Anatomy of a Startup

Behind the scenes of Hawaii’s latest dot-com venture

March, 2006

It was an absolutely gorgeous day on Oahu’s North Shore. Waimea Bay was epic, at a solid 25 feet, and Olin Lagon was dropping into what was by far the biggest wave of the day when his life began flashing before his eyes. As the monstrous wave lifted the tail of Lagon’s board, sending him flying down its steep face, black-and-white visions flickered in his head like an old motion-picture reel. Childhood memories. Long-lost friends. And an idea for a revolutionary new Web-based business.

The truth is, the actual story of how Lagon’s initial concept became the impetus for a dot-com startup with the potential to be not just Hawaii’s – but the world’s – hottest tech phenom in recent memory, is far more compelling than any surfer’s tale Lagon could concoct.Alright, alright. There was no 25-foot wave. There were no visions. Heck, Lagon wasn’t even out of bed when his Aha! moment hit him. “Actually, I just sort of woke up one morning after having had this idea in my head for a few days, with the realization that no one else was doing it,” he admits, after telling the lavish Waimea tale in the hopes it might make for a better story.

It all began with a very simple act, one that each and every one of us has committed at least once in our lives: chipping in. For days, the secretary at the Council for Native Hawaiian Advancement, where Lagon was working as the head of one of CNHA’s subsidiaries, had been scurrying around the office, futilely trying to collect money for an office gift that everyone was chipping in for. We all know how that goes. The collector begs and pleads. Some people forget. Some pay too much. Others don’t pay at all. And then the envelope gets lost. “It never works out perfect. It’s a pain in the ass, it takes up a lot of time and it leaves a bad taste in people’s mouths,” says Lagon. “The bottom line is that the process sucks.”

THE LAW OF SUPPLY AND DEMAND

Beyond griping, most people wouldn’t have given it a second thought. But Lagon isn’t like most people. A product of Hawaii’s public housing compounds, and the youngest of four in a single-parent household, Lagon overcame tremendous odds to become one of the state’s most innovative, socially conscious entrepreneurs. At 34, he’s already got three successful startups under his belt, and has designed software that’s been adopted by Kodak, Disney and MIT. He’s perhaps best known for his role in creating some of the technology behind former Hawaii tech firm WorldPoint Interactive, which was among the world’s first multilingual Web content management systems and, in its day, was the industry standard.

WorldPoint’s initial popularity, Lagon says, was a simple matter of supply and demand. The founders recognized a huge market for a service that no one was providing, and created a product to fill that gap.

After witnessing his secretary’s plight, Lagon came to a similar realization. Every day, millions of people around the world chip in for something, whether it be a birthday gift or an office lunch – and yet there is no simple, convenient or uniform way to pool money together. He saw the demand. All he needed to do was figure out how to supply it.

Carnet Williams
Title: Chief Executive Officer
Age: 35
Birth Place: Bangkok, Thailand
Previous Startups: NetCorps.org, Boardtactics.com, TurboLinux.com, NetVocate.com, SkyWavebroadband.net
Past employment: Associate dean, Stanford Law School; director, academic technology, Stanford University; executive director, NetCorps; director of International Trade Policy, The Nature Conservancy; CEO, Boardtactics.com; CEO, Skywave Broadband; executive director, HiBEAM; technology strategic planning consultant, Punahou School
Community involvement: National Technology Enterprise Network Founder and Board Member (nten.org), Board member McKenzie Network Foundation, Kanu Hawaii, Envision Hawaii, Surfrider.org
Passions: Life, love, technology, surfing, food/wine, laughter, making the world a better place for our children
Places he’s lived: Bangkok; Manhattan; Long Island; Toronto, Canada; San Francisco; Colorado; Eugene, Oregon; Hawaii
Noteworthy: Conference co-director of the Public Interest Environmental Law Conference (pielc.org); helped form the Nonprofit Technology Enterprise network to support social advocacy through technology; spoke at national nonprofit tech conferences

THE TIPPING POINT

There’s a saying, “Great minds think alike.” Well, great minds apparently congregate also. For several months prior to Lagon’s Aha! moment, he had been meeting regularly with a group of like-minded social entrepreneurs, which included HiBEAM Executive Director Carnet Williams and marketing strategist and consultant Song Choi. They came together in a roundabout way through a mutual friend, James Koshiba, head of 3Point Consulting.

