Tech Brew Ride Home - (IHP Bonus) Shirish Nadkarni On Microsoft, Hotmail, MSN and Blackberry Internet Email

Episode Date: September 6, 2021

Serial entrepreneur Shirish Nadkarni came to the U.S. as a teenager with $25 in his pocket. After graduating from Harvard Business School, he worked at Microsoft where he engineered the $400 million acquisition of Hotmail and launched MSN.com, the world’s leading web portal. Striking out on his own in 1999 at the height of the dot-com boom, he founded TeamOn Systems, an early pioneer of mobile email that was later acquired by BlackBerry before becoming BlackBerry Internet Email servicing over 50 million users at its peak. His great new book is: From Startup to Exit: An Insider's Guide to Launching and Scaling Your Tech Business Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. By the way, I'm a huge fan of your podcast. I've been listening to it for a very long time. Oh, great.

Great. I'm just delighted beyond words to be on this podcast. Well, and let me say that you, you know, consider ourselves recording. Let me say that you are the first person that I have brought the show back for in about a year and a half. I've always said that if somebody approached me that was interesting enough and you've been involved, You've had a finger in everything, so you definitely qualify. So thanks for coming on the show. Yeah, you're back.

You're coming to promote a book. I'm going to mention that right now, but then we'll circle back to it at the end. It's called From Startup to Exit and Insider's Guide to Launching and Scaling Your Tech Business. I highly recommend it, and I'm going to tell you all why at the end. But, Cherish, let's start with the fact that you joined Microsoft in 1987. which is one year after the Microsoft IPO. This is way before the web. This is way before Windows.

Microsoft is basically an MS DOS company. So how old are you when you join and what was Microsoft like in 1987? Yeah, so I was 26 when I joined Microsoft. I was fresh out of business school at that point. And Microsoft probably had about a thousand employees at that point. So it was still a small company. And what was incredible was that as a young graduate, I was given the responsibility of product managing the Microsoft's entry into the email space.

And this was a time when email did not really exist. There are very few companies. I remember Boeing here in Seattle was one of them, and they were using a mainframe system called IBM Profs. Many people would probably never heard of IBM Profs. And I remember going to meet with Boeing to see what the requirements were, and it was quite daunting because they thought a PC-based email solution. I mean, no way that could scale up to our needs of 100,000 employees.

So it was an exciting time to be at Microsoft because you were given this responsibility at a very young age to really manage the entry of Microsoft into a whole new category. Well, and I think we should share a little bit of context here. Again, this is 1987. The web doesn't really start to take off till 93, 94. So when we're talking about email in 1987, we're talking about largely intranets, largely corporate mail systems and things like that. This is not getting your mom a hotmail account yet. This is something entirely different. This is very much an enterprise thing, right?

Yes, definitely. And again, it was, you know, companies using, you know, systems like IBM profs and deck all in one, etc. I would say that one of the challenges we had was that a lot of companies didn't even have local area networks, you know, to run email software. So we were that early in terms of how email was being adopted by corporations. But it was clear, you know, at that time we had an internal system called Zenix Mail that we were using at Microsoft. And it was clear that email was a lifeblood of the company and that it was only a matter of time before email would get positive. among all kinds of companies of all kinds of sizes. So you're involved in the launch of Microsoft Mail.

There's a bunch of acquisitions that go into making that product. But I think, was the big product there, the Microsoft Mail for PC networks? I think that comes in 91. That's right. Yes. Yeah. First launched on the Macintosh, it was called Microsoft Mail for Apple Talk Networks. And then we launched, we bought a company called Network Corrier out of Canada, and that became Microsoft Mail for PC networks. And then we started working on what became ultimately the Microsoft Exchange server, which launched in more like, I think, in 95 timeframe.

The, again, for context, like, you know, Macintosh, Apple was very big on networking at the time, sooner than other people as a way to try to differentiate themselves. And it's Microsoft Mail for PC Network. So when that launched, was that a Windows product at that point? At this point, Windows is overtaking BOS. Windows 3.1, I think, is out by then, right? Yeah, we had a Windows, as we called a Windows client, in addition to MSDOS and Apple, Mac clients that were available for Microsoft Mail for PC networks. Yes.

And that was key for, that was critical for Microsoft to have a Windows client. Are you, can you give me any background or color? Do you remember when things like what was originally called the information super highway, or what did Bill call it information at your fingertips or something like that? He had a different... Information on your fingertips, yes. Right. He had a different acronym for it.

