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College Bootstrapping Buddies: Grasshopper Cofounders Siamak Taghaddos and David Hauser

Siamak Taghaddos and David Hauser are both serial entreprenuers and co-founders of Grasshopper, which offers advanced phone capabilites to small businesses. Siamak oversees the strategic direction of Grasshopper and serves as the company’s brand visionary while David oversees the strategic direction and operations of Grasshopper and serves as the company’s technology visionary. They met as students at Babson College.

SM: Let’s start with your personal backgrounds. Tell me where you are from and how you came together.

ST: I am originally from Iran. I was born in Tehran in 1981 and I moved to Boston in 1986. I was doing a lot of different things related to business in junior high and high school. In high school I ran a pager business. I distributed pagers to students all over the United States. That is when I first saw the need for a virtual phone system. I had calls and phone calls ringing at the house because clients would call the house where my mom or dad would answer. I knew there had to be a better option for entrepreneurs.

I attended Babson College and was in class with a lot of entrepreneurs, and I quickly saw a need for a solution in this space tailored to entrepreneurs. That is also when I met David.

SM: David, what is your background?

DH: I started a number of companies when I was in high school. I grew up in downtown Manhattan. I went to Babson as well, and that is when I ran into Siamak. We had a shared interest in that we had both started a number of companies when we were younger, separate of each other. We were both really entrepreneurs before we met each other. All of my companies were technology- or Internet-based companies. I founded Return Path in New York City, and prior to that I did consulting online. I started a few Internet companies during the boom days.

SM: What did Return Path do?

DH: I started it with four other people. The company was about email management. It originally focused on fixing bad email addresses. We raised a significant amount of money and acquired a number of different companies. Then the company evolved into email management as a whole. It is still in business today and is doing quite well.

SM: You were both attending Babson together and decided that you were going to start Grasshopper. What was the surrounding infrastructure like? Did you incubate the company at Babson or did you just run with the company yourself because of all your experience?

ST: I had looked into starting this type of company before and I found out that David had as well. When we met we saw that our strengths complemented each other. I focused on marketing and sales and David’s focus was on operations and technology. Our business started outside of the Babson curriculum; however, we did write a business plan for our school’s business plan competition and we won.

SM: Did Babson College play a role in your early days?

ST: We always had access and support from our professors. Writing the business plan and getting the feedback that we did solidified the concept for us. Winning the competition opened some doors for more advice and helped to lay the groundwork for us.

SM: Which kinds of doors did it open for you?

ST: The company was originally called Gotvmail. Winning the business competition helped us win some press. Back then it was rare for kids our age to start a tech company, unlike today when everyone has a tech company in college.

SM: Did you raise money to start the company or did you bootstrap it?

ST: We bootstrapped it and have never raised money. We tapped family for the initial seed money. We have never raised any capital.

SM: What were the dynamics of involving your family in your venture?

ST: Entrepreneurship runs in my family. My father ran an accounting firm when he was young in Iran. He had been in a similar situation as David and I had. When we started this company, he was great at providing some of the initial capital as well as advice and help that only someone with experience can provide. He has been involved from day one.

SM: David, did your family get involved as well?

DH: My family was not involved, but I have seen their family businesses over the years. I had a lot of opportunities to watch them and that definitely was a beneficial influence.

SM: What level of financing did you get from the family?

ST: It was minimal. When David and I looked at the startup requirements to start a true telecommunications company with infrastructure, we needed a few million dollars. We did it for less than $500,000. We had very creative vendor negotiations thanks to David for our cost of goods sold from our technology providers. That made it a very variable expense.

DH: We first picked the technologies that we wanted, and we picked the best ones we knew of. We then went and found companies that sold those technologies and made them partners. We told them up front that we did not have all the money and we asked for creative terms. We offered to pay starting at the 30-day point and then spread that over five installments. Ultimately that meant we had to sell them on the idea of what we were doing. They were buying into our vision with real dollars because by extending us those terms it was as if they were providing us financing. We did that with a number of different vendors to allow us to get going quickly.

SM: In your initial stages, what was your company’s value proposition? What vision did you sell to the vendors?

DH: It was a virtual phone system for entrepreneurs. That is still exactly what we are selling today. We wanted to get people to understand the market and vision.

