Rick Stollmeyer co-founded MINDBODY in his garage in 2001. He raised over $100 million before leading the IPO for the company. Some or his investors include Bessemer Venture Partners, Institutional Venture Partners, or Catalyst Investors. The company was recently acquired by Vista Equity Partners in a $1.9 billion deal.
In this episode you will learn:
- Lessons from being a submarine officer
- Bootstrapping out of a garage
- Raising capital from top tier VCs
- The IPO process
- Getting your company acquired at the right price
For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400 million (see it here).
Remember to unlock for free the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
About Rick Stollmeyer:
Mr. Stollmeyer is one of MINDBODY’s co-founders, and has served as the company’s Chief Executive Officer and Chairman of the board of directors since October 2004.
Mr. Stollmeyer has led MINDBODY through its early years as a startup based in his garage (2001) to the global online wellness services marketplace it is today. In 2005, Rick led the industry when he took MINDBODY’s business management solution fully to the cloud. Today, the company remains the leading SaaS platform for the wellness services industry.
Mr. Stollmeyer holds a B.S. degree in Political Science and Russian Language, with a concentration in International Relations, from the United States Naval Academy.
Connect with Rick Stollmeyer:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello, everyone, and welcome to the Dealmakers Show. I’m very excited about our guest today because he has been through every single, I would say part of the lifecycle of building, financing, scaling, and then also exiting a business. So, without further ado, Rick Stollmeyer, welcome to the show today.
Rick Stollmeyer: Thank you, Alejandro. It’s great to be here.
Alejandro: So, you studied Integrated Technology and Political Science. What an interesting combination. What was the reasoning behind this?
Rick Stollmeyer: I went to the U.S. Naval Academy. It’s in Indianapolis, Maryland. It’s a training ground for Naval officers. Everyone at that university gets a general engineering degree, and you can choose a major. I wanted a major that would help me understand the complexities of international relations and geopolitics since I would be serving as an officer in the U.S. Navy as an extension of that. So, I was able to—at the time, the Cold War was still going on, and I was able to study the principles of Leninism and Marxism, the history of Russia and the Soviet Union, of China. I minored in Russian language. So, it was an opportunity to round out my education. But I graduated and became a submarine officer. That’s a graduate degree in nuclear engineering. After that, I actually got my professional engineering license after I left the service. So, I was a licensed mechanical engineer. All of that was perfect preparation to start a yoga software company.
Alejandro: Yes, absolutely. Let’s keep there. You were a submarine officer, and this was for about six years. So, how was this experience for you?
Rick Stollmeyer: It was a remarkable experience. It taught me so much. It really shaped my character enormously. Building a submarine is doing something really complex and really difficult. It requires a high level of mental discipline to truly understand the depth of a topic and very complex systems. I think a nuclear submarine is one of the most complicated things ever built by humankind. Certainly, on par with a spacecraft. So, there’s nobody on that ship that is a wasted person. Everybody has an important job. The officer’s job, first and foremost, is to learn every system in the ship from end to end, so that we are one day capable of being a captain of that ship. So, it taught me that. It taught me how important leadership principles are. I was an officer at a very young age. I was just about to turn 24 when I made it to the ship. I was put in charge of 13 men whose job it was—the first group that I supervised called The Division was electricians who managed all the electrical generation storage and distribution systems on the ship. After that, the reactors controls group that literally operates and keeps safe this nuclear reactor. After that, I went up forward and was a sonar officer for those systems. You learn how to absorb information very quickly, and you learn some important principles of leadership in a very high-consequence environment.
Alejandro: Got it. And also, those submarines are quite complex, and also, quite expensive. I saw that they go up for 1.5 billion. Is that right?
Rick Stollmeyer: At the time, the ship I was on was the USS Chicago, SSN-721. So, it was the Los Angeles-class Fast Attack submarine. I remember reading that the ship had cost 700 million dollars. This was in the late ’80s, and I thought that was an unbelievable amount of money. Yeah, it’s widely expensive to operate these ships. As it turned out, I was on the ship when the Soviet Union fell. When Boris Yeltsin climbed on top of that tank in Moscow and waved the Russian flag, our biggest concern was that there would be break-away groups that accessed the nuclear weapons. So, I think it’s a modern miracle that the Soviet Union fell peacefully and that there were never shots fired, and there was certainly never any kind of war. I think there are a lot of unsung heroes that people will never know about that insured that.
