Ralph Wagner - "Flunk Calculus, Ace Life"
ANGEL INVEST BOSTON PODCAST - EPisode 2
Ralph Wagner recalls his journey of self-discovery that led from failure in engineering to incandescent success in marketing and sales. The man who could not do calculus or write code excelled at identifying and exploiting opportunities created by computer technology. In this interview one sees that Ralph’s captivating personality is firmly ballasted by good sense and common decency. It is made evident how his interest in people was vital to the success of his many ventures.
Transcript of: Ralph Wagner "Flunk Calculus, Ace Life"
Guest: Entrepreneur & Corporate Executive Ralph Wagner
SAL DAHER: Welcome to Angel Invest Boston, conversations with Boston's most interesting angels and founders. I am Sal Daher and my goal for this podcast is to learn more about building successful new companies. The best way I can think of doing this is by talking to people who have done it. In our second episode, we'll be speaking with founder and angel, Ralph Wagner. Ralph, I'm so grateful you agreed to be interviewed. Welcome.
RALPH WAGNER: Thank you, Sal. It was nice to find the place.
SAL DAHER: Well, I'm glad you're here. (Laughter)
RALPH WAGNER: So am I.
SAL DAHER: Awesome. Ralph Wagner founded Microsource, a pioneering computer reseller in New England. He was co-founder of KeyFile Corporation, one of the first software products for the management of documents. Ralph has been involved in a number of high-tech start-ups both as principal and investor. Ralph has been an Angel investor since 1987. He's a founder of the angel group, Walnut Ventures, and founders greatly value Ralph's incisive but always genial advice.
Ralph, I wanted to talk to you about your time at Columbia because I always like to get into how people got started in their career. You were at Columbia starting Liberal Arts and then you went and got an MBA ...
RALPH WAGNER: Actually, it was pre-engineering.
SAL DAHER: Pre-engineering?
Flunk Calculus, Ace Life
RALPH WAGNER: Yeah. The idea at that time was Columbia would give you over five years, two degrees, a BA, Liberal Arts and a BS in Engineering. That was my goal. Chemistry was my chosen area of specialization. I had gone to Brooklyn Tech and took three years of chemistry at Brooklyn Tech in high school. Sal, (pregnant pause) calculus killed me. It killed me. I couldn't do it. Anyway, so ...
SAL DAHER: Let me guess, the limit theorem?
RALPH WAGNER: Whatever it was, I couldn't do it. As I think back over it, I wasn't psychologically prepared for Calculus.
SAL DAHER: Preparation is all. It really is. My dad was a mathematician and his response to this would have been, it's just because Math builds on top of other things. It adds up. It's all very rational and so on. You just weren't prepared and if you've had a preparation, you would have gone and done the engineering side of it.
IBM Used to Pay You 25% of Your Salary While You Were in Military Service
RALPH WAGNER: I didn't and at that time, this is 1951, 1952, there was a Korean War going on and the draft was very much with us. In my sophomore year, I joined the Air Force ROTC. That kept me out of the draft for sure. I was out of sequence. You have to take four years of what they called Air Science in order to get a commission. When I graduated with the liberal arts degree in '55, I applied to the business school at Columbia and went for my Master's in Marketing and Industrial Engineering.
Roughly at the same time, parallel to that, I got a job with IBM. IBM said, "You know, Ralph, we will pay for your tuition anything over a B." It was a piece of cake. Instead of two years at graduate school, I spent two and a half because I went to work at IBM in the morning and took classes late in the afternoon and into the evening. That was a very successful two and a half years. I really enjoyed that and I found myself, it was mostly marketing that I took, some management. I had gotten married and then March of '58, after I'd graduated in January, the Air Force called me and I was sent to South Western Oklahoma to a newly reopened Air Force base which was designed with a new runway to handle B-52's which we're just then coming onscreen.
It was a really wild three years, I tell you something. What an experience living in an Air Force base. We made good friends. We had our first child and went through various crisis in the Middle East and nobody got hurt which was good.
SAL DAHER: Yeah, got it.
RALPH WAGNER: B-52's would take off on a mission. I was responsible for the IBM department on the base which did mundane things like payroll, inventory control.
SAL DAHER: You were with IBM while you're getting your MBA. Then, when the Air Force called you, you got an assignment that was IBM related?
RALPH WAGNER: Yes and here's the good news. As a second lieutenant, IBM at that time would pay up to one quarter of your salary every month while you were in the service.
SAL DAHER: Awesome.
RALPH WAGNER: I was the wealthiest second lieutenant on the base. It was wonderful.
SAL DAHER: You never had anything to spend it on.
RALPH WAGNER: Right. It was a dry state.
SAL DAHER: Was it Utah?
RALPH WAGNER: Oklahoma.
SAL DAHER: I'm sorry, Oklahoma.
RALPH WAGNER: Southwestern Oklahoma, you could barely find it on the map. What they used to say is nobody would be AWOL for at least three days because you could see them from the control tower. It was flat, flat. It was cotton and wheat. Those were the two crops and drinking.
SAL DAHER: And drinking.
RALPH WAGNER: Then, the IBM transferred me to Hartford, Connecticut when I got out of the service. We lived in West Hartford for three years and then I was asked by IBM to move to Boston to head up the service bureau which was the service arm of IBM which would perform computer services for customers, payroll, accounts receivable, inventory control, but I was specializing in brokerage systems. We automated the Boston Stock Exchange. In 1965, it was green eyeshades and quill pens.