But generally, the coming of what we would now call the Internet era, there was the famous tidal wave memo, but there was all sorts of agitation before that. Give me a little background in terms of Microsoft. getting religion about the web and the internet? Yeah, so initially, you made a call, you know, you had AOL and CompuServe and other systems, which were proprietary systems. Ultimately, of course, AOL provided access to the internet. And then Microsoft launched MSN, really as a, originally as a proprietary online service

to compete with AOL. And I think we did that for about two years and realized that the internet was really taking over. And so I was brought in as part of a new team to re-engineer Microsoft's efforts into the free web. And that led to our acquisition of Hotmail. I also did the deal with Inkamey, which was the Google of its days to, to provide Microsoft entry into the search business. Well, we're going to come to all that individually. So essentially, and again, if you were alive for this, you remember this clearly,

but if you weren't there for it, at first Microsoft, essentially, once you go toe-to-toe with AOL, create MSN as a dial-up proprietary system, the original Waldgarten sort of system. And then when it's clear that the web is taking off and you don't need proprietary networks, then MSN is reconfigured to be what would later be called a portal. So tell me about, I'm thinking about these teams and the hundreds of millions of dollars, maybe even billions of dollars that Microsoft poured into MSN, Microsoft Network when it was

a proprietary dial-up service versus throwing that all out and going the portal route. Was that a hard bloody pivot? Was that a transition that people had to fight for? Give me a little bit of background on that. Yeah, I wouldn't say it was a bloody pivot. In fact, in addition to spending hundreds of millions of dollars on MSN, the proprietary network, we also spent probably more like a billion dollars on Internet TV, if you remember that, right? That was the major effort at Microsoft, and that whole effort went to waste, unfortunately.

So, you know, when Bill Gates wrote that famous internet title of a memo, it became very clear that the Internet was going to take over. So I think it was not a controversial decision internally within Microsoft to do something on the free web, as opposed to, you know, proprietary system. Yeah, when people make fun of Google now for their moonshots and, you know, some people would say wasting billions of dollars to try to, you know, give you satellite from balloons and things like that. Microsoft spent the first half of the 90s and into the 2000s trying to see what the next platform for computing would be. They knew it would be interactive computing in some fashion. Yes.

It's just that no one really, it's like that analogy of looking at the elephant. No one knows what part of the elephant you're looking at. So when MSN becomes a portal, what is the strategy there? Is this an attempt to out Yahoo? Is it to be a home on the web? Is this supposed to be the all-encompassing home on the web for everything? Microsoft. What's the vision for MSN at the beginning?

Yeah, it was, you know, at that time, Yahoo, excite, Info, Seek, we're all trying to become, then they all started off as search engines and they, if you recall, became, then became web portals providing access to a number of, you know, services like Yahoo Finance, Yahoo, travel, et cetera. So we had a similar vision at MSN that we would create a portal to our portal, Yahoo and others. And that, you know, we had a number of properties that we were working on, you know, like Expedia, sidewalk, if you recall that, you know, it was a, you know, Yellow Pages type of service. Carpoint was another, you know, service, et cetera. So the goal was to create a personalized, you know, web portal where you could access your email, you know, you could, you know, conduct your internet service.

and then access a variety of services that we would provide like Expedia for travel and, you know, CarPoint, et cetera, for car information. So that was the overall vision at that point. Or maps and things like that. Yeah. You know, I've said before that all of your basic stock apps that come with your smartphone now are sort of tools that the portals sort of all had because the idea was you would, wanted you wanted people to come back to the portal on a daily basis. So, you know, there's things

like sports scores, headlines, weather, maps, all these things. But, and this will lead us into Hotmail, I mean, what is more utilitarian that will cause people to come back on a daily basis than that's where their email lives? Absolutely. And so one more thing of context, This is an era of, I think we're into like 1996, where it's hard to get an email address because you either get your email address from your service like an AOL or a prodigy or from your work or from your college or something like that. So the idea that an email address would be free and accessible from a web page. So you could access it anywhere you had access to the internet was completely revolutionary,

and probably the stickiest thing that you could come up with for these portals, right? Absolutely. I mean, the Hotmail really was the first SaaS service of its kind at that time. So the idea of taking something that originally required a client application that sat on your desktop to access your email, but now being able to access that from the web, get it for free, get an email address, be able to access it from any location just with a web browser was totally revolutionary at that point. And that's the reason why we decided to go after Hotmail and ultimately make that acquisition. Can you, I know that you weren't around for this, but can you give me some of the background

just for the audience right now of Hotmail as an enterprise and how it was launched and that sort of thing? I think the famous story is that the founders, when they had the idea, thought it was so blazingly obvious to them that they tried to keep it a secret. They would approach VCs and pitch something else. And then if they like the VC, they'd tell them the real idea, which was Hotmail. Give me a little bit of background on the Hotmail story. The two founders, you know, Sabir Bartia and Jack, I forget his last name, They're pretty young folks who built the hotmail concept.

