044: Getting Leverage on the Competition (Without Throwing Your Money Away)

Hello and welcome again to the Scaling Up Business podcast. I'm your host and Gesell's business growth coach, Bill Gallagher. So we want to talk to you today about necessity being the mother of invention. Right. How do you get a significant advantage over competition? How do you succeed and thrive in the marketplace?

And.

And sometimes we think it's throwing money at things, but sometimes hardship is really where we find our advantage and where the innovation comes from. So I don't know exactly how he'll put it and stuff, but I think this is a great story for you. I have on the show with us today, Gleb Budman from San Francisco. Gleb, welcome to the show.

Thanks. Good to be here.

Yeah, thanks for coming on and sharing some of your story with us. Now, we're connected in a lot of different ways. You and I are both in the entrepreneurs organization for some years now. When did you first join?

I think it was about three years ago.

Oh, not that long. Okay, good.

Yeah, not too long ago.

Yeah. And who connected you to that?

You know, there were a couple people. David Rodnitsky was one, and a couple other people actually suggested it as well.

Very nice. And you're in San Francisco today, right?

I'm in San Mateo at the moment, which is where our headquarters is, but I live out of San Francisco in the bay.

Yeah. And I'm actually up in Seattle today, which if I could show you, like right outside, I've got a beautiful view of the water right here. And I've been doing some work with one of our clients, kind of somebody in your same world in doing their scaling up. And then I understand we have an older connection, somebody who's become a dear friend who I coached first on a project and then ended up more as more of a friend and personal coach over time. Lenny Gosell, right?

Yeah. That is definitely a small world situation. We actually just saw Lenny about a week ago. He was out here at conference.

So, yeah, now he heads up like fraud, consumer fraud or stuff like that for JPMorgan Chase, I think now these days. Right.

Yeah. He's been in kind of that fraud prevention for banks for a while. So he's developed quite a good skill set and reputation there.

So when I coached Lenny, he was starting a project and he did it in this leadership course that I led for many years. And he created a project around 79ers, or primarily Russian Jews that came that left there around 1979. And there was quite an exodus, if you will, of those guys. And then he created. And that's how you guys met?

Yeah, yeah. So, you know, I was born in St. Petersburg, and we immigrated here to the US in 79. And I was actually on the trip to Israel in 2000. It was 2000. And someone else was kind of pontificating about the idea that there's not a community for people who kind of fit this very niche world, and we're living a little bit between worlds. And that was Igor, who then.

Oh, yeah, Igor.

Lenny. And then I got connected with Lenny, and he started this great group called the 79ers, where a lot of people got connected and actually through which I met my wife.

Oh, wow. Wow. So I have something to do with your marriage.

It's true. And we just had. Our second daughter was just born a month ago. So you have something to do with our marriage and two kids now.

Oh, I really, really love that. And I actually do take some responsibility for that. I think that's really cool. I think the ways that we're connected are staggering and amazing. So while we're on this diversion for a minute, and I think that these kinds of connections are relevant to the topic of innovation and finding your competitive advantage. So I'm having lunch today with a guy who found me online. He's also a member of the Entrepreneurs Organization, and he was looking at his school history, and he was thinking he should have more connections with people that went to some of the schools that he attended. So he and I attended two of the same high schools. The first one is pretty well known, is a school called Punahou in Honolulu, and it's a school that became more famous for people outside of Hawaii because Barack Obama attended Punahou. And it's really, really awesome school. One of the very best schools I went to. One of the other two best schools that I went to is in Jerusalem.

That is a far cry away from Honolulu.

Far right. So when I moved from Honolulu to Jerusalem, everybody thought I was insane, right? And they were like, how could you move from there to here? That's just crazy. And I was still, like, a skateboarder and a surfer, and surfing in Tel Aviv is kind of a weird thing. And nobody was skateboarding in those days or doing much anyway. So I moved there, and I was definitely a little bit of an oddball. But my family immigrate in a moment of idealism that didn't last that long. So this guy is looking at, I think, Punahou grads, and then he sees Mikhail at Ort, which is the school that I went to next to the Hebrew University of Jerusalem, where they have kind of an accelerated engineering program for high school students. And it was really, really cool school. And he's like a guy from Hawaii that went to school also in Jerusalem. And of this like obscure little school, not like, you know, one of the bigger high schools in Jerusalem even, or the American school or, you know, like that. Like every school has. Every city has schools for expats. But I always went to school in the native language whenever we lived overseas. So there you go. Strange connections. Isn't that awesome to discover a little bit of this? I love these kinds of connections. So we're going to talk a little bit about your entrepreneurial journey. So your company is backblaze, right? And you do backup cloud backup for people. So versus having it my backup be to a drive connected to my computer, I'm backing up to the cloud so that if my building burns down or somebody steals my machine, it doesn't go off with the drive that's taped to the back of it.

