The Next Big Thing
For Peter Wexler (’93), you start a business because: “You have a great idea, you’re solving a real problem, and there’s an opportunity in the market.” Common sense, right? But too often, people don’t see beyond the good idea, don’t understand that need and opportunity are part of a package. Not surprisingly, they’re bound to fail.
Wexler is a cofounder of SpiderCloud Wireless, a mobile broadband technology provider that was fifth on the Wall Street Journal’s 2012 “The Next Big Thing” list, which ranked the top 50 American start-ups funded by venture capital. An engineer with a long and distinguished career—as vice president of engineering at Juniper Networks, he helped build his team from 17 to over 600—Wexler knew that based on his track record and that of his two partners, they would have no trouble raising money if their idea was sound. He was right: in five years SpiderCloud has raised $100 million. Investors were willing to make the leap not just because they believed in the product; they believed in the plan, too. Although there’s no blueprint that can guarantee the success of a start-up, the plan executed by Wexler and his two partners appears to be a model of its kind.
The idea for SpiderCloud began to percolate in the fall of 2006, when the three got together and started contemplating where the wireless network was heading. “We picked up early on that emerging technology was going to enable new classes of mobile devices like smartphones and tablets that would have substantial demand for bandwidth inside buildings.” They also recognized that traditional outdoor cell towers could not satisfy the indoor bandwidth needs. “At the same time, we were talking with the semiconductor vendors who were developing new processors that could provide the needed bandwidth inexpensively.”
Getting wireless devices to work effectively inside office buildings has become more and more problematic as the number of mobile devices has skyrocketed. Today, 55 percent of cell phone users have a smartphone—and most of them are trying to grab data from the Internet, whether downloading emails packed with attachments or watching online videos. “There’s a limited amount of spectrum, and it tends to be very expensive,” says Wexler of the pressure that burgeoning use places on the networks delivering all the data. “And buildings, especially the newer green ones, have features that can significantly limit the penetration of radio signals.”
SpiderCloud, based in San Jose, California, was created to resolve those issues with an innovative indoor system that reuses the outdoor spectrum; it’s like having a mini personal cell tower in your building. “Imagine a little device you can hold in your hand that’s a complete cellular base station,” says Wexler. “The devices are distributed throughout a building, they’re easy to install, they deploy quickly, and they’re cost effective.”
But in November 2006, when Wexler seeded the company and opened a small office, the technology was still in its infancy, so he and his partners took the time to thoroughly investigate the alternatives, to learn what was already possible and what would be possible in a few years. They also started talking to potential customers: the businesses that might have a need for installing SpiderCloud in their buildings and the mobile carriers that would have to agree to allow the company to use their spectrum.
“People often think they have a great idea, but they don’t validate the idea sufficiently: they don’t understand the market, who’s going to use the product, what it will cost,” says Wexler. “There are lots of people who have great product ideas, but they don’t get the market timing right, or they don’t understand the customer, the technology risk, or the sales channel. And they don’t make it.”
When they felt they had learned enough about the technology and the market, they drafted a plan. The next step was to begin raising money. “What happens in negotiations with a venture firm is you share your plan with them, give them an idea of how much money you want to raise, and they give you a term sheet,” says Wexler. “Essentially they say, ‘OK, we’ll give you this amount of money, but here are the terms.’ Then there is a negotiation as to the final terms. One big question is valuation: What does the venture investor estimate the value of the company to be at the time of funding? Essentially, the higher the valuation, the greater percentage of the company the founders, seed investors, and the employees retain.”
The first venture investor came on board, but only after SpiderCloud made some alterations in its initial plan. “Things change, so you have to have the ability and willingness to adapt, whether it’s to the market or the environment around you,” says Wexler. “You don’t put a business plan in place and execute it without looking at what’s going on—it needs to be a living document.”
But they still needed a second venture investor and that was proving to be more challenging. “We talked to a lot of people, and they believed we could build it; they believed the market was there,” says Wexler. “But they were concerned with the complexity of the sales channel model and felt we needed to have a senior member of the team with deep telecom carrier sales experience.”
Wexler and his partners took some time to evaluate their next steps, and by the end of summer 2007, two things were clear: They needed to raise more money than they’d initially calculated, and they needed to hire an experienced sales executive. The team submitted their new funding requirements to their initial investor, who agreed to support their numbers if a second investor was found. With a new sales executive on board—he’s now the CEO—another venture firm signed on, and SpiderCloud officially opened for business in February 2008.
“The great start-ups tend to employ incredibly talented Type A personalities, many of whom haven’t worked with each other before… [They’re] put under insane schedule pressure, and they’re not paid a whole lot. Fundamentally, this shouldn’t work.”
It began with a staff of seven—it now has about 100 employees—and spent the next two and a half years in development, working closely with companies that were building the new processor chip technology. “It was a long development cycle because we had to build hardware and software,” says Wexler. “And there were fundamental questions of whether we could build it, whether it would work, and whether it would meet the cost targets we set.”
Once they got the technology humming, they had to find a mobile carrier that would let their product radiate on its spectrum. London-based Vodafone, the second-largest mobile telecommunications company in the world, stepped in and did “a massive amount” of testing over a two-year period.
SpiderCloud’s progression has been steady; the only hitch was during the recession, when it went to raise a second round of capital and venture firms were not doing much funding. “It took us twice as long to raise the money the second time,” says Wexler. “If we hadn’t decided we needed more money during the initial capitalization, we wouldn’t be around today. We had to be really careful about our spending; we were literally a couple of weeks away from having to shut down. It also helped that we were passionate about what we were doing.”
The talent, enthusiasm, and support of SpiderCloud’s staff are other major factors in the company’s success. “The majority of venture-funded companies fail,” says Wexler. “The great start-ups tend to employ incredibly talented Type A personalities, many of whom haven’t worked with each other before. The team members are put under insane schedule pressure, and they’re not paid a whole lot. Fundamentally, this shouldn’t work. It’s like an arranged marriage. One of the key leadership challenges is keeping people motivated and focused. Also, interpersonal issues need to be dealt with in an effective and timely fashion. If you have recruited great people, they can get another job at any time. So nurturing the culture inside the company is critical, especially if you want the company to be around for the long term.”
Wexler has good reason to be optimistic. Vodafone is now a customer, and SpiderCloud has trials going on elsewhere in Europe, the United States, and Latin America. “The test period is much shorter now,” says Wexler of SpiderCloud’s technology, “because once you’ve got a big company that says a product works, other companies don’t feel the need for a such a long trial.”
In 2012, SpiderCloud raised an additional $35 million in venture capital, with a valuation of close to $200 million. That money is helping the company to develop the next version of its product. “We’re probably on the third generation of technology now because the cellular stuff evolves so rapidly,” says Wexler. “You always have to adapt; otherwise, you’re toast.”
Wexler is hoping to turn a profit by the end of 2014. Meanwhile, SpiderCloud will likely take advantage of debt to finance working capital. “We’d prefer not to go after more venture capital, because we don’t want to give away more chunks of the company,” he says. “The hope is that your sales rise enough, and with working capital financed by debt, you can become profitable.”
Peter Wexler is a member of the SMG Dean’s Advisory Board. He and his wife, Deborah (’93), recently endowed a professorship at the School.