Turning an Addiction into a Bootstrapped Startup

by: Megan Weinerman

AS THE SON OF RUSSIAN IMMIGRANTS, Dan Ushman would struggle for years to find something he could focus his mind on and hopefully deter his wild tendencies.  Looking back now, he started out like so many tech entrepreneurs: obsessed with computers and no real interest in school.

“As long as I can remember, I was always a piss-poor student. Always. I failed a lot of classes because I just didn’t go. I was pretty reckless and didn’t like fitting into any kind of regimen. I got into trouble a lot, like the time a friend and I coated our principal’s car with mustard. It completely takes off the paint, you know. That’s why we did it.”

“But I always had aspirations. I didn’t know what they were at the time, but I knew I didn’t want to follow the traditional path of school, college, marriage, job. I wanted to do something on my own.”

“And I had a lot of fun playing with computers. I remember the day I asked my dad for our first computer. He fought me. Then he relented. So, we went to Comp USA and I picked up a shiny Packard Bell and I spent the rest of my adolescence playing with a keyboard. “

THAT WAS THE BEGINNING OF DAN’S FUTURE BUSINESS, even though he didn’t know it at the time. He didn’t know where his life was going and was too busy living in the here and now while his classmates thought about college and taking the ACT. Even though he had a lot of aspirations to plot an uncommon path for his life, other than spending a lot of time skateboarding, Dan wasn’t doing much to actually make that happen.

He would spend time writing useless little pieces of software, including a virus or two to plant on friend’s computer to mess with them. That would all change at the age of 16 when he literally stumbled into the realization that if you build something people need, they will pay you for it!

“I started to experiment with writing code. People downloaded my programs and liked them. So I gained some notoriety, and by the time I was 16, I was starting to make money. Writing and selling my first anti-virus tool made me my first $100. I would not call coding an escape. It was a passion. I went to bed thinking about it. I woke up thinking about it. It was a lot of fun. I had no idea what I was doing, but I knew I wanted it to become a business. I remember when my program first started selling, I begged my dad to open a bank account for me because I was too young to open one myself. He did, and I think from that point it became serious for me.”

DAN’S OBSESSION WITH COMPUTERS was partially fueled by his home life, which he readily admits wasn’t peachy. Growing up in Buffalo Grove, Dan remembers finding solace in his ability to shut the world out and get lost in online world.

“My parents divorced when I was 14, right around when I first started playing with computers. They were not afraid to get confrontational with me, or each other. They would argue a lot and I would play in the basement on the computer and ignore them. I think their fighting really affected me. To this day I’m afraid of marriage.”

Like so many immigrant families, Dan watched his parent’s work night and day to try to build a new life for themselves.

“In Russia, my dad was a nuclear engineer. He worked on Chernobyl before it went kaput. When he moved here he worked for a large electrical contracting and drafting company in Chicago. Then he was laid off after ten years. He’s very bright and talented but he had to provide for his wife, children and extended family that my parents had helped move here from Russia and Eastern Europe. So, he did what he had to do and started driving a taxi. My mom was a piano teacher. I saw how they worked for days on end.”

Another common trait of immigrant families is a very strong drive to insure their kids receive the best education possible. For so many, the opportunities that were non-existent back home, were now within reach in America. The pressure to excel at school was often too much for Dan.

“Being an engineer, my dad was fiercely into education. It bothered him that I had such disdain for it. I always told them I would be a business guy at some point, but my parents were reluctant. They believed in the traditional path of going to college, getting a degree and being a doctor or a lawyer. They did everything they could to stop my obsession with computers, and almost took away my computer and Internet access many times. It wasn’t until I started making some money from it that they let me be.”

Sometimes it only takes the smallest success to prove your point. Dan had finally been able to show, in real world terms (cash in the bank account) that what he was doing in front of the computer all those hours had a real purpose to it.

While building an online advertising platform called Adtention, he noticed that many of the advertisers looking to use his software were web hosting companies. After taking a hard look at the web hosting space, he discovered one very interesting fact: there didn’t seem to be a definitive guide to reviews and ratings of web hosts. With that realization, Hosting Catalog was born.

“I started to experiment more. I wrote an ad server program and launched a web hosting comparison site in order to sell ads. It started generating traffic and making money. I was selling ads to various web hosting companies. I became addicted to selling ads, building the site and growing it. And it worked out well. Selling ads is tough, but it’s an incredible business if you own your own property.”

Trying to balance high school and a growing company was a daily struggle. Sometimes you just have to get creative with what you think of as an “office”.