Alejandro: Got it. Yeah. Absolutely. Then after this time as a submarine officer, then you go to commerce for a few years, but why did you decide to leave this career because six years is quite a bit, and then go into commerce?
Rick Stollmeyer: There were really two reasons. First and foremost, the impact on your personal life is that you’re gone for months at a time. I knew I wanted to start a family. I had come from a large family, and that was an important value to me. The second reason was rather interesting, and that is I realized that in my most joyous moments, I was actually creating something new. For example, we actually ran a ship’s store that funded our morale and recreation fund. It was like running a business, and as we would come into ports, we would allow tourists to come onboard the ship and tour it, and we would sell them things like t-shirts, ball caps, and belt buckles. I quadrupled the size of that business because like as soon as you gave me this business, I’m going to grow it. I actually got accommodation for my running of this sort of ancillary thing. I realized, “You know what? Maybe my best gifts aren’t in being a military officer. Maybe my best gifts lead back to business.” I was raised in a small business family. I found real joy in that. So, that translated later to the decision. After I left the navy, worked for a while in various civilian private sector roles, commercial nuclear power for a short while, and realized that wasn’t the career I wanted. Then, in space launch out of Danby Air Force here in California. That’s what moved me to the California central coast.
Alejandro: That was MCA Engineers?
Rick Stollmeyer: That’s right. We were a government contractor also selling our services, our engineering, and support services through the various entities that were launching spacecraft out there. Lockheed Martin, Orbital Sciences, and Boeing. I learned, again, that I really loved the idea of building a business. I tripled that size of that contract through effective business development. So even though it was a government contractor, there was an opportunity to develop new lines of business. Once again, we had this confirmation. I’ll never forget this because, in government contracting, MCA Engineers was a small business. I had half of the employees in MCA Engineers working for me out of 170 people. I went to the founder CEO of the business, and I said, “I’m really enjoying this. I think I can grow this for you a lot more, but I’d really like to have a piece of the pie. I’d like to have some ownership in the business. He just wasn’t okay with that. Had he said yes to me, I would have made that guy a lot of money. I was one of those spark plugs. Anything I see, I’m going to improve and grow. So, at the same time, I old friend from high school started writing software for yoga, pilates, and spin studios, and this was in the late ’90s. He educated me on the market, and said, “I think I’m onto something here.” I think at the time, he had nine customers in LA and San Francisco. “I’m looking for a partner.” He was asking me if I knew someone. So, I went out and visited a couple of his customers, and I just fell in love with the market. I realized there was a transformational shift happening in fitness in box health club model to this boutique fitness model which is a very different operating system, and nobody was meeting their needs. We both felt this industry would grow massively. So, I went back to him, and I said, “How about me?” I thought he was shocked, but he just told me recently—this was only a few years ago. He said, “You know what? I always was aiming for you. That’s what I wanted, and I was hoping you would come back with that answer.” So, we became business partners in October of 2000. I started taking paid time off, and I bought my own laptop. Driving up to San Francisco and down to LA, and calling on yoga, pilates, and spin studios and realized I could, in fact, sell this software. At the same time, became immersed in the industry, and I took a lot of classes. I just fell in love with these people. These are grassroots entrepreneurs who are leaving the relative safety of a job. They’re committing most or all of their net worth. They probably are taking 2nds out on their homes, borrowing money from mom and dad, friends, and family, spending hundreds of thousands of dollars to build out a space, signing a multi-year lease that they personally guarantee, which means if that business fails, they lose everything. And then opening all for the purpose of hanging up their shingle and being Mary’s Yoga Studio or Jim’s Workout. This resonates with me and my family. My grandfather, my father, three of my brothers, all small business owners. That was really what connected to me, the idea that we could take technology and solve problems of these grassroots entrepreneurs who are actually going to make the world a healthier place. To me, that would be a worthy endeavor, and it connected to my purpose-driven attitude, the reason I volunteered to serve in the navy and the reason that I took great worth from that and the job doesn’t pay very well and demands way too much of individuals, way more than business does. The reason I did that was because I hungered for being part of something bigger than myself. I found that a wellness group and specifically in boutique ones, small business owners delivering something that is transformational.