“James would always say, if there was ever a group of people he wanted to get together to throw ideas around, good things would come if you’d just put us in the same room together,” says Choi. “So we began meeting over lunch and it just sort of took on a life of its own.” Although their backgrounds are extremely diverse – Williams, for example, is a former associate dean at Stanford Law School, while Lagon did a Peace Corps stint in Russia – their commonalities created an instant connection.

“We’ve all got backgrounds in tech, we’ve all had some experience with startups and we’re all really committed to social activism and community organizing. So it was a natural fit,” says Lagon, who presented his idea for a Web-based system that would collaborate transactions, or chip-ins to the group in the summer of last year. “I asked them, ‘Hey, am I crazy?’ and they said, ‘No. Your idea is just a small part of it. This thing could be huge.'”

As with any gathering of serial entrepreneurs, it didn’t take long for the excitement to build and the ideas to start rolling. Lagon furiously scribbled notes, and by the end of the meeting, they had outlined a rough, but viable business model for a Web-based service company that would handle collaborative transactions. They called the company ChipIn.

“Our vision is to be like a Visa or Mastercard or Paypal – it’s just another type of payment option. So if you go online to buy anything, one of your choices could be: Do you want to chip in with more than one person to buy this product?” explains Lagon. “We want to be the standard. So if someone’s doing collaborative transactions, they’re going to be using our engine.”In very simplified terms, it works like this: Let’s say you and your siblings want to chip in to buy a chainsaw for dad’s birthday. You’re in Hawaii, your brother lives in California, your sister lives in Seattle and your dad lives down the road. As the organizer, you’d log on to the ChipIn Web site, let it know how much you’re trying to collect and from whom, and the system takes over from there. It sends emails, enables online payments and outputs the pooled cash according to your preferred method, whether directly into your bank account, in the form of a Home Depot gift card or what have you. All that’s required of your siblings is a simple click of the mouse, indicating that ‘Yes, I’d like to contribute x-amount to this chip-in.’

By “our,” he means the ChipIn founders: Williams (chief executive officer), Lagon (chief operating officer), Choi (chief marketing officer) and tech wizard Kevin Hughes (chief technology officer), who joined the team shortly after they realized how big the idea was. “Between the three of us, we all had tech skills – I’m an engineer myself – but this idea was too big,” says Lagon. “We needed someone like Kevin (who’s one of only six recipients of the World Wide Web Hall of Fame Awards) to be the chief architect of this project. Kevin was the missing link. He filled out the team.”

So with nearly a dozen startups between them, the boys got the ball rolling – and it didn’t take long to pick up speed. “As soon as we realized what we were onto, we knew it would be a race to market,” says Hughes. “I strongly believe that, taken as a whole, this is a billion-dollar company. But there are a lot of people out there who are doing similar things. They just haven’t connected all the dots. So it [was] very important to us to make sure this general idea did not percolate elsewhere while we built our system.”

To accomplish that, they began the long, tedious process of filing for a patent, meanwhile, keeping everything about ChipIn as quiet as humanly possible. They registered ChipIn as a subsidiary of one of Lagon’s existing companies, Kealoha Technologies Inc., then took out space at the Manoa Innovation Center under Kealoha Tech and went into hiding. They dodged questions from local reporters, secluded themselves from friends and business colleagues and even had family members sign non-disclosure agreements. There was simply too much riding on this idea to let the public get wind of it.