So that's exactly right. So it's $5 a month for unlimited backup of your laptop or desktop. We offer cloud storage, so if you just want to store data with us, you could do that as well.

So backup or store things. Right. And five bucks a month per desktop.

Yeah, five bucks a month per desktop.

And do you do business as well as consumer or is it.

Yeah, we started off mostly consumer 10 years ago, and then we started getting more and more demand from businesses. A lot of companies saying, look, you know, I use your product at home and I come to the office and I don't understand why my office computer doesn't have the kind of backup I have at home. So a lot of people tend to start using it on the consumer side and then they bring it into their office environments. And so business actually makes up a pretty big chunk of our company's finances. Now.

How did you get into this business? Tell us about a little bit of your entrepreneurial journey. Where did you get started? Before we get to how do you do it and how do you make money at it and all that.

So I have been doing various random entrepreneurial things for a while. When I was in high school, I actually started a used car dealership with a friend of mine. Before that, the reason I got into the used car dealership business was I found a weird anomaly between newspapers in San Francisco and San Jose, where you could buy cars that were 50 bucks, 100 bucks in San Francisco, but you couldn't buy anything under $500 in San Jose. And so I was Going to try to arbitrage this opportunity of selling the cars for a few hundred dollars and drive them from San Francisco to San Jose. It didn't end up being exactly what I thought, but it ended up sending me down this path of realizing that you could still buy and sell cars at different prices. So then did the used car dealership. Then later in college, I started a company doing bicycle components for a brief bit and then it went to business school and I was working on an Internet company called Net Relevance. And from that ended up joining up with some people who were working on something similar and did a company called Kendara which was venture funded. It was crazy times. 1999, you know, raised money on a PowerPoint, hired 43 people in nine months and were acquired before, before we'd even launched. And then worked at the acquiring company, Excited Home for a couple of years before it went out of business. Took a few months off and then came back and rejoined up with some of the people from Kendara who were working on a new company in the email security space, fighting spam, and came back and joined up with them on that. And we did that for four years that was acquired. Worked at that acquired company for a little bit. And then what happened was we started talking about things with the CTO and co founder of the previous company. And he does it for friends and family the way that many of us do. And he had a friend who was a writer who called him up in a panic and said, you've got to help me. My Mac died, All my stuff's on there.

Help.

And he was always religious about backups. So he said, look, no problem, we'll get you a new laptop, we'll get you set up. Where's your backup? And she starts pounding the table and she says, look, what I don't need now is a lecture. What I need is for you to get me my data back. That didn't go great. What do you mean you don't have a backup? And she didn't. So we just started talking about that and saying, well, how many of our friends and family and co workers are not backing up their data?

Yeah.

And you know, realizing that over the last 10 years or so, every single solitary thing that all of us care about at home and at work has gone digital. I mean, every photo, every document, every text. And so, you know, there were backup solutions that existed, but we said for whatever reason, people are not doing them. And so five of us actually quit our jobs to start backblaze. And we didn't exactly know how we would solve it. We just knew there was a problem and we decided we would try it and figure it out.

Yeah, nice. So then you tear into this thing, right, and you discover making a business of it is not so simple.

It's true.

What are some of the things you looked at and tried to do?