Alejandro: Then, MINDBODY obviously is born, and this starts out of your garage. So, what were some of those early days like?
Rick Stollmeyer: You know, at the time, it was simultaneously thrilling and terrifying. I remember the very first day—I gave notice of my job. I gave a nice long notice because I didn’t want to burn bridges. Who knows what’s going to happen with this startup? So, I gave them 60-days’ notice. Then I planned a vacation with my wife. We went down to Cabo because I thought, I don’t know when I’m ever going to be able to take a vacation again. It’s going to be a long time. Got back right around the Christmas holiday. There was a picture of Blake and I on January 1st, 2001. We had a New Year’s party at our house. He and I on a 01-01-01. That was the official start of MINDBODY. I woke up on January 2nd after everybody left, and I sat down in my garage, and I looked at my computer, and I was instantly terrified. I thought, what have I done! I have three kids. I took a 2nd on my house, and I committed most of those funds to this business, and I was terrified. There was a moment when I literally pushed away the mouse, went and got in my car, and went for a drive. There’s this great song by the YoungBloodZ called “Get Together.” The song says “We hold the key to love and fear in our hand.” In other words, we make that choice. The opposite of love isn’t hate; the opposite of love is fear. I had to set aside this fear and get back to the love, the love for the customers, the love for the idea of building something that mattered. After that, never looked back. The original plan was Blake’s going to build the software, and I’m going to sell it. Not long after that, I realized, “Wait a minute. They keep calling me because they need help.” These are small business owners. They’re not techies. Even if we write the software perfectly, this is such a robust solution, they’re going to want to talk to us. So, I started hiring people from Cal Poly initially to do tech support. We got some really smart computer science students and recent grads who helped us with the coding. We started building a team in my garage. At its peak in 2003, we had six people in the garage, a couple of people working out of their homes, and Blake was down in LA.
Rick Stollmeyer: In the morning, I’d come downstairs, and there was a Cal Poly student, Argo Broker who was an engineering major, would come in at 6:00 AM to do her early-morning tech support in the garage. It was cold, and she’d be wrapped up in this huge sleeping bag with a wool cap on with a headset doing tech support for customers on the east coast. Almost immediately, we started gaining customers overseas, and we weren’t prepared for that. In October of 2001, this guy calls me with an English-sounding accent. I learned later he was Kiwi, New Zealand, and said, “I’d like to buy your software.” So, I walked him through the features and the options and built a purchase order. I said, “Where do you want me to ship the CD?” He said, “Hong Kong.” So, I thought he was pulling my leg. I figured out how to ship a CD to Hong Kong, and how that would clear customs. But, by the way, we shipped it to his house. It was a personal package. We had a customer in Hong Kong. That customer became Pure Yoga, the largest chain of yoga studios in the Pacific realm and one of our top 50 customers today out of 65,000 businesses. What happened there, and this is an important insight, when one of your many benefits is being vertically focused, and I had so many people who told me that we were doing the wrong thing. “You’re aiming too narrow. This sounds nichey. It’s small. You need to broaden your field. You’re building point of sale, and scheduling software, CRM software, how many other business types are there out there that could benefit?” The answer is, “Millions.” I vertically focused. First and foremost, one of the key benefits of a vertical software business is that you can rather quickly tap into a global audience, assuming that vertical transcends. So, we found in our first year, we had a customer in Asia, in Hong Kong. By the end of the second year, we had multiple customers in the Pacific rim including Australia and New Zealand, and we had customers in the UK. By the end of the third year, we had multi-lingual customers, and we had to put in capabilities that would support them in Spain, France, Germany, as well as multiple Asian countries like Taiwan and Thailand. So, we’re getting pulled internationally before we were ready. That’s a huge opportunity. One of the mistakes we made was thinking if it was that easy to get our first early adopters in these countries, then we ought to be able to become mainstream in these countries very quickly. This is the next insight. That’s not true because the early adopters in any market are people that tolerate product market fit discrepancies, i.e., in this case, obviously localization and internationalization of software. So, we actually, years later, pulled back and said, “Let’s stop selling software in countries where we don’t have a complete full product, and we have narrowed our focus to what we call the English 8, which is U.S., Canada, UK, Ireland, Australia, New Zealand, Singapore, Hong Kong. These all have high per capita income, very thriving wellness industries, and over 300,000 businesses in our target market. Even today, with a 300 million-dollar run rate we only have 65,000 businesses. So, while it may sound good to say, “Yeah, we’re selling software in Lima, Virginia, Rio, and Madrid, the reality is that’s going to diffuse the efforts of that business.” So, we become much more focused now on this, and that focus has accelerated our business. Every time we focus down again, I use the metaphor of a beam of light. The light that is diffused doesn’t cause much impact, but if you narrow the focus far enough, it becomes a laser and blows holes through steel. So, being laser-like focused is so important. So, we will enter the other markets. By the way, in the meantime, they’re still inbound, so yes, we have inbound coming in from all over the world. We actually have customers. But our market share in those non-English countries is very small. As we add countries back into our target market, we’re going to do so very deliberately. Start with a product-focused approach and make sure that we’re bringing forth a product that meets the needs for the majority of the market before we allow ourselves a marketing team to start
Alejandro: Got it. So, let me ask you this. Rick, at what point, because obviously, you really had this laser-focused mentality, the business was growing. At what point did you decide to raise capital?
