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Peter Sisson, CEO of Line2 (also known as Toktumi), is an entrepreneur and VoIP pioneer whose last company, Teleo, was acquired by Microsoft in 2005. He has been on the forefront of[…]

A conversation with the founder and CEO of Line2.

Question: What’s the very first step to starting a company?

Peter Sisson: That's a great question. I think the first thing is, don't quit your day job until you've done real diligence on the idea. And what I mean by that is, really look at the market, look at where the market is headed, look at the trends, look at the competitive landscape, and try to play a few strategic moves into the future. So see, is this something that's ultimately going to be dominated by X big company or Y big company? That's not always a reason to say no, but it's certainly something you want to look at. And then make sure you have a business model and you know how you're going to make money. And then bounce it off a few smart people, but not too many; people you really trust but will be honest with you. If it passes all of those tests, then you should ignore everyone else that tells you it's a bad idea, because you will hear endlessly from people that are naysayers or don't understand it and haven't researched it as well as you have at that point, who all say no, that's not possible, and here's why. Part of being an entrepreneur is that as long as you've done that initial diligence and you've convinced a few smart people, and you all agree that this is an opportunity, then you've got to just believe that to the very end, because you will get a lot of days where you start to second-guess yourself and where people are telling you that it's not a good idea.

Now, I'll qualify that with they key to startup success, and why they succeed where big companies don't, is that they can turn on a dime. And the whole process is really about test and measure, test and measure, in a sense. There's the Facebooks of the world and there's the Googles, and they're these massive homeruns. And everyone thinks, “I just put up a Web site, and if I get lucky and do the right things it's going to take off.” But very few businesses are created that way, and you can count the major stars on two hands, and everybody else is working their ass off. Not that they don't work either, but it's a little easier for them. And so the trick is, you know, to once you've gotten past your own barriers of self-criticism to make sure that you know how that you believe it can succeed, then there's a whole series of steps that I could talk for two hours about. Bottom line is, you don't have to risk a lot of capital upfront to learn things. So the way we do it is -- and you don't have to get it right -- but you get it out there. Get something out there. If you sit and stew and try to make it perfect, and nothing ever gets out there, you can be too cautious. So the trick is, get it out there and then iterate. Get feedback from customers.

And that's what we've been doing. We got the first version of our product out in February of 2008, and we didn't do much to promote it. We got 50, 70 beta customers, and then we iterated on what they were telling us. What did they like about it? What didn't they like about it? What features were missing? What did they want to see? And we iterated for nine months until we were comfortable to actually start to put marketing money behind it. And there's a lot of learning that is -- you have to be receptive to. So it isn't really sort of this, you know, put it out there, build the field and they will come, which really has a whole other aspect to it. Once you've got the product right, the real challenge is attracting customers to it. It can be a fantastic, insanely great product, but if you can't get the word out and acquire customers cost-effectively so that you have a business model and can make money, it doesn't matter how nice a product it is.

Question: What’s the story of your career?

Peter Sisson: I have always wanted to start a business. I have always felt that running my own company was really the best place for me, the best home for me, for a lot of reasons which we can go into. And typically I'd look at different opportunities and see what could pan out. And the trick is to be very hard on yourself when you're first thinking of an idea, and talk to smart people to make sure that you kind of vet it out. Typically you want to solve a problem, right? And the problem I had was that I liked wine, but I would go into a wine store, and I had no idea which wine was good and which wasn't, which is still a problem today. So you could read Wine Spectator, other magazines, to learn about wine, but then you could never find the wines that they were talking about. So there was a mismatch between the ability to learn about a wine and then act on that information and make a purchase. WineShopper was my first company, which was a site that combined the ability to buy wine with the information, including ratings from Wine Spectator and wine enthusiasts and other agencies' reviews, community and all this. This was in 1999. It was a bubble company. It was funded by Kleiner Perkins and, raised $46 million and built a 200-employee company very quickly, and ultimately learned some painful lessons in terms of access to capital and how quickly that can dry up. The company was ultimately acquired by a competitor, and -- but that competitor did not survive. So that was my first sort of big venture kind of deal. Good experience, lots of learning, but nobody made any money.

