The BuildGroup Prequels: Episode 1
In Lanham’s book, Billion or Bust, he talks about joining Rackspace when it was in startup mode. Then how it became one of the world’s leading managed cloud service providers with over 100,000 customers and a billion-plus in revenue.
Spoiler alert: Building a company is hard.
Entrepreneurial stories like this would be pure fiction (see fantasy) if not for the real-life electricity generated when courageous and motivated people are fused together by an unwavering belief in a meaningful mission.
Even so, the entrepreneur’s journey is ripe with drama. And chock-full of the kind of plot twists, characters and setbacks that can wipe out the collective spirit and resolve of even the strongest teams.
I hope you enjoy some of the stories we’ll share here. And since BuildGroup is creating new ways to make startup sequels even better, we’d love to hear the story about yours.
The Call
The phone rang. “Lanham!” It was my friend, Quincy Lee, from Houston. “I invested in a company in San Antonio, and you need to check it out.”
The company was called Rackspace.com. “They need a CFO,” he said. Quincy and I had gone to the same high school. He’s a smart guy who runs a successful hedge fund. When he laughs, he sounds like a goose honking, which makes you laugh. After we hung up, I sat, thinking about whether to interview with Rackspace.
I enjoyed working at Silver Ventures, but I had been observing the incredible lights display that was the internet economy in 1999. While I was sweating it out building financial models, wonder kids were landing amazing jobs at companies that a week later were going public. They were minting money. I had never seen so much optimism.
The internet mojo was affecting me. Every day, I talked to friends who were executives at companies that were “e-” this and “.com” that, or about whom I read in the newspaper. They were all on the internet bandwagon, and their new companies were raising millions at skyrocketing valuations.
As I plugged away as the lone 20-something in Silver Brand’s renovated-church offices, internet company founders were indulging in spending benders and VIP parties. Although I was skeptical of the environment, I also felt envious that everyone seemed to have found a job at which they wore flip flops and jeans, and earned huge stock option packages. I thought I may as well meet with Graham Weston and Morris Miller at Rackspace.com, early investors in the company.
Graham had built a successful real estate business and made a name for himself as an exceptional entrepreneur. We met at The Mexican Manhattan on the banks of the San Antonio River. He reminds me of Messy Marvin, I thought. Marvin is a blond kid from the 1980s Hershey’s syrup commercials. Graham had little round glasses like Marvin, although Graham seemed much more comfortable in his own skin than his Hershey’s doppelgänger.
Graham told me about Rackspace, and I liked what I heard. I began due diligence, knowing I had to work to understand the product and industry. It had been years since I had programmed in FORTRAN and BASIC, and my only internet experience was sending email through my America Online (AOL) account. I bought How the Internet Works and began reading.
When people began to build websites in the early 1990s, they had to host the sites on their own servers. Nearly every company in North America had a server closet with a few servers networked together on shelves. The servers ran the company’s local network, webmail, website, and data storage. Setting up and maintaining the servers was a pain because they came unplugged, malfunctioned, and regularly needed upgrades.
Every office had someone who bought and managed computers, installed software, trained employees on the software, and managed the server closet.
Occasionally, the mail server or internet stopped working. “Uh Oh! Network’s down!” someone called out, and the network manager went down the hall to the closet, pushed buttons, did a reboot, and the network came back up.
That was the environment for web servers.
I also met with Richard Yoo, a co-founder of Rackspace.com. He was a Houston native who started the predecessor, Cymitar Network Systems, in the mid-1990s. He brought on Dirk Elmendorf and Patrick Condon as Cymitar co-founders.
They initially planned to develop websites, with internet access and web hosting as side shows. When they couldn’t find a third-party company to host the servers for the websites they developed, they realized they should focus on website server hosting more than website development.
By 1998, they had a business in web hosting. Small business owners were very happy to offload the maintenance and operation of their server closets. Cymitar changed its name to Rackspace.com, a company that aggregated server closets into organized infrastructure in large data centers and delivered this as a service to small businesses. The service was called “managed web hosting” or “managed hosting.”
Richard, Dirk, and Pat built the data centers in nondescript buildings where real estate was cheap. These data centers look almost like a grocery store, but instead of aisles of cereal boxes, they have aisles of computers. Along the front of each rack, flashing green, red, yellow, and white lights show how the machines are performing, and power and network cables line the backs and sides. It’s a beautiful sight. Data centers are the internet’s physical home.
Rackspace.com operated on a Linux platform because Linux was a rapidly growing, open-source operating system for the web, and Richard and Dirk were open-source advocates. As I read and interviewed with Rackspace investors — angels like Jim Bishkin and Fred Hamilton, plus venture investors like Doug Leone at Sequoia Capital and George Still at Norwest Venture Partners — I became interested.
Rackspace represented a pioneering wave of web-hosting providers. Other companies in the space were giants like AT&T, IBM, Dell, and Intel.
I felt I had to get in on the internet action! If I wanted to create jobs, this was my time.
Rackspace wanted me to join as chief financial officer, and the board wanted me to help take the company public. For an internet startup, Rackspace.com had comparatively good fundamentals. It had gross margins of about 65% — low for a pure software business, about average for a hardware business, and high for a service business.
Rackspace combined all three — hardware through the servers it owned and aggregated, software through the code and systems that ran the servers, and services through its groundbreaking Fanatical Support.® Fanatical Support drew me in.
The story goes that David Bryce, the Rackspace.com VP of Customer Care, was meeting with his team one day in 1999. Team members told Bryce they couldn’t guarantee customers would never encounter problems, because that wasn’t realistic — sometimes power went out, hardware broke, customers or Rackspace.com made mistakes.
But Bryce had developed strong ideas about customer support, and when he looked up those ideas in the dictionary to find ways of describing it, he came upon “fanatical”: obsessively concerned with something. He described and explained the idea of fanatical support. “This is going to be our focus from now on,” he said.
People jumped on board and refined the ideas that would constitute Fanatical Support. They agreed they could keep customers happy if Rackspace.com could guarantee a 99.999% uptime level and offer a money-back guarantee if the level wasn’t hit.
From that 1999 meeting on, they started calling the idea of guaranteed uptime and money-back guarantee Fanatical Support. I loved Fanatical Support, and I liked that Rackspace. com had big growth plans. As CFO, I’d register our intent to go public with the SEC and we’d start our road show soon because we knew the IPO window would shut down sometime — we just weren’t prescient enough to know when.
I decided that leaving Silver Ventures for Rackspace. com would be the right career move. I saw potential in the company and industry, and hugely wanted to lead an IPO.
I talked with my wife, Dacia. “I think you should go for it,” she said.
With that, I left Silver Ventures and joined Rackspace. com.
