Troy Henikoff Wants You!

by: Seth Kravitz

It’s when we least expect opportunity to find us that it typically shows up. Most businesses will have at least one chance encounter in their lifetime that leads to a big opportunity. These are the opportunities no one can plan, whether it’s sitting at the right barstool, a handshake at a conference, deciding to strike up a conversation with the person next to you on the airplane, etc.

In 1992, six years after founding his first company, Specialized Systems and Software, Troy Henikoff (current co-founder of Excelerate Labs)  was sitting in the boardroom of a one of their larger clients, Medline Industries. He had been brought in to discuss a system to help them digitize their achieved paper – invoices, bills of lading, etc. The conversation didn’t stay there for long.

“Medline was a client and they asked us to come in and bid on a project. Basically they were wasting a bunch of money on warehouse space. I’m in the boardroom with the CEO, Jim Mills. I’m sitting there talking about how we just completed Hyatt’s worldwide purchasing system.

“Jim, looks at me and says, ‘If you can do purchasing for hotels, you can do purchasing for hospitals, right? Hospitals are just like hotels, only the people don’t feel so good.’ Those were his exact words. I said yes. He says, ‘Forget the stuff we brought you in to talk about, let’s talk about purchasing systems. I want to hire you.’

“I said, ‘Ok, tell me the specs and I’ll get a quote for you…’

“He cuts me off and says, ‘I don’t think you understand, I want to HIRE you. I want you to come work here as an employee of Medline.’

“’Jim, I can’t do that I have partners, employees, customers…’

“’Ok, then I want to buy your business!’

“’Jim, my business isn’t for sale.’

“’Everything is for sale. How much?’

“’Jim, it’s not for sale.’

“He asked some questions about revenue numbers, and he says, ‘Ok, I’ll buy your business for $X.

“’Jim, we aren’t for sale.’

“So, he gets up and walks out of the boardroom. His brother, the president, walks out as well. I’m sitting with the rest of the board with blank stares, thinking, ‘What just happened? I’m just here to give my presentation…’ So, the next day his brother calls and says, ‘Jim was serious you know. He wants to buy you. Here is a new offer…’ He made a better offer but again we turned it down. We weren’t for sale. Financially we were doing fine, growing on our revenues, had a cool office in Lincoln Park and were having a ton of fun. They continued to call back with new offers again and again. Finally, they came back with a bigger offer that got our attention.”

Troy and his partners would end up selling to Medline with a five-year earn-out contract. But Troy has never been a big company guy. The larger their unit became at Medline, the more he craved the startup environment again.

“By the end of my five years, we had about 55 people. Our little software department was responsible for $125 million in incremental revenue for Medline. We planned for my transition and I was gone the day the five years were up. It was a giant company and I’m a small company guy. I took some time off that summer, ran some marathons, had a ball.”

BORN IN SKOKIE, IL, Troy was always intrigued by tinkering with things. Even from his earliest memories he remembers wanting to know how everything functioned.

“When I was six years old I was starting to read and I was exploring books about Buffalo Bill and Daniel Boon. I remember driving home with dad from the YMCA and sitting in the car I realized there weren’t any horses pulling it. So I asked, ‘Dad, how come there aren’t any horses pulling the car?’ He tried to explain how an internal combustion engine works, but I was six years old. So I asked, ‘Can we make one?’ He came home from the hospital with some surgical tubing, some glass tubing, a beaker, and a syringe. So, we made half a cycle of a steam engine using the stove to heat the beaker and drive steam into the syringe and push a crank.”

Although he never remembers having any thoughts about being an entrepreneur at a young age, Troy always kept himself busy working. Many of us balance mortgages, health insurance, and car payments and a part our drive to succeed comes from the necessity of supporting these costs. Nine-year old-Troy found out the hard way that the things we own sometimes end up owning us.

“I had three paper routes when I was nine. I was getting up at 4:30 a.m. because of that. When I was 10, I saved up enough money so that a friend and I could buy a sailboat for $200. I had my paper routes and I also washed cars and cut lawns as well, because I needed money for boat upkeep. A boat is a fiberglass-lined hole in the water into which you throw money.”