I was pretty upset for a little while, and then I realized that you've just got to pick yourself up and dust yourself off. Entrepreneurship is really like sales in that you get a lot of discouragement along the way, and you have to be really strong and just keep going. So I just got right back up on the horse, started a company called Mixonic, which is now profitable and growing nicely, still private. I'm on the board. So that one's a wait and see, I'd say.

Then I started something called Teleo, which was a white-label version of Skype, if you know what Skype is; I think most people do now. And that was very lucky timing and was acquired by Microsoft within 18 months of its being founded. And I didn't want to work for Microsoft so I signed a noncompete, took a year off and traveled, and then started my latest venture, Line2, also known as Toktumi. But Line2 is really a solution for where business is headed today in terms of the way people work.

Question: What is the mission of Line2?

Peter Sisson: So if you think about land lines, more and more people are saying, why do I need a land line? They're getting rid of them. And they're sticking entirely to their mobile phone, and there are some problems with that because it doesn't always work in your home, and there's battery-life issues and stuff. But a lot of people are getting rid of land lines. We believe with Line2 the same thing is happening in the office environment, particularly small businesses. You don't really need an office where everyone has to drive their car in and park in order to be productive. You have all of this technology; you can use the Internet and communication technologies to be productive virtually.

So Line2 basically is a business line on your mobile phone. It's a second line, so you add a second line to your mobile phone -- that's why it's called Line2 -- that has all the features, ultimately, that that office phone had: transferring calls, setting up conferences and stuff like that. And so we just released it. It was approved by Apple in early September, and sales have been very strong. I think there's a lot of need for that, and ultimately, the problem we're solving is that people want to work and be productive, but they don't want or need an office, and they don't want to be tethered. Everyone's using WiFi; there's not even a jack into which to plug an office phone in most office environments, for new companies. So that's what we do. So the long answer to your question, to sort of give you a synopsis of each business, it's always about trying to solve a problem.

Question: How important is social media?

Peter Sisson: Very important. I was skeptical at first, and I still scratch my head about Twitter, but I now it's here to stay. You know, it's one of those things that it's a self-fulfilling -- it became popular because it became popular; I don't know how to describe it. But at any rate, the guy that does my marketing is religious about that. So for example, there are a lot of cool tricks. There's a lot of stuff that's important, and one of them is, you need to blog. And I was like, why do I need to blog? Part of it is, if you have constantly changing content on your Web site -- so the blog has to be on your Web site -- then search engines reward that. So like a news site or something, constantly changing content. So if you put up a Web site and do nothing with it, you'll slip down. If you keep changing the content and making that content relevant to the service that you offer and the types of customers you're trying to attract, you'll start to go up in natural search.

The other thing that you do is, once you blog a post -- this is where the social media comes in -- post a blog entry, then you Tweet it and you post it to LinkedIn, Facebook, everywhere, and to different groups. And then what happens is, this magic thing happens where it just reverberates through the Web. It's really fascinating. And so one blog post suddenly translates into multiple hits, and those hits are all then linking back to your blog post, and that means you're getting more links into your Web site, which, as you probably know in search engine optimization, that's another thing that's very important, is to generate links back to your site. So I was sort of dragged kicking and screaming, but now I’m a true believer. It really does work.

Question: How are you rising above the fold of competitors? 

Peter Sisson: There's a lot of companies offering phone service, obviously, and you know, we are -- our differentiation is our focus. And I think this is an important lesson for all startups, is that we have a lot of people, because we only charge $14.95 a month, who ask us if they can hook up an ATA, which is what Vonage provides you, which is a little box that you plug your phone into. One end is Internet, the other end is the phone. They want an ATA. But I know from looking at Vonage and other companies that the biggest support expense for those companies is that ATA, because getting people to get under their desks and play with their routers and hook that thing up is a pain. And everyone practically needs a customer support person holding their hand through the process, so it's very expensive. And so we're like, yes, our customers -- there are customers that are trying to drag us in that direction, but we are razor-focused on our belief that the future is not about wired phones, that the future is about mobile and laptop calling. So it's like Skype and your mobile phone. So what does business phone service look like in a world of Skype and mobile phones? And that's what we're laser-focused on, and we're the only ones positioned that way. And by being that focused, it just makes everything better. One, you can communicate your position to the market in a much more laser-focused way so that you can actually stand out as a brand.