Rick Stollmeyer: We were able to bootstrap the business from 2001 all the way through to 2004. In 2004, we decided to fundamentally change our business model, or at least, I don’t think we quite realized how much it was going to change our business model when we decided to go to a SaaS model. I had never heard the acronyms SaaS. Software as a Service and clouds were puffy things in the sky. But one thing had become clear: we had this on-prem solution that was operating from PCs. You’d get out two or three PCs networked together in a land inside of a small business, and then we could use the internet to synchronize data up to a web server where we could offer—we could serve up an HTML form that links the business’s website so they could do real-time online booking. That’s a lot of moving parts. It was complex. It was breaking a lot. We were remoting into computers, to our customers’ computers around the world while they were closed to fix software problems. The databases would corrupt. These are replicated synchronizing databases that would corrupt. We became really good at file-transferring SFTPing down a fresh copy of the database doing a pin query and then restarting the sync. By the time we got to early 2004, it became abundantly clear that this business wasn’t going to scale. We had about 400 customers at that point. I went to Blake and said, “We’ve got to change this up. The Web Scheduler is the software. Web Scheduler actually has access to the entire database. So, why don’t we just reverse engineer the desktop software capabilities into the web? Let’s make a point of sale system. Let’s build all the reports. Let’s build the class check-in. Let’s build a CRM functionality because we’ve got the data. The problem with that approach was that I was killing his baby. He had spent four years of blood, sweat, and tears building this product. Actually, he started before I did, so it was more like six years. He was deeply and emotionally invested in it. That was another key insight. Once in a while, there are like these amazing unicorn people that are the coders, and they are the great business strategy folks: Mark Zuckerberg and Bill Gates, those guys. But there really are the outliers. The vast majority of the case is it’s two very distinctly different personality types, and I think not being emotionally invested in the product was an advantage for me. It created, for a while, a rift between us. In fact, our partnership broke up, and he left for several years. A new partner came in, Bob Murphy who bought him out, and who believed in the vision of online software. So, we rolled that software out. We developed it in 2004. We beta tested it the first time in January of ’05 at Yoga Works in Santa Monica. We were watching these classes of 50 and 60 people checking in on our web software. It was running faster than the desktop software. In my mind’s eye, I’m visualizing these queries are going across the internet, back to our servers hundreds of miles away, and returning, and reloading the page faster than the desktop software could communicate with the tower that was beneath the desk; it was a few feet away. I realized, “This is going to work.” So, we launched it as MINDBODY Online in February of ’05. I know accounting, so I had set up the original business accounting. In the early days, I had set up QuickBooks Pro. I heard about QuickBooks Online in 2003, and I was an early adopter of QuickBooks Online. The early versions were really rough, and slow, and bulky, but it was a breakthrough that you could use. I could access my books on vacation. I could go to a friend’s house and login via their PC or a Mac; it didn’t matter. So, that taught me the power of an online web-hosted system like that. So, we called it MINDBODY Online. Not a very original thinker, I guess. QuickBooks Online; okay, MINDBODY Online. My thought was if we call it something fancier or more abstract, our customers won’t get it. We need to make it very simple. So, long answer to a short question, when we launched MINDBODY Online in February ’05, we thought there would be a gradual adoption, innovators, early adopters opting into MINDBODY Online and then mainstream customers still buying the traditional On-prem software. We were utterly wrong. We completely annihilated our On-prem software business overnight. Disrupted ourselves. We went from selling 50 perpetual licenses per month, which is roughly at the time, about $2,000 per license. That’s a nice little business to selling 150 subscriptions. We tripled the rate of customer acquisition overnight, and we annihilated our revenue. So, I had to get really good at raising cap. It was like, “Wahoo. We’ve created something breakthrough. It’s going to work.” And, “Oh, crap. We’re about to go broke.”