Well, you know, for starters, we said, okay, backup clearly exists. And we tried, we thought about various different solutions to the problem. So we didn't immediately start off with the idea of online backup. We thought about doing peer to peer backup and we thought about writing software for your external hard drive and we thought about all sorts of ways to approach the problem. But in talking to lots of customers or people at the time, we said, why are you not doing backup? And the two things that kept coming back were it's too hard or it's too expensive. And most of the other solutions peer to peer and everything else fell into the it's too hard. And so we said, let's take a step back and just think about, forget technology and forget product and forget business. What would we want to have happen? And what we said was in the ideal scenario, your computer would just magically back itself up somewhere. It would be somewhere away. So that if your computer got lost or stolen or house burned down or whatever, you wouldn't have to worry about and you wouldn't have to think about it. People don't want to deal with backup. And it would be great if all that just kind of happened transparently. And that set us down this path of, well, the closest way to getting there would be to just have a go online. And then the question was, well, how much data do we provide and for how much do we charge? And when we asked people how much data they had on their computer that needed to get backed up, people would typically say things like, well, you know, I've got like a 300 megabyte gigabyte megabyte hard drive, something so you know about that much. And so we realized that most people really don't know how much data they have on their computers and certainly don't know where it is and what of it needs to be backed up. And so we came up with this idea that we would just backup everything on your computer, every single solitary byte, unless we knew it didn't need to be backed up or unless you explicitly tell us, I don't want this backed up, but if you don't do anything and we don't know anything, we're just going to backup your data. So that was the idea. And then we asked about what would people pay for and people said about five bucks would be a no brainer. So that's how we came up with the idea. And then the question was, can we do that? I mean, is it actually possible? Like sure, I want free money from the sky too. But it might be a great idea, but it's not possible. So $5 a month for completely unlimited backup to the cloud was a question for us. And so the first challenge for that was, well, where do you put all of that data? And it's a lot of data for not a lot of money. And so at the time there was something called Amazon S3, which is now a very large multibillion dollar business for Amazon. And it's a storage service and you pay per gigabyte. And we planned on using Amazon S3 to store all the backblaze data. And when we looked at the math, we realized that it was too expensive, that the unit economics didn't work and we would lose money on every customer. And so we gave up on that.

Sounds like a great Internet business.

Yeah, definitely a common approach, I guess.

Just advertising data mining of their data.

Eyeballs and build it up and scale. So then we looked at buying equipment from these multi billion dollar storage companies. Dell, EMC, NetApp, and all those systems were incredibly expensive. And they were expensive not just up front, but they were expensive on a per unit basis. So we looked at it and said, well, at the end of the day all we want to do is take a hard drive and plug it into the Internet. And if we could do that, it should be possible. And so that set us down this whole crazy rabbit hole of trying to figure out how to actually build our own storage systems from the ground up.

So you built the device? Yeah. And to find some hardware people.

Yeah, we actually built our own storage servers with these big crazy red boxes that have 60 hard drives in them and cost less than anything else on the planet at the time for storing this amount of data. Then we wrote our own whole cloud storage file system to store all that data on top of it and leased data center space and ran operations and built out this whole crazy system where we now have about 75,000 hard drives storing 300 petabytes of customer data. And we've done about 20 billion restores for customers at this point. And the thing about it was that we started the company, the last two companies that we worked on were both venture funded from the beginning. And in Silicon Valley that is kind of the default path. You immediately go out, you have an idea and you immediately go out and you raise funding. And with Backblaze, we actually decided to go a different path. We said, five of us, we're going to quit our jobs, we're going to commit to each other for one year without salary, and we put a little bit of money in. That would be the seed round, and we would get the company at least started without taking on any funding. And then we would talk about it as a team every six months and decide whether we wanted to go out and raise funding. And we didn't raise our first venture round for five years, which was definitely, you know, in terms of limitations, starting a company that is very capital intensive, that builds and runs its own infrastructure, bootstrapped definitely put some limitations on the company.