Question: Do you have plans to expand out of the SOHO market?

Peter Sisson: That's an interesting question because we are increasingly getting consumers who come to us, and so the Line2 app, as I talked about earlier -- particularly young people, they're like, a land line? Why? Why does it make sense for me to buy a phone wired to a wall? And particularly young people because they're moving from dorms and then apartments, and many apartments -- it just makes no sense, and you can't even use it most of the time because you're out and about and what have you. What's the point? People want to get rid of their land line. The problem is, some can't because either they don't have cell phone reception at home or, you know, they talk a lot and they don't want to wear down the battery. You know, there are all sorts of reasons. And so you can use Line2 -- the current version works over cellular, but the version coming out in a couple months will work over cellular or over WiFi, and that's going to be the first dual-mode thing on your iPhone, phone on the market in the U.S. So like Skype can only work over WiFi; it can't go over broadband. So bottom line is -- excuse me, it can't go over cellular; Skype only works over WiFi on the iPhone. So if you can, this now gives you a way to ditch your land line. So a long answer to your question, but you could use a Line2 number as your land line substitute. You can use it over WiFi when you're at home and you don't have cell phone reception.

You can use it as sort of a number you give out to everybody else, not the number -- your best friends have your cell phone number. But your bank people and credit card company statement. You know, anyone billing, anyone where they ask for your home phone number that you're doing business with or something, and you don't want to be bothered on your cell phone. You do that on your Line2 number, and then you have all these controls where you can say let certain people through, depending on the time of day, who they are, whether they're a friend, whether a business, different greetings depending on who they are. You can do all this stuff to sort of make it much more of a tool rather than a nuisance, which I think -- like my land line phone at home I never answer any more because it's all spam. It's -- even though I'm on the Do Not Call list and have been since they started it, people -- I don't know where they get my number, but every call I get is some kind of marketing call, so it's useless.

Question: What mistakes did you make with your first two ventures?

Peter Sisson: I mean, constant. That's how you learn, right? And what's nice about Silicon Valley is that it rewards that. Well, no, let me take that back. It doesn't reward that; it tolerates it more than a large enterprise, where mistakes can be career-ending in a really bad company where they -- you know, where it's a fear. Typically a corporation that's run on fear versus encouragement, and sticks rather than carrots, tends to be an environment where mistakes are not tolerated, and then no innovation happens. And so Silicon Valley is the opposite. It encourages you to take risks. Entrepreneurs are not rational business people. If you look at the risk and reward curves, we're way out here. We're taking a lot of risk in the hopes of a lot of reward, but it's not really rational. Actually, most business people are much closer to the origin there, where there's some risk and some reward, but not the kind of risks that entrepreneurs take.

The mistakes I've made in taking those risks have been numerous. WineShopper, obviously. We were burning $3 million a month before we even had customers. That was the dog food that everybody was eating back then, or the Kool-Aid that everybody was drinking was, you know, build these -- build it; it's a land grab. Everyone believed that the Internet was a land grab, and you had to build this thing. We build a 20,000-order-a-day pick/pack center to automatically fulfill wine and it was a thing of beauty. Built it from green field to full production in six months, had 15 bays for big UPS trucks to back up into. And it never got to ship much wine. Those assets were restarted by Kleiner in a new company called New Vine Logistics, which did ship wine in the back end for winery clubs and what have you. But it was never, never the opportunity that we all believed it would be.

You make hiring mistakes, you make strategic mistakes. I had an opportunity to merge with a company earlier in WineShopper's history that I did not pursue. Hindsight is 20/20. I should have pursued it. But each time you get smarter, and the other thing you learn to do is, you don't fret over your mistakes. You just instantly correct and move on. You make a bad hire, you've got to make the decision to say, listen, this isn't right; it's not working out. And you cut and run and you hire someone else. So as long as you can act decisively, you can undo the effects of bad decisions. But I think we all make bad decisions. The fact is, if you never made any bad decisions, you probably weren't taking any risks.

Question: What’s your advice for startups looking to raise capital?