SAL DAHER: I can imagine, yeah.
Moll Associates Gets Founded
RALPH WAGNER: That went on and I was there for three and a half years when a neighbor in Wellesley who was also an IBMer left the company and became a recruiter. He said, "Ralph, I want you to meet a guy." "Okay," and I met this fellow about my age by the name of Bob Moll. Bob was a head of a software development group at State Street Bank. He had in mind to build a business around developing software for large money center banks.
We met at the offices of TA Associates, a very early venture group. We were funded modestly at the time, I don't remember, maybe a quarter of a million dollars might seem like a reasonable thing. We started off doing work for First National Bank of Boston, First National Bank of Chicago, BayBanks and in '70, '71 or so, that business simply ended. There was no more contract work. We were scrambling to stay in business.
SAL DAHER: Under what name were you doing that?
RALPH WAGNER: It was called Moll Associates.
SAL DAHER: Moll Associates, okay. It's interesting that you got venture funding for essentially a consulting business.
Car Parts Catalog on Computers Was a Bust
RALPH WAGNER: They didn't know what they were doing either at the time, nor did we really. We did manage, and I don't remember how it happened but talk about serendipitous events, an auto parts distributor approached us. How that happened, maybe it was through one of your investors, I don't recall. They wanted to see if it were possible to automate a parts catalogue. If you walk into a parts store and you have a 1959 Mercury so and so, the muffler would be such and such. It was a very complicated database issue.
Some people introduced me to a company called Meditech in Cambridge and here's where Michael and I crossed.
SAL DAHER: Meditech, was that founded by Ed Roberts?
RALPH WAGNER: Ed Roberts was on the board.
SAL DAHER: Was on the board, but I think he was involved with founding it.
RALPH WAGNER: Yes, very much so. Neil Pappalardo ...
SAL DAHER: Yes. Yes, that name….
RALPH WAGNER: Neil and I got to be good friends. Ed, I got to know at that time. We were on a street in Cambridge, was it Bent street. Across the street was Michael's company. I didn't know him at the time.
SAL DAHER: It was his Cadmus, Interleaf?
RALPH WAGNER: Interleaf.
SAL DAHER: Okay.
RALPH WAGNER: Yeah, Interleaf, purely coincident. The story with Neil and Ed Roberts is they had a database system that ran on a Data General Eclipse and we tried to use their software language known as MUMPS which stood for Massachusetts General Hospital Universal Multi-Programming System. Our investors poured some more money into it. We could never get it to be a product, never fit. One of our wonderful investor said to me one day, "Ralph, if tomorrow you saw that this was over, how would you feel?" I said, "It would feel great." He said, "We'll then just shut it down."
It was a time to reinvent the business. We were still going ...
SAL DAHER: Was this still Moll Associates?
RALPH WAGNER: Yes. It was still Moll Associates.
SAL DAHER: Right.
Ralph Cottons on to a Good Business
RALPH WAGNER: I had an idea. It was just about the time that savings banks and small regional banks were looking for some more independence from their correspondents (correspondent banks), so we decided that we would try to manage their data processing functions. We built with the help of what was then Coolidge Bankand Capital Bank a data center in Watertown which serviced a bunch of banks in and around the area. We did the same thing on Long Island. In Huntington, we had a big data center. Burroughs Corporation at the time helped us with equipment and we had another one on Cape Cod, lovely place for a data center.
SAL DAHER: Yeah, I can imagine.
RALPH WAGNER: It was now roughly 1974, we wanted to sell this thing and serendipitously, a guy from System Development Corporation, big government focused software development company that did the software for DEW Line for early detection radar wanted to get into the commercial business and not be so dependent on ...
SAL DAHER: The defense contract.
RALPH WAGNER: The government.
SAL DAHER: Yeah.
RALPH WAGNER: They said, "Oh, look at this interesting business on Long Island and Boston, on Cape Cod." The long and short of this, they made us an offer we couldn't refuse. It was sufficient money to pay back all our creditors, to give our investors their money back and to take some coffee money out for ourselves.
That ended that chapter, but the idea of servicing banks stayed with me and I said, "You know, Bob, suppose we could develop a system using this Data General hardware, that we could aim at the same banks but it would have no people and no paper." I called it the people and paperless system. He said, "Let's see if we could sell that," and we did. Arthur D. Little had a division called Arthur D. Little Systems and this was right up their alley. They said, "If you guys come on board, we will help you develop it."
At the time, the banking system at Arthur D. Little was run by George Rockwell, the former CEO of State Street Bank and he thought it was a great idea. We were signed on for a three-year contract to help facilitate the development, Bob on the development side, me on the marketing side. We got several banks lined up, the largest being Charlestown Savings Bank which no longer exists.
The company attempted with great courage and a lot of money to develop it, never could make it happen. One day, they said, "We're cutting it off." I said, "Wait a minute. I've got a contract about a year and a half in." "Don't worry about it, Will. We'll continue to pay you on a quarterly basis. Just shut this thing down."
SAL DAHER: Who was shutting it down?