Olin Lagon
Title: Chief Operating Officer
Age: 34
Birth Place: Honolulu, Hawaii
Previous Startups: Advantec, WorldPoint, Verbioso
Past employment: CEO, Hawaiian Homestead Technology (2003-2005); business volunteer, Peace Corps (2000-2002); chief architect, WorldPoint (1995-2000); CMP Media, monthly columnist/ conference speaker (1998-2000)
Community involvement: Grants administrator, Council for Native Hawaiian Advancement; board member, Parents and Children Together; board member, College Connections Hawaii.
Passions: Community development, surfing, family, healthy living
Places he’s lived: Hawaii, Mississippi, Russia
Noteworthy: SBA 2005 Minority Small Business Champion of the Year for Region IX, 2005 Petra Foundation Fellow, chief architect of software that won 1998 Internet World Best of Show Award; designed software adopted by dozens of multinational corporations; software adopted by MIT

BEEN THERE, DONE THAT

Right off the bat, the team acknowledged it had certain advantages compared to most other startups. With the team’s combined talents and experience, it was ahead of the game in several aspects, not the least of which was fundraising. On top of an experienced team with proven successes and a simple, catchy idea, the guys had strong connections to investors with whom they’d previously worked. The company all but sold itself.

“We were pitching some pretty sophisticated investors, and they’d have their private talks for like three seconds, then come back and say, ‘Okay. We’re in.'” recalls Lagon, of their initial investor meetings. They even had the luxury of turning down a few interested investors, who the guys felt weren’t a good match for the company. “We realized we were in a rare position, and that not a lot of companies raise as much money as we did in the couple of days we did it, but we’ve all learned from our previous startups,” says Williams. “And the reason we are so particular about who we have invested is that we want them to be a part of the team. We don’t want passive investors. We chose people who also feel it’s important to build a technology industry in Hawaii, and who can serve as advisors to ChipIn.”

For its seed round of funding, which closed in mid-January of this year, ChipIn secured $200,000 from two small local huis (each consisting of roughly four people), and a few individual investors (such as Lagon’s close friend Shawn Santos who attended the very first ChipIn meeting). They also tapped Silicon Valley-based CommerceNet, a nonprofit consortium for companies building and supporting e-commerce, where Hughes was working part-time prior to ChipIn.

CommerceNet Chairman Marty Tenenbaum says, “I’ve known Kevin since his days as a Web master at [Honolulu Community College], at a time when there literally might have been 100 Web sites in the world. He is absolutely world class, and that’s not an overstatement. … At CommerceNet, we invest in talented people with bold ideas that have huge potential, just like Kevin and his pals. Hawaii is emerging as a desirable place in the global economy and these guys could well be the harbinger of a whole slew of companies with similar models. I think this is a real gem they’ve got.”

Song Choi
Title: Chief Marketing Officer
Age: 34
Birth Place: Inchon, Korea
Previous Startups: ShipToHawaii, B+ CAUSE Marketing, SkyWavebroadband.net
Past employment: Marketing strategist, Six D Studios; marketing director, CTA; marketing/communications manager, The Contemporary Museum; adjunct professor, Hawaii Pacific University; president, B+CAUSE Marketing
Community involvement: Ad 2 Honolulu, Ad 2 National, Envision Hawaii, Public Relations Society of America, HiTech Quest, Kanu Hawaii, American Marketing Association
Passions: Food/wine, family, friendship, fiction, fun, frolicking and alliteration
Places he’s lived: Hawaii, Oregon, Indonesia, Korea, Massachusetts, New Jersey
Noteworthy: 2005 Public Relations Society of America Hawaii Chapter Young Communication Professional of the Year; 2005 Hawaii Pacific University, Paul C.T. Loo Distinguished Alumni of the Year Award; 2002-05 First place National Ad 2 Public Service Campaign Production award; 2004-05 American Advertising Federation, Division IV, Club of the Year award; 2004 American Advertising Federation, First Place in Club Achievement, Cultural Diversity; 2004 Pacific Business News, Forty Under 40; 2002 American Advertising Federation Foundation Crain Diversity Grant

GROWING PAINS

Tenenbaum isn’t the only one with that much confidence in the company. ChipIn investors were throwing money its way so quickly that for nearly a month Williams had $75,000 worth of checks burning a hole in his backpack while they waited for approval on a bank account. Sure, it wasn’t the worst problem a startup could have, but then again, it wasn’t their only one.

