Business Owner Story #29 – Palo Alto Software

Business Owner Story #29 – Palo Alto Software

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Palo Alto Software sells business planning software that helps companies organize and understand the key financial and other elements of running their businesses. These elements include strategy, tactics, milestones and managing cash flow – all the things a company needs to have a handle on to get from assumptions to selling products, and keep everything on track once it’s up and running. For a long time, the company’s main product was standalone box software. More recently, it introduced a cloud-based version of its product. Incidentally, the company isn’t in Palo Alto any more, it’s in Eugene, Oregon. It moved there in 1992, when it was still mainly a consulting business and had only one full-time employee – founder Tim Berry. We recently talked with Tim about how Palo Alto Software turned into the company it is now.

The Start

How did you get started with your business?
Back in the 1980s I was consulting in business planning with startups and several well-known companies, mostly high-tech, like Apple Computer, which was my favorite client. In order to help people understand their financials, since projecting cash flow isn’t always intuitive, I developed templates and spreadsheets so they could go through the details and see for themselves. Several clients who worked with my main financial projections template said "That’s cool, it should be a product." So I turned expensive consulting— one of my projects was for $60,000— to tools and templates I could sell for less than $100. Basically I found ways to productize the financials of a business, which made it possible to go from a service to a tool. Writing business plans is knowledge and people-intensive. With tools, you sell boxes not hours.

But it didn’t really take off until 1995 after we published Business Plan Pro. The templates barely broke even, I supported the business by consulting. But I was stubborn about sticking with the product business. Finally by 1995, computers were more powerful and software tools were better so it was possible to create a standalone application in Windows that could help people not just with their numbers but with their entire business plan.

We distributed Business Plan Pro nationally as packaged software that was sold in major retail chains. There were several years where sales doubled. From 1995 to 2000 we were in fairly high growth. By 2000 we had 35 employees, while in 1995 it was just me and my wife and three or four others. We have had another double-digit growth spurt in the last two years since the introduction of Live Plan [a cloud or SaaS version of the software based on subscriptions rather than purchase]. Its advantage is you don’t have to download or install software, which means you’re no longer dependent on Windows, it also works on Mac and Linux for that matter.

How did you fund your business in the beginning? Have you taken on any additional funding since?
We bootstrapped early on to fund the business. In tough periods we ended up with 2nd and 3rd mortgages. I had co-founded a software company that went public, so we had a decent house in Palo Alto. We turned that into equity for operating expenses like development, marketing, sales and administration. We didn’t have outside money in that stage. The second stage was interesting. I raised Silicon Valley venture capital from investors in 1999 and bought them back in 2002. So we went from 100 percent owned to having a minority stake owned by venture capitalists then back to 100 percent.

When we raised that money from the VCs it was the heyday of the dot-com boom. When we bought them out it was after the bubble crashed. So valuations went way down during those two years. They were holding minority interest in a company whose market value to outsiders was a lot less than in 1999. They jumped in intending to sell the company, they were going to sell it for $80 million. Then the market crashed in 2000, so they turned around and had a minority share in a company that nobody was going to buy for $80 million. It was not attractive. So we had collected money, saved up, and we bought it back.

From my point of view the company was always a labor of love. I believed in it, it was cash flow positive. I didn’t have an opportunity to sell it for a huge price, I would have had to sell it for what it was worth. But if we didn’t sell it [the VCs] would never get their money back. I didn’t want to put them in that kind of situation. The general partner at the VC firm had been a classmate at Stanford Business School. He later said investing in our company was the best deal they did in 1999.

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Running The Business

How did you learn to run your business?
People debate the value of an MBA these days. In my specific case, after my time as a journalist and business writer, getting my Stanford MBA from 1979 to 1981 was life-changing. For me, the curriculum gave me a basic understanding of major phases of business. Having that understanding is the part that’s learnable. Then you learn by doing.

I had a familiarity with the basic functions, then there were things I had to learn, like making decisions and growing familiar with risk. Understanding how to lead and manage, and knowing when to quit. I made lots of mistakes.

Who was your first customer?
Hector Saldana was the general manager for Latin America at Apple Computer. He was my first consulting client, and was also instrumental in the early launch of the templates product, the client who was quickest to say "This is a product." When you move from consulting to products your whole mentality changes. From 2.5 million to 3 million people have bought our products. The individual customer is no longer what you’re thinking about. Apple Computer was 80 percent of my business in the 1980s. Now that we’ve moved into the product business we’re selling to 5,000 companies a month.

What was the biggest mistake you made in your first year?
I hired a true expert in his field and then failed to listen to him, and overruled him. His name was Jim Johnson and he was the best of the best in direct mail marketing back in the late 1980s, before the Internet, when that still mattered. But instead of letting him do his thing — which was getting results for all his other clients — I vetoed his layouts and wording and at one point, the worst point, I even told him that the $99.95 price point he was using was stupid and insulting to customers who knew that that was $100. So we sent the direct mail out saying $100 instead of $99.95 and it bombed horribly. Later, when I started listening, he proved he was right on every detail, including the $99.95 price.

What’s the smartest thing you did in your first year?
Paying someone to do good graphics and packaging. That was proven by the sales. You can’t really sell a physical product without good packaging. I was betting on product reviews to sell it, but it turns out you can’t sell it unless it really looks good. Even in 2014 to have your website look good enough is really important. Anybody can do HTML but it has to look really good.

What’s the most rewarding thing about running your own business?
I built a business that gave me the satisfaction of working on something that was good for customers, making a decent living doing something that interested me, and working with a team of people who believe in the same things. My basic driver was avoiding boredom, but I needed to make money.

What’s the most difficult/challenging thing about running your own business?
Firing someone who cares and is really trying.

What’s the most surprising thing about running your own business?
A not-so-pleasant surprise but one that was so important was when sales tripled in 1995, that killed the cash flow. The sales increase meant an increase in working capital needs. We were paying someone to build something three months in advance that we would get paid for later. This happened when we were going from $200,000 to $300,000 in [annual] sales to several millions of dollars. So we had to do the mortgage thing again. Our business has changed significantly with the Internet and downloadable software, so now we depend less on boxes.

What business owner or entrepreneur do you admire most? Who is your role model?
The man I admire most is Bill Gates, for several reasons. First, he’s set the standard for caring about the world, in a scale appropriate to his power, starting with technology for schools (and especially the more needy schools) early on, and expanding that to the rest of the world, things like building infrastructure in Africa. I also like the way he built a company around doing what he loved to do, without forgetting that doing what customers want is more important. And I admire how he managed to build Microsoft over three decades while constantly avoiding the business-killing mistakes that were all around him.

What I’ve Learned

What advice do you have for others who are starting their own businesses?
I would advise that cash flow is critical. Today a lot of people will get the investment, have the money and then use it fast to grow the company. But we were bootstrapping.

What do you wish you had known before you started your business?
I wish I had known better how to enjoy the journey and trust that it would be OK. It did turn out OK, but I wish had known it.

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About the Author — Lydia serves as Content Manager for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs.

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