While school never seemed to pose the challenges Troy desired, he did manage to do quite well through the years. After his family moved to Philadelphia his sophomore year of high school, Troy would continue to excel in math and science. By his senior year, he was faced with an interesting opportunity after he had exhausted all of the school’s science opportunities.

“I don’t know how I weaseled this. My high school didn’t do this kind of thing, but my senior year there wasn’t a science class for me to take, so they let me do an independent project. I had this idea that you could use a flywheel to store energy in a car and I wanted to build one. I had an innovative transmission that was a continuously variable transmission. CVT’s are in some production cars now like Subaru and Nissan. But this was back in 1981. I did it with a series of cones and disks. I learned how to weld and put it together with bicycle parts and the engine from a snow blower. It was a great learning experience.”

Deciding that college was the definitely the next big step, Troy wanted something dramatically different from his high school experience. He wanted freedom to learn the way he wanted to learn. Even though his grades were moderately good, Troy is still a little surprised that he was able to get accepted to an Ivy League school.

“Honestly, today I wouldn’t have gotten into Brown with the grades I had. But I had a scale model of the flywheel-powered car I built, and the interviewers were so intrigued by it. It helped me a lot. But once I got there, I definitely fit in perfectly.

Brown doesn’t have core requirements and there isn’t a lot of structure. Their curriculum allows students to experiment a lot. You aren’t told ‘here is the path you take.’ You have to figure out your own path. You can take extra classes simply pass/fail. These extra classes wouldn’t affect your GPA, so you could feel free to experiment and explore in lots of interesting classes.”

Still stuck on his childhood fascination with sailboats, Troy would major in engineering and take all the necessary classes to propel himself towards that goal.

“My dream had been to design sailboats for a living. That’s why I got an engineering degree. But by the time senior year rolled around, I realized that wasn’t the way I wanted to make money. There also wasn’t much opportunity. I remember during the America’s Cup, people were talking about how much money was being spent on the event. I thought, ‘All of these people are spending all this money to see who can race their boat around a triangular course faster. How is this making the world a better place?’ I really got turned off by that aspect of it. I still love them, but I don’t own one.”

Shifting his focus toward other careers in engineering, Troy would begin doing rounds of interviews his senior year. However, the more he saw of what the real world of mechanical engineering was actually like and the daily lives of those engineers, he started to rethink things.

“I was going back to my last interview with General Dynamics. We went on a tour and there must have been 30,000 square feet, the size of a football field, of cubicles and there must have been six identical floors like that. I talked to a guy who had just spent the last 18 months designing the hinge for a door in a submarine and was excited about it. They made me a job offer and there was no amount of money you could have paid me to work there.”

Once again, shifting his focus to another direction, a job opportunity at a Boston-based consulting group caught his attention. Needless to say, after so much change in the past year of his life, he wasn’t completely sure he was making the right choice. It would be easy to argue that the decision he made next changed the course of his life forever.

“I had spent the two previous summers in Chicago doing custom software development for a couple different companies. It was my senior year and I was about to accept this job at a consulting group in Boston, when I decided to call a friend of mine in Chicago. I said, ‘I’m about to accept this job in Boston, is there anything like this company back in Chicago?’ He said, ‘No there isn’t, but the last two years I have seen you do this work for these local companies, and I thought I was going to get all this extra work cleaning up after this dumb college kid. But you did great work and have two customers that would vouch for you. You should start your own consulting company.’”

The thought of being an entrepreneur had never even crossed his mind. He had just spent the last four years building a foundation that he could use to secure a great engineering job. Now, this guy wants him to walk away from all of that and go it alone?

“I laughed out loud on the phone. I have vivid memories of where I was standing. I thought, ‘Me? I’m 21 years old, what do I know about starting a business?’ He said, ‘I’m serious, you should consider it. My business is growing and I need a new accounting system. I’ll be your first customer.’ I thought about it and I realized the risk was low. I didn’t have a mortgage to pay. No kids to support. I could live at home and work out of the basement. So, I decided to give it a shot.”

He would be able to live at home back in Chicago where his family was. The idea of being able to set his own hours, work out of the basement for free, and he would have a first customer upon setting down in Chicago seemed like the perfect way to try entrepreneurship.

