Tech Executive Takes Gamble-On Start-Up in Tough Market- "Start-ups die a thousand deaths. The key is to keep surviving those deaths."

SAN FRANCISCO — When Barry Cottle broke the news of his new business venture last year, a close friend called him crazy. His mother, Billie, sternly lectured him. His wife, Susan, recalls that her "heart sank."

By PUI-WING TAM
Staff Reporter of THE WALL STREET JOURNAL

It wasn’t just that Mr. Cottle was going out on a limb by leaving a good salary as an executive at handheld-computer maker Palm Inc. It was also what Mr. Cottle planned to do: launch a technology start-up in Silicon Valley, smack in the middle of a downturn that has paralyzed the tech industry and the region.

"I just care that you can provide for Suzie and the kids," Billie Cottle, a retired hospital administrator, admonished her 41-year-old son. "Can you really provide for them that way? Can you really do this?"

Mr. Cottle thought he could, and he still does. At a time when most Americans are happy just to hold down a steady job, this former co-chief operating officer of Palm is risking his career and his family’s livelihood by rolling the dice again on Silicon Valley.

Again and again, whenever Silicon Valley has been left for dead, tenacious entrepreneurs such as Mr. Cottle have revitalized the area with new ideas and inventions. It happened in the late 1970s during one slump when a handful of Silicon Valley tinkerers created early versions of the personal computer. It happened again in the 1990s, during another downturn, when engineers’ experiments turned into the World Wide Web.

Today, Silicon Valley is still a mecca for people with start-up fever. Take a look at Palm. Three years ago, Mr. Cottle was part of an all-star executive team that took Palm public. After the recession battered the company in 2001, most of that dream team left — and then came back to tech for another shot. One of Mr. Cottle’s former colleagues is helping to run a data-storage start-up. Another has founded a chip company and a software firm. Yet another, Satjiv Chahil, is teaming up with Mr. Cottle.

"This is how Silicon Valley works," says Doug Henton, a Palo Alto, Calif., economist. "It’s a large incubator that keeps hatching new things."

But Silicon Valley is a very different place than it was three years ago. Venture capitalists who once fawned over budding businesses are now loath to invest. Potential customers don’t want to spend much on tech products. An initial public offering is no longer the immediate endgame. Start-ups now live for small successes, such as an injection of $10 million or a customer order.

The young companies are also exacting steeper financial and personal tolls. Mr. Cottle is experiencing this firsthand. From the time he set up his company, Mobile Digital Media Inc., last March until he officially launched it in October, he had no income. He put his wife and four young children, who are based in Atlanta, on a shoestring budget, living off their savings. Often, he didn’t see them for weeks.

Mr. Cottle says he knows he may be on a fool’s errand, but he can’t resist. "Maybe I’m cursed," says Mr. Cottle, a boyish Midwesterner with a cellphone earjack perpetually attached to his ear. "But I’ve always had the drive to start my own company."

Mr. Cottle displayed an entrepreneurial streak early on in his career by working at a new technology division at Hallmark Cards Inc. and launching a new business unit at a property-development company. He married Susan Carlin in 1988, halfway through his MBA program at Northwestern University’s Kellogg School of Management. Mr. Cottle spent most of the 1990s at various jobs at Walt Disney Co. He and his wife had two daughters. In early 2000, Palm recruited him, and he moved the family to Silicon Valley.

Mr. Cottle led a unit that developed information for Palm hand-helds, launching a service that provided data wirelessly to users of the devices. His salary and bonus totaled $185,938 in fiscal 2000 and $430,000 in fiscal 2001, according to proxy filings. He also got 850,000 stock options over the two fiscal years, which at Palm’s peak made him a multimillionaire on paper.

Hand to Mouth

Then, in mid-2001, the downturn hit. Palm’s sales collapsed, and the company closed down much of Mr. Cottle’s division. Around this time, Mrs. Cottle became pregnant with twins. The couple decided she and the children would move to Atlanta, where they have friends. Mr. Cottle would stay behind, moving out of the family’s home and living in hotels.

Mr. Cottle also began thinking of moving on. In late 2001, he started eyeing a small but burgeoning side business at Palm: its line of multimedia cards that tuck into slots on a handheld computer and can add extra memory or content. He talked to Palm’s chief marketing officer, Mr. Chahil, about divesting the unit. In early 2002, Palm said it was amenable to the idea, but it didn’t want to invest any new money in the venture until there was independent financing as well. Mr. Cottle or Mr. Chahil would have to leave the company and raise the funds.

For Mr. Cottle, it was a big gamble. Palm’s share price had by then plunged more than 90% to around $3, leaving all of his stock options underwater. (After a 1-for-20 reverse stock split, Palm’s shares now trade for about $17.) Mr. Cottle’s equity portfolio, where he had put much of his family’s savings, had also taken a drubbing. And there would be no signing bonus or easy profits.

Over several weeks, Mr. Cottle dropped hints to his wife that he might set up his own business. One night, the couple hired a babysitter so Mr. Cottle could take Susan out for dinner. Over the meal, he dropped the bomb.

Mrs. Cottle was alarmed. "I knew the amount of time a start-up would consume," she says. But she quickly took a practical approach. The couple drew up a list of pros and cons of going the start-up route. Among the negatives: instability and zero cash flow. On the plus side was Mr. Cottle’s long-running desire to manage his own company.

After several long discussions, Mrs. Cottle said she would support the idea. "If Barry isn’t being challenged, he’s not happy," she says.

