity to all of our employees. At EdgeCast everyone had stock options, our receptionists, our sales people, our engineers, and even people working in our network operation center.
What does it take to analyze the feasibility of a business idea?
“If we find an idea that we are passionate about (being passionate is key), we do a competitive analysis. How many people have tried, or offering are currently offering this product/service?” Tools like Crunchbase highlight competitors, their funding and leadership. Then we look at market size, and decide if it is a big enough market to go after. We also look at the barrier to entry, how long would it take for us to bring a solution to market? and how hard it is for a new startup to catch up?, and finally, determine the impact. After doing all of that, if the idea still has legs, we move to phase 2 which means we survey the market by talking directly to people and documenting their feedback, identify partners and think through possible outcomes.
“Anyone can veto an idea and that would stop the entire business idea. The team always comes before the idea. I would rather work with a great team and not do so well, than to do well alone.” “Don’t worry if others think your idea is stupid, sometimes stupid works.…‘Everyone thought a couch sharing concept is a silly idea, and it turns out to be Airbnb.” Kazerani encourages sharing ideas: “You will learn if your idea truly solves a problem by talking to customers, and if you are afraid of sharing, it means the barrier to entry is low and anyone can catch up to you once you bring it to market.”
How did you start and manage EdgeCast?
“We started by wanting to be the creator of content, but download speed is so important that we pivoted to focus on a fast content delivery network for all content creators. Speed directly correlates with conversion.” Using $1M of our own money, and 9 months later we had built a global network, a working product, cutting edge self-service portals, and some beta customers. We raised $2.5M from friends and family, and started signing up paying customers. Steamboat, a division of Disney, approached us wanting to invest and give their business to one CDN. We reached an agreement to raise $6M at a pre-money valuation of $26M, post $30M, and closed the financing in 2007. During the 2008 crash many companies had massive layoffs, and Steamboat expected the same of our team. But with substantial growth, “We told them, ‘We are not going to fire anyone, but five founders will go to zero salary.’ It’s like firing your most expensive and valuable staff without losing them. A year goes by and we told Steamboat, ‘everything is going well we are have grown substantially, the credit crisis hasn’t impacted tech. We are going to take salary again…and need some equity for past years deferred salary.’ We worked it out.”
In January 2010, we did a Series B financing and raised $10M. We had 250 employees at the time and our customers included all the major social media companies. We received an offer for $150M for the company and more if they reached other milestones. “But we thought we were doing a lot better than that—$150M was too low of an offer. We were on track to do $70M of revenue for that year. So we passed on the offer. At the end of 2012, we had to raise more money in order to increase our growth rate, and we were looking for $20M.” Kazerani says, “When valuing a company, it is about the growth curve, and growth rate, not the actual revenue. So when we are building a tech company, we would like to sell when the growth rate is increasing. When you get to the top of the growth curve, it’s flat, and it is too late to sell. Your valuation is actually far lower, even though your revenue might be higher”. For our financing, 5 VCs valued us at about $200M—one VC over valued us at $350M. It was smart of them, since we they beat all the other offers and signed an exclusive time period to perform diligence. And they did do a ton diligence. For example they called 150 customers, both former and prospective. And eventually realized that $350M was too expensive. “They bowed out of the deal. We had to go back and redo our fundraising. Eventually we were able to get a $200M valuation, and raised $20M.”
What happened between Verizon and EdgeCast?
“Verizon reached out to us in the summer of 2013. We started having some meetings. In the meantime, we started consulting with our Investment Bankers. The Bankers gave us some great advice, they told us not to rush Verizon, and to let them build their business case internally. Eventually it received higher visibility levels of visibility within Verizon. They wanted more information, and we wanted them to commit.” Their first offer was $260M, which was so low I didn’t counter. Agreeing on 2 more weeks of information sharing they offered $350M. We ended up negotiating and getting close to $390M.
“In our agreement with our last VC, they had a blocking right for any exit below 2x. They had come in at a $200M valuation, so they could block any deal below $400M. We needed it to reach over $400M. If it didn’t, it would come out of our pocket and dilute our investment Clearly the VC’s were looking for reasons to block the deal. One of the VC’s slipped: “since the company was selling in the same year as their 2013 investment, he wouldn’t have to distribute back the proceeds to his shareholder, and could continue investing with his 2x return. Using that argument against him, he finally agreed not to block the deal as long as the deal closed in the same year. So we worked hard to make that happen. We closed on December 23rd 2013.”
Lessons Learned:
· Appreciate the team. Trust is key.
· Go after a pain you identify withàpassionate about the problem you are solving.
· Understand the size of market
· Figure out how you are going to sell your product/service early
· Manage conflicts carefully
· Make a deal that works out for everybody
