s metaphors for Indy’s startup culture go, a racecar plant seemed an ideal place to gather. A few hundred entrepreneurs arrived at the Dallara IndyCar Factory in Speedway on a hot July afternoon, all keenly aware of the news: ExactTarget, the city’s e-mail marketing giant, had just sold for $2.5 billion. The guests had come for an event called The Innovation Showcase, an opportunity for the city’s aspiring tech founders to pitch their ideas to investors. Attorneys specializing in startup law, in turn, had shown up hoping to get in on the ground floor of the fledgling businesses. Like the open-wheel racecar models that sat around in varying stages of completion, many of the startups here were works in progress. The booth of at least one sported a handwritten cardboard sign. Others already had public-relations people grabbing passersby and hawking their app, website, or biotech firm. A vendor sold T-shirts emblazoned with the universal startup-founder’s credo: “I’ll Sleep When I’m Dead.” In the soaring atrium of steel and glass, about 50 venture capitalists—who manage funds that invest in startups—from several states bounced from booth to booth, carrying poker chips they would use to vote on the idea that deserved the Showcase’s top prize of $60,000 in services and cash. Even above the din, several could be heard wondering aloud: “Who will be the next ExactTarget?”
If Indy’s startup scene has been drafting in recent years, it’s in passing mode now. The sale of ExactTarget to the San Francisco software firm Salesforce.com created more than a dozen new millionaires here—executives who are already pouring that money into local tech businesses. What’s more, the venture-capital funds on the coasts that took a chance on ExactTarget nine years ago just made a mint. They’re not likely to overlook the city where that happened. In 2014, United Airlines will add nonstop flights between San Francisco and Indy to accommodate all the recent traffic.
Kristian Andersen, founder of the local fund Gravity Ventures and part of an investor panel at The Innovation Showcase, is always looking for deals. The $5 billion in new wealth created by Indy tech startups in the last five years, he says, blows Boston out of the water. It blows Portland out of the water. At least 140 startups call Indy home, a number he expects to grow rapidly as young entrepreneurs find they can stay and fund their ideas here. “Sure, there’s a ton of opportunity in Silicon Valley: the biggest venture-capital firms, the brightest minds. But accessing all that is quite difficult today,” Andersen says. “It’s a little like actors who move to Los Angeles. It seems like a great place to launch your career, but unfortunately, there are a million other people trying to do the same thing. Conversely, in Topeka, there’s very little opportunity. But access is really easy—I can have lunch with the mayor every Thursday if I want. Places where opportunity and access overlap are very difficult to find. It wasn’t always this way, and it won’t always be this way, but I don’t know of any other city in America where access and opportunity overlap as profoundly for startups as they do in Indy right now.”
You might call Indianapolis a Stage 3 city—the kind of place Palo Alto was 20 years ago.
Everyone in the startup world talks about stages, although no one agrees on exactly how many there are or when a business has reached the next one. Generally speaking, Stage 1 (seed stage) startups are little more than an idea. Stage 2 (early stage) businesses have a few customers, partnerships, and employees but aren’t yet profitable. Stage 3 (growth stage) companies are rapidly scaling into multimillion-dollar enterprises. Stage 4 (IPO stage) corporations are the few that make it to Wall Street.
You might call Indianapolis a Stage 3 city—the kind of place Palo Alto was 20 years ago. Events like The Innovation Showcase occur here monthly now. A few years ago, the idea of a hangout specifically designed for tech founders would have sounded absurd. Today, five of them around the city compete for members. Over the last decade, only five markets can boast more tech IPOs than Indy. Even in a startup ecosystem as fast-growing as this one, however, it’s a long way from the bottom to the top.