Alejandro: What was the price per subscription, Rick?
Rick Stollmeyer: At the time, $65.
Alejandro: Got it. So, a big difference from $2,000 to $65 for sure.
Rick Stollmeyer: That’s right. Long-term, a much better model and a much more valuable business. Obviously, we don’t have to make that case anymore, but at the time, this was really a breakthrough. There were very few SaaS businesses. QuickBooks Online had hardly disrupted QuickBooks Desktop. It was only a small fraction of the userbase, and Salesforce was still a small company. Yet this idea was still quite novel. I think because I wasn’t a software professional because I’m not a coder by trade—I had learned how to code in college, but it’s not my unique ability. I like to say I didn’t know enough to know that it wouldn’t work because lots of experts told me it wouldn’t work. I just sort of saw through it in a different way and it didn’t work. It was transformational in change. So, I started raising money immediately. The first round of fundraising was friends and family. We got in a couple $100,000 just to keep the lights on. By the way, the friends and family include my parents and two of my brothers. My brother just sold his last shares in the acquisition.
Alejandro: Obviously, the Thanksgiving dinners were more like a shareholder’s get-together.
Rick Stollmeyer: Yeah, that’s right. I think in the early years, both my brothers and my dad thought, “Well, we’ll probably never see this again,” my brothers writing me a $15,000 check. In my dad’s case, it was a $30,000 check. They don’t have a lot of money. I don’t come from much money in our family. I offered the chance to pay them back when we subsequently raised capital, raised a million dollars from the Pasadena and Tech Coast Angels. One brother said, “Yeah, I’ll take the money back.” My dad and my other brother said, “Ah, [let it ride 28:29].” And again, I don’t think they thought they were going to make anything out of it. They ended up being quite good for my dad. That really gave my mom and dad a retirement, and my brother held onto most of his shares until literally last month. So, that feels really good. I really love making money for my investors. It feels good to me. I’ve met other entrepreneurs that don’t quite have that point of view. They’re thinking in terms of a zero-sum game, and they’re thinking in terms of the pie’s only so big. “If I give up too much to my investors, then I’m going to get polluted, and my outcome won’t be as great.” A wise mentor said in 2005, one of the angels ended up being a very close friend, said, “Rick, nobody ever went broke polluting themselves.” The point stuck with me because I had to decide: am I running a small business? Am I creating a small business, or am I creating a big business? If I’m creating a big business, and the potential future of this business is literally infinite, it’s only constrained by our ability to execute on the opportunity, and our talent, and our imagination. So, realizing a seemingly infinite future, no I did not realize a 1.9 billion market cap. That wasn’t something I had even dreamed of. I was probably thinking a couple hundred million would be an amazing market cap, and if I could just own a few percent of that, then I’m going to be all right. Well, it turned out a little better than that.
Alejandro: Absolutely. We’ll talk about that in a little bit, but how much did you raise for the business before you did the IPO?
Rick Stollmeyer: $100 million.
Alejandro: $100 million.
Rick Stollmeyer: Yeah, and I got a little bit of liquidity. I was able to pay off some debts and things. Also, some early investors, some of that was recapitalization. So, the net end of the business was actually like high 80s, like $88 million. IPO was another $100 million. Data FOS, about $92 million. Then we did a following offering of $130 million the following year. Then the year after that, this past year, we did a convertible note of over $300.
