How I Screwed Yasser Arafat out of $2mm (and lost $100mm in the process)


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"I needed to make one hundred million dollars pretty fast. You know how it is. There are bills to pay. There are things you want to do in life. I wanted, for instance, to work as a cashier in a bookstore. But with a twist. I would own the bookstore. I wanted to do a 90 second ad in the SuperBowl which would just be me walking around for 90 seconds saying and doing nothing. People would argue afterwards, “he could’ve used that money for charity. How selfish!” But I wouldn’t care. It was my money and I could do what I want with it. I would be teaching this grand lesson to all the people watching the Superbowl. I had no other specific desires about what I would do with one hundred million dollars. Just those two. But I knew more things would come.

At the time (1999) I had recently made money selling a company in the web services business. Among other things, my company made the website for the movie, “The Matrix”. I knew I was Neo but I wouldn’t be able to take the red pill until I had my first hundred million. That was the pill that would let me be a real person. The pill that would allow me to be fully alive.

So I came up with an idea. It was a catchphrase and I would use it many times over the next six months. “First there was the wireLINE internet. Then there was the wireLESS internet. Which would be ten times bigger.”

Those three sentences (or maybe its one if you use commas) were my path to $100 million. Here’s what you do then once you have your catchphrase. I had a business partner who wasn’t shy. So he called up 20 companies in the wireless software business and said, “We want to buy your company.” We had no money to buy anybody but if you ever let that slow you down you might as well run around naked in a football stadium with 60,000 people watching you.

One company responded. A company called “MobileLogic” out of Denver. They flew in and we took them out to breakfast at the Royalton Hotel on 44th Street. Its a fancy breakfast place. The sort of place Rupert Murdoch orders the pancakes, chews it up, spits it out without swallowing, and then orders granola to be healthy.

We’re all sitting around a table. “Its fortunate that you called,” the CEO of MobileLogic said to us. “Since Ericsson just offered us seventeen million and we’re thinking of taking it.” “Why would you take that,” I said. “We’ll offer you twenty million, half cash, half stock. That stock alone will be worth one hundred million or more once we go public. We have five other companies we’ll buy after you. You’ll be President of a major company thats going public, pronto. Ericsson is the old generation. Be apart of something new and exciting.”

I love the pancakes at the Royalton. They whip the eggs into the batter. Its fluffy and delicious. And the bacon is thick and the bacon juices spill into your mouth as you bite into it. Life was good. Jerry Levin might very well have been at the table next to us buying AOL right in front of our eyes. Thats how good life was then.

They took our offer. We quickly wrote up a binding LOI which they signed. We negotiated their salaries, their options, their earnout, everything. Now we needed to pay them twenty million dollars. We knew we could pay half the twenty in stock. So that was easy. That was a piece of paper. Now we had to come up with the other ten.

No problem. Because suddenly I had a real asset. I had a binding LOI for a company with $5-10mm in revenues (despite my propensity to remember every detail of my childhood, I can’t remember how much in revenues this company I was buying in 1999 had). There were companies going public then with zero dollars in revenues that were now worth over a hundred trillion dollars.

So, with some partners who were excellent middlemen I started going to potential investors. Mark Patterson, who was then vice chairman of CSFB and is now the head of multi-billion dollar hedge fund Maitlin-Patterson set up a conference call with a few small investors. One call he set up was with Henry Kravis, Leo Hindery, Jim McMann (CEO of 1800-Flowers) and Dennis something or other who just sold a huge Irish telecom company and was worth a random billion or so. I gave a fifteen minute talk. I described my background and the company I had sold. Then I used my catchphrase (see above) and scoped out the opportunity (“10x the size of the wireline internet”) and that was the call. Henry Kravis asked a question. I can’t remember what it was now because all I kept thinking was “you were the barbarian at the gate and now I’m the barbarian.”

Right after the call, Mark Patterson’s phone started ringing. Mark told me, “Henry wants to wire five million right now.” But we only took one from him. Too many other people wanted to invest. Everyone on that 15 minute conference call put in one million each.

At another meeting to raise money, I had to describe what we did. I wasn’t even totally sure what MobileLogic did. We protected data that was in corporate databases but was being sent out to the salesforces through wireless devices that we set up. It was pretty solid. I said, “the data goes to the satellite and then comes down to our devices.”

“I thought the data didn’t go through satellites. Doesn’t data go through cellular towers?” someone named Mamoon asked.

Uh-oh. That seemed to make more sense than satellites. “Sometimes,” I answered.

And they put five million in. Frank Quattrone put money in. Sam Waksal, Allen & Co. CMGI. The list goes on. We were the hot investment for three seconds. One guy who had initially rejected us but then saw the list of investors called me at two in the morning and said, “please let me put in a million.”