STAGE 1: Recoverator
A crowd of young hackers shuffled into the Speak Easy one Friday night last November, making themselves as comfortable as possible in the industrial confines of the hip Broad Ripple warehouse. Many of them weren’t going anywhere for the next 48 hours. Carrying enough laptops, tablets, and smartphones to challenge even the muscular Wi-Fi at the workspace for entrepreneurs, about 50 of them had signed up for an annual showdown called Indianapolis Startup Weekend. The two-day idea competition pits aspiring founders against each other, and then encourages them to form groups around the best concepts. They came in as strangers. By Sunday, some of them would be in business together.
One by one, the contestants made their way to a small stage to deliver 60-second pitches before a panel of judges: A baby monitor for the iPhone. A website that sells dog treats made from brewery grain. A networking app for business travelers in unfamiliar places. Then Nate Acuff, a 32-year-old software developer and perhaps the only guy in the room wearing a tucked-in dress shirt, stood up and told the hard-luck story of his friend Joel Meador. A few days ago, Meador’s apartment had been burglarized. Like most people, he had no record of his possessions, let alone the serial numbers of the electronics and other items that had been stolen. That gave Acuff an idea. And while some here had been stewing on theirs for years, not days, he made an appeal as seemingly practiced as any infomercial: “Bad things happen—fire, flood, theft,” he said. “You know you’re supposed to keep your serial numbers in a safe place, but no one does. Now imagine an app that allowed you to scan serial numbers with your camera phone, creating an inventory of your stuff that could easily be handed to police or insurance companies. Who wouldn’t want it?”
As the pitches ended, everyone broke off into groups to work on the idea that most intrigued them. Six, including Meador, followed Acuff into a small room and started to map out a business plan.
“Should we charge consumers for the app, or charge insurance companies to provide it as a service?” one team member wondered.
“Will consumers have to photograph their items, or will scanning the serial number automatically generate a photo?” another asked.
“And what’s this thing called?” a third said.
The group wrestled with questions like those for hours. When they emerged late that night, they had a name: Recoverator. For the next two days, Acuff and his partners coded a crude version of the app and website on their laptops. On Sunday night, a panel of judges that included local angel investors—wealthy individuals who finance startups—and tech CEOs convened for the final pitches. Team Recoverator waited its turn. When the moment arrived, Meador delivered the group’s proposition, and with renewed urgency—his place had been burglarized once again during the competition. Sporting a Mohawk and rumpled clothes, he talked the audience through a five-minute PowerPoint presentation, complete with photos of his smashed windows.
The judges conferred. Recoverator, they decided, was clearly the winner. And when they announced it, the free PR, legal, and IT services that were Startup Weekend’s prize seemed sure to carry the seed business to the next stage of development.
Nine months later, Acuff tries to explain why Recoverator never happened. As co-owner of a small group of IT consultants called Expected Behavior, he admits that other projects just got in the way. “We generated a working prototype in a weekend, and the code still works today,” he says. “But not much has been done since. The weekend ended, and we had to get back to our jobs.”
Like plankton, Stage 1 businesses are plentiful but have very little chance of survival. For that reason, even new startups in Silicon Valley rarely attract the capital they need to grow. And in Indy, where the tolerance for risk tends to be lower, a business idea like Recoverator would have to sign up a few customers and show a clear path to revenue before the first $25,000 investment check arrived. Jonathon Perrelli, a former Hoosier and co-founder of Fortify VC in Washington, D.C., travels to startup gatherings throughout the Midwest looking for slightly more mature businesses to bankroll. “At the seed stage, friends, family, and fools invest,” he says. “The rule of thumb for startups is that a third of them will fail in the first year. Another third will struggle along, and maybe investors break even. The successful third pays for all the failures.”
Historically, seed-stage businesses weren’t in much worse shape than their larger counterparts in Indy—there wasn’t a lot of investment capital for the little guys or the big ones. For startups that survive long enough to grow into Stage 2 companies now, however, money comes looking for them.