It makes for a great story when the first hard lessons of starting a business are delivered on day one.

“A couple months later I get to Chicago. I knock on Michael’s door and he says, ‘Oh, what are you here for Troy?’ I replied, ‘I’m here to work on the accounting system.’ Surprised, he takes me and walks me over to his brand new Unix-based accounting system. He completely forgot about the conversation. So, I lost my first customer before I was even in business. I still decided to start the business anyway.”

MOVING ON FROM MEDLINE after his five-year earn-out was complete gave Troy some breathing room for the first time in years. He could take a step back, consider all the options around him, and take his time deciding what was next. When you have a resume like Troy’s though, it doesn’t take long for the next big thing to plop in your lap.

“My friend Harry, who started Jellyvision, was trying to move his technology in-house. He was asking me questions left and right about technology, and finally he just grabbed me by the neck and said, ‘Why don’t you just come here and do it?’ So, in 1998 I joined Jellyvision to build out their technology. We built the platform that powers the You Don’t Know Jack game.”

(Author side note: To those reading this, You Don’t Know Jack is one of the most addictive trivia games ever. It has recently been re-launched and the reviews are phenomenal so far.)

“One of those You Don’t Know Jack CD’s contained over 10,000 audio clips on it that were spliced into the game in real-time to make the experience feel more interactive. and as if there was an actual live host back there. For example, if you missed a topic in question no. 2 and miss the same topic in question no. 5, it would make fun of you like, ‘You still don’t know the answer to that?’”

Amazing opportunities seem to fly at Troy every few years. The tradition continued after he had only been at Jellyvision for just over a year.

“While I was at Jellyvision, a prior client of mine came to me and said, ‘Hey, I think this internet thing is here to stay. What do you think about if we provided HR services for small businesses who can’t afford their own HR person? We would charge like a $1 a month per employee. Who wouldn’t pay a $1 a month?’”

“We started looking into it just as my project at Jellyvision was wrapping up. It appeared that no one in the HR world was delivering these tools over the internet yet. We realized to do HR we would need to interface with the payroll systems as well. So, to do some research we looked at the public filings of public payroll companies like ADP and Paychex. We saw how much money they were making and we said, ‘Forget HR, payroll is the business to be in!’ We realized that we could be disruptive in the space.”

SUREPAYROLL WAS BORN IN SEPTEMBER 1999 and would address one of the biggest and most inefficient aspects on business at the time. While it seems bizarre by 2011 standards, payroll was still a mostly archaic process for small businesses at the turn of the millennium.

“Back in 1999, you had a payroll specialist who would call in and the company would read off the payroll list. Pay Bob this much, pay Mary this much. Lots of opportunity for mistakes. The specialist would enter all the data into the mainframe, process it, print out reports and the checks, and then these would be delivered to the company via a courier service.

“We realized if we put this online, the business owner would enter their own payroll, check it quickly, and click submit. We could show them how much money was going to come out for taxes and out of their bank account. We would then process it all electronically and email all the employees with a link to the secure site to view their paycheck. The term software-as-a-service didn’t exist yet, but that’s basically what we were creating.”

Realizing the system would take a substantial amount of time and significant resources to develop, Troy and his co-founders knew they needed to raise capital. The timing couldn’t have been worse.

“We were out on Sand Hill Road in April 2000, the week the Nasdaq was dropping 350 points a day. On Monday everyone thought we had an amazing business. By Friday, they wouldn’t even return our calls. We didn’t close on that round of financing until Jan 2001. It was really hard there for a while. We were scraping bottom on the bank account. Our first round ended up being $8 million. We thought that was enough money to get to cash flow positive and go public. All the things you think when you are drinking the Kool-Aid. It ended up being a lot harder than we thought and we needed to raise two more rounds later on.”

Things were always stressful in those first few years of Surepayroll. Not only was money tight, but they were entering uncharted territory with their automated online payroll system.

“I remember one Friday where we had 10 payrolls to process and we were like, ‘All hands on deck!’ Now, Surepayroll processes over 30,000 payrolls.”