Rick Stollmeyer: The ability to raise capital as a public company is the #1 advantage. The liquidity of your stock is the #2 advantage, but for the entrepreneur or particularly for the CEO, it is not a liquidity event. Your capital is locked inside the business, and you can sell tiny bits of it, called the 10b5-1 plan where you decide essentially a year in advance, a couple of quarters in advance, you come up with a plan that says sell off a little bit on these predefined dates. It doesn’t matter if the stock got hammered, it doesn’t matter if the stock’s high. So, it’s kind of like sucking through a very small straw. For me, I had been at it for a long time.
Alejandro: How many years?
Rick Stollmeyer: We were public in 2015, so I’d been at it for 15 years. We would have public investors. I would have them challenge me that I was selling my own stock, and he was like, “Don’t you believe in your own company, Rick?” 98% of my net worth is in the stock of my company, which is extremely volatile. I’m in my 50s now, and I’ve got kids in college. What kind of question is that?
Alejandro: I totally get it.
Rick Stollmeyer: For all you public investors, when a critique [inaudible 32:30] selling of the stock, I’ve got rich words for you.
Alejandro: Let me ask you this, Rick. Now, you are running the show on a public company. Was it challenging, would you say for you to adapt your leadership and management skills to this business that was incredibly growing from private to public? How was it for you as a leader and a manager too?
Rick Stollmeyer: Going public was thrilling for me. Even though we really had a rough IPO, and I’ll talk about that in a second, really hard. I loved the delivery moments where you’re in front of an individual who is considering investing or a group of people, and the IPO roadshow is a blend of both. I love that moment when you can see it in their eyes when they see a shift of now, they’ve gone from skepticism or neutral to “Okay, I get it.” Classically, you’re in this meeting and depending on who they are, they’re either writing with a pen on a pad, or they’re on their little iPad, and they’re typing away while they’re talking to you. So, rarely making a lot of eye contact. There would be this magic moment where the person would set down their pen or take their hands off the keyboard and look up at you, and I could see it in their eyes: they got it! I’d walk out of that meeting, and I was like they’re going to put in a bid. More often than not, that would be the case. So, I love that. It’s a form of selling, and I am so passionate about this business. I love talking about it. The effect on MINDBODY’s brand in our stature in the world went up substantially. So, there’s a lot of benefit going public. And one more point, my wife was just saying this last night, reflecting on how much discipline it created in our organization. Venture back, and you’re getting these huge investor checks in the bank, and it is pedal to the metal, grow, grow, grow. Nobody really cares about the bottom line. We would never talk about the bottom line. I couldn’t have told you what our gap loss was prior to the IPO prep. When we went public, we were using 30% of revenue. That was part of the reason why our IPO reception wasn’t great. Markets shift. They swing back and forth between loving fast-growth companies that, oh, by the way, are also burning cash and losing money on a gap basis, a non-gap basis to becoming more risk-off. Those kinds of businesses get punished. So, if you’re going to go public losing money, you better have [35:44]. A good way to think about it is a Rule of 40. The Rule of 40 says if your growth rate plus your similar is at least 40, then you’ve got a great story. So, if you’re losing 10% on [inaudible 35:58 – 36:03]. Look at Lyft. Lyft has just filed their IPO. Right?
Rick Stollmeyer: The headline is they lost nearly a billion dollars last year. $900 million dollars 36:09]. The only way that IPO is going to go well if the investors buy into a story of Lyft’s very, very large growth opportunity. In other words, Lyft is going to grow north of 50% as far as the eye can see. If they can make that case, they’re going to have a highly successful IPO. If they can’t, it’s going to be rough. For MINDBODY, we went public going about 40. We were burning about [inaudible 36:45]. So, that really harmed us in our IPO, and a month after IPO, stock came out and closed the first day at like $13 in change. By the end of 30 days later, we were trading at $9. We had enterprise value about $350 million. I was lying in bed at night, staring at the ceiling. My board and my advisors [37:16] investors were so great to me. They gave me such encouragement. They said, “Look. Rick, pick one investor—said, “Look. Open markets have the emotional maturity of a teenager. Your [inaudible 37:40] price on any given day makes about as much sense as the outcome of a junior high school class president. But, in the long term, market is a very efficient machine, laying the quality of your vision, your strategy, and your execution. I think that has turned out to be true. So, my only therapy was that 45 days after the IPO, I was able to buy my own stock. I didn’t realize that actually was a public form—the officer of a corporation trades their own stock it is news. You have to file this with the SCC, and people calling your business are going to get this report. But I didn’t realize when I bought my own stock, it actually [inaudible 38:31]. So, that actually stopped the slide in stock, and the stock started going up again.