Peter Sisson: Fund-raising is hard right now. Angels have -- their personal net worths have been depleted. In some cases not depleted, but certainly reduced to where they're less willing to take risks. Some VCs have had trouble closing new funds. The top VCs have money to spend, and there's plenty of money that's being spent and invested. The way I think of it is -- well, in terms of the stages, it almost always is going to be credit card debt and friends and family initially. It's very rare that you're going to go right out of whatever you idea is and pop into Kleiner Perkins and they're going to write you a check. You're going to have to prove something before you can typically raise money from a VC. And the four areas that they look at, there are four areas of risk. And investing is all about risk versus reward. They want as little risk for the most reward, so they're going to try and reduce that risk. There's management risk, market risk, financial risk, and technology risk. Management risk: if you've never run a company before, you'll do much better going in to pitch a VC if you've already got two or three seasoned people who have run the types of functions you need them to run and done it successfully on your team. So that reduces management risk: people in the company who've done it before. You don't have to do all four of these, but you have to, you know, typically hit, depending on the investing climate, two to four.

Market risk is, is there a market for your product? What's the competitive landscape? Is it a billion-dollar option? Because VCs typically want to see at least a billion-dollar adjustable market. That doesn't mean you can't start a company if it doesn't have an adjustable market of a billion dollars. It just means it's probably not a VC play. It's probably a different type of business. And you don't have to attract venture to build a great business, as many people know.

The third one was financial risk, which is, is there a business model? Can you actually make money? Is there a way for this business to sustain itself and be profitable?

And the fourth is technology risk, which, if your company involves some kind of new technology or new thing, have you built one and proven that it can be done? During the bubble days, like in 1998 and '99, when it was really crazy, you could probably only have to tick off one of those boxes to get VC funding. Now you probably need to tick off probably all four, maybe three. And you know, mitigating market risk means having paying customers, right? So that's not always the case. Certainly in the past few years there's been a rush of money sent into social media stuff, but the more that you can sort of address those four issues and do it in a very convincing way through data, through beta customers, through letters of intent -- whatever you can do to sort of increase the likelihood that you're going to be able to execute is going to improve your chances of getting funded.

Question: How do you make smart hiring decisions?

Peter Sisson: It's very hard. Hiring is the most important job of the CEO, and it's the hardest in many ways, because if you think about it, the screening process is broken, right? You get an e-mail and a résumé, and you're supposed to figure out who this person is. So clearly, the screening process means you're leaving some good people behind. If you can find someone who you're somehow connected with, that sort of is the pre-screen process, either through someone -- so that helps with the screening. You know, different people look for different things. Part of the reason I'm an entrepreneur is that I am not a political animal. I don't think I could ever succeed, quite frankly, in a big enterprise where, in my opinion -- and this may be unfair to people in big enterprises -- where half the battle of getting ahead is playing the political game correctly. It's not purely about the best ideas.

In a startup environment, you get a chance to see your ideas tried very quickly, and it's not about who you play golf with. When I'm hiring, I try to look for people who have succeeded in environments where politics probably wasn't part of their success. And there are ways to read that. You can read it in body language and in answers to certain questions. But I really try to wean out the political animals and focus on people who are really good, not just really politically savvy. And the other thing I do is, I think it's very important to ask them some questions that are more on the human side, not just -- you know, the work stuff is a given. Do they have the skills? You're going to get that out of the way pretty quickly. But then you've got a sort of, is this someone I want to work with? Is this someone I can trust? Is this someone who's a team player? And one of the things I did with my first company, actually, with WineShopper, was the condition of being hired was that everyone was going to make the same base salary, and it was going to be low. And you know, this was when, with Kleiner Perkins and Amazon backing us, there are a lot of people who were coming to us with dollar signs in their eyes. And I said, I want to wean out the people that are really passionate about this opportunity, so I'm going to only offer -- and these were people from big companies, seasoned people -- I'm going to only offer $130,000 in salary. I'll take that salary, and everyone will get the same salary. And for the first year everyone's going to get the same salary. And then after that it'll be more merit-based.

And that was really effective at building a cohesive team, because one, people who were in it just for the money, that was a turnoff for them, and they were out the door. They never even applied. And then everyone felt like -- there's this whole sort of salary envy thing that can happen in a management team, like how come that person's getting paid more? If everyone knows that everybody's paid the same, then it sort of breaks down that one potential for tension in the office. And it worked great. We built at WineShopper -- it was probably the best management team I've ever built. I mean, it really was an excellent team. And so it's a tough process, though. And you do have to move quickly when you make a mistake.