So the first company I joined EO with was a software development company. We did customer development for some nice big names from AOL to Wells Fargo to Fidelity Toyota. I mean, big number of sort of blue chip things. We did custom app development for those. And then along the way, we decided that we had an idea for something and everybody else's. This is in the 90s. And so we built a kind of a SaaS app for restaurants and delivery services. And it was very cool and definitely a bit ahead of its time. And we funded it pretty much. Friends and family funded the whole thing. So much more. Bootstrap and our choice of technology then went along with that. We didn't go with Solaris and Oracle and things like that at the time. We did things with MySQL and like that. So similar kind of things. Somebody asked me at, at some CEO event once, well, what would you have done if you'd started with a few million dollars? And I said, oh, I'd have made the same mistakes in a far grander fashion. Would I have made them faster? I'm not sure that I would have actually made them faster, but they would have been bigger, for sure. I would have poured money down into things and along the way maybe had better offices. But sometimes we make bad mistakes. And I've often thought that there's a really powerful lesson here, innovation that we talk about, like creating, you know, we think about, we read about innovation Labs and they're fun places with squeeze balls and things like that and, you know, places where we encourage play and experimentation and stuff like that. But I think that maybe an often common or sure route to innovation is you throw a man in a cave and you give him a stick, right? And you close the cave up and he'll invent A lever or a crowbar, a pry bar, a pickaxe, like he'll use the stick to get the hell out of the cave. So you're going to use whatever you've got, you'll force to innovate and create something more efficient if you don't have that. I think that's the core message that I'm hearing here, and one that I've often thought about and preached is that really you want to force something and hardship. Some of the best, most innovative things I've done in business at different times as a CEO have been times when my back was against the wall, there were capital constraints or a lender was pulling out, or there was a massive shift in the marketplace and I suddenly had to do something new because I wouldn't have a business, I might not have a house, things like that, those kinds of things. And that's what I loved when I thought about your story in this podcast. And I think there's something for people to listen in that. How do you feel now as you look, how long ago was that that you developed your solution and you've gone on.

And so we started the company 10 years ago and so developing that was all in the first two years or so. Now we've kept developing it over the years, but that initial get go was in that first year, year and a half or so. And I agree completely with your characterization of what causes innovation. I mean, we've talked at various times that if we had gone the more traditional route and raised funding, we would have looked at it and said the problem we need to solve is backup. And we would have focused on the backup piece and we would have said there's a solution today for the storage, we'll use Amazon and S3 or Dell or NetApp. And we would have just said, yes, it's too expensive, yes, the unit economics don't work, but we've got $5 million sitting in a bank account. Let's just do that for now and work on the figure it out later, right? Yeah. And then we would have gotten, you know, we would have gotten three, four years in and gotten to scale and burned through a whole bunch of money. And maybe we would have been able to figure it out later, but maybe not. And we would have definitely been wedded to an expensive infrastructure. And instead what happened was we spent 10 years focusing on really building this super low cost infrastructure. And so recently we actually launched a Competitor to Amazon S3@1/4 of their price point. And right now, if you look at it, Microsoft Google and Amazon are all competing in the cloud storage space and they're all within a tenth of a penny of each other and we are one fourth the price and it's the lowest.

Now, are you just doing S3? You got any EC2 type service or.

We're just doing storage at this point. It's what we know really well.

Yeah.

We may do compute at some point, we definitely get asked for it. But storage is something that we've spent 10 years really optimizing.

Well, the scale and scope of what's now dependent on these mutually hosted things like the Amazon web service. EC2S3 hosting is pretty notable. In fact, this last week we saw tons of Internet sites go offline or be significantly impaired because somebody accidentally shut down a bunch of the servers in maintenance.

Yep. Yeah. When S3 went down yesterday, it definitely caused tremendous ripples to the Internet because a lot of people rely on it.

For those listening or watching. By the time you hear this, it'll be a couple weeks later, but these things have happened and it'll happen again.

Absolutely. We tend to preach redundancy of services. So we actually see more customers now using a combination of Amazon and Backblaze because they really want different stacks, different technologies. They want to know that if one goes down, the likelihood that the other one will have the exact same issue is pretty unlikely.

Awesome. Well, I think there's a great lesson here for us that you really can often do better, faced with some constraints. So you should thank instead of curse your constraints sometimes and look at what the opportunity is for them, because from them will come innovations that give you sustainable competitive advantage. So your costs have no doubt continued to go down and you continue to develop and evolve that and that gives you an access to expanding your business because you've got something that is lower cost and you're still making money now as opposed to relying on the next round of funding. I think this all the time. Some of the companies that I coach are funded companies and they tend to have better offices and more people and that kind of thing. And then. And they have beautiful stand up desks and things like that and better meal service and then some are bootstrapped and they have funky Frankenstein desks with shit hanging all off the side of them. Or they built them themselves in Ikea like that. Right. And I definitely, I mean, you know, there's good and bad in both things, but it's possible to make some expensive mistakes when you've got the money to burn them. And the other forces you to rethink Some things that you might not do otherwise and that can pay long term dividends. In addition, it's also nice not to have to answer to as many bosses. Right. When you take on money, whether it's on the equity side or the lending side, you've got people to answer to who want to know how you're spending that money and what you're doing with it. Right?

