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Quarterly Column by John P. Dilts, Westlake Keiretsu Member
NETZERO FOUNDER RON BURR SAYS IT’S ALL IN THE PLANNING
While riding the wave of the Internet boom in the late 90’s, former NetZero CEO Ron Burr faced many uphill challenges. Most entrepreneurs would certainly have given up.
One of those challenges was fundraising. “We were rejected by investors 37 times,” says Burr. “I actually counted them.” But thorough planning by NetZero’s tight-knit team of four founders and a willingness to research the market opportunity laid a strong foundation for what would eventually become a multi-billion dollar public company.
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NetZero was founded in 1997 by Burr, Stacy Haitsuka, Harold Mackenzie (all Keiretsu members in the Westlake chapter) and Marwan Zebian. “Marwan called me one day while he was driving down the 101 freeway. He was listening to a high-priced Super Bowl ad and came up with the idea for the company,” says 39-year-old Burr. “Why not replicate the broadcast TV and radio model where you make money on advertisers but give away the access for free?” says Burr.
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NetZero is an ISP (Internet Service Provider) that offers free access to the Web as well as a discount pay service. Like other ISPs, it makes money on advertising but unlike its competitors, it charges fees for customer service. “That is an ISP’s biggest expense. Customer-call centers have to be available 24/7 and that costs a lot of money, much more than telecom costs which have become cheaper over the years,” says Burr. “We followed the playbook of the software industry and charged for customer service,” he explains.
But that meant that NetZero had to build a “world-class network” to reduce the number of customer problems. Needless to say, NetZero succeeded at this task. The four founders had come out of IBM where they met as contract engineers in the 80’s. They left IBM to form Impact Software in 1990, a successful IT consulting business serving Fortune 500 clients which they built over the next seven years. They eventually sold Impact Software in a multi-million dollar deal and were looking for their next project together.
Zebian’s idea while driving down the freeway started the wheels in motion for a new kind of ISP, the likes of which the Internet had never seen. Burr credits “extreme planning” for much of the company’s success. “We thought through every aspect of the business. We did a great deal of research with advertisers who were our real customers. We spent weeks meeting with them on Madison Avenue, asking them if this is a model they would support,” says Burr.
The NetZero model quickly hit gold. The new ISP signed up more than a million subscribers in just the first nine months. Today the company has reached 2.5 million users. “We had first-mover advantage,” explains Burr. The basic business model created by Burr and his team still survives today and provides NetZero with its key competitive advantage in the ISP marketplace.
Burr, a native of California and self-trained software engineer with no college degree, had no real experience in dealing with advertisers. “We didn’t know anyone in that business, but we had friends who did. Somebody always knows someone, and we started pulling on our network,” Burr explains. “Our founding team all had a strong entrepreneurial focus. We worked hard to get to know people in advertising.”
This teamwork among the four founders would serve the company well over the coming years. “There is no question that the history of our friendship together was critical to our success, especially as the company grew and did well. There was a lot of chaos along the way,” says Burr.
A key success factor of the team was that they were aware of the limitations of their collective skill sets. “We all knew we had to bring in the best people to get the job done,” recalls Burr. “Most entrepreneurs are afraid of exposing their weaknesses, but when you are sacrificing everything to achieve success, you can’t afford not to bring in experienced people. You can’t know everything,” he explains.
Burr and his colleagues grew the executive team as well as the employee base which swiftly reached 500 people. The number of employees remains fairly constant today because of the company’s ability to create scalable and reliable technology in a model that does not require too much manpower.
A key addition to the executive team was Director Bill Gross of IdeaLabs Capital Partners, NetZero’s first venture investor. “Bill and his partner Bill Elkus gravitated toward our model and really liked our team. They really took the time to figure out who we were,” says Burr.
Burr explains that Gross served as a great mentor to him and taught him the ropes when it came to attracting and negotiating with venture investors. IdeaLabs invested $3 million at a $6 million post-money valuation. That would eventually be followed by a $12 million investment from Draper Fisher Jurvetson and $65 million from Compaq, a Southern California venture investment record.
The company eventually went public in September, 1999, at a billion-dollar valuation and received a $160 million follow-on investment from Qualcomm. After seven acquisitions, NetZero finally acquired its largest competitor, Juno, and formed United Online as the new parent company of both brands. Today, NetZero’s market cap remains in excess of $1 billion. “We hit the wave at the right time,” says Burr.
However, prior to receiving venture funding, Burr and his team spent a year pounding the pavement “talking to anyone who would listen” in an effort to raise money. The company was self-financed at that point and most employees were working for stock. “We knew we had a huge idea and it was either going to go through the roof or would just burn out, “ says Burr. “We felt we had a good shot.”
Burr believes there were two reasons why they had difficulty with fundraising early on. “We were really unknown to the VCs,” recalls Burr. “We also had a radical model. We wanted to give away access to the Internet for free at a time when Earthlink was losing money and they charged for access.”
There were some key lessons Burr took away from his experience as an entrepreneur. “You have to have the courage to be honest with yourself about your product or idea. You have to take the time to know your market,” explains Burr. “You will sabotage yourself if you don’t look at reality. A lot of entrepreneurs don’t want to hear negative comments, but how can you fix a problem if you don’t know what the problem is?”
Burr and the other founders transitioned out of the company following the acquisition of Juno and are now just shareholders of NetZero. Following the IPO, Burr was left with approximately 5% ownership of the company. The four founders who started as equal owners of NetZero have since formed Westlake Venture Partners through which they invest in a variety of businesses from their sizable personal holdings.
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