Rick Stollmeyer: Boy did that feel good. But that wasn’t actually my intention. Actually, a couple of board [38:44] also. We went to a software technology [38:51], and a couple of analysts said to me, “Thanks for doing that. That was a brilliant move.” I said, “Okay.” It was just therapy. I was like this company’s worth at least double what the public markets are saying. So, to me, it was a safe bet. If it went down again below $10, I was going to sell the Tesla and buy more stock.
Alejandro: Nice. Let me ask you this, Rick. At what point did you decide it might make sense to consider doing an acquisition and to explore options?
Rick Stollmeyer: You mean us being acquired, or do you mean?
Alejandro: You guys being acquired.
Rick Stollmeyer: Yes. All along, I had said if we get to a place where the public markets are just not benefitting either through access to capital or through our market cap, then we should be open to strategic opportunities. I’ve had that attitude—any healthy public CEO and board should have that attitude. That’s our fiduciary responsibility. We are here for our shareholders, and we are here for the long-term good of the company. So, we did some significant acquisitions of our own last year. I thought the market would really rally behind us. We acquired our largest competitor in Salon and Spa [inaudible 40:22]. That came with it, this really sharp IA-enabled small business marketing system called Frederick. That was a 2-for-1 for us. Then we also acquired a fitness technology business called FitMetrix. Both of these acquisitions long-term are very accretive of our future, but there’s a lot of near-term cost and frankly, focus solution while the team is integrating these acquisitions. You’re merging product roadmaps. You’re integrating teams. You’re integrating business systems. Frankly, we underestimated how hard that was going to be—caused us in the back half of 2018 to have two misses in a row. We were had us at 64 million in revenue, and we only did 63.8. For that sin, we lost about 400 million dollars market value. We also guided down because we realized as we started unpacking these acquisitions, there’s a lot of work to do here. There were revenue streams that weren’t going to be long-term sustainable. Let’s unwind those revenue streams because they’re diffusing our energy right now. Synergies that we are hoping for are going to take longer than we thought. So, while this is happening in the fall, the potential acquirers see that as an opportunity. So, we started getting a significant inbounding [no audio 41:58 – 42:05] These are really robust meetings, particularly four to five hours in length. You’re going very deep in the business. They’re signing an NDA, so they’re getting access to information that isn’t public yet. We were working hard to create a competitive process because the board agreed on two things. That was, 1) that if we’re going to consider selling the company, we want to get top dollar for it. 2) we want to have options. We don’t want to have just one person buying. It’s like if you’re going to sell your house, you don’t want to show it to just one interested party. Vista Equity Partners came in with an offer right before Christmas. This is all public information. They came in with $35, and we pushed back hard. We were hoping to get close to 40, not over 40. At the same time, the market said we’re getting especially [no audio 43:07]. In Q4, late Q4, there were some really serious warning signs that we might be entering a really bad barrier market ’19. So far to date, right now it’s the 8th of March, the markets have actually been pretty good in the first quarter of ’19, but who knows what’s coming. At the time, the third week of December, go back and look at the chart of Nasdaq and remember what we’re looking at. So, we were looking at that saying, “If we try to hold out here—if we wait weeks, there will be better-competing offers. We might never see this offer again.” That’s, of course, a hard game of buying and selling things.
Rick Stollmeyer: And it was clear to us that this offer may not be there in January. So, we voted on December 23rd, and it was an emotional moment for me because you cannot have a 100% certainty of what’s going to happen. Actually, I take it back, we voted on the 21st, and to accept. Then we signed the definitive agreement with Vista on the 23rd. Then we announced on Monday, December 24th, Christmas Eve. An unfortunate timing, but that’s an SCC law. You have to announce on the next business day.
Rick Stollmeyer: It was an emotional, big moment, but we knew that this was an excellent price, that there was a very low probability that our stock would get back to the mid-30s or above in the next year. Frankly, probably two or three years given the hard work we’re doing on the business right now to upgrade our products, expand our reach, develop our consumer marketplace, to integrate our recent acquisitions. We’ve got a lot of work to do, and we need to roll up our sleeves on that. We were our constraining our work because we were also under pressure from our investors to get profitable again.