It wasn’t as easy to win over Mr. Cottle’s family. His mother, Billie, has a self-described "old school" philosophy. She had burst into tears when Mr. Cottle told her 15 years ago that he was leaving his job to go to business school. "Why would you leave a good job?" she asked at the time.

After Mr. Cottle called home to Columbia, Mo., to tell his parents about the start-up, his mother was anxious and quickly got in touch with her daughter-in-law. Susan reassured Billie that she and the children would be fine — but didn’t tell Billie about their financial position.

Many friends, such as Dan Oliver, an old business-school classmate, were blunt about the idea. "Are you crazy?" he asked Mr. Cottle over a sushi meal. "You’ve got four kids and plenty of other options that would give you more stability. Do you really want to go through a start-up?"

But some friends encouraged Mr. Cottle’s plan. Alan Masarek, an entrepreneur with a consulting and investment-portfolio firm in Westport, Conn., told him, "Start-ups die a thousand deaths. The key is to keep surviving those deaths."

Last February, Mr. Cottle took the plunge. "It’s the first time I didn’t have a safety net," he says.

Mr. Masarek signed on to Mobile Digital. So did Mr. Chahil, a Silicon Valley veteran, who agreed to be chairman of the new venture and arrange meetings with potential investors.

The team quickly ran into a big obstacle: Gun-shy venture capitalists. In 2002, the amount of venture money raised in the U.S. totaled around $5 billion, compared with more than $20 billion raised in 2000’s fourth quarter alone.

Messrs. Cottle and Masarek began flying across the country to visit investors in New York, San Francisco and Atlanta. Often, they met in airports to give each other status reports. Unlike his days of travel at Palm, when he stayed in luxury hotels, Mr. Cottle used Priceline.com to snag hotel rooms for under $100 a night. Also unlike his Palm days, he had no permanent office, so he worked primarily on the run with a borrowed laptop and an e-mail address from Palm.

At home, Mr. Cottle put his family on a tight budget. "All spending is on hold," he told his wife. Their 4,000-square-foot home in Atlanta remained sparsely furnished, with no furniture in the living and dining rooms. At one point, Mr. Cottle drove the family’s Jeep Cherokee cross-country from northern California to Atlanta to save $1,800 in car-shipping costs.

By June, Mr. Cottle had raised several hundred thousand dollars, enough to incorporate Mobile Digitalk. But many investors turned him and Mr. Masarek away — a far cry from the days at Palm, when the company’s name and his position opened doors. Over time, though, the duo were able to show investors how Palm had already had moderate success with its multimedia cards, proving Mobile Digital could be a viable business. Several other funding commitments slowly began trickling in.

In the boom days, the new start-up could have used that money to rent swanky offices and go on a hiring binge. To keep things lean, Mr. Cottle recruited just four employees and elected, for the time being, not to get office space but to establish a post-office-box address in Mountain View, Calif.

The start-up was following an increasingly common Silicon Valley tactic known as hibernation. The strategy calls for companies to operate in a deep freeze, forgoing salaries and commercial space and making sacrifices until they are ready for prime time. With MDM, Mr. Cottle had his staff mostly work out of their own offices or homes. He also had the employees — many of whom had jobs on the side — defer their pay until he secured a first round of funding.

The Home Front

Mr. Cottle’s workload and traveling were putting a strain on his family. While he tried to commute to Atlanta every weekend, there were stretches where he was away for prolonged periods. After one three-week absence last summer, Mr. Cottle returned and made plans to see some friends. That set off Susan, who hadn’t seen him for weeks. "Go ahead and do whatever you want," she said, then gave him the cold shoulder. Mr. Cottle ended up staying home.

It was also tough on the children. In particular, the couple’s two older daughters, ages seven and four, sometimes get upset when Mr. Cottle leaves at the end of a weekend. "They want Daddy nonstop," says Mrs. Cottle.

Around this time, the couple discussed the possibility of basing Mobile Digital on the East Coast. Since the tech bust, many companies have moved away from Silicon Valley to spots such as Sacramento and Minneapolis, which offer lower labor costs and commercial rents.

But Mr. Cottle reasoned the start-up still needed to be close to tech experts and investors. "The reality is I’ll be working 24 hours, seven days a week no matter where the company is," he told his wife.

"I thought I wouldn’t see him again," Mrs. Cottle says, but she eventually accepted his decision to base the company in Mountain View — the heart of Silicon Valley.

"Unfortunately, something has to give while doing this start-up, and that something is usually my personal time," says Mr. Cottle. "Sometimes I forget that work-life balance, and need to be reminded." Often, he takes to the treadmill at the gym of whichever hotel he is staying at to work off the stress.

By late September, Mr. Cottle had boosted the company’s small staff to 13 people. He also closed a first round of financing — he won’t say how much — that gave the firm enough cash to operate for at least eight to 12 months without additional revenue. Palm handed over its existing multimedia-card operations to Mobile Digital and agreed to take a minority stake in the company. (Palm won’t say how much it invested.) On Oct. 3, Mr. Cottle officially launched the new company.

"We know the hard work is just starting, but the reward is I’m doing what I love," Mr. Cottle says. "I’m like a pig in mud." He estimates Mobile Digital will clear $25 million in revenue by the end of October.

To his wife’s relief, Mr. Cottle has also begun drawing a salary again — he won’t say how much, except that it’s "much less" than what he made at Palm. "If it makes Barry happy, then I’m happy," says Mrs. Cottle. But, she adds, "I know people look at us and think we’re crazy."

Write to Pui-Wing Tam at [email protected]