RALPH WAGNER: Arthur D. Little, because it was affecting the employee savings account and other employees were jealous of the fact that we were sucking money out of that account and not putting anything back. Anyway, the parent company said they would continue to fund me, pay me on a quarterly basis but that wasn't the key. The key was during the period of development, we were using a time-sharing service called Avco timeshare. We paid anywhere from three to five grand a month to do forecasts for these banks and projections as to how their business would look X number of years into the process. It was all teletype machines but it worked.
Living in Wellesley, a neighboring business not far from my house opened up called ComputerLand, run by another guy you should talk with, Steve Watson. Have you ever met Steve Watson?
SAL DAHER: I have not.
Ralph Realizes the Disruptive Potential of Desktop Computers
RALPH WAGNER: Steve was the first franchisee here in the Boston area for ComputerLand and he was right on Route 9, maybe a mile from my house. One afternoon, I went in to see what it was all about and they had a bunch of Apple computers around. I naively asked them, I said, "What do you do with these stuff?" He said, "Let me show you something." He sat down and he showed me VisiCalc.
SAL DAHER: Oh, gees. Yeah.
RALPH WAGNER: Oh, Jesus right. Yeah.
SAL DAHER: Because it's blowing up your business for doing projections and so forth.
RALPH WAGNER: Yes, exactly, for savings banks. I said, "Wow, this is exactly what we do in the office. This is exactly what we do." I said, "So, how much is one of these things?" He said, "You know, two disk drives and printer and so on, it's about three grand." I went to my boss, Howard, and I said, "Howard, we need to buy an Apple computer." He said, "Ralph, you don't understand. Arthur D. Little doesn't buy anything. See if you can rent it."
I went back to Steve, I said, "I'd like to rent it for like 90 days and see how it works." He says, "Ralph, you can't. I can lease it to you but I can't rent it to you." A light went on in my head. I said, "Ah, oh, I see." I bought the system and my first customer was Arthur D. Little. That's how Rent-a-byte was born. Rent-a-byte went about buying computers from Steve and getting them rented to companies all over United States for anywhere from 30 to 60 to 90 days and very often, they bought them.
Apple thought it was a great idea and they said, "Ralph, if you do it, we'll worry about the receivable." Just then, it was the spring of the year, a new form of summer camp appeared called computer camp. This one outfit wanted like 150 Apple computers for 90 days. I talked to Apple. At that time, Apple granted me the ability to buy directly from them. We put them out for rent, got them back in September in very good shape just when the Boston school department and the Archdiocese put out a bid for Apple computers. We bid them and of course, we had the lowest price. [crosstalk 00:19:05] We got them all out.
SAL DAHER: Ralph, that's amazing.
Disruption Creates an Opportunity for Ralph
RALPH WAGNER: That started Microsource Financial. That was the beginning. We actually opened it off [crosstalk 00:19:15]
SAL DAHER: You went from Rent-a-byte to MicroSource.
RALPH WAGNER: Right, exactly. We opened a facility in Watertown which had the office space, show room and a big warehouse in the back right across from the Arsenal Mall but we never really thought of ourselves as a retailer. I built the sales organization that focused on large corporations.
We were just getting to understand VisiCalc. We had a training center, teach people how to use it and then we were offered the ability to become an IBM dealer in 1982. We were invited to IBM's facility in, was it Boca? No, Fort Lauderdale. That was the PC headquarters. We were interviewed. I had to bring one of my directors down. They checked us out and they said, "Okay, you guys are good. Give us an order."
With Apple, we used to order as we needed them. Sold an Apple, you ordered an Apple. Sold two Apples, you ordered two Apples. IBM said, "What's your opening order?" We said, "How about six?" They said, "You got to be kidding."
SAL DAHER: I need a magnifying lens to see your order.
RALPH WAGNER: The first order, they forced us to take an order of 16. No sooner than they arrived, that another 16 arrived. Somehow, they doubled the order. "Holy smoke, what are we going to do with 32 IBM PCs?" I said to our guys, "Get out and sell them." Well, they went pretty quick. We had one customer who had an interesting client and it was the government of Iraq. He said, "I will take everything that you have." We got rid of that group of 32 computers very quickly. I think we sold a dozen to the government of Iraq.
SAL DAHER: A little comment, Iraq was a US ally at the time.
RALPH WAGNER: Exactly, not the bad guys they would turn out to be.
SAL DAHER: Right.
RALPH WAGNER: After that, we were off to the races. Our business just grew so quickly. Never really raised any money, we just leaned on Bank of New England and they were very happy to provide funds. Did you know Alan Woodward?
SAL DAHER: No.
RALPH WAGNER: Alan was the head early-stage company officer and he provided us with virtually unlimited liquidity. The company grew from a handful of people. At one point, I had nearly 75 people working for us. We had office at Cambridge, Providence, Boston, Framingham, and of course headquarters in Watertown which we ultimately moved to Waltham.
SAL DAHER: You were getting financing from Bank of New England basically to finance your inventory?
Ralph Sells Out Microsource Financial to Mathbox
RALPH WAGNER: Yeah. The most amount of money I put into the business to start it was $25,000. We were doing $50, $60 million a year by 1985, decent margins. Company in Washington DC called Mathbox, I got to know them ... I was on the Hewlett-Packard dealer council and we met there in California. He said, "You know, I like to think about buying your company. We are a public company and you'd get stock." They did their due diligence, we did ours. We negotiated a deal.