STAGE 2: ZergNet
Of the hundreds of business ideas presented on ABC’s hit show Shark Tank the past few years, “I Want to Draw a Cat for You” may have been the stupidest. Reggie Renner watched from his Noblesville townhouse in early 2012 as a lovable nerd presented—by rapping, no less—his idea for selling hastily drawn cat cartoons over the Internet. Amused as the show’s four billionaires considering the investment were, three declined quickly. But IU grad and Dallas Mavericks owner Mark Cuban pounced on it: $25,000 for 33 percent of the business. The other financiers could only laugh.
Where most viewers saw a bad idea and good TV, Renner saw opportunity. He paced his apartment late into the evening. If Cuban was willing to take a chance on an idea as wild as that, might he invest in Renner’s nascent business? The 32-year-old self-taught programmer had been tinkering with code for a free widget, which publishers could add to the bottom of stories on their websites, that would recommend links to related stories around the Internet. But the thing didn’t even have a name. And his only business partner was a twentysomething Canadian coder named Mike Langin he had met through online gaming sites and rarely saw in person. Given that Cuban’s e-mail address is listed on the flashy mogul’s blog, Renner decided he had nothing to lose. He carefully crafted a long, detailed e-mail pitch and hit “Send” sometime after midnight. Cuban replied within minutes.
Unfortunately for Renner, it seemed the answer might be “No,” as Cuban asked several questions about the pitch. Renner knew he faced challenges: businesses charging for the service already existed, he had no connections in mainstream publishing, and good algorithms for story recommendations are extremely hard to build. But he also knew the idea was a good one, and he replied to Cuban’s questions that very night. Another e-mail arrived: Cuban was in.
While the Shark won’t divulge exactly how much he invested, sources familiar with the company suggest the amount now approaches seven figures. Renner and Langin, a high-school dropout, began to build the business some 500 miles apart. They decided to start by creating an algorithm that would recommend articles about video games, not only because that’s what they knew, but because readers of those blogs and websites are known to be early adopters of new kinds of technology. In the gaming community, “zerg” refers to a lot of people coming at you at once. So Renner and Langin named their fledgling startup ZergNet. Convincing small gaming publishers to try a free source of additional visitors to their sites was easy. At the bottom of each story, recommendations for a few related articles on other sites steered readers through zergnet.com on the way to those pieces. For every person a publisher sent through the site to another article, the publisher could expect about three visits in return (thanks to ZergNet’s readers clicking multiple links). The number of visitors grew modestly at first. Then, in June 2012, the business expanded to recommending movie-related articles. Traffic exploded.
Today, more than 12.7 million unique visitors hit zergnet.com every month—more than nbc.com. As the site has expanded into sports, news, and other categories, it has acquired partners such as MTV and TMZ; a deal with The Huffington Post is in the works. Yet the business has fewer than 10 employees working from their homes and spent less than $100,000 last year, mostly on very modest salaries and server costs. Because Renner, slightly heavyset and rarely shaven, shies away from social situations, he hasn’t engaged much with the startup community in Indy. Although ZergNet’s current traffic would be worth millions of dollars a year if he slapped up a few banner ads, not a single article has been written (until now) on the enterprise, which traffics 200 million of them a month. It may be the city’s quietest success story.
Of course, that’s only true if you measure success in traffic and not dollars. Unlike most Stage 2 companies, ZergNet doesn’t yet have its first paying customer. It generates $0 in revenue. Cuban, who e-mails Renner twice a week for updates and, surprisingly, has never spoken to him on the phone, encourages the founder to focus instead on growth. “Every now and then,” Cuban wrote IM in his preferred medium, “a company has the chance to dominate its market and become ubiquitous, all while knowing it won’t be difficult to generate revenue once it has reached critical mass. ZergNet is one of those companies.”
Not having a strategy for generating money makes Renner’s business an oddball in Indy, where the California approach to funding unmonetized sites (as Twitter once was) remains rare. And dauntingly, ZergNet’s biggest competitor, Outbrain, is a billion-dollar New York company that charges advertisers to direct traffic to them. Renner isn’t exactly hurting for cash, however. For now, he actually turns away venture capital to retain as much equity as possible. “I could walk into any VC firm and say, ‘Here is my traffic. Here is my growth. Give me money,’” he says.