SM: What is a virtual phone system for entrepreneurs?

ST: It is a capability for a one- to five-person team of entrepreneurs to sound like a big company. They can work remotely and have a phone number regardless where they are working from. If you and I wanted to start a company right now and we did not have a physical office or $10,000 to buy a phone system, we could then just sign up with Grasshopper to get phone numbers with multiple extensions. That would let us start a company from wherever we are and let all phone calls be forwarded to your home office or my cell phone. When we started this, one of the vendors we were working with agreed to be paid as we grew the customer base.

SM: What did you need to put this service together?

DH: There was software as well as the physical infrastructure for the telecom. We needed servers to handle the data, Oracle databases, and all the telecom infrastructure to handle the load. All of that was required in our data center.

SM: David, were you doing the technical work yourself?

DH: Yes, it was my responsibility. I have never had any formal training but I am pretty technical. I handled all the technical aspects and I learned a lot about telecom that I did not know before.

SM: The two of you worked on the project and did creative financing deals to get started. What time was this?

ST: We got started in January 2003. At that time we set aside six months to focus on the technology and work with various vendors creatively. We did that from January to June and then launched in June. While David focused on the technology aspects from January to June, I worked on the marketing and promotion aspects ready so that when we turned on the service everything would be ready to go. As a result we got sales from day one.

SM: Were you still in school while you did this?

ST: I had just graduated and David was at the very end.

SM: During the six-month build-up, how much of the $500,000 did you receive from your family?

ST: We received all of it.

SM: What did you spend that money on?

ST: Almost all of it went towards the technology that we had to spend technology for. There was certain equipment and infrastructure that we had to spend money on. Very little was spent on marketing and sales because Overture and Google AdWords had very little competition. I was able to get 15 clicks with high-traffic keywords which today are $30 per keyword. There was very little spend on marketing.

SM: Was keyword marketing your primary customer acquisition strategy?

ST: Primarily, yes. We did some small ads in certain magazines such as Entrepreneur, Business 2.0, and Inc. We did a little bit of radio advertising as well.

SM: How much traffic were you able to generate with that marketing strategy and how did that relate to ramp?

ST: We were getting one to two dozen signups daily from day one. The cost of service was about the same as it is now. The base plan was $9.95 a month. I looked at the site on a daily basis and maintained it to see where traffic was coming from. I was getting a 1.5% to 2.5% conversion rate even back then. Orders were coming in at a low cost.

SM: What was your first year revenue?

ST: We had a little less than $500,000.

SM: That is a great ramp!

ST: That was just six months. We did all of that by bootstrapping. It was your typical ‘two people in a small office’ story. We did not want to waste any cash at all. We could have easily raised $10 million, but I think if we had done that we would have very easily wasted it. I have no idea where we would be today if we had done that. We had to be frugal and have well-planned strategies because we were bootstrapping. That made all the difference.

SM: At the end of your first year you had $500,000 in revenue. Was it still just the two of you working?

DH: By the end of the first year we had two employees. I was still in school. We hired our first employee because we were still answering customer service calls ourselves. Every employee we have hired from that point on has been a similar scenario where we wanted them to take over a role that we were doing.

SM: After the first year, what were some of your major milestones and challenges?

ST: The primary challenge that we have had from day one is scaling the company without external financing. We continue to reinvest the money and make smart bootstrapping decisions. We grew for the first few years. We were #66 on the Inc 500 list in 2007 simply by continuing what we were doing. The market was great and business continued to grow.

Around 2008, the market was going down. We saw real estate going down hard and we knew we had to make a decision to implement changes in the company to prepare us for the next level. Any business 101 class will teach you that 2,000% as we experienced our first four years is never sustainable. You will eventually hit a plateau of growth.

As a result, in 2007 we decided that we needed to re-brand the company. A challenge that we did not see when we founded the company was that the name Gotvmail was a very difficult name to spell, remember, and understand. Some people thought it meant Government Voicemail. We put a lot of effort into branding a company that was not memorable. We wanted to be more than just a telecommunications company. We wanted to empower entrepreneurs through any offering, including our telecom services. That is when we re-branded ourselves as Grasshopper. Our goal was to make Grasshopper brand for entrepreneurs much like Virgin is a brand for consumers. We set our vision to have 1 million entrepreneur customers within ten years. All the decisions we now make are focused on those core values.

SM: How many entrepreneurs do you have as customers today?

ST: We have served 90,000 so far. We have 40,000 active entrepreneurs out of 150,000 active users.

SM: What is your revenue level now?

ST: It is above $10 million.

SM: Are you still sticking with the bootstrapping model?

ST: Correct. With all the tools such as Grasshopper available to entrepreneurs, it is possible to hire good employees regardless of where they are located. We are now moving toward a dispersed workforce. We have subleased half of the space in our headquarters in Boston because we are hiring great talent in various cities. Austin, Texas, is our second headquarters. We have lab members in Portland, Sacramento, San Francisco, and North Carolina. We are moving toward a dispersed workforce.

SM: To some degree it seems as though you have a solid virtual PBX service which is scaling nicely, and there is not much more to do in that realm other than focus on customer service in terms of development.

ST: All we have to do is scale the product. We have to listen to the customers and update their experience and listen to their needs for new features. That product is our bread and butter. However, our vision is to become a brand for entrepreneurs. We want to empower 1M entrepreneurs to start and grow their business more efficiently.

When someone thinks about entrepreneurs and entrepreneurship, we want them to think of Grasshopper. Grasshopper Labs builds the products that enable entrepreneurs. The first product we launched from the labs is called Chargify. If you are an entrepreneur and you have built a Web app you can now charge for that application efficiently. Before you would have had to hire a programmer to develop a billing system for yourself, or you would have had to use a company to manage that for you. We launched that at TechCrunch50 last year. That product has its own CEO.

SM: How are you structuring your products as you spin them out of Grasshopper Labs?

ST: We want brands that are self-sustaining. We are structured like Coca-Cola is. They are the manufacturing company and the flagship product. However, they also have other brands. Our virtual PBX is our flagship product, but we have other brands as well.

SM: Are you launching other products as Grasshopper products with another brand or as other companies with other brands?

ST: We are launching them as other brands. When Chargify launched we gave it a brand. We knew there was so much opportunity for entrepreneurs that we knew we did not want to become a Google Labs-type product. We wanted to start self-sustaining companies along with their own team for marketing, operations, and so forth with their own CEOs. They are grown at Grasshopper Labs.

SM: Who is the corporate entity? Are they separate corporate entities?

ST: We have one corporate entity, which is Grasshopper.

SM: So you essentially have product managers running your other brands?

ST: It all depends on how big their product goes. We gave Chargify its own corporate entity because we brought in a CEO for it to essentially co-found it and grow it with us. However, the majority of the products that we are going to come out with will not require full-time employees. In those cases we will have a product manager within our team for those.

SM: So Chargify is unique as a separate corporate entity, and you intend to have most of our products will be brands under the Grasshopper corporate entity?

ST: Exactly.

SM: In your product vision, you are focusing on items to help small businesses get off the ground?

ST: We want to focus on products that will get small companies established or help them grow. In our vision of empowering entrepreneurs if we find an opportunity that is not a service for entrepreneurs then we will not do it. If we can create a disruptive product for entrepreneurs which is better than anything else anyone else is doing then we will do it. Right now at Grasshopper Labs we have dozens of ideas for labs to start. It is not just a matter of finding out what products are the right ones for us to focus resources on.

SM: How do you see yourself vis-à-vis larger companies such as HP and Intuit that have the same strategy regarding their desire to serve small businesses?

ST: Our focus and understanding of entrepreneurs, and what we are doing for entrepreneurship, is something that cannot be matched to the entrepreneurship community. Our competitive advantage is really our understanding and connection of entrepreneurship. No way will Intuit or HP ever understand entrepreneurs like we do. They will try to get into the small business market and they will do a great job of it, but they will not get into the entrepreneurship market.

SM: I would contend that any entrepreneur who starts a business will use QuickBooks.

ST: Entrepreneurs use QuickBooks because they have no other choice. There are other better services out there such as LessAccounting or FreshBooks which are in our circle. Those are much better options for entrepreneurs. It is just a matter of time before Intuit realizes that their product is doing well because it has been the only service available for such a long time.

