Interview Published May 23, 2000|
Rick Carroll and Stephen Hughes, How2TV
My interview today is with Rick Carroll and Stephen Hughes, founders of Los Angeles-based How2TV. Rick is CEO and Stephen is CFO. I spoke a bit with Stephen, who filled me in on some of the background on the company, and later had a chance to talk a bit with Rick on some of his experience.
BK: What is How2TV.com, and what market are you addressing?
SH: How2TV is being built to help manufacturers and retailers solve the multi-billion dollar problem of inadequate post-purchase customer support - think of all those times when you've gone to the store, purchased an item, and discovered that "some assembly required" is the understatement of the year!
We provide a web-based audio/video instructional package that guides a consumer through the daunting assembly or installation process for a recently purchased product. As an Application Service Provider, we deliver this service directly onto the website of our client (the manufacturer or retailer) and enable them to elevate the support they provide to the consumer. Because of the economics of the Internet, we are able to give our customer this capability for a fraction (think: ~10%)of the cost of traditional support programs like telephone call centers.
By providing the consumer with the right information at the right time, we also have the ability to reduce the rate of product returns. Product returns are a major source of drag on the financials of most consumer product manufacturers. In the consumer electronics space (one of two initial target verticals), 14% of all products sold are returned (source: Consumer Electronics Association data), with the number one reason being the inability of the consumer to make it work. These returns amount to $10 Billion per year in the US. When a product is returned, the manufacturer has two choices: (1) re-market the product at great cost as "opened", or (2) crush it. Our research has shown that many of the sub-$100 products are simply sent to landfill because of the prohibitive cost of re-marketing.
In addition to our instructional capabilities, we also enable the manufacturer to establish a connection with their ultimate customer. In the past (because the only interface with the customer was through the retailer), manufacturers were forced to fly blind, never knowing the identity of their ultimate customer. When a consumer signs on to receive our instructional service, we receive name and email data and provide this to the manufacturer to establish (for the first time) a one-to-one connection. We are also providing the manufacturer with an opportunity to sell extended warranty revenues, by bundling this service into our interface.
BK: How did you decide to start the company, and what was the process which took you from the initial idea to where you are now?
SH: I had been running Royal Bank of Canada's Technology banking team in the US for the past six years. As such, I had been working with some incredibly energized clients who jumped out of bed every morning , sprinted to work, and set about to change the world. I decided that I needed to try my hand at the "operating" side of the fence and set about to look for opportunities. Through a mutual friend, I was introduced to Rick, who had been developing the idea for our company. Rick and Cindy Frei (our second Founder and our SVP of Corporate Development) presented the opportunity to me - three weeks later (April 1999), I signed on for the Founder and CFO responsibilities.
We immediately set about developing the business plan for the company and began to raise the seed capital to get our business up and running. We raised $1.3 million seed capital at a several increasing valuations throughout 1999 and used the money to build the technical infrastructure of our service, hire the marketing and sales teams, and produce a suite of demos to facilitate the sales effort.
We approached venture capital investors in November of last year and signed our lead investor (Chase Capital Partners) in December. We closed the first tranche of our Series A in February and completed the round (we had structured the transaction with a 60 day rolling close feature) earlier this week. All told, we raised $8 million in our Series A round. Of this total, $5 million was from Chase and $3 million was from a number of high profile indivdual investors.
BK: Rick--how did you get the idea for How2TV, and how long was it between your original idea and when you decided to make it a company?
RC: This came about as part of a creative process in which I crossed local/regional industry expertise (entertainment/media), trends in content production and delivery (streaming/rich media and ITV) with obvious consumer points of pain (behind which always lies the money). I came up with a master plan in which 5 operating groups became possible. It took but a matter of a week or two from that point to select How2TV as the natural starter of the original 5.
BK: What is your background, and how did you get into this business?