So we closed on thirty million dollars and bought our first company. Then we bought a second company. A consulting company called Katahdin. They had nothing to do with wireless but they had profits. We’d bury them in the IPO story but make use of their profits. Then we bought a third company. I can’t even remember their name but they were a spinoff from MIT. Right away we were getting calls. Aether Systems wanted to buy us but we said no. They only wanted to pay fifty million for the company. A banker at CS First Boston told us he could get us seventy five million no problem. But we didn’t even listen to him. In the elevator we laughed at him. What an old fool! We were going for an IPO.

Every bank came in with a powerpoint and a team of young people to pitch us. Goldman, CSFB, Merrill, Lehman, etc. CSFB was the front runner because Frank Quattrone was an investor but Merrill made a strong pitch. The pitch was funny. The top Merrill banker was there. He said to the associate on the deal, “John, walk them through the numbers.” And John said, “uhh, my name is Roy”. Two other things I remember from the pitch. The first was, “Henry Blodget will be the analyst on this deal. He loves wireless.” Which made no sense to me since he was an Internet consumer analyst.

The other thing I remember was the back page of the presentation. The beautiful back page. The only page that mattered. It had what my networth would be if we IPOed and the market valued us similar to Aether Systems. I would be worth something like nine hundred million dollars.

I knew exactly what bookstore I wanted to buy. It would be Shakespeare & Company on Broadway. None of the other employees would know that I would be the owner. And I would work just stacking books and being the guy at the cash register. My secret would give me infinite power.

I didn’t know how to be CEO of this company. And because I didn’t really know any of the employees of the companies we were buying I was feeling very shy. I would call my secretary before I arrived at work and ask her if anyone was in the hallway and could she please unlock my office door. Then I would hurry into the office and lock the door behind me.

Eventually they replaced me as CEO. Even later, when we had to raise up to another 70 million, they asked me to step off as a director on the board. At one point I arranged for a reverse merger to occur. We’d be public at at least at a hundred million dollar valuation. But the guy behind the reverse merger turned out to have a checkered past and had spent some time in jail in 1969 for either embezzlement or something to do with transporting fake diamonds. But thats another story.

None of this portrays me in a good light at all. Except for maybe the fact that I was a good salesman during the greatest bubble in world history. But it was decade ago and I don’t mind what people think.

But I did learn several things that became incredibly important to me later. :

A) if you have to raise thirty million to start your business, its probably not a good business (at least for me). All of my good businesses (businesses that I started that I eventually sold and made money on) started off profitable from day one and never raised a dime of money.

B) Most M&A transactions don’t work. When you buy a company, its very hard to keep the owners of the old company incentivized. 90% of acquisitions don’t work. Build your business. Don’t buy it.

C) A lesson I learn repeatedly: traveling for business almost never generates more revenues. New York (and America) are big enough places to generate revenues. You should never travel. In the course of doing this business I traveled repeatedly to the west coast, Denver, England (to try and buy a company), Sweden (where Ericsson was based), Germany (Ericsson wanted me to show up at a conference for one day), Georgia, Florida, Boston, etc etc. Not a single meeting generated any revenues for the business but wasted hundreds of hours of my life.

D) Hiring smart people doesn’t work if you aren’t smart. Everything ultimately comes form the top down.

E) Spending a lot of money on branding and marketing materials is a waste of money for a startup. If you don’t know who you are, no amount of money will create materials explaining who you are.

F) If you are going to raise thirty million for a business, then raise a hundred million if you can. Don’t turn down Henry Kravis’s five million. It doesn’t matter how badly you get diluted. If you have to raise money, take in every dime you can.

G) MOST IMPORTANT: If you raise thirty million, spend none of it. Warren Buffett once said, “if you know a business will be around 20 years from now then its probably a good investment.” With thirty million we could’ve stayed in business for 20 years or more and eventually figured ourself out. Instead, I spent forty million in the first month or so. I learned a lot, and over a hundred million was lost.

Eventually Vaultus (the name of the company. I think i forgot to mention it until now) was sold to Antenna Software. I made no money, as I rightfully shouldn’t.

Four years later, I was on a train to Boston with my business partner. It was 5 in the morning and we were going up to visit a hedge fund we were invested in. He was reading Bloomberg magazine. “Holy ****,” he said, waking me up. He showed me an article in the magazine. It was about Yasser Arafat, who had just died. Turns out he had a front corporation that was making various investments for him from the money he had somehow made off of the PLO. His largest (or second largest ) investment was two million dollars he had put into a “New York company, Vaultus, Inc.”. I can tell you for a fact his estate lost that two million. So, as they say in Brooklyn, it was good for the Jews."

90% of acquisitions don’t work. Build your business. Don’t buy it.

This speaks to my prejudices. I've been the customer of several small software companies that got taken over, and the result was inevitably worse for the customer in the long run.

The "about" page on that site is also interesting: