Surviving and thriving at Rearden Commerce

Rearden Commerce is a survivor. Founded right before the dot-com bubble peaked in early 2000, it's gone from a tiny company based in a sketchy San Francisco neighborhood to a growing Silicon Valley online service that helps more than 2,000 customers manage business services such as shipping and travel.

In a recent e-mail interview, CNET News Executive Editor Jim Kerstetter asked Rearden CEO Patrick Grady what's next for his company. In the interview, Grady was surprisingly candid about whether Rearden is a good acquisition target, discussed how Rearden made it through the dot-com bust, and revealed himself to be a considerable fan of the author Ayn Rand.

The following is a condensed version of that interview:

Q: When I first met you, your company was in a little office on the edge of (San Francisco's) Tenderloin. What happened to that old office?
Grady: When we moved into that office in February 2000, it was the very top of the bubble and the vacancy rate was one-half of one percent in San Francisco. It was the absolute cheapest space I could find and it came with some interesting "amenities." We had the XXX "Theater" next door, drug dealers openly conducting business in front, the homeless regularly making their way into our cubes, and the methadone clinic behind us. As soon as the real estate market collapsed, we ran from that lease and the neighborhood and never looked back!

Your company is certainly a survivor. How'd you make it through the dot-com bust? Was there a point when you worried the company was going to go under?
Grady: Nuclear winter was much longer and far more difficult on us than most companies I believe. First, we had raised a seed round of only $2 million before the bubble burst as opposed to the war chests of others. Second, our initial target market was the "enterprise" and large corporations simply didn't begin buying in any consistent manner from start-ups again until 2004. Third, more than a simple Web application company, we were building out a general-purpose platform and an application in parallel. In summary, we had virtually no cash, no customers and enormous technical complexity to contend with from 2000 to 2004. We call it the character-building era.

We survived by recapitalizing the company and ridding ourselves of investors that didn't have the patience to be in it for the long haul, moving into an industrial warehouse for a fraction of the cost of our former space, buying our equipment from auctions of dead dot-coms (i.e. Pets.com, WebVan) and having employees exchange cash for stock. During one stretch, our executive team worked for a $1 annualized salary and I invested $3 million personally to provide confidence to other investors. We lived payroll to payroll through the nuclear winter.

When exactly did you change the name of the company from Gazoo (to Talaris and finally Rearden Commerce) and why?
Grady: I always intended to call the company Rearden Commerce once we had established proof of the platform and the business model. The name Rearden Commerce was inspired by the literary character, Hank Rearden, in the book Atlas Shrugged. Rearden worked for nearly 10 years to create a new kind of alloy that was far superior to steel. Rearden Metal was lighter, stronger, and cheaper than steel, revolutionizing not only the steel and railroad industries but served as a core enabler for the industrial economy.

Until we had proven ourselves, the idea was to remain under the radar, in stealth mode. Our initial name was "Gazoo," the little green alien on The Flintstones. We loved the name and had a lot of fun with it. For a variety of reasons, we had to quickly come up with a more "serious" name for prospective customers and investors and changed it to Talaris. It was a name that was always viewed as an interim name until we proved ourselves. In early 2005, with real customers and partners on the network, we unveiled ourselves as Rearden Commerce.

Are you now profitable? If not, when will you be?
Grady: We're not profitable yet but we're closing the cash deficit gap each month. Like any network-effect based model, we benefit from increasing returns to scale (users), breadth (content), and usage (transactions). With critical portions of the platform and application in place, it's now a function of driving these levers via partners such as American Express and Chase that have user populations measured in the tens of millions.

Revenues are in the tens of millions annually. We're not currently making projections regarding profitability. We are very focused on becoming cash-flow positive as soon as we can while not sacrificing strategic investments for the long term.

It's widely understood that comparable attempts at this vision, such as HP's e-Speak or Microsoft's Hailstorm and Passport initiatives, burned through well over $500 million without achieving any commercial success. We are very proud of what we've accomplished with $200 million of invested capital. We have thousands of companies and over 2 million subscribers today and are entering the consumer space in 2009 and we're just getting started.

What's the elevator pitch to customers?
Grady: Giving your employees the Rearden Personal Assistant (the company's main product) not only makes them more productive, it saves your company money each time a user schedules or purchases something by applying corporate policy at the point of purchase. For example, it can distinguish between a manager and a VP and ensures that the manager can only fly coach class versus business class or can only ship a package two-day ground versus next day, early morning. Documented savings are as a high as 20 percent.

Last year was a good year, as TechCrunch recently reported. But I imagine this year will be tough. What are you doing to deal with the bad economy? Do you expect to do any hiring this year?
Grady: We enjoyed great success in 2008 and we expect to achieve significant success in 2009 as well. That said, this will be the most difficult macro-economic environment since the great depression and it would be reckless to assume that we'll be immune.

We're watching every penny on the cost side and we're only funding the most important product initiatives. There is a benefit though to this environment which is the opportunity to acquire innovative (software-as-a-service) companies that don't have the balance sheet and distribution channels that we have. I suspect we'll be more acquisitive this year than last.

Also, on the (business-to-business) front, we save companies money with each transaction and, as a result, we've seen no deceleration in sales cycles to date.

I understand you're working on a consumer version. Can you tell me about that?
Grady: Leveraging the same underlying platform, we'll begin to roll out phases of the consumer version in connection with Chase consumer card services throughout 2009. The initial functionality will revolve around travel and entertainment and will expand from there in 2010. Chase is bringing a large user population and other key assets to bear to drive adoption of the application.

Do you think you'll take Rearden Commerce public anytime soon?
Grady: I would very much like to take the company public. In addition to providing liquidity to investors and employees alike, it would provide a legitimate branding opportunity for us vis-a-vis customers, partners and developers and it would give us a stock currency that would allow us to further expand our ecosystem via acquisitions. That said, I don't believe there will be a vibrant IPO market until the structural issues in the economy and capital markets sort themselves out.

I know executives never like to give an answer to this question, but do you think Rearden Commerce is a likely acquisition target?
Grady: Yes, Rearden Commerce is clearly an acquisition target.

For Google, we simply have the most interesting and monetizable data of any site I'm aware of today. We deeply understand a users' identity, location, and context and we're transactional. Thus, we not only understand a users' "intent" from a search query, we have their actual transactional data. Our product, the Rearden Personal Assistant, is trusted and every aspect is "opt in" so we don't breach the users trust. No site can offer ads that are identity-based, locations-sensitive and context-aware.

For Microsoft, outside of Xbox, we are a logical part of their entire portfolio of (business-to-business) and (business-to-consumer) offerings and they could leap-frog Google in the online world by acquiring us.

For eBay, we offer a general purpose online trading platform for services. As you know, services represent over 70 percent of GDP. It's inevitable that they arrive at this conclusion. Simply buying vertical-specific sites like StubHub, isn't a scalable or interesting path for them or their users.

There are clearly others that have also indicated an interest. For Rearden Commerce to deliver on its promise, we need true scale and certainly doing this on an organic basis is our intent. However, each of the current Web gorillas already has the requisite scale in place to make Rearden Commerce financially and strategically accretive immediately.