RC: I'll start with a funny. At one point sitting with one of the heavies in the 'Tech Coast Angels, Orange County - after a dynamite pitch by our founders team, that was very well received I responded to this question by saying "I'm a bit of the original rolling stone" which had Stephen Hughes nearly apoplectic! Truth in advertising is important because I've really done so many things, the bulk of which revolved around entrepreneurial ventures, start-ups, fix ups etc. Here's a sample - first company hot out of the USMC 'Wind Energy Unlimited' which became 'California Energy Group' after I raised $5M of mostly Argentine private investment to construct large scale wind turbine generators (Age 22). Since then I've been a General Manager of a small telecommunications company, VP Marketing for an International Trade Consulting Firm, a broker for one of the top 3 houses specializing in Small to Mid sized institutional, 8 years of producing large (mostly out door) entertainment and sports events with a partner and more recently VP Marketing/Sales for a small LA based ISP with a specialty in developing vertical solutions for the automotive industry. My great gift I believe is the ability to create interesting ideas and then forge them into a vision that others can come to understand and embrace. At this point in my life I have come to understand those things I do quite well (where I add value) but I also know those areas which are better left up to others of my team.
BK: What's the next step for your company?
RC: Maybe I'm in a bit of a minority here but I think one builds a company with its' customers, its' shareholders and employees in mind first, with a solid focus on creating real and substantial (measurable) value, not a quick pop after the S1 ink dries. I believe staying focused on the basics of good business like earnings and employee attraction and retention, product development, concise and creative brand building means the funding will always show up. Top of the list is to continue to build a great team (land a terrific CEO we all admire) and continue to land substantial Fortune 1000 accounts.
BK: What has been the most difficult part of starting up How2TV so far?
RC: Like many other start-ups, the funding process is the toughest part of getting going. This has required great effort, time on the part of every department. We're over the toughest part the first Series A round. Not to say that the rest is downhill, but I do not anticipate anything like the time and effort that went into the first series.
BK: Finally, what advice would you give to other entrepreneurs on starting their own companies?
RC: WOW.... I could write a book on this one. Some of this could be quite personally expressed as the founding CEO and some of my comments could be more general, concerning the team. Let's stay general. First and foremost, pick the founding team wisely! No other element will have more to do with your success in the first year or so. I have been extremely fortunate to have attracted a wonderful team starting in my living room and still all here today. Lots of hurdles will need to be overcome, so care in determining character traits like: persistence, resilience, work ethic and integrity must be emphasized. Achieving balance on the team is important. Not everyone can be a genius or a "whiz kid". There is room for head down doers.... Who don't give up. Second..... do your homework and think ahead five moves with contingency plans at the ready. Anyone serious about starting a business has to have a dogged determination forged upon great research and the conviction thus based. Conviction is only possible when the model is tight and the back-up is in hand. Laziness here will spell doom at the gate. A clear value proposition at every level of product delivery must be clearly defined and backed up by factual data. As I have indicated earlier, the days of napkin deals are I think over. Now, VC's will focus on plans that show real promise for earnings and profitability. Cookie cutter "me toos" are passť'. I get plans sent to me all the time for comment, people asking for some guidance. Some have the grist of terrific promise with a bit of polish here and there, but I am amazed at the half-baked stuff that still flies around. Anyone on the receiving end can tell in the first page if the exec summary is well organized and meaty. By the way.... With the number of deals still moving through the pipeline, who you know is important. Business plans coming over the transom at most firms end up in inglorious places, most never being read, so it is important to network, in the elevator, on the phone...everywhere. Presuming you have a great idea and a fine plan, the only thing really necessary is getting to the right audience; this takes real effort and determination. None of this is new I know. Elements of success seldom are. Nuances of strategy may change, markets may change and technology will always march on but grit, backbone, the can-do, I won't give up attitude is what makes for the winners over time. Going the extra mile as the plan is fleshed out, doing the hard research, asking the hard questions, creating the multiple financial models and then carefully selecting makes for the ride of a lifetime reserved for only the deserving. God speed!
BK: Thanks to both of you for the great insights!
Copyright (c) 2001 by Benjamin F. Kuo. All rights reserved.
May not be reprinted without permission.