SAL DAHER: At this point in our conversation, Ralph Wagner mentioned what he recalled was the price paid by Mathbox for his company MicroSource. After the interview was completed, Ralph asked me to correct the record and to state that the price paid was $7.1 million in the spring of 1985. Adjusting that sum for inflation would correspond to about $16 million in 2016 dollars.
Ralph Has Huge Loss – Does a Trump – Role of Luck in Business
RALPH WAGNER: I got half of the money in stock and half in cash which was the most efficient way tax-wise at that time. Unfortunately, I was never able to sell any of the stock before the company went out of business. The good news was I had a large tax loss carried forward. Like Donald Trump, I didn't pay any taxes either for a lot of years. Anyway, so that was the end of my retailing experience. This is now 1987.
How Ralph Got Into IBM & Found His Calling in Life
SAL DAHER: Ralph, I just want to stop a little bit here. You just sold your company. I want to go back ... One question is on my mind right now, how did you connect with IBM when you were at Columbia?
RALPH WAGNER: I had no idea of what to do when I got out of school. A friend of mine from elementary school's mother was in the recruiting business. She sent me for an interview at IBM headquarters, 590 Madison Avenue and they gave me a screening test which was allowed at the time. I don't think it's allowed anymore.
SAL DAHER: No.
RALPH WAGNER: They put me in a group called customer assistance and I was sent off to programming school. Well, that didn't last very long. I was not meant to be a programmer. In 1957, IBM entered into a consent decree with the federal government to divest itself of certain businesses including the Service Bureau Corporation. A new entity was formed and I was then transferred to that entity. I went to their sales school which was a great experience. Six weeks in Poughkeepsie in the middle of the winter was amazing.
SAL DAHER: Nothing else to do but to learn to sell.
RALPH WAGNER: Yeah. Maybe it wasn't six weeks, maybe more like three weeks but it seemed like six. It was an extraordinary experience, roleplaying different situations. Anyway, I loved it. That's how I got involved with IBM on the sales side and I've been selling ever since.
SAL DAHER: You're a smart kid from Brooklyn Tech. You got to Columbia. You found out that you weren't prepared for calculus, so you decided not to go into engineering but because your mom had a friend who was a recruiter or your friend of yours had a mom who was a recruiter, you connected with IBM. They sent you to programming school but that wasn't quite the fit for you but then they sent you to the sales program and then that you discovered your calling.
RALPH WAGNER: Yeah, exactly. Only in America.
SAL DAHER: Only in America. It's a great lesson in a sense that you bumped against the things that wasn't quite the right fit and when you found the right fit, it would just like took off.
RALPH WAGNER: Yeah, and it's been that way ever since.
Ralph Invests in His First Startup – KeyFile Corporation
SAL DAHER: Awesome. Let's go back then. You had just sold your company to a public listed company that had gone belly up and then how did you invest in your first startup? How did that come about?
RALPH WAGNER: What happened then is I got to know Steve Gaal. Do you know Steve?
SAL DAHER: No, I don't know Steve.
RALPH WAGNER: Steve was a partner at TA Associates, the same outfit that funded me way back when. Steve was a local Boston guy. He was head of software development at Data General. Ed Belove worked for him.
SAL DAHER: Okay.
RALPH WAGNER: As did several other people. Tony Helies, he was also one of the pioneers at Walnut. Anyway, Steve and I got to be good friends and he said, "You know, I saw a company who came for funding called KeyFile and let me introduce you to Jim. Jim and I met at Steve's office. We liked each other. He explained to me what he was doing. He and his partner Bill Chakowsky, wanted to build a workflow system and a document management system on a PC and they had in mind how to do it. They had Jim, very smart guy, understood what they needed to build and this was before Windows. Ultimately, it was migrated to Windows.
I came onboard as one-third partner, Bill, myself and Jim. I threw some money at it. I think I put an initial $25,000 and then I agreed to help find funding. I ultimately collected three little venture funds. We got it working. This was a long effort. We had a visit from Nathan Myhrvold from Microsoft to see what we were doing. He was very impressed. We then adopted the software to Windows in the early days.
SAL DAHER: Which crashed all the time.
Serendipitous Sale of KeyFile – Role of Luck in Business
RALPH WAGNER: Yeah, it worked pretty well. Anyway, KeyFile took in quite a bit of money over several years, so we brought in another CEO whose job was to stabilize the sales effort as well as control the costs and to find a buyer. The investors were nervous and concerned. We were not generating sufficient revenue to ever be a profitable entity.
Out of the blue, a bank in Utah heard about us. We had pretty good PR, heard about us and said, "Can you do the following things?" "Yes." They came out to see it. They said, "We'd like to make you an offer." Wow, out of the clear blue. What a godsend.
We all got out. The best investment that I made was the last loan to the company which had a 3x multiple. We got out, it was pretty good success. That was KeyFile.
SAL DAHER: That was your first Angel investment?
RALPH WAGNER: First Angel and active investment. I was there, I commuted from Wellesley to Nashua every day for three years. That was quite an effort as I look back at it, not the best use of my time but it was still a learning experience. That was KeyFile.
Ralph Founds Walnut Venture Associates
SAL DAHER: Tell me about the Walnut, founding Walnut.
RALPH WAGNER: Walnut, Steve Gaal and myself, Steve was at…
SAL DAHER: That's Walnut Venture Associates, an Angel ...
