On Monday, April 8, 2013, OLC attended Founders@Fail event featuring Entrepreneur’s Roundtable Accelerator’s NYC Managing Director: Jon Axelrod. Axelrod has spent years building startups. He experienced the Internet bubble in the 90s, founding Music123 in 1999. Later, he founded MusicGremlin, which was acquired by SanDisk in 2008. Schuyler Brown was the moderator of the event and interviewed Axelrod.
“Music123 wasn’t a traditional startup. How did you kick it off?” Schuyler Brown asked. “In 1999, it was a very particular time,” Jon Axelrod said. “It was when everyone was rushing to start a startup. I was focused on ecommerce. A couple of us thought we understood it, thought we had what it took to build a company, so we went around to see what was online. We brought in a third partner and settled on musical instruments. It was a fragmented industry and we thought we could capture it,” he said.
“One thing about physical inventory is that it’s fairly expensive,” Brown said. “How did you build your structure?” he asked. “We assumed debt and paid very little cash,” Axelrod said. “The debt was bigger than the inventory, which was not surprising. There was always a dichotomy—third party vendors thought we were selling digital music and they had it all wrong,” he said.
Brown asked how Axelrod was able to manage cash flow. “When we started, we tried to take over a business that could grow ahead of cash flow. We had a bank line because we had a legacy of being profitable. We also had on-demand credit lines. That was how we funded inventory. We had to figure out how to generate sales,” Axelrod said.
“How did you begin to understand how to source customer acquisition?” Brown asked. “We found sponsorships on Yahoo and Guitar.com. We tried all this stuff. There was a handful, but we did have a smaller group that was trying everything. The bubble popped and we had to change our model,” Axelrod said.
“How did your investors react?” Brown asked. “Our investors pulled it. It’s a one-off event and in this case, it [the Internet bubble burst] was an Ice Age. We had to figure out how to get profitability. We had to cut our marketing division by 85 to 90 percent. We had to figure out where our ROI was coming from. One thing we figured out was keyword buying. We found it made us a lot of money. Another was affiliate networks. We cut banner ads and moved our marketing to affiliate and keywords,” Axelrod said.
Brown asked Axelrod if there was a systematic test for A/B testing. “Let’s walk through the immediate aftermath of paying hefty CPM [Cost per impression],” he said. “The system then wasn’t as good as it is now. We eventually built a system to automate ROI. Initially, we didn’t have a system,” Axelrod said.
“How did you keep your team together? How did you keep morale up?” Brown asked, regarding the Internet bubble burst and the layoffs that came after. “In terms of morale, it was tough. We tried to get people to believe in our idea, our cause. We tried to communicate with staff. Luckily, our staff loved music. They had a lot of passion for it,” Axelrod said.
“You not only stuck through, you exited. How did you create leverage?” Brown asked. “Before we get there, we started growing, but we found out that we kept bumping up against our bank credit. The bank that we were using called us to say that we were going to lose our credit line. We ended up being aggressive with them, threatening to go to the news, that a bank was trying to close a profitable company. They did back down in the end,” Axelrod said.
“Well, you were enough of an addict to get back into the music industry. How was the transition from your first to second startup?” Brown asked. “It was music, but it was totally different,” Axelrod said. “Music was content to be downloaded into your device. We thought digital content was going straight to device. The difficult problem was to get DRM [Digital Rights Management] to the mobile device. We built a software to try to mitigate that,” he said.
“How did you think about creating your own market?” Brown asked. “We thought about streaming content and optimizing WiFi. So we were betting on electronics companies to capitalize in WiFi,” Axelrod said. “So how did you build a flexible company?” Brown added. “With very flexible board members. We had an electronics company that had an agreement with us tell us that our hardware was going to be delayed another year. When the board found out, they fell over in surprise, but they let us go into hardware. Our goal was to look at the options. The risk of waiting around was just too big,” Axelrod said.
“Can you talk us through your sources, the vetting process and how you educated yourself about your candidates?” Brown asked. “Our engineer had a lot of experience in the technical side. Our partners helped out a lot,” Axelrod said. “How do you build alliances like that?” Brown added. “With Microsoft, we demoed in front of them and we basically created a black box—a secret—and they were intrigued. They also needed us to compete against Apple. We talked to corporate and they introduced us to companies in Asia,” Axelrod said.
Brown said that anyone who has manufactured in Asia is frightened of copycats. “Our engineers created a system where you’d have to authenticate the device using the Internet and connect it to our server to be authorized to use the device. The factory that manufactured the device tried to convince us to set up the software on their side, but we refused. Later, we got a log that someone tried to authorize 800 unauthorized devices from their factory, so we were glad that we didn’t give them our software,” Axelrod said.
“We got written up by tech blogs and the Times, but we quickly left the hardware side. We had an acquisition attempt, but it never went through. It was such a frustrating moment. The deal broke down the day before the signing. They just woke up and decided not to sign. We tried to keep our staff out of the process. We thought it would be a distraction. We tried to keep our employees go on with their projects,” Axelrod said. “When the deal didn’t go through, we took ourselves off the market. We did end up selling to SanDisk because they wanted to take our Gremlin technology and put it into their disk. We actually debated whether or not it was safe to let SanDisk but us. Nokia actually was thinking about bidding, but we’re lucky we sold to SanDisk,” he said.
“Looking forward, is there any advice you’d give to entrepreneurs to help understand building a company?” Brown asked. “I wish we could saw we could predict and see the market,” Axelrod said. “My advice is that markets are always going to change.”
“Now you’re sitting on the other side of the table as an investor. Why did you start Entrepreneur’s Roundtable Accelerator?” Brown asked. “We started in 2010 and though there was a need for New York venture capitalists. We’re conducive to New York’s strengths. It was about for New York, by New York, and starting a successful accelerator. A lot of things people asked for was to help accelerate their company,” Axelrod said.
“What mistakes did you make?” Brown asked. “The market trends change and people have different needs at different times. Each startup has its own needs and rhythms. The challenge is figuring out what they need. My advice for first time entrepreneurs is to focus on traction and understand how you’re going to invest money to get started,” Axelrod said.
Brown asked how Axelrod stays focused and how advises teams. “It’s hard,” Axelrod said. “There’s a ton of mentors around and you can get mentor whiplash pretty easily. Some aren’t helpful at all. Others are disengaged, but that’s probably because they don’t know your space. It’s also painful. You don’t know when you’re going to get funded. It’s a constant battle,” he said.