Despite the ease with which ChipIn decided on a company name, acquiring its corresponding domain wasn’t quite a cake walk. “Chipin.com is a great domain. Of course, we found out that it was taken, like every other name on the Internet,” says Williams, adding that Aaron Walburg, the guy who owned it, was planning on building the world’s largest directory of golf courses and had absolutely no interest in selling it. “So we played the name game for a while – echipin, ichipin, uchipin. Ultimately, we decided, we had to get that domain.”

Well, as luck would have it, the owner of the site taught at UC Berkley, where Williams attended college. Over a couple of months, they built up an online rapport and one day, Walburg sent Williams an email. “It said, ‘Hey, Carnet, I hope you don’t mind, but I Googled you,'” says Williams. “He found out I had done a lot of nonprofit work and said, ‘I have an idea you guys are going to change the world with what you’re doing. I’d be happy to sell you the domain.'” And at quite a steal, nonetheless. ChipIn scored both chipin.com and chipin.org for just $10,000 – a paltry sum compared to the offers Walburg was getting from major international gambling and golf companies. “He could’ve sold that for a considerable amount of money. He had so many gambling sites inquiring, but it wasn’t something that resonated with him as a person,” says Choi. “It just so happened that with ChipIn, everyone’s values were in line with one another.”

Acquiring the domain name was just one of numerous challenges the guys ran into along the way. But with each encounter, experience always helped dictate the right course of action. When it came time to divvy up equity shares, for example, the guys may joke about drawing straws or rolling dice, but they knew precisely what they were doing. First and foremost, they unanimously agreed that 4 percent of the founding shares would be set aside for a foundation they have yet to establish. So they first gave before they took. Secondly, they decided that a large chunk needed to be reserved for “others,” whether that be staff, advisors or employees.

“Right away, we said, before we decide what we get, we know that these things are important to us, and let’s budget for that. Then it took us about a week to decide how we should split up our shares. And there are some differences. For instance, there was no premium for me coming up with the original idea – although I tried,” says Lagon, laughing. “We all agreed that it would be based on what we can bring, and if we need to adjust shares over time, we will.” Furthermore, the founders’ shares vest over a four-year period.

According to Williams, this was one of several deliberate, battle-tested decisions the group made thus far: “With my very first startup, we had five friends, so 20 percent each, right? It seems really simple, right? Well we totally screwed up. We didn’t put any aside for investors, we had to redilute ourselves. We didn’t vest the shares, we got them outright. We had terrible paperwork. I ended up walking away and giving my shares back to the company because obviously friendship means way more to me than any company ever could. Obviously that, and the experiences everyone else had with their startups, affected the way we approached the equity division with ChipIn, for the better, I think.”

Kevin Hughes
Title: Chief Technology Officer
Age: 34
Birth Place: Berkeley, Calif.
Previous Startups: CommerceNet, Veo Systems (acquired by Commerce One), Bonsai Development Corp.
Past employment: Enterprise Integration Technologies (acquired by VeriFone), VeriFone, Commerce One, Webify Solutions
Community involvement: Founded the Forward Foundation (nonprofit), developed Hawaii People’s Fund Web site
Passions: The Web; future technology discussion, nonfiction and speculation; playing guitar
Places he’s lived: Palo Alto, Calif. and Honolulu, Hawaii
Noteworthy: Hawaii’s first Web server at Honolulu Community College; developer of imagemap and Apache icons; World Wide Web Hall of Fame Award; received University of Hawaii’s Distinguished Alumni Award in 2002; nominated for Na Hoku Award (Best Album Cover Design, Makana’s “Ki Ho’alu” album); survivor of childhood leukemia; flunked out of U.C. Berkeley’s mechanical engineering curriculum; has maintained blog (kevcom.com/kevsnews) since July 2003