RALPH WAGNER: Yeah. I'll tell you how that came about. After KeyFile, I took a temporary office space on Walnut Street. You'd share a conference room and Steve and I gathered a bunch of guys together and said, "What do we call it?" "We'll call it Walnut," because it met on Walnut Street every second Tuesday of every month.
There were six of us initially including Ed Belove who you know well. Jim Massarelli was also at Data General. In other words, they were all Data General alumni except for myself. We came together with Julian Lange. You know Julian?
SAL DAHER: Yes, I do.
RALPH WAGNER: You met him?
SAL DAHER: Yes, I met him.
RALPH WAGNER: Do you know that he was the president of VisiCalc, Software Arts?
SAL DAHER: Yes, I think I once knew that fact.
RALPH WAGNER: He said, "You know, it would be very good for us if you guys would meet at Babson," and we could have ...
SAL DAHER: Julian Lange, professor for entrepreneurship at Babson College.
RALPH WAGNER: Yeah, right. "If you guys could come and meet in our facility, we'll show you what we have, and allow some of our graduate students occasionally to sit on your discussions." We said, "That would be great." This is circa '99. We've been there ever since and Julian has been more than generous as has been the entire Babson community there at that facility that we use.
Are Angel Investors Who are Jerks?
SAL DAHER: Ralph, I was thinking about you saying Julian is a delightful person. All these people were talking about really wonderful people. I have yet to meet an Angel Investor who's a jerk. I haven't run across one.
RALPH WAGNER: They exist, I can tell.
SAL DAHER: Yeah, but in my experience, I haven't seen it. There’s quite a large spectrum of humanity, I'm sure there is some somewhere.
An Early Angel Investment That Did Not Work Out
RALPH WAGNER: Oh, yeah, [laughter] There are some. Anyway, we decided that we would meet every month on the second Tuesday and then we used to have morning meetings as well. We started to look for our first investment opportunity and it was, in best of my recollection, the first one I was heavily involved in, they did back off a software specifically for software companies. Accounts receivable, Bob O'Connor was a very charismatic CEO. There were several rounds of funding for it. It lurched along. There was nothing wrong with it but it never reached escape velocity even though it had taken in quite a bit of money, some, I think, over $6 million in total.
SAL DAHER: Wow.
RALPH WAGNER: I was on the board. We had a very good active board. Bob O'Connor was a charismatic CEO. Handled his meetings well, hired well but there wasn't much of they're there. Ultimately, we had to sell it at bargain basement pricing.
SAL DAHER: Basically, the business wasn't there? It was a business ...
RALPH WAGNER: It was there but it wasn't there enough.
SAL DAHER: Enough, right.
Ralph Gets Involved With the Company That Would Become Netegrity – One of Top NASDAQ Stocks
RALPH WAGNER: There wasn't enough there. About the same time, I got a call from Steve Watson, the very same Steve Watson that originally sold me my Apple computers. He lived in Wellesley as well. He said, "You know I'm a chairman of this company. It was a public company. The stock was selling from anywhere from 80 cents to a buck." He was chairman. Its business was to sell software by catalogue. Quarterly, they would send out a half a million catalogues and wait for the orders to come in. This is when ...
SAL DAHER: Is this the company that Michael was involved with at some point?
RALPH WAGNER: Soon, soon, not quite yet.
SAL DAHER: Not quite yet, okay.
RALPH WAGNER: Not quite yet.
SAL DAHER: Okay. By Michael I mean Michael Mark.
RALPH WAGNER: Yes, right. It sent out the catalogues and then the orders came in. This is when Lotus was selling for $495 a copy. It was ...
SAL DAHER: Lotus being a spreadsheet program prior to ...
RALPH WAGNER: It was the successor to VisiCalc.
SAL DAHER: To VisiCalc.
RALPH WAGNER: Very successful. It was built specifically for the IBM PC.
SAL DAHER: Before Microsoft Excel?
RALPH WAGNER: Well before Excel.
SAL DAHER: Boston company, big success, but then it was overtaken by Microsoft Excel.
RALPH WAGNER: Yes, exactly. Steve said, "Would you join my board?" I said, "You know, Steve, I don't know if I could." He said, "Ralph, I really could use some help." He was really drowning. It was tough business. He had taken it over from someone else and he raised a little bit of money to keep it afloat but the stock was nowhere. I joined the board and it was decided by the board that we should find a buyer for the business. We hired a banker. The long and short of it is he found us the only possible buyer which was another company that did the same thing.
SAL DAHER: The other catalogue.
RALPH WAGNER: The other catalogue company and we took out the order of $13 million of that deal, not a very big number for a public company.
SAL DAHER: But for a company that was on the rocks ...
RALPH WAGNER: Then a new face came on the scene. A fellow by the name of Eyal Shavit. Do you know Eyal?
SAL DAHER: No, I don't.
RALPH WAGNER: Eyal is an Israeli guy, has an office in Lexington, lives in Concord, smart as anything. He and I met and he said, "I think I could help find something for you guys to invest in. I have a lot of Israeli contacts and there are some interesting stuff going on." What he found for us was a software company that was in the security space and they were just at the beginning of getting underway. They had it all developed. We spent a good part of that $13 million to acquire this asset and start to redevelop it for US corporations and we renamed the company Software Developers Corporation. This is where Michael Mark came on the scene. He became a board member.