I don't have the original founding story as you outlined it, but what I do know is that they got traction immediately and they were adding, by the time we spoke to them in, I remember in September of 1997, they were adding, about a million users a month. And one of the biggest challenges that they had was being able to scale their solution so that it could handle that kind of load. And they literally had to re-architect the solution twice, sort of like changing the wheels

of your car while it was running. But they managed to do it and keep it running. Well, one thing that we should poke at a little bit is, you know, the idea of something going viral or a product having viral growth is something that seems, you know, almost second nature in 2021. Hotmail was, there's no way that they were the first to create, you know, a viral hit product. But they were very early in having a product like that. And one of the things, one of the reasons, the main reason was because it was a product where the product evangelized itself by someone using it. Because you get a,

a Hotmail account, you send an email to your friend, and at the bottom of that email, it says, you know, I can't remember, sent via Hotmail, the free web email. I think it said, get your free email at hot, you know, www.hotmail.com. Exactly. So in a world where email addresses are scarce, are commodities that you can't just grab anywhere, the very fact of people adopting it. So, of spread textbook virally. And I feel like that that is a lesson, that very basic lesson is something that all sorts of companies have evolved over the years, everything from social media startups to web apps

and things like that, where it is the, your user base sort of becomes your marketing team, essentially, or the product does, I guess, is a way to look at it. And so you mentioned a million users a month or something, but again, this is in 1996-97. No one knows how to handle a product taking off at that sort of scale, right? Yeah, I mean, yeah, the whole concept of viral marketing was popularized by Draper of the Draper Jebrson of fame. and he was the one, I believe, who convinced the Hotmail founders to put that tagline at the end of each email, which is now commonplace now for every email application. But that was a revolutionary idea and really helped Hotmail grow tremendously at that time.

So tell me about the actual deal with Hotmail. This is early, even in 97, it's hard to remember now how compressed the actual deal. the real mania of the dot-com bubble was, but a $400 million deal in late 1997 was a huge deal. And people, I'm sure the headlines at the time were screaming, but they don't make any money, et cetera, et cetera. So tell me a little bit about A, why you guys wanted Hotmail and then B, sort of the thinking that went into the deal and see how you convinced the hotmail folks to sell to you. Yeah, so as you pointed out before, email is a very sticky application and email is an application that you use on a daily basis.

And so we felt it was really important for us to have email as part of our web portal so that, you know, one, we could capitalize on the growth that Hotmail was experiencing, but also that it would bring people back to our portal to check their email. What was interesting was that when we started discussing the potential for acquisition with Hotmail, the founders were interested in selling, but the VCs were not interested in selling. And I remember, you know, when we met with them, the founders literally had to go back, you know, to the back room and have a separate meeting with their VCs to really convince them that it would be better off being acquired by Microsoft because at that time as you recall there were a lot of IPOs happening and the VCs thought that they could get a billion dollar you know IPO with Hotmail but I think the hotmail founders were smart they knew that they could get a good price from Microsoft and the Microsoft

stock was something that would retain its value because even if they went IPO who knows what would happen in the future, right? Might go IPO for a billion dollars and end up at $100 million value, you know, six months after the IPO. So they were really smart in saying, hey, let's, you know, Microsoft stock has a lot of currencies growing very fast as well, and let's go do the Microsoft acquisition. So we didn't really have to convince the Hotmail founders. We had to, of course, agree on a price that they thought was reasonable.

but they had to convince their VCs to really let them sell the company. And there was a big gap also between what we wanted to acquire the company for and what they wanted to pay. Our original range was in the $150 to $200 million. And there's a story which I was told by Sibir Bhartia was that they created a response and they faxed it back to us saying, you know, we are worth X. And the last moment, as the last page was with the final price that they wanted, was going through the fax machine, they pulled it out. And they changed that number.