“I remember in high school taking a sales call from a bathroom stall and hoping the guy next to me wouldn’t flush. I was making good money for a high school senior: $3,000-$5,000 a month in the beginning. I held on to it for about 10 months then when it started to peek in traffic and revenue, I sold it. That was around August 2002. With the money I made from the sale, I was able to pay for school and a car when I went to college.”

AT SOUTHERN ILLINOIS UNIVERSITY, Dan turned half of his dorm room into an office, bumping his desk up against his bed and taking over most of the space in the room. He told his roommate that he didn’t want any noise because he would be working. When the university found out that he was running a business from the dorm, he got into trouble. He told them he would stop, but he just kept going. Every time they would catch him and tell him to stop, he would simply continue on.

During his first semester he would launch his second company. Not wanting to search for another potential industry, Dan decided what better business to try next but something else web hosting related.

“I started a site called HostSkin that sold pre-made website designs to small web hosting companies. I partnered with a designer friend of mine in California. The motto was “Look Big When You’re Starting Small”. It did well for a little awhile, but I shouldn’t have partnered with a designer and put all of my eggs in his basket. I should have hired designers. He eventually fell apart, then I fell apart and that was the end.”

Never one to lay down and mull over a loss, Dan immediately struck out again to try a new concept.

“Then Zak Boca, who owned a hosting review website called RateMyHost, came along. We were online friends since my Hosting Catalog days and had never met in person. I was in Illinois. He was in Kentucky. I was marketing website designs and software and Zak was doing stuff with ads, too. At this point one of us said, ‘Hey, we’re both pretty good at selling hosting, running sites, getting advertisers and getting them to stay. Let’s start our own hosting company together!’ I said I had the perfect name for it: midPhase. It just sounded cool. “

Dan had always been on the side of marketer; helping other hosting companies find new customers. Now for the first time, Dan and his partner Zak would be the hosting company and they would have to fend for themselves.

“We threw midPhase together quickly.  We maxed out our credit cards; we really boot-strapped it.  I remember we took midPhase live in May 2003. I picked up Zak at the airport and headed to my dad’s house where I had a make-shift office set up in the spare bedroom. We stayed together for a week to launch the site. We had four sales our first day. “

“I think we were a little ahead of our time because of the way we focused on affiliate marketing. Zak and I are marketers at heart. I like to think in terms of ‘How do I market this? How do I sell this? How do I position it?’  And the hosting industry, if you know anything about it, is full of techies. All the hosting companies focus their energy on being technically excellent. We wanted to be that, too, but none of them were marketers. We learned there were only a handful of companies who knew how to market hosts, and there were 10,000 that had no clue. Those 10,000 were all fighting with each other for a 10% sliver of the market, while a handful of companies were pulling in 90%. We wanted to be part of that 90%.”

True to the nature of any bootstrapped company, they could only grow when their revenue grew. The process of what should be referred to as “relentless sales” began. The fell back on every piece of knowledge they had learned as hosting marketers and took it to a new extreme.

“We rolled out our own affiliate program. We bought ads everywhere, reinvested every penny we made into marketing, and paid out affiliate commissions higher than our competitors. We realized it was just a numbers game: the more people you touched, the more conversions you got, the more sites you got on, the better you converted. It was just a vicious cycle, but it worked.”

The sales started to roll in, just like they had when they drove customers to competitors in the past. Only this time, they had to deal with customer service, technical problems, and significant overhead.

“We were selling thirty accounts the first month, sixty the next. We eventually grew to 600 customers and were making $9,000 a month in revenue, all while running the business at college. Our phone system was set up so a call would bounce from my dorm, to Zak’s house, to my cell, then Zak’s cell until one of us would pick up.”

Throughout all of this, Dan struggled to find any meaning in his presence at college. He would eventually transfer twice, before dropping out his second year after four disastrous semesters. Looking back now it certainly was for the best, as the next few years would be a whirlwind of business growth.

“I was skipping class or running out of class to take phone support calls, a service we had to provide because most of our competitors didn’t. We didn’t know how long we’d be in business, but we agreed that if we reached a quota of a 1,000 accounts, we ‘d leave school and open an office. We were at 1,500 accounts by November 2004. So when the semester ended, I was done.”

Realizing it was time to get out of the parent’s house and find a real location to run the company, in true bootstrapper form, Dan found the cheapest office possible. midPhase’s first office makes most startup office horror stories seem luxurious in comparison.

“We rented a basement office with doors that didn’t lock, windows that were so high up you couldn’t use them, and a patio door with a screen separating two rooms, right in the center of the office. I think the rent was $700 a month for about 1,000 square feet. There were cockroaches and grease stains everywhere. The rooms on either side of our office were full of broken desks and furniture.  But we sat there all day, sitting at the desks I’d built by hand, taking support calls.”

