I wrote this piece during a post-acquisition “rest-and-vest” period where I had a lot more time and felt like I could tell the truth (most founders avoided this very topic for fear of retribution – or lockout – by the big EHR vendors).
In 2009, I started a digital health company. One of the first people I hired was a sales rep who I’ll nickname “Bruiser.”
Our company’s big idea was to get doctors to message with patients by rewarding them not with money (those attempts by earlier startups had mostly failed) but with verified reviews instead.
Whenever we encountered problems Bruiser would declare, “I’m an immigrant from the toughest part of the world — this is nothing.” His confidence gave the rest of us confidence.
But the more successful our SaaS company became, the more difficult he became. At each growth milestone, he wanted to renegotiate his position with clauses like “anti-dilution guarantees.”
Meanwhile, the business was gaining traction and soon hit $1 million in annual recurring revenues. Before we could celebrate, Bruiser called. He wanted to renegotiate.
I let him go on the spot. “Let’s chat on Monday and figure out your exit package,” I said.
He agreed saying, “I love you but you’re too difficult to work with.”
I remember thinking, “Well that was cordial! I thought he was going to break something.”
On Monday I got a letter from his attorney demanding $750,000.
We didn’t have the money, or an attorney. The closest thing I had was a friend who had just started his own law practice. It was so new I had designed their logo a few months back.
On Monday I gathered my team with my friend the attorney and explained the situation. “I’m worried,” I admitted. “But he’s muscling us and I don’t want to settle. What do you guys think?”
“No. I can’t settle,” said my Operations Manager without hesitation. The others nodded. We were officially embroiled in my first lawsuit.
We responded letting Bruiser’s lawyer know we were fighting.
And then something unexpected happened. Bruiser’s attorney dropped out of the case. But why?
Using the power of positive thinking, I told my team that Bruiser was likely getting a cheaper lawyer.
A week later we got a letter from Cotchett Pitr McCarthy. They were Bruiser’s new attorneys. Known as “Cotchett,” they had successfully sued companies like Eastman Kodak and Citigroup. Their founder Joe Cotchett was described by a popular legal website as “The Bully of Bullies” with the subtitle “Why does Joe win so often?”
So much for positive thinking.
Cotchett introduced us to their firm by sending in a wheelbarrow of documents four feet tall containing every email, contract or anything thing else that could produced from a commercial laser printer.
“Total intimidation tactic, so Cotchett,” marveled my attorney. I was less thrilled.
We had an open floor plan and we stared speechless with looks on our faces like the primates in the movie 2001, where the obelisk suddenly appears and confuses the monkeys.
I broke the silence by getting up slowly from my fake Herman Miller chair and announcing, “We’re going to win. I promise you.”
I’m not sure anyone believed me, but I packed my laptop and went home early. I didn’t want anyone to see me looking stressed. Later that night I brought half of that pile home (my attorney graciously took the other half).
It was time to ping my network. My friend Jay was the former in-house counsel for Twitter. A Harvard educated attorney Jay knew technology and the law, he was brilliant.
“John,” he said, “if you were in a knife fight, with Cotchett Bruiser just brought a gun. You sure you don’t want to settle?”
But I had told my team too much about standing our ground to settle now. If I settled I would lose all credibility.
We continued on as if I was running two operations – my company and this lawsuit. Evenings after work I sifted through documents until I passed out drinking a glass or two of scotch. Maybe three.
Also, I picked up smoking.
My life kept going on like this until my phone rang at 3:00am one morning.
“Get up!” My attorney was shouting like he just discovered who killed JFK. “What year did you incorporate?”
“2009, I think,” I was still groggy. “What time is it again?”
“And when did you buy the .com domain name for your company?” he asked. “Look at the sales contract that Bruiser signed with a customer. What year did you buy the .com name?!”
To me, it looked like a regular sales contract.
“You incorporated in 2009 but bought the domain name in 2010,” said my attorney. “So why does this sales contract from 2009 say the agreement is with the .com name you bought in 2010?”
“Because he forged these sales contracts,” I said, flabbergasted.
There were other sales contracts with the same error. But why would he do this?
“Because Bruiser plans to show that he was instrumental in the success of the company, so he faked these documents,” my attorney said.
I immediately called my Operations Manager. “Get up!” I shouted.
About a week later we demanded an early deposition of Bruiser from Cotchett. One of the lead attorneys at Cotchett asked if we really wanted to do this, saying it was unusual to call such an early deposition. But we called their hand and at the deposition, we presented Bruiser and his attorney with the evidence.
Another week passed and we got a call from Cotchett. They wanted to settle.
“It’s a fraction of the original demand amount,” my attorney marveled.
I balked.
We kept pushing back and running up their expenses until Cotchett caved. I don’t know a law firm’s internal cost structure, but Cotchett ended up getting so little from us (I’ve spent more on domestic vacations) I bet they lost six figures betting on Bruiser.
All successful businesses that are growing will have unethical parasites and contingency attorneys trying to suck off you. Just remember –
If you build a profitable business early on, you won’t have any VC financing event pressures to be forced to settle, and with recurring revenues you’ll be able to fund the legal battle all the way to trial. Your initial growth rate may be slower focusing on profitability, but you’ll retain more optionality later.
Parasitic personalities think they’re geniuses (they’re not) and either forget, or willingly try to hide unethical behavior from their contingency attorneys (and their own memories), omissions that will ultimately lose their case at trial. Oftentimes well before.
After winning, your team will bond and become stronger. It’s a funny thing about us human beings and foxholes.