SAL DAHER: Because he had been involved previously in a company founded by a couple of guys from Brown named Underwear that had a piece of software called BRIEF. Apparently it has been sold to Software Developer Corporation and so Michael got involved in that business and discovered that the software catalogue business was really lousy because there was always somebody who could underprice you [crosstalk 00:40:30]
RALPH WAGNER: Other people come on board now. Eyal helped that process he got and I got both some shares for doing the work. Steve was no longer CEO. He's chairman of the board and we brought ...
SAL DAHER: You would have advised and got compensated with equity?
RALPH WAGNER: Yeah. He got put as a chair and we recruited a guy by the name of Barry Bycoff who at that time was living in Hingham but commuting to Albany running a company called Mapinfo, early navigation company. Barry was delighted to be sucked out of Albany to become CEO of what became Netegrity. That was a pretty heady ride.
SAL DAHER: Michael told a story of Netegrity from the point of view that they had developed a corporation or the subsequent company had ventured money in there backing them up. When they managed to sell that business, the catalogue business, the venture capitalist wanted to get the money back and they had a little bit of a fight and they managed to retain the money. The company was down basically to the CEO so they formed a committee with the CEO and some other people, I think, including Michael and they went out to acquire companies or acquire software in the permissioning space and so forth. That's what became Netegrity. Traded on the Nasdaq as an NETE which was one of the most profitable companies in the Nasdaq for a period of several years so very hot company.
RALPH WAGNER: The company had a great record and then it was decided by the board, Michael was ...
SAL DAHER: I think it was taken private. Eventually, it was taken private like $400 million and something.
RALPH WAGNER: No.
SAL DAHER: It was not?
RALPH WAGNER: No, no. What happened was we decided as a board that the company need to be acquired. They were two competing companies, Oracle and CA.
SAL DAHER: Okay, so CA.
The Role of Luck in Business – Netegrity Gets Sold at a Price Way Below Expectation
RALPH WAGNER: We felt we could get a very nice price for the company. It was selling for about $30 or $40 a share at that time. Lo and behold, we missed a quarter ...
SAL DAHER: Oh, no.
RALPH WAGNER: Just at that time. CA said, "Okay, we'll take you out at, I think, it was $12 a share."
SAL DAHER: Oh, geez, you could've sold it for $36. You missed a quarter, you're selling for $12.
RALPH WAGNER: Okay. Anyway, we all made a substantial amount of money. It was a very nice event, very nice exit. Barry was a terrific CEO and we see each other from time to time.
SAL DAHER: Barry who?
RALPH WAGNER: You know him?
SAL DAHER: No, I don't know but his name is, Barry?
RALPH WAGNER: Barry Bycoff.
SAL DAHER: I'm sorry. Yeah, Barry Bycoff which you've mentioned before.
RALPH WAGNER: Very interesting history.
SAL DAHER: He was the CEO but one man left standing in the company after they sold the catalogue business. He's the guy that put together ...
RALPH WAGNER: No, no, no. He took Watson's place. I think you should invite Steve Watson as well.
SAL DAHER: I will. You could introduce me and I'll interview him [crosstalk 00:44:04]
RALPH WAGNER: We are very good friends. He's made tons of money over the years. He's a very, very shrewd guy. Barry too, and we see each other from time to time. He went into the venture business for a while, didn't like that and I think he's just at leisure now. Barry is another interesting man to interview.
SAL DAHER: I'll look forward to that.
Kurzweil Education Systems
RALPH WAGNER: Here we are. After that exit, I started investing with the Walnut and we had a first ... Well, the first one, one of the things that Michael and I did together along with several others is there was a company called Kurzweil Education Systems which was acquired during the heady days of the early 90's by a Dutch company, the name escapes me. That was ...
SAL DAHER: Is that Ray Kurzweil?
RALPH WAGNER: Yeah, Ray Kurzweil. Kurzweil Education Systems was doing pretty well selling reading systems for the visually impaired, not blind but visually impaired. It had dealers all around the country. It was doing quite well and the move was with Michael's analysis as I recall is to buy it out of bankruptcy because the Dutch company went belly up and the assets were being managed by the court. The court made a suggested offer. We negotiated that and we bought Kurzweil Education Systems. It was doing several million a year. It was doing fine.
Another company came along in the field and said, "We'll buy it." It was a nice exit in little more than a year of 3x or 4x. That's when Michael and I, we know each other from Netegrity board. We really worked together very nicely.
SAL DAHER: That's a little bit of private equity…
RALPH WAGNER: Yes.
SAL DAHER: …activity there rather than angel investing.
RALPH WAGNER: Yeah, exactly.
SAL DAHER: Right.
Other Early Investments by Walnut
RALPH WAGNER: Exactly. Then, we did several other new investments not all of which was successful either. There was one called Collego which was in Bedford. I don't even remember exactly what it did but it had a very good technical team and a fellow by the name of Stefan Mehlhorn became the CEO to try to find a buyer for it and he did. As a result, we got our money back and then some and we put him into the leadership of a company called Permessa.
SAL DAHER: Which you're still associated today?
RALPH WAGNER: No, it's gone.
SAL DAHER: It's gone.
RALPH WAGNER: It was acquired by a German entity, Stefan being German and myself being also German, we thought was a terrific opportunity, they were really stiffs. They didn't pay all the money that they owed us but we got most of it. It brings us up to date to things like ViralGains and Polis.