Things may not have been comfortable, but they were moving along quickly. The business allowed Dan to take care of his family, but didn’t leave anything else for himself.

“By that time my dad had more faith in me. I paid all their living expenses and he was able to retire from driving a cab. But he was nervous. We had no clue what we were doing, I was getting further and further into debt, I’d quit school, and Zak and I weren’t paying ourselves a dime.”

MIDPHASE WAS GROWING, but it was about to make a big leap no one saw coming. Around 2004, they were presented with a big opportunity for an acquisition. A competitor approached them about selling their hosting company, AN Hosting.

Realizing that they had accumulated enough cash to afford the acquisition, Dan and Zak saw that it was true win-win and dove in head first. With a little creative negotiating, trading some assets, and a couple of promissory notes, they were able to seal the deal quickly.

“AN Hosting had accumulated nearly 60,000 accounts while MidPhase had probably about 20,000 at the time. So, midPhase acquired half of the company, while one of the ANHosting founders retained the other half. They literally split the business down the middle, 30,000 and 30,000.”

midPhase had just doubled in size overnight and they now had over 50,000 accounts. The company began to take a on a new life almost immediately.

“AN Hosting’s brand had a lot of good rankings and traffic. It gave us our second mainstream brand. The increase in revenue was immediately noticeable. We were signing up more accounts and billing more people. We decided, ‘Enough of the cockroaches. We’re moving downtown!’ That was around 2005 or 2006 when we moved to the corner of Jackson & Wells. We each had our own office, we all had windows, and it was the beginning of our golden days.”

Dan and Zak had just learned one of the tricks to the entry-level hosting industry. With so much advertising noise and thousands of competitors with nearly identical products, if you wanted to grow, you had to do it through acquisition. The more brands you had, the more advertising space you could hog up on Google, in publications, at events, and across affiliate marketing channels.

“This was also the birth of our overall strategy for midPhase: developing multiple brands and marketing them separately but alongside each other. As we acquired more companies, I applied this same strategy of operating multiple brands that offer similar products and promoting them in the same places at the same time. By 2007 we were paying out nearly $1 million a month in affiliate commissions and growing rapidly. I think at one point we peaked at 1,000 new accounts per day. I remember that day very distinctly.”

A NEW BRAND AND A NEW DIRECTION WITH SINGLEHOP. Wanting to get out of the unreliable world of the entry-level hosting, Dan and Zak would set their sights on the much more resource intensive side of the industry called, dedicated hosting. While midPhase continued to grow, they began to plan their entrance into dedicated hosting with the silent launch of their most recent brand, SingleHop, in 2006.

“SingleHop was originally built by sharing a lot of the same staff with midPhase, but as soon as we approached the eventual sale of midPhase in 2007, we completely split it off. We were so excited about getting into dedicated hosting because there are like 10,000 hosting companies, and they all make the same boring claims: uptime, support, etc. Anyone can make these claims and they really don’t make one company any better or worse than another.”

Dan and Zak wanted to make this unlike any other dedicated host they knew. It needed to be focused on automating everything possible on the customer end to make their life easier.

“SingleHop has all of these fundamentals, we have a good network and all that, but what really makes us different is how much control we give our customers… be it control to provision a new server themselves without talking to us, or just to reboot their server from their cell phone… We were the first in the market with this level of automation and accessibility, and that’s what I think makes the SingleHop platform so unique and attractive.”

With the intense growth, they are experiencing some of the difficult, but fun, aspects of rapid growth.

“We’re going to have to find a new office; we’re busting at the seams right now. People are literally sitting on top of each other. We are always looking at other data centers, but for now we don’t have any concrete plans. Potentially, we may be adding a location on the west coast somewhere in the future.”

Looking at what they have been able to accomplish with no outside funding is pretty astounding. By bartering for services, operating as lean as possible, and reinvesting every dollar in profit Dan and Zak  have been able to grow from a two person shop in Dan’s bedroom to a $20mm operation that 100% owns its downtown data centers.

As for what the future holds, Dan passionately believes in Chicago’s ability to transform into an true startup community. His thoughts don’t focus on building giant incubators or creating our own Techcrunch, but rather Dan sees the power residing in cups of coffee and corner booths filled with entrepreneurs sharing their ideas over a beer.

“I’d love to see the community come together and be more than a spread out series of events. I’d love to be able to walk into a coffee shop and hear background noise littered with internet terminology like CPM, CPA, Visitors, Impressions, PHP, MySQL, etc. That’s something you get in other parts of the country, but we need it here.”

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This is the first article of our newest writer, Megan Weinerman.

About the author Megan Weinerman @Technori

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