And they changed that number to $700 million was there asking price. And of course, after much negotiation, we ended up with $400 million, which was still an amazing price for a company that was barely generated. any revenue. Split in the difference a little bit. Yes. Was there other folks bidding for Hotmail at the time? Because I think I've spoken to, is it the Rocket Mail that became part of Yahoo Mail?

And then I've spoken to folks that, again, at this time, the portals are all putting together their utility belts. So I've spoken to people that had calendar startups and other things like that. Stock quote startups and things like that. So was there competition or did you swoop in before the things got heated? No, that's a very interesting question. So there was not any competition for Hotmail. What did happen was that Yahoo acquired Rocket Mail, which was a follower to Hotmail,

before we made our move on Hotmail. And I think they purchased it for like 110 million. and they had I think 900,000 users or something to that effect, but as Hotmail had about 8 million users. And that immediately set the price for Hotmail. So that immediately made that whole acquisition for us a lot more expensive because the Hotmail guys could say, hey, you know, Rocket Mail was just acquired by Yahoo for this price

and they have far fewer users than we do. And if you calculate a per user price, then we should be worth X. So it immediately made the acquisition of Hotmail a lot more expensive for us. I'm going to skip ahead in your career, but we did miss that you were involved in the launch of Microsoft Visual C++. So you were very involved in Windows development tools and things like that. But let me skip ahead in the interest of time to you go the startup route yourself with team on systems, right?

Yes. And so this is, again, web-based email, but more of an enterprise sort of product? Yeah, I mean, so, you know, I had clearly developed a significant amount of email expertise while I was at Microsoft, and I was blown away by the simplicity of Hotmail. And at that time, Microsoft had something called Exchange Server, which was their flying server-based email system. But the challenge with the exchange was that you had to have system administrators to set it up, to manage all the servers, to upgrade it, to back it up, all of that cost. And I felt that that was too expensive for small to mid-sized companies. And so I said, hey,

if Hotmail was successful as a web-based consumer email service, why not create a enterprise grade or business scale email service with calendaring and scheduling along with that so that it could meet the needs of small to mid-sized companies provide the same kind of functionality that exchange did but without any of the hassles of upgrading, you know, backing up, etc. of their system. So again, it was one of the first business SaaS products out there and we launched, in fact, at the same time at SD, the event as some of the other SAS services at that time. What year is this? This was in 1999.

So this is right when Palm pilots are taking off when things like. So it's essentially you sort of pivot a little bit to allow sort of mobile access to email systems and calendars and things like that? Yeah, yeah. So this was when Blackberry was getting started. They had a couple of 100,000 Blackberry users. And then phones, you know, commodity phones were becoming internet enabled with something called GPRS, you may recall that, very slow connection.

And you had these special purpose browsers called WAP browsers that allowed you to access the internet from your phone. And so we felt that given that email had become ubiquitous, that, you know, instead of purchasing an expensive device like Blackberry, why not enable phones to access their, you know, to allow users with phones to access their existing email accounts? And our engineering team did a great job of reverse engineering

all the proprietary email systems out there, including AOL, hotmail, you know, Microsoft Exchange, Lotus Notes. We could all access that through our system. When were you acquired by BlackBerry? What year was that? It was in 2002. 2002. Because, okay, again, I feel like BlackBerry is one of those companies that risks going down the memory hole in terms of how important it was and how huge it was at the time. But the idea of getting your email when you're out on, out in the field, out on the road, or whatever. That's what made BlackBerry BlackBerry. So your systems are essentially what

became BlackBerry Internet email? Yeah, so BlackBerry had two email systems. One was the original corporate email system that allowed you to access your exchange or Lotus Notes email. But when they started selling through wireless carriers like T-Mobile and Singular at that time and Verizon, they were saying, hey, there's a class of users called prosumers. These are the business folks who, you know, have, you know, small businesses. And they don't use exchange, a lot of us knows. They use pop email or they use AOL or they use, you know, some of these other email systems. And we want access, we want to enable those users to access the existing email accounts. And BlackBerry did not have a solution for that.