With new categories of stories rapidly being added, Renner would like to see his traffic double or triple in the next two years. Then, and only then, will it be time for a round of fundraising, hiring, and a headquarters. Renner may even have to abandon his hermetic lifestyle and network a bit. “I’m not really ready to go back to work in an office,” he says. “It’ll be rough.”
STAGE 3: ChaCha/Social Reactor
On February 24, 2011, Scott Jones awoke to learn he had lost half of his business. The serial inventor’s question-and-answer site ChaCha had been humming along at 22 million unique visitors a month, bringing the six-year-old Carmel-based startup closer and closer to profitability. Then Google launched a reworked version of its search-engine algorithm. Aimed at reducing “low-quality” sites that spammers had optimized to appear high on Google’s results pages, the update also had the effect of devastating some legitimate Internet destinations. The change immediately cut ChaCha’s unique page views by 50 percent.
A wave of layoffs followed. Jones, who invented voicemail and co-founded the company that owned some of the software underlying the iPod, was on the verge of the biggest failure of his career. So he and his team turned where every business seems to turn these days for salvation: social media. In addition to answering questions, ChaCha publishes quizzes and photo galleries. To drive more people to those, Jones experimented with paying Facebook and Twitter celebrities to broadcast the posts. The ploy worked. In a single year, ChaCha managed to reclaim all of the traffic it had lost. “It was going so well; about two-thirds of our traffic was coming from social media,” he says. “We decided to see if anyone else wanted to benefit from what we had learned.”
Jones branded the new wing of his company Social Reactor—a startup within a startup. About a dozen of his 73 employees work on the business today. They pay a team of about 7,000 “influencers” to tweet and post on behalf of clients like Red Bull, MTV, and Disney. Some are B-list celebrities like David Hasselhoff or Crystal Hefner (Hugh’s wife). More often, they’re people with huge Twitter fandoms but little name recognition. (Ron Ciccarelli, who runs astrology handle @Xstrology, has 2.6 million followers.) Paying big names to promote brands through social media is nothing new, of course. A-listers such as Kim Kardashian and Justin Bieber command upwards of $10,000 per tweet. But Social Reactor’s pay-by-the-click model—a client pays them only when a reader clicks the link on a celebrity’s post, sending the reader to the client’s website—creates something to measure. They know exactly how many people saw Hefner’s tweet and ended up at MTV.com as a result.
Early this year, Jones added a key member of the startup community to his team, though it wasn’t his first attempt to do so. Matt Hunckler, a recent graduate of IU’s No. 1–ranked entrepreneurship program, had his sights on Silicon Valley. Through the Orr Fellowship, designed to attract entrepreneurial talent to Indy, Jones hired the 26-year-old instead. Then ChaCha promptly downsized, eliminating his position before he even started. Hunckler stayed in Indy, looking for another opportunity, and founded Verge, a social group for entrepreneurs that meets once a month at places like the Speak Easy. That collective quickly swelled to 2,300 members in four cities. Hunckler, who is short neither in stature nor charm, found himself answering for the startup community in every Indianapolis Star article on the subject, and even visited the White House in 2012 to meet the nation’s chief technology officer and deliver a presentation on what was happening here. He organized an idea competition called Powder Keg at Lucas Oil Stadium last October that Forbes called “the best startup event you’ve never heard of.” If the tech scene had a 2013 yearbook, Hunckler would be the guy Least Likely to Ever Work for Anyone Else.
“We had to risk personal bankruptcy in our mid-20s,” says Scott Jones. “And it’s no different now.”