Yeah. And fundamentally, I think there are pros and cons of going the venture route and pros and cons of going the bootstrapped route. But at least in Silicon Valley, the venture route tends to be the one that's always talked about. And so it gets built as the only way, as the default way, as the best way. And there are pros and cons of both.

I think it's the only way that gets much respect. To be honest, I see a lot of people sort of turn their nose up at some entrepreneur talking about bootstrapping. And yet some of the coolest work happens in the early bootstrap phases before the money flows in. And then when it does later, when you're really scaling something that is really thought through and that has legs and doesn't have a massive business problem to solve at some point down the road. And I think there's a lot of social stuff that gets started that way these days, like, well, we'll do something with it and it doesn't always emerge. Right. That's kind of in some ways a cooler thing and ought to get a little more respect than it.

A few years ago, Thailand had a flood.

Say it again.

Thailand issue for anyone who cared about storage.

Yes.

Because it turned out that half of the world's hard drives were built in Thailand. Yes. And all of a sudden, overnight, the supply of hard drives dried up and those that were available became two, three times more expensive. And what, you know what, what many companies had to do is raise prices on their customers or stop selling certain products and services because the drives were unavailable. And, you know, limitation being the mother of invention, when we looked at it, we were buying about 1,000 hard drives a month, and we needed 1,000 hard drives a month to keep the service going. We again, if we had had millions of dollars in the bank, what we might have done is said, well, we'll just pay these two and three times more expensive prices for the drives. And instead what we realized was that while the drives that go inside the servers are two and three times the price, the drives that you would buy as an individual consumer, that you plug in through a USB port were maybe 15, 20% more expensive. And so we actually bought some of those drives, cracked them open and looked and said, same hard drive. And so we said, okay, the plan now is we need to buy 1000 external hard drives a month, crack them open, what we called shucking like an oyster.

Yeah, yeah.

And putting them into the servers. And so we drew a map of the Bay Area, mapped out every retail store that sold hard drives, mapped out where every employee lived, and said, your job as part of being employed here is to stop by one of these stores and buy some hard drives and bring them into the office so that we can shuck them and put them in servers.

I love that story. That's rich and colorful. I was doing business with another company I was CEO of during the Thailand floods and we had factories over there doing stuff as well in another category. And they were moving equipment to the second floor and they were putting in benches and things to create walkways from roads and stuff in and around the factories. The amount of ingenuity and grit really that we saw in our Thai partners was amazing. That's awesome. I love this image of a major hosting service harvesting consumer hard drives and discovering that they're the same thing and shocking them when the price is skyrocketing for the server grade hard drives. Well, this is awesome. Really. Thanks for sharing your story with us. I'm sure that it will inspire and connect with many of our listeners. We have listeners all over the world who are always looking for ideas. They come from companies large and small and this gives us a way to reach more companies. Our purpose is helping leaders fulfill their visions for a better world. So your success is our success and I love playing some role and I love hearing about all the different ways that we are connected and the impacts that we have on people in the world around us. And I hope people sees this and hear something from this. A couple reminders of things. So if you like this, please share it like it so that others discover us as well and share it around. Subscribe on YouTube, on iTunes, on wherever. So if you see this online or you're hearing this, our video versions and our video lessons and things are@YouTube.com billgallagher and then the podcast is Scaling Up Business podcast on itunes or wherever you get your podcast from. Of course you can find a free growth kit that tells you an overview of the scaling up methodology and how to begin to run your own strategy and planning sessions with your own team. We've got a free download of that@scalingupbusiness.com and look for the growth kit there. And as always, it's been a pleasure to be with you. Please drop us a line. Tell us how you're using what you love and what you'd like to hear more of in our shows. Thanks again. I'm Bill Gallagher.

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