Question: Has being gay affected your experience as an entrepreneur?

Peter Sisson: Yeah, I think where it has has mostly been in the opportunity to bond with people in the industry. Certainly in the Bay Area, where I've started most of my businesses, it's really a non-issue, and in fact it can even be a plus because there's so much networking within the gay world there. There was an instance where a couple, you know, a guy who was very senior at Facebook and has moved on to an even bigger role elsewhere, a guy, a really good guy to know, very smart guy. I've known him for 10 years. And you know, he and another guy I know went on kind of a stag trip to Las Vegas. And I wasn't invited and didn't know about, and found out afterwards, and it was fine, but you know, I think they wouldn't have felt comfortable with me being there because it was kind of a stag, male bonding thing. And I probably wouldn't have been comfortable in it. The other thing that happens is increasingly -- I've chosen not to have kids; I realize you can have kids as a gay adult, but I've chosen not to -- and increasingly, peoples' lives center around their families and social calendars. So there's stuff that maybe I'm not as connected with people because I don't set up play dates with their kids and my kids and all that kind of stuff. So there's some social aspects, maybe, that I miss out on, but there's never been any sort of problem with anyone finding out that I was gay and suddenly not wanting to do business with me or not wanting to fund me, or -- you know, in fact, typically what happens -- because I was afraid to tell people -- but when I finally told people at WineShopper, the management team, it was amazing. It really was amazing.

I was in a fraternity in college and learned how to fit into a very male-dominated environment and was just fine at it. So I tended to slip into that. But you know, what I don't do any more is, I don't feign interest in sports, because I'm simply not. And I don't feign interest in girls, because I'm simply not. And so whereas up until maybe even 10 years ago I would sort of, you know, jump in on those conversations, and it just felt so wrong, right? So I think that was -- that's the only issues, is maybe just missing out on some bonding opportunities with people that are straight-oriented, like family stuff and stuff. But other than that, not really an issue.

Question: Who do you look to as a gay business icon?

Peter Sisson: I looked at that question, and you know, my favorite business icon is Steve Jobs in terms of my role model, and he's not gay. But I couldn't think of anyone in the business world that I knew was gay, and that, I think, is telling, right? Because I'm sure that some of these very successful business people that are out there are gay, but they're not out. And so that's why it's difficult to answer that question in the business world, because you know, I know -- confidentially, so I won't say -- but I can think of five major household name companies where I know either the CEO or very senior people who are gay, but they're very careful about it. And so I think the business world is kind of the last frontier, I think, for that kind of diversity to really take hold, and it's interesting: it also is very regional. I think if you're in -- it's a big difference if you're trying to business in perhaps a more conservative part of the country than it would be if you're doing business in San Francisco or New York, where really it is completely a non-issue, it's just irrelevant.

Question: How do you anticipate dealing with cultures that treat homosexuality differently?

Peter Sisson: Yeah, there are issues. I think in the Arab world, for example, I think it would be very challenging. And China -- I don't know as much about their views on homosexuality, but I imagine not great. You know, the bottom line is that business -- unless you're in the sex business -- there's no reason to mix sex and business. And just like in the straight world, it would be inappropriate in a meeting to discuss your fetishes or something like that, and you know, your wife and all. You just don't talk about it, and so it really doesn't need to be relevant, and it doesn't need to be discussed. And it would be weird. I actually -- I've always been of the belief that I should just be myself. And if someone asks me, “Are you gay?” I will answer them honestly, but I'm not going to broadcast it, because it's a personal characteristic of me. I was made this way, and it's nothing that I need to rub in everybody's face. It’s just an aspect of me. I have no problems with it. I'm proud of myself, but it isn't something I need to wear on my sleeve. And so I just can't think of, in 20 years of doing business in some form, I can't think of any situation where it's ever come up in any kind of meeting with, you know, big companies, Sony, Dell, Staples, all big corporations I've met with, New York Times. And it just never comes up, which is great.

Recorded on October 1, 2009