Alejandro: Got it. What was the total value of the transaction?
Rick Stollmeyer: 1.9 billion.
Alejandro: Who would have thought when you were starting out of your garage to sell the business for 1.9. What was it like for you the day that you closed the deal? You were mentioning that it was emotional. I can’t imagine after all those years.
Rick Stollmeyer: Well, the date of signing was the emotional day. It’s just emotional. It’s hard to explain the emotion except—I’ll tell you, I wept. Not because I was sad, but it’s just so incredibly emotional. At the same time, very excited about the next chapter and the opportunity. I’ve heard a lot of good things about Vista. I’d also heard some things that weren’t good about Vista. So, you have a certain amount of unknown. Technically, by the way, and this is really important for people to know: as a public CEO, I wasn’t even allowed, nor were they allowed to have any discussion about my appointment or my compensation other than there was an agreement not to touch our 2019 compensation. Every MINDBODY employee was guaranteed that wouldn’t change in 2019. There was no promise or discussion. It’s a bit of a leap of faith, and I’m not done yet at MINDBODY. I’m very passionate about what we’re going to accomplish in the next few years. So, I had to have a certain amount of faith that these people acquiring us what—year-round, and aligned with our vision. I’m very happy to report now that the deal is closed. It closed on February [no audio 47:17 – 47:21] day after. I’m very happy to report that we are in fact, highly [inaudible 47:24]. They’re incredibly excited about us. They want me to stick around as long as possible. They appreciate my leadership, and they only want to help us grow faster. Their largest questions: how do you accelerate? How do we get this consumer marketplace igniting and growing faster than it is? How do we increase our business customer base? That begins with greater investments and product technology, and it includes great investments in our go-to-market team, our sales and marketing, and customer services. They’re willing to make those near-term investments in a way that we would have not have as was we never had greater access to capital and been more restricted in our ability to spend it.
Alejandro: Rick, now, I typically ask this question to the guests that we have on the show. That is knowing what you know now if you could go to the past and give yourself advice before you were launching a business, what would that advice be and why?
Rick Stollmeyer: If I was launching a business?
Alejandro: Let’s say you were going back in time, and you’re about to launch your first business. After all these remarkable experiences, what would be that piece of advice that you would give your younger self?
Rick Stollmeyer: Spend the money on a good lawyer. I know that doesn’t sound very inspiring, but when a group of people come together, two people or more to create a business, there’s enormous enthusiasm. There’s enormous positive energy. Lawyers are like dentists. You’ll either spend a little bit on preventive care, checkups, and cleanings, or you’re going to have a root canal later. Blake and I, unfortunately, did not craft our partnership agreement with an eye towards what would happen if we ever wanted to break up. By the way, Blake is back now. One of the great joys of my life is that we were able to reunite. He’s called the MINDBODY evangelist, and he does some special projects like our user group community. But because we didn’t have a clearly crafted agreement, when he decided to leave, didn’t want to work full-time with us anymore and wanted to go do something else, we had no mechanism for transitioning control. We were in effect, equal owners. It led to a power struggle that was very painful and took us years to heal from because we had been close friends before. So, hire that lawyer who has experience with startups to help you think through these things. A few thousand dollars of preventive care will prevent a nasty dispute later because then it’s written down. It says, “If one partner wants to leave,” for example, “then this is what’s going to happen to ensure that the others that are staying with it left holding the ball, or have control” because they should. They’re going to continue to work hard. I think that’s about it.
Alejandro: That’s a good one. That’s a good one for sure, Rick. What is the best way for folks that are listening to reach out and say hi?
Rick Stollmeyer: The best way to reach out and say—well, my email address is pretty easy because it’s my first name, firstname.lastname@example.org. Via social media, I tweet from time-to-time, but the truth is if you try to send me a personal message, I’m probably not going to respond. I get a lot of them, and not all of them are—it’s not an effective method to communicate. So, just shoot me an email.
Alejandro: I hear you. Rick, it has been a pleasure. Thank you so much for being on the DealMakers Show.
Rick Stollmeyer: My pleasure, Alejandro. I had a great experience. Thank you.