Ironically, I now occasionally refer new clients to CPM. I liked how formidably they did business and how professionally they conducted themselves, so when a friend needs a type of legal firm like CPM, that’s who I suggest. Which (to me, anyway) means that not only did I win that lawsuit, I made that lawsuit my b*tch.
95% of the World’s developers don’t have the skills or experience to work for a Series A (or later) company.
Most ideas (even the good ones) don’t make for sustainable businesses.
Like “Dave’s” (not his real name) who sat across from me at a cafe in Kyiv, nearly falling out of his chair with excitement. He was a very fit, middle-aged London banker who had an idea for an iOS app and had hired an outsourcing firm in Ukraine.
$150,000 into his yet-to-be-launched app, he kept saying “I’m certain.”
It doesn’t occur to many first-time product founders that success in this game is all about the team you have. Your ideas are for sh*t.
But here’s the dirty truth outsourcers don’t want the public to know:
Outsourcing is a grueling business that relies on tier B talent managing tier C talent, with 10% to 25% margins, and that doesn’t account for the constant churn as developers leave you for better-paying positions.
Almost every outsourcer I know is working on their own product, hoping one day to leave outsourcing. That’s why 99%+ of apps developed by outsourcers fail.
If outsourcers could build successful products, they wouldn’t be outsourcers.
Dave became upset when, instead of joining in his excitement, I told him “Dave, you’re a great guy but if I could short startups, you’d be first.”
I really got to work on my tact.
However, a few months later Dave sent me a Facebook message with the all too common, “John, I should’ve listened to you… hey can you meet up for coffee?”
What About Marketplaces That Attract Top Talent?
Marketplaces that allow anyone (like Dave) to become a customer do not attract top coders.
Why would top developers be looking to work for someone’s side-hustle idea when elite coders can make 3.5x more (with benefits) working for a VC-funded startup or an Amazon (which hires coders globally and lets most devs work from home)?
Nothing about the claims of online marketplaces (“Hire ex-Googlers to work!”) make logical sense.
Consistent Mini-Pivots Means Killing The Puppy. Often.
Too often founders or PMs hold onto an idea because they’re squeezing it slowly to death like a newly adopted puppy instead of quickly finding a new puppy that actually has product market fit.
Call it luck or psychotic determination, but both of my startups have had profitable exits and nearly all of my clients who I’ve been a growth advisor to have had: an IPO, a Series A investment, or been acquired.
Who knew this website I designed for my first startup in 2004 would become a $Billion company?
When I think of why “luck” has been on my side, my belief is that it has to do with one core habit I’ve developed with my colleagues over two decades of building, advising and investing in new software projects that I call the CMP model:
Every successful project is a product of Consistent Mini-Pivots based on a relentless collection of data.
Too often I hear younger founders say something like, “We failed because of _______ but we learned a lot!”
I don’t believe failure is anything to celebrate. And most of the time I’ve seen that it could’ve been avoided with CMP.
At my first startup Five9 we were the David versus multiple Goliaths, so we had to come up with a 10x better product with a 3x better marketing strategy using the CMP model with our engineers and marketer.
Based on CMP grew from $0 to $10 Million in annual recurring revenues within 24 months. $20 Million in just 35 months. Quite frankly it felt easy, it was fun (while our competitors used words like “grinding,” to describe their lives).
It just happens that CMP is the exact opposite of how outsourcers operate profitably – they have to give you the cheapest developers for the highest price taking the most amount of shortcuts.
At DoctorBase (our second startup) we beat our direct competitor nearly 3:1 in sales even though they had raised 30x more than us. 30. X.
A very, very famous angel investor passed on investing in DoctorBase because he said “HealthXX has raised so much money we feel they will run away with the market.”
I printed his email and taped it to my laptop.
I removed it when we got acquired. The CEO of HealthXX and much of the founding management team quit.
They were in love with their idea, heck they had raised so much money from so many well-known VCs that they may have even been in love with themselves.
We were in love with the act of searching for product market fit.
In 2009 my buddy Mischa and I wanted to make a ding in the healthcare universe. We were both pretty fed up with the status quo for consumer health, and felt like we could build a communications app that made it much easier for doctors and their patients to communicate digitally.
We learned some really harsh lessons about the American healthcare system. Namely, some of the powers-at-be who want to maintain the status quo can make Russian mobsters look like pussies.
If you work for Russian organized crime business, please know that I have the highest respect for your craft – no insult intended.
DoctorBase was also a lesson in competing with better-funded competitors as a bootstrapped startup by sticking to your passion for building the best damn product with superior marketing tactics – and ignoring the VC hype machine.
Our closest competitor HealthXXXX had raised 30x more money than we did, but at the time of our acquisition we were a totally employee-controlled company and was doing over triple their revenues with nominal churn.
VCs had passed on us because, well HealthXXXX had raised much more money and (according to their formulas of prediction) that meant they were going to win.
A very famous VC told us that “HealthXXXX is going to run away with the market.” I printed out his email and taped it to my desk so I could stare at it every Saturday when I showed up to the office.
We eventually raised $1 Million via Angelist only after we were profitable (as a cash cushion) and at a healthy valuation that kept us founders in total control of the company.
When other digital health founders ask me how we did it, the short answer is that we approached our startup differently than our competitors – we treated software development and product marketing as the same discipline.
Many folks assume my first startup Five9 was more important to me because it became a much larger company, but in truth my time at DoctorBase were the best five years of my life (even better than college!). I think it was because we all felt like we were on a mission, and the team was small enough to feel like family.
At the time we sold the company we had about 18,000 doctors communicating electronically with nearly 9 million American patients. We were small, but we were a badass gang. I mean, not as bad as Russian mobsters, but still.