SAL DAHER: In a moment, we're going to ask Ralph about a really interesting company, ViralGains but before that, I want to ask our listeners to do us a favor, to help get the word out about our podcast. Best thing you can do, if you like our podcast, go to iTunes and take a moment to review us and we make a pledge to you that if you have an interesting review on iTunes, we'll feature it in future episodes. Now, we go back to Ralph and a very interesting story about ViralGains.
Tell me your side of the story of ViralGains, your version of the elephant because I have my own ViralGains ...
RALPH WAGNER: I see. I met Jay Singh, a charming guy, super smart, had a very clear vision of a company though he had trouble elucidating exactly what it did but we saw enough of it. Michael and I, and another friend of mine, Dan Singer, we looked very carefully what they were doing. We liked the fellow who was head of technology.
SAL DAHER: Are you thinking of Doron? Doron (Gan) is a technology guy.
RALPH WAGNER: Yes, he is the technology guy.
SAL DAHER: Dan Levin and Jay Singh I think were roommates at UMass Amherst.
RALPH WAGNER: Yes, exactly. That's right.
SAL DAHER: They were selling their services to brands out of their college dorm room. They were getting ...
RALPH WAGNER: Which became ViralGains.
SAL DAHER: Right, they're getting $20,000 checks for helping figure out how to get videos promoter on the web.
RALPH WAGNER: In any event, Jay, he was a storm. You couldn't get rid of him. He just stayed out on me until my friend, Dan Singer and I, okay, we said, "You got us, Jay. We're coming in." We did. Tod (Loofbourrow)was already on board.
SAL DAHER: On the board, yes. Really, it's incredible that the person who can get the ball rolling in a company is not necessarily the person that's going to take it to the next level.
RALPH WAGNER: Well, I've had several iterations of that situation.
SAL DAHER: Yeah, that's a big argument because there are times when if you bring a professional CEO in, it may be too soon. I think it speaks to the fact that skills are very domain-dependent and Jay Singh's skillset just wasn't appropriate at that moment.
RALPH WAGNER: He was a marketer. He was a good vision guy.
SAL DAHER: Excellent vision guy, yeah.
RALPH WAGNER: Tod stepped up and he's done a terrific job as far as I can see.
SAL DAHER: Outstanding, yeah. I just got the last report and things are looking very good to the extent that we can talk about private company like that. Yeah, that is an exciting company that is basically helping brands that have videos to find the right place to put them on the web and to really understand the analytics.
RALPH WAGNER: Yeah, the idea is to attract a certain kind of audience that has the ability to attract others to their orbit.
SAL DAHER: Right, and therefore, you get the virality, yes. One point three times, one point five times. Michael talked about a situation where they had taken out a founder because they thought that the founder just wasn't ready and they brought in someone who's a professional CEO.
RALPH WAGNER: Which they did with the company that Michael's on the board of, a public database company, Progress. Barry Bycoff was brought in as executive chair.
Large-company Executives Not Always a Good Fit for Startups
SAL DAHER: Now, he was mentioning in another situation where it was not so successful and the reason why is that the product wasn't as sufficiently developed as they thought it was and the company needed to do a pivot to change its course, to refashion its business plan and an experienced executive from a large company just isn't up to doing that. Their skillset is all refined around making small changes to an existing plan instead of coming up with a completely new plan. That's the other side of the coin there, so to speak.
Bill Sahlman & Angel Investing 101
RALPH WAGNER: There is another individual who was an early member of Walnut, no longer, but still active as a professor at the Harvard Business School, it's Bill Sahlman. Do you know Bill?
SAL DAHER: No, I don't know Bill.
RALPH WAGNER: He wrote a piece called Angel Investing 101 and his first chart is top 10 ways to lose money. A, pay a high price for common stock, second is be passive. Third is ignore future dilution. Then invest with the crowds. Try really hard things. Don't diversify. Don't do due diligence.
SAL DAHER: Agreed, yes.
RALPH WAGNER: Back ideas not people. Back products not companies. Back greedy people and it goes on. It's a very, very ... This is a talk he gave quite some time ago.
SAL DAHER: It's very wise, yeah.
RALPH WAGNER: Direct personal experience and he goes through the whole litany of them.
SAL DAHER: Jeez, maybe I can get him on.
RALPH WAGNER: Yeah, Bill is a good guy. I think, is he emeritus? No, he's still teaching actively. He was an early Walnut guy, no longer involved, a direct personal experience. This is a whole thing here about the business. I've kept it from 1989.
Polis & Kendall Tucker
SAL DAHER: Ralph, tell me about Polis a little bit.
RALPH WAGNER: That's an interesting story. I got to Polis ...
SAL DAHER: Yeah, how did you connect with Polis?
RALPH WAGNER: Through the Columbia Alumni Association. Kendal is a graduate of Columbia.
SAL DAHER: Kendall the founder?
RALPH WAGNER: Yeah.
SAL DAHER: Kendall?
RALPH WAGNER: Kendal l Tucker.
SAL DAHER: Kendall Tucker.
RALPH WAGNER: She contacted me. I didn't know what a Kendal Tucker was. I didn't know it was man, woman and child. I said, "Okay, let's meet at the Blank Center," at Babson one day and I walked into the lobby. I don't see the guy I was looking for. Instead I see a six-foot tall young lady by the name of Kendal Tucker.