CHIPPING IT DOWN

Part of the reason ChipIn’s investors (along with everyone else they mentioned the concept to) have so much faith in the company is that its potential applications are enormous. In fact, for the first few weeks after Lagon hatched the initial idea, every time the group would leave a meeting, they’d have hundreds of new applications filed away on their laptops.

They discussed pan-Internet wedding registries that included gifts from multiple stores and partnering with major retailers to make the chipping-in process seamless from start to finish. They talked about SMS-enabled authorization, making chipping in as easy as responding to a text message on your cell phone. They even envisioned a day when consumers could chip in for discounts on large purchases like computers, office supplies and even airline tickets. The possibilities were seemingly endless.

Choi says that speaks to the quality of the idea: “It was so big, so massive that it could’ve gone in hundreds, if not thousands of directions, but now we’re bringing things back down to reality and saying, ‘It is a great idea, it does have that potential, but to get there, we have to make sure we tier it out properly.”

COO Olin Lagon outlines
the ChipIn Revenue Model:

We have a very defined revenue model. This is not going to be something that’s just cool and has lots of users. We’re going to churn and turn that user base into real revenue through three different channels:

AFFILIATE REVENUE – If we’re partnering with a national retail chain, we’ll get a percentage off the business we drive to that chain. And that’s something that’s already defined. The vast majority of online etailers give between 5 percent – 25 percent for that kind of traffic.

AD WORDS MODEL – We’re going to have millions of points of contacts with our customers. They’ll come to the Web site. There’ll be emails going back and forth. With every one of those, we have the potential to put an ad. Not only that, but our ads can be based on demographical information we’ve collected, as well as information about what they’re chipping in for. If it’s a group chip in for flowers and they’re all in Seattle, that’s worth x to a certain kind of retailer.

TRANSACTIONAL – When you do transactions, there are many ways to earn revenue from that transaction, from charging for the transaction, to holding the transaction and so forth.

That job – whittling down hundreds of ideas into just a few solid ones with which they can best test their business model – was split largely between Lagon and Williams. After several discussions with Hughes and Choi about which ideas would be both technologically feasible and marketable, they settled on three initial market segments. They decided that since they couldn’t initially go after everyone when they launch the ChipIn Beta in mid-March, they’ll target communities that by their own natures chip in all the time.

The first is one they refer to as “cause-based sponsorships.” These are groups, typically nonprofits, that hold charitable events like walk-a-thons, in which the participants ask friends and family to sponsor them. Using ChipIn, the sponsorship process would be automated online, with the monies being pooled and “chipped out” to the organization in a seamless fashion. ChipIn’s second market segment is college campuses, which Lagon says are ripe with natural purchasing groups. “If you think about it,” he says, “college kids are always chipping in for parties or kegs or things like that.” Thirdly, ChipIn is targeting affinity, or social networking groups, such as MySpace, FaceBook and LinkedIn. Williams says people on these sites have already established a database of contacts they can import into ChipIn to make the chipping-in process easier.

“The reality is there are only four of us. So we can’t be going after one person at a time,” says Williams. “We need to go, at least initially, where there are natural aggregations of people. From there, we’ll measure our success and progress. So the angel investors help us prove the prototype. Series A investors help us prove the business concept within these test market segments. And Series B investors say, ‘It works, great! Scale it. Go hit 50 market segments!'”

Lagon says: “The bottom line is that everyone we’ve talked to comes up with all these different, great ideas for how to use ChipIn. So it’s not a matter of finding a market. The market’s there – people chip in every day. It’s a matter of enabling an existing market and teaching them that they can do something they already do, in ways they never could before.”

 

 

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