And so that's why they acquired T-MON systems. And the technology we built became known as BlackBerry Internet email. And in fact, at one point, there were more BlackBerry Internet email users than their corporate email system. Right. We're talking about like 50 million when there's probably only a couple hundred million, you know, remote, you know, cellular-based internet users in the whole world at that point. Yeah. I think you leave Blackberry before the iPhone comes out, right? Yes, well before that. Well before that. Do you have any memory in terms of when the iPhone comes out from friends back at Blackberry,

what their reaction was or even the industry or your personal reaction to, you know, the idea that the internet is mobile is so fundamental now. But it kind of took the iPhone to make it make sense to, again, folks like my mom. So do you remember that moment in time when seeing the iPhone and seeing that next couple years when the mobile web and internet really took off? Yeah, I can certainly describe my reaction. I can probably describe the reaction of REM. I was blown away by the iPhone in terms of the touch interface and the fact that they had done

such an incredible job of building an easy-to-use device that not only allowed you to access email, but also, you know, the web and so forth. But I can tell you at REM, their reaction was, this is never going to be successful. Who in the world would want to type on a glass piece of glass? And the battery life on this is going to be dismal. There's something that, you know, the Rim folks were very proud about Blackberry was the fact that it provided tremendous. end this battery life because it was so, you know, a Spartan in its usage of, of, you know, battery and so forth. So they, I'm sure, they basically thought that they are such a big lead.

They had a great product that this was just going to be a fad and would not succeed as a, as a device. So that was, unfortunately, had the wrong conclusion as they found out a few years later. when the iPhone and Android phones really took over. Shereesh, let's stipulate that you've done other startups. You've been on all sides of the table in terms of, you know, acquiring companies, selling companies, having companies not be successful and go under. You've been heavily involved with the Seattle startup ecosystem.

So let's get to the book. What was the impetus to write from startup to exit an Insider's Guide to launching and scaling your tech business? Well, I would say I have somewhat of an idealistic vision around that. You may have heard of the statistics that 9 out of 10 startups fail. But the one startup that succeeds, boy, they change the world. In fact, if you look at the top 10 companies in the world by market capitalization, nine of them are software companies like Microsoft, Amazon, Google, et cetera.

So they have a tremendous impact on the economy. So my hope is that if I can change that equation even a little bit so that one more company succeeds, one more founder succeeds and creates a big company, then I can have, you know, in some small way, a significant impact on the startup ecosystem, significant impact on the economy. So my goal is to really help inspire founders and then make them successful, help them avoid the mistakes that I made. Let me, I am not blowing smoke because I read every tech book that comes out, and I've had an advanced copy of your book for about a month now.

And I would say that this is maybe the most comprehensive, this is almost like a primer or a textbook. I know that I've worked with publishers before, and they're like, never say textbook because it sounds, they feel like it'll scare people away. But I feel like this is the most detailed step by step. Other books are like, well, here's how to negotiate rounds with VCs. Here's how to find product market fit. Not only do you go into, okay, well, wait, stop. What does product market fit actually mean? Like, that's a buzzword. What is, what does it mean? What does it look like? You go into how to split founder equity, how to recruit great employees, but you even do things like, you stop and you're like, you know, have you heard basic terms like lifetime value or cack? Here's what these, again, terms mean, and here's what they mean to your product, to your startup, to your business.

I just have to tell you that I don't think, I think this is the best book in terms of comprehensively step by step, giving a startup primer holistically. Great. Thank you so much, Brian. I really appreciate that feedback. That was the idea, right? That this would be something that would really not only get founders up to speed and some of the key issues that they'll face, but also serve as a reference, you know, that they can go back time and time again as they make the journey through their, you know, to the startup. I would say not only founders, but, you know, if you're interested in the tech industry, again, and you hear these buzzwords that people use. or you're like, I don't understand what it means to a company raised a series C or something like that. You know what I mean? Like, even if you're not a founder, I think that the way the modern world is, like, this is an excellent book that will give you that sort of grounding and background in how these things work. If you, but it is aimed, as you said, at founders and startups and things like that, if you had one lesson from the book that you would hope that founders would, take away in terms of having a successful company, hopefully.

What would it be? I would say that it's really to focus, you know, hard on how to achieve product market fit and really testing whether the idea, you know, has merit and developing an understanding of what are the channels of distribution you will need, what will it cost for you to? to acquire customers, really spending time on that, I think will serve people really well. And that's what I talk about extensively in the book. Well, again, the book is from startup to exit, an insider's guide to launching and scaling

your tech business. And again, it's not just, it is a roadmap where at all stages, okay, now we need to hire. Okay, now we need, as you say, to really scale and acquire customers. And it's just such a great guide for the basic nuts and bolts of what that actually means. Sheree, thanks for coming on the Internet History Podcast. I encourage everyone to get the book. And thanks for sharing your stories with us. Yeah, thank you so much.

Great to be here.