SAL DAHER: Amazing, yeah.
RALPH WAGNER: She is a piece of work. She is really ...
SAL DAHER: Very impressive. I've seen her present, very self-assured, very capable, excellent execution.
RALPH WAGNER: Amazing, amazing self-confidence. I said I'd help guide her through some fundraising activities and got her introduced to a number of very useful people in the political arena, one of whom is David Solomont. His brother was the former ambassador to Spain.
SAL DAHER: The reason for her interests in this political space is that Polis is a software company.
RALPH WAGNER: A software product to help volunteers do an efficient walk-around to their selected neighborhoods.
SAL DAHER: Get out to vote effort.
RALPH WAGNER: Get out to vote and more importantly collect key data that would then be analyzed through nation builder or one of the other big data centers. She spent a fair amount of time in Washington D.C. It did not go very well. She pivoted sharply to an industry that none of us really knew anything about. That's the door-to-door selling business.
SAL DAHER: The oldest and toughest selling. You've been in sales all this time, you know how hard that is.
RALPH WAGNER: It is a $30 billion plus a year opportunity and some of the biggest players in that field are solar companies. Solar companies, let alone the Mary Kay's and those kind of guys. It's a very big business. She has currently a pilot going with one of the solar companies. We're hopeful that that would be well. She is encouraged. She's not discouraged. She's doing it a month at a time. She's not quite at breakeven. She's about $10,000 to $15,000 below breakeven but she's getting close.
SAL DAHER: That's impressive.
RALPH WAGNER: Very impressive.
SAL DAHER: Because it's a competitive space. Of course, door-to-door sales is an extremely old business.
RALPH WAGNER: It's really old.
SAL DAHER: Very mature and yet, selling in the solar industry, the value of each transaction is pretty significant so you could spend a fair amount of money to target, to find the right customer for your product in that space. It warrants having the very elaborate and very well thought out ...
RALPH WAGNER: Evidently so and she's encouraged. She sends me a personal summary of her activities. I haven't seen her personally in a while but she was on the crew at Columbia, eight-woman crew [crosstalk 00:58:06] and she was the stroke.
SAL DAHER: There's a lot of women in leadership positions who row crew. It seems to be a farm team for women leaders.
RALPH WAGNER: I had a picture of myself and my wife and daughter in a shell which was a stage set on the banks of the Charles that was sponsored by Bank of New York and it looked as if we were in the water. Somebody took a picture of us there, all smiles and I sent it to her and she said, "I knew you were not in the water because you were smiling. If you were really in the water, you would not be smiling." She is one tough gal.
SAL DAHER: Yeah, that's impressive. Since we're talking about Kendal, what do you think of the qualities that really set her apart that makes her a successful entrepreneur versus other people that you see that haven't really succeeded?
RALPH WAGNER: Well, over the years, you get a gut feel for people. The way she got to me was unique. The way she presented herself was very impressive and the way we worked together in those early days of getting people behind her, she was just tireless. She's just on this all on her own.
SAL DAHER: Impressive, really impressive.
RALPH WAGNER: When we talked together, I always asked her to sit down.
SAL DAHER: So energetic.
RALPH WAGNER: No, she's six-foot tall.
SAL DAHER: Oh, that's right.
RALPH WAGNER: I'm only 5' 6". I'm looking like ...
SAL DAHER: You got a creak on your neck.
RALPH WAGNER: She's extremely responsive, works very hard. I remember ...
SAL DAHER: High energy, coachability and toughness plus grit.
RALPH WAGNER: She had to take her partner out because his technical job was not cutting it. She asked me to sit in as a board member witness when she fired him. She was resolute, had to go.
SAL DAHER: Those qualities are ... That's another argument we can get to another time.
RALPH WAGNER: That's what impressed me. She's charming.
SAL DAHER: A combination of affability with grit, with persistence and ...
RALPH WAGNER: Intellect.
SAL DAHER: Intellect and ability to execute to get things [crosstalk 01:01:00] organized and to pivot and the flexibility of mind to realize that that particular business is not working even if you give it a 120%. You have to find something else to do.
RALPH WAGNER: Exactly.
SAL DAHER: Tremendous, tremendous. Ralph Wagner, I am most grateful to you for sharing your wisdom and good humor with me and with our listeners. It's really tremendous and I may take you up on some of the suggestions that you made for people I should interview in the future because it's just [crosstalk 01:01:29]
RALPH WAGNER: I think you got to interview Steve Watson because he was core to my later success. You got to really should get to know Bill Sahlman because from a business school standpoint and a personal standpoint, he has wonderful tales and he's very dry humor.
SAL DAHER: I look forward to that. You're so generous to take the time, to come way out of your way.
RALPH WAGNER: … the other guy.
SAL DAHER: Excellent.
RALPH WAGNER: We'll hook you up.
SAL DAHER: Awesome. Thanks a lot, Ralph. Thanks a lot. Listeners, if you enjoyed this podcast, kindly review it on iTunes. I'm Sal Daher. This is Angel Invest Boston, conversations with Boston's most interesting angels and founders.
Glad you're able to join us. Our engineer is James [Willis 01:02:24]. Our team was composed by John McKusick . Our graphic design is by Maywood Art. This is Angel Invest Boston. I'm Sal Daher.