As with Medline, Troy once again found himself in an unlikely position for an entrepreneur to consistently arrive at: the company he had founded had grown larger than he felt comfortable with. In addition, this time there was another person taking the rollercoaster ride with him.

“My wife and I got married six weeks into my creation of Surepayroll. We had our first child a week and a half before we closed on our first big funding. If you think about when the really hard part of the negotiations of closing funding are, I was literally in the delivery room. My daughter was born December 19th and we closed the funding January 6th.

“Ultimately I’m an early stage guy. We were processing billions of dollars in payroll. You think of what it takes to be a good early stage entrepreneur; you put things together with duct-tape and bubble gum. You don’t want someone processing billions of dollars with duct-tape and bubble gum.”

In late 2002, Troy stepped out of the day-to-day operations of the company to refocus on family life for a while. On a more recent note, Surepayroll was sold to Paychex for $115 million in December 2010. This makes it one of the largest technology sales in recent Chicago history and a great boost for Chicago’s entrepreneur community.

YOU AREN’T INNOVATIVE UNLESS YOU HAVE FAILED” seems to be a shared feeling among tech entrepreneurs. Pushing the limits of what people are used to or comfortable with is one of the only ways to make something new that is worthwhile. In 2003, Troy and a partner thought they were onto an exciting new way of driving customers to local businesses. They would sell giant discounts online to drive a volume of consumers to local businesses. Sound familiar?

“I did a startup called Certified Supplier that never got off the ground. It was in a way a really early form of the Groupon model, but without the tipping point concept. It was electronic gift certificates sold through eBay. For companies like Fleet Feet Sports, which was a shoe retailer, we would auction off gift certificates for $25 off Nike shoes at Fleet Feet, and someone would win the auction for $5 or $6. We had a fully automated system that did all the customer service, answered questions, and sent the gift certificates.”

Immediately they faced two big challenges. eBay was a million miles wide, but only inches deep as far as any particular product sales go. Second, they needed a mass promotion engine, but none existed yet.

“Twitter and Facebook didn’t exist yet, so we didn’t have the vehicles to distribute the deals around. We ended up doing it for about six months and didn’t get any critical mass, so we shut it down. One of the main problems was that local retailers didn’t think about customer acquisition. We would go in and ask them for their average cost of acquisition per customer. Of course, they had no idea what that number was. So, it was a tough sell purely on numbers. So, we went to larger companies like FTD. But realizing that we could only deliver, let’s say, 500 more orders for them on Valentine’s Day, meant nothing to them. It was a fraction of a fraction of a percent of their sales.

“So, then we approached Circuit City, who was trying to get into audiophile sales at the time. We came up with gift certificates for Monster Cable, since we figured people searching for ‘Monster Cable’ on eBay would be the audiophiles that Circuit City was looking for. We did some research on eBay sales and discovered the single largest selling item on the site, the 20 Gigabyte iPod, sold only 1000 units in the month of January. Circuit City has 600 stores. That’s only 1.6 customers per store per month. We realized right then, this wasn’t going to work. The idea was dead.”

OPPORTUNITY COMES KNOCKING AGAIN in 2005 and 2007 in the form of more big operations reaching out to Troy to head up their latest big operational efforts. The first was a company called Amacai, which is a division of TargusInfo. He was recruited to head up their direct marketing division, and under his guidance they experienced explosive growth in their direct marketing revenues. When the decision was made to not sell Amacai off as a separate entity but to merge it into TargusInfo for strategic reasons, it was time to move on.

Luckily, it only took a few months before another big organization came knocking about an exciting opportunity they had.

“Lake Capital had this idea in 2007 that they were going to do a bunch of niche vertical websites around life events and monetize them through advertising and lead generation. They liked my background from SurePayroll and Amacai. It started out as building a business plan and financial models, presented them to the investment committee, and they were approved. So, we went ahead and built OneWed.com. I ran it for two years, and today the site gets about 500,000 visitors a month. We sold it last fall to a company in Seattle.”