“The perception is indeed that he’s a startup guy,” Jones says. “But the truth is, while he has done some startup-y things, he hasn’t done a voicemail. He hasn’t done a Gracenote [Jones’s software in the iPod]. So he can learn a lot from being in this world. We did $12 million in revenue last year. We created something large from nothing. Sometimes you can create it for yourself, but I think he became convinced that we were already onto something interesting with Social Reactor. It’s like hopping into a Ferrari instead of walking.”
When Jones reached out with a job offer again in 2013, Hunckler was intrigued as much by the business concept as having one of Indy’s tech titans as a mentor. “It was very similar to an idea I had written down in a Moleskine years ago,” he says. “Scott has needed me in a sales role lately, and I have a knack for that. I learned to do it selling Kirby vacuum cleaners door-to-door in college. One thing that separates the entrepreneurs from the ‘wantrepreneurs’ is how you behave when things aren’t going well. Will you knock on that next door even though you’ve been turned down 10 times? It’s hustle.”
Hunckler has flown to New York and San Francisco a lot over the past year, trying to convince ad agencies to fit Social Reactor into their media pitches. He remembers wearing a suit to his first meeting with MTV and finding a room full of executives in Chuck Taylors and T-shirts. While not all of the stereotypes of tech and entertainment people ring true, hoodies have indeed replaced Hugo Boss. Jones has even been known to wear sweatpants to speeches.
ChaCha and Social Reactor grew by about 58 percent last year, a rate that isn’t nearly fast enough for Jones. His voicemail company, Boston Technology, expanded by 1,000 percent in its third year. He knows that companies need to “pop,” or hyperaccelerate, if they’re ever going to reach the IPO stage. The two businesses do enjoy an unusual advantage over most startups, however: The founder is independently wealthy and doesn’t need much venture capital. Jones has estimated his net worth at $150 million, much of which came from the sale of BT. So the occasional investor in ChaCha, such as Amazon CEO Jeff Bezos, amounts to a luxury, not a necessity.
Even so, Jones hasn’t forgotten the struggle of raising money. He started Gazelle Tech Ventures, the forerunner of Allos Ventures, a $50 million investment fund that has attracted several other funds to Indy. Finding people to ask for $200,000 to advance a business might be easier for the Verge entrepreneurs than it was for his generation—and it’s about to get easier still with a crop of new ExactTarget millionaires. But Jones emphasizes that for all that’s changed, you’re still asking people to back a longshot.
“If you’re a 20-year-old who has no pedigree, you’re in the same boat I was in when I was first trying to raise capital,” he says. “People laugh at you. I don’t think it’s legitimate to expect money to just drop in your lap. You earn it the hard way.”
Before he and his partner at Boston Technology got friends-and-family money, they signed up for every credit card they could find and maxed them out. The first $50,000 came from credit cards. The next $200,000 came from friends and family. The next few hundred thousand came from angel investors. The final $16 million leading to the IPO came from Merrill Lynch. “It was a dangerous game,” Jones says. “We had to risk personal bankruptcy in our mid-20s to make that happen, and it’s no different now.”
STAGE 4: ExactTarget
If their business sounded like one that was going nowhere when they founded ExactTarget in 2000, at least Scott Dorsey, Chris Baggott, and Peter McCormick had no trouble keeping their dress shirts crisp. Baggott owned a local chain of dry cleaners, which became the first customer for a company he formed around a new idea: permission-based e-mail marketing. Skeptics could be forgiven. “Spam” had been added to the Oxford English Dictionary only two years before. The prevailing wisdom said that no one would willingly provide his e-mail to a dry cleaner or any other business. Moreover, the Internet bubble had just burst. But through in-store sign-up sheets, Baggott gathered e-mail addresses from any of his customers who would give them and quickly found the method a great way to send coupons. The average rate for newspaper coupon redemption was around 1 percent. Baggott’s e-mail blasts averaged 15 percent.
