Schafer: Cash in the bank makes risk easier to stomach

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: November 10, 2012 - 5:11 PM
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Matthew Dornquast is the chairman/CEO and owner of Code 42 Software, a Minneapolis company that backs up data with a service called CrashPlan. The company also does some with with hardware, designing and selling servers (made in California) to run its backup software for corporate clients. At Dornquast's right is the company's modern-looking logo, which he described as emblematic of making order out of chaos.

Photo: Jim Gehrz, Star Tribune

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Think about how an entrepreneur's behavior would change if the company had $1 million in the bank. Or maybe $5 million.

Not that the founder intended to spend it, but would knowledge that the money was there get the company to take more risk? Would it grow faster?

For Matthew Dornquast of Code 42 Software Inc., having money does let him be more aggressive.

It's been 10 months since Code 42, based in Minneapolis, announced a $52.5 million investment by the venture capital firms Accel Partners and Split Rock Partners, the first capital the company has ever raised. That money is still on the balance sheet.

"This capital isn't here to be burned through," said Dornquast, Code 42's co-founder and CEO. "This capital is here to embolden us to do the things we think we need to do."

Code 42 sells software used to easily back up data produced by computers and other electronic gadgets, for homes as well as big companies. It has some strong industry winds at its back, but its products also get plenty of good press.

It grew from about $1.4 million in sales in 2008 to $18.5 million in 2011, so the team has enjoyed a good run. As Dornquast described why he and his co-founders took outside capital, what came across was more that they felt financially constrained, not that they actually were.

Dornquast likens the situation to a blackjack player on a hot streak. Early in the evening, betting all of the chips on a hand seems fine. It's just a few bucks.

But as the chips pile up, the value of making a meaningful bet starts to grow. At some point, each bet seems like a lot of money, and the player starts to grow cautious.

That's the problem. They knew what to do, they just needed the security of capital to push ahead.

An example of how the new capital changed thinking, he said, is Code 42's recent "Carbonite Switcher" campaign, sort of a Pepsi Challenge for data backup software. It provides a yearlong free trial to anyone dumping that competitor's product for Code 42's.

It's a sound marketing program and is going well, he said. "It really comes down to this: You can take short-term hits for a longer-term gain. You really can't do that in bootstrap mode."

Code 42, in fact, had been bootstrapped from its founding in late 2001. It aspired from Day One to develop and sell Code 42 products, but to pay bills for the first five years the company did projects for other companies.

The product the founders got around to eventually was CrashPlan, an automated data backup software launched in 2007 at the consumer market.

Not long after, Dornquast said, he "sensed" that a bigger opportunity may lie in data backup products for large business organizations, adding that "by the way, that isn't that hard when Google said they were thinking about running [CrashPlan]. I mean, Google."

He explored venture capital in 2008 with firms like Sequoia Capital in Silicon Valley. Talks ground to a halt as the financial crisis blew up and sapped investor appetite for new deals at anything other than rock bottom valuations.

So Code 42 kept on funding itself as it rolled new versions of CrashPlan into the corporate market. Word of its success got around.

Attention got to the point that in mid-2011, Dornquast said, he sorted his e-mail inbox and counted more than 100 unsolicited inquiries from investors just in one 30-day period.

In a position to pick partners, Code 42 chose Accel Partners, best known for its early funding of Facebook, and Split Rock. New directors included Split Rock's Michael Gorman.

Growth continued in 2012, as employment grew from 78 at the end of 2011 to 152 this week. It's just that the company has met those expenses without needing the investors' money.

Gorman explained the funding round this way: "The opportunity doesn't wait for them to grow at a pace that they may want to grow. This provides them some degrees of freedom."

The venture capitalists, of course, bring their personal networks and experience in addition to capital. Dornquast said he can now use Accel relationships to reach senior Silicon Valley professionals such as cloud storage architects at Facebook. In one call.

He said recently he was playing a game made by the social networking gaming firm Zynga, and noted an advertisement, just then remembering that results from Code 42's own ad with Zynga were disappointing. "With 30 seconds of effort I was able to connect that company's marketing VP with our marketing," he said. "Well, this is how we scale."

Figuring out the best way to quickly "scale," or grow the organization, is top of mind for Dornquast, who twice in one conversation observed that "the problem of a year of experience is that it takes a whole year."

What's remarkable is how little of what he talked about means spending any investor money.

No big-dollar recruits from Silicon Valley. Former Compellent Technologies executive Brian Bell is now on board as Code 42 president and chief operating officer, but he was from the Twin Cities. Dornquast said having capital may have helped recruit him.

And no big raise for Dornquast. "I just assumed that would be off the table" with new financial partners, Dornquast said. "Seems kind of rude, doesn't it?"

Staff sit on Herman Miller Aeron chairs and peer into large computer monitors, Dornquast said. But they also did back when the company was nothing more than a handful of people.

"We do have nicer whiteboards, I admit that," he said. But a request for a video conference system was denied, as Skype seems to still work fine.

"In a perfect world, that capital is never touched," he said. "It just sits there. That's a win for me."

lee.schafer@startribune.com • 612-673-4302

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