THE INSPIRATION FOR EXCELERATE came from a chance encounter with a group of Northwestern University business students. Troy has always been passionate about giving back to young entrepreneurs

“I started teaching undergraduates at Northwestern in 2005 – it is a class modeled after a class that I helped Barry Merkin develop for the MBA’s at Kellogg. In 2008, I had a team in my class called Next Big Sound, and they were doing stuff around online music and were really passionate about it. They came out of my class with a business plan and decided to execute on it and spent the next year struggling to figure out their business and revenue model. In 2009 they got accepted to TechStars in Boulder and they went down there to be a part of it.

“I didn’t know much about TechStars at the time, but while I was in Boulder for demo day, I realized several things. Boulder had 10 companies and Boston had nine companies. Out of the 19 companies, five of them were Chicago companies. My first reaction was, ‘Wow! This is great!’ Then I realized, ‘Holy crap! These guys left Chicago to come here and most of them aren’t coming back.’ The Next Big Sound was looking to raise $350,000 and they had a line of VC’s waiting to talk to them after their demo. They ended up raising a million instead. Their investors are in Boulder, so they ended up staying in Boulder.”

It was then that a small group of Chicagoans started talking about doing a similar program in Chicago. Five months later, Excelerate was announced.

The passion to give back is deeply rooted in Troy’s desire to provide opportunities, mentorship, and funding that wasn’t there for him when he first got started. Looking back at his first company, he sees dozens of mistakes that he could have avoided with the helping hand of an experienced mentor.

“I had no idea what an entrepreneur was. All I knew was I had this skill, I could talk to companies, solve their business problem with technology, and they would pay me for doing so. When I first started I didn’t have a business plan, I didn’t understand financials, I didn’t understand taxes. I had no clue. That first business was successful in spite of me. That’s what has driven me so passionately about Excelerate—I think back and wonder how much better I could have done if I had mentors guiding me along the way.”

Beyond just supporting entrepreneurs in general, his passion for Chicago runs just as deep. After his experience with watching his students fly to Boulder and stay there, he knew Chicago needed something similar of its own, something to encourage and accelerate innovation in Chicago.

“That experience was the inspiration to launch Excelerate. By November 2009, we decided we were going to do it. The original investors were Sam Yagan, Sandbox, I2A, and me. We scrambled to put it together and convinced Sam to run it for the first year. We raised about $350,000 for the fund. We figured in our first year there were going to be three things to our success. Having enough companies apply so we could have a good pool to find 10 awesome companies. The second was getting the community heavily involved so we could get great mentors involved. We felt that mentorship was the biggest key to the companies’ long-term success. The third was getting interest from investors. The response from the community was phenomenal.

“We had over 100 mentors get involved. In the first month there were 399 meetings between the mentors and the companies. That’s an average of four meetings for every company. For demo day we rented out the House of Blues and we had all 10 companies present on the main stage in front of a standing-room-only audience of 250 investors on the floor. As of today, seven of the 10 have been funded, the eighth is on the way. They have raised a total of over $5 million in funding and now employ 50 people. This is only five months after the event!”

THERE IS A CALL TO ACTION out there for any startup willing to step up. Excelerate is entering its second year and is here to stay. Applications are now open.

“Now we are doing it again for 2011. This year we have an early application deadline. We give special attention to the companies that get their applications in before March 1st. They close on March 18th. We are going to pick 10 companies again. This time we raised a three-year fund, which means we are here to stay. The community had reached out even more. Twelve months ago today, we didn’t even have a name for this yet and now look at it. This year Sam and I are switching places and I will be running it this summer full time.

“The big aspiration around Excelerate is to build the entrepreneurship community in Chicago. Our goal is to make Chicago a great place for startups and technology. So people will look to Chicago to say, ‘That’s where I want to start my company.’”

http://www.exceleratelabs.com/

About the author Seth Kravitz @secondcityceo
Seth Kravitz is the Cofounder & CEO of Technori. Seth is a mentor at TechStars Chicago and The Starter League. At 19, Seth started a web design company out of his dorm room at Ohio State Univ. At 20, he met a local insurance agent with a big idea and co-founded his largest company to date, InsuranceAgents.com in 2004. InsuranceAgents.com grew to a 65 person operation and reached number 24 on the Inc. 500 before being acquired by Bankrate (NYSE: RATE) in 2012.

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