Sensing an opportunity to sell the service, he recruited a recent graduate of Northwestern University’s MBA program named Scott Dorsey—a guy who also happened to be his brother-in-law. As CEO, Dorsey brought on McCormick, an old buddy from his days working at a Michigan furniture manufacturer. The three began traveling to conferences, setting up booths to spread the word about e-mail marketing. They experimented with diversification, selling to restaurants and other businesses. Because the base subscription fee was just $1,500 a year, plenty were willing to try it.
“We started generating revenue very early on,” Dorsey says. “Suddenly we could hire, and we focused on hiring only two kinds of people: developers and salespeople. I see so many early-stage businesses get off-track by bringing on employees in other areas that are only important as you get bigger. In those early days, you need to be focused on people who are building something or selling it.”
ExactTarget established a tiny headquarters in Greenfield. In 2001, angel investor Bob Compton poured $1 million into the business. By 2003, large corporations like CareerBuilder.com and The Home Depot were experimenting with ET’s services. In 2005, 200 employees moved into ET’s new headquarters on Monument Circle. A few years later, there were 1,000 workers. The incredible growth earned ET the nickname “Google of the Midwest.”
When the time came for an initial public offering in March 2012, Baggott had left the business, and Dorsey and McCormick (senior vice president) owned millions of dollars in stock. During ET’s first day on the NYSE, the 8.5 million shares traded for $23.05 each. But the real seismic shift—for the business and the city—was still 15 months off. For a few years, Salesforce.com, a San Francisco–based cloud-computing company, had partnered with ET on projects. On June 4 of this year, Salesforce announced it would acquire ET for $2.5 billion. Because most of the Indy company’s venture capital had come from groups on the coasts, like the $4 billion megafund Battery Ventures (which also profited from the $900 million IPO of Angie’s List in 2011), it certainly wasn’t lost on those investors how much money they had made by betting on Indiana talent.
Closer to home, new fortunes sprang up overnight. Dorsey’s shares rose to a value of about $70 million. His colleagues at ET, where every employee owns some equity, also won big. According to the Indianapolis Business Journal, Scott McCorkle (president of technology and strategy, $26.5 million), Traci Dolan (chief administrative officer, $11 million), Andrew Kofoid (chief operating officer, $10.2 million), Timothy Kopp (chief marketing officer, $10 million), and Steven Collins (chief financial officer, $6.7 million) all enjoyed huge paydays. Many other ET staffers reaped smaller fortunes.
“That sale has shone such a bright light on Indianapolis,” says Kristian Andersen, the venture capitalist. “There are a number of VC funds from the coasts that feel they’ve found the pot of gold at the end of the rainbow. So we’re poised for a flood of external investment. But we’re also poised internally. Those new millionaires aren’t going to stick that money in a 401(k). They’re already calling me. The money has already started to find its way into the startup ecosystem.”
How big has ExactTarget gotten? Its annual Connections event drew 6,000 clients to the JW Marriott and the Convention Center in mid-September to hear speakers such as Condoleezza Rice and Steve Jobs biographer Walter Isaacson. Over at Lucas Oil Stadium, the Avett Brothers provided musical entertainment. ET’s three downtown office buildings host a sea of cubicles filled with orange tchotchkes, a nod to the company’s signature color that feels as corporate as the former encouragement of employee-worn “flair” at TGI Friday’s. Dorsey, an affable executive who once made himself extremely available to the press, now struggles to grant a 10-minute interview.
In other words, ExactTarget has blown up—the envy of tech startups from every stage. And Scott Jones, who has taken the ride himself, believes the biggest impact will be on the youngest entrepreneurs. “This is what we’ve been missing for decades in Indy: examples of people who got rich from equity,” he says. “If the guy with the nicest house in your neighborhood came from ExactTarget, you’re going to notice. In Silicon Valley, you can’t miss it. It’s not just the nicest house in the neighborhood, it’s every other house. If you’re a 22-year-old and you see that, you can’t help but think that entrepreneurship is the way to go.”
Photos by Tony Valainis
This article appeared in the October 2013 issue.