SM: Intuit does well because accountants and bookkeepers all know and use its product. They are all trained on QuickBooks, and they are not entrepreneurs. Even Microsoft could not penetrate that relationship.

ST: It all depends on the services they’re going to provide to entrepreneurs. Intuit has done a great job and has been very successful because its distribution has been directly into the accountants. However, for the same reason we would never start accounting software, we doubt that they will go into some of the product areas we intend to go into. For us to wonder if Intuit or HP would get into entrepreneur’s services is just speculation, and I would put our money on ourselves rather than anybody else.

SM: Intuit just bought PayCycle, which does small business payroll software for companies that have 1 to 20 employees. What they are doing is rolling up a bunch of software as a service companies and small startups. There are very solid companies out there, and Intuit has the currency to roll them up. My question to you is, what is your strategy to compete against Intuit if they really go heavily into that space? I’ve had conversations with their CEO to that effect.

DH: First, just look at the market perception of Intuit and what entrepreneurs think about their brands. For the most part entrepreneurs dislike QuickBooks, yet it is the only option they can use.

SM: I’m an entrepreneur and I have no problems with QuickBooks. I haven’t met any other entrepreneurs who do. QuickBooks has millions of users.

DH: We’ll just have to disagree on that point. The more important fact that you pointed out is that Intuit is not creating those products on its own. It is going out and buying companies. It bought Mint and other companies that it could not build on their own.

SM: It’s possible that you could be an acquisition target for Intuit.

DH: We don’t want to go in that direction. The Intuit plan shows that it is not able to create products or services and that it has to acquire them in very large multiples.

SM: So your game plan is to build a company that is independently large and over which you have control?

ST: That’s correct. Acquisition opportunities are hard to speculate about, and we would never rule that out because it depends on who it is and when it comes along. We are going to continue on our path, and if the right investor comes along and wants to acquire our company we will look at that situation. If Intuit came right now, we would say no.

SM: Who are your direct competitors? Do you view RingCentral as a direct competitor?

ST: RingCentral and VirtualPBX are both direct competitors.

SM: Is RingCentral larger than you are?

ST: Not necessarily, but I can’t say for sure. The only thing I really know about them is that they have raised a couple rounds of venture capital. I never look at competitors and worry about what they’re doing. I don’t believe they are much bigger than we are.

SM: You are right, they have raised substantial amounts of money. They are also quite a bit larger than you are. Why don’t you worry that much about your competitors?

ST: We do have people who keep an eye on them. I absolutely disagree with anybody who tells me that I need to be worrying about my competitors, because I think that creates tunnel vision and roadblocks for yourself. Ultimately it hurts innovation. The greatest entrepreneurs, those who start companies and grow them very successfully, are those who come from an industry other than the industry in which they did their startup. They cannot really see anything in their industry other than the lack of good competitors in the space.

SM: In your case there are some very good competitors out there.

ST: That’s the beauty of entrepreneurship; we can always see it from different perspectives.

SM: I see your key differentiator in your labs. You are growing through innovation and not acquisition.

ST: What we are doing for entrepreneurs is very exciting for us. We’re coming out with new things this year that excite us, and the best part of what we are doing are the new products and services coming out of the labs. Chargify is a testament to how we can make the labs work. Entrepreneurs keep us motivated to continue to do what we are doing.

SM: I really like to see companies who have bootstrapped. I like the fact that you built this yourselves. How many people do you have employed now?

ST: We have just under 50 employees, and the entire Grasshopper family encompasses about 100 people. On the lab side we have a lot of people, and we have a customer support center that is outsourced that has 20 people dedicated to handling Grasshopper accounts. We look at it as just under 100 real Grasshopper employees.

SM: Where did you outsource your customer service?

ST: It is outsourced with a partner of ours who is a part of our executive team. We run the customer service center separately, which allows us to focus our virtual PBX service and allows them to handle the customer experience.

SM: In effect, you have 50 full-time people plus another group of approximately 50 support are generating more than $10 million in revenue?

ST: Exactly.

SM: Excellent. Those are great numbers. Congratulations on building your company, and I look forward to seeing your progress.