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Learning by doing: An interview with Arthur Zards

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Ben Bradley (benbradley@bwmginc.com) interviewed Arthur Zards, our co-founder and President, on his best and worst decisions in business. We’re re-printing the interview with Ben’s permission. Check out Ben’s blog at www.benbradley.net.

Learning by Doing - Five Thoughts
by Ben Bradley

Learn about entrepreneur Arthur Zards’ worst and best decisions. Following the market both up and down.

Arthur Zards, president of XNET, a regional ISP, spent the mid-1990s building a business in one of his partner’s parent’s basement. In 1999, XNET was sold to Winstar Communications. In 2001, when Winstar filed for Chapter 11, XNET’s founders, neither of whom knew aything about bankruptcy, decided to buy XNET’s assets. In the process learned valuable lessons about planning, growth and following the market.

How did you get started?
Arthur Zards: Back in 1985, Brian Clark, one of XNET’s founders, was running a BBS [bulletin board system] out of a parent’s basement. I was in high school and started helping because I was really into computers. In ‘92, we decided to offer Internet access via a dedicated 14.4k connection to UUNet. Our timing was perfect. Customers and growth allowed us to quickly bring on 24 employees by 1999.

What were your worst and best technology decisions?
Zards: My worst decision was following the market. Unfortunately, I don’t think anyone could have anticipated what would happen to the telecom market. In 1999, the market was really moving. The big telecom companies were buying everything in sight to gain market share and capture customers. At the time, conventional thinking for small ISPs told us to get acquired or die. The big companies had the marketing dollars and the power. The market was telling us the time was right. In 1999, we received five offers and finally decided to merge with Winstar Communications. To protect our customers from the rapid merger, we demanded that XNET remain autonomous for at least one year. Winstar gave us two years of complete autonomy. This decision, in hindsight, was a good one. In fact, it saved our business. By holding off on integration, we were able to maintain our identity, infrastructure and customers with virtually no interruption or change in operating procedure.

What was the result of that decision?
Zards: A lot of good things happened as the result of this decision. It was nice to have the comfort of a large corporate parent. Life was easier. Benefits, payroll, employment decisions were all handled. We were able to give our employees great benefits. And, we were no longer personally liable. And like all Internet start-ups, Winstar threw great parties. Everything was first class. We felt like royalty. Plus, it was a cash and stock deal — the future tends to look bright when you have a pocket full of money.

When the market turned, there was a packet of papers from Winstar sitting on my desk. It included my layoff, layoff instructions for the staff and the notice of bankruptcy. Everybody was going to get laid off, myself included, and it appeared as if every customer would be completely ignored. If you start a company in your basement and manage to survive for eight years, you develop great relationships with your customers. You don’t want to see them dropped. The night before the layoffs, on a long shot, we had our attorney contact Winstar and offer to buy everything back. That phone call got the ball rolling. We knew nothing about bankruptcy or buying assets. It took about nine month to close the deal. Now, I know more about bankruptcy than most would ever care to know.

We’re running the business now the way we should have been four years ago. We’re more efficient, using a lot more common sense and, unlike the Internet boom days, we actually know where all our money is coming and going! Plus, we bought the business back for far less than what Winstar paid us for it - so we’ve got that going for us.

Looking back, what could/should you have done differently?
Zards: That’s easy. Next time someone buys my company, I’ll ask for all cash.

How has failure impacted your personal life and what did you learn from the experience?
During that nine months, I went through a tremendous amount of stress and anguish. That was the most difficult period of my life. Nothing against lawyers, but eight hours a day with attorneys will break even the strongest entrepreneur. Another six hours a day went to repairing vendor relationships. There were a dozen key vendors that we had to convince to stick with us. If all 12 vendors weren’t on-board, the entire house of cards would crumble. XNET was owned by Winstar, but since we were autonomous we had our own vendor relationships. We’d get an invoice and pass it to the corporate office for payment. And while XNET might have owed Ameritech $1,000, Winstar might have owed Ameritech $100,000. Ameritech sent us the bill for the entire amount. Negotiating with vendors while trying to convince them that we were going to pull out of this mess was draining. On top of that, another company was trying to buy XNET’s assets. And even worse, even if it all came together flawlessly, someone else could still steal it away through the public bankruptcy bidding process. The stress was unbelievable.

When everything fell into place, our earlier demand to remain autonomous proved to be a lifesaver. Our autonomy enabled us get back on our feet extremely quickly, if we had been integrated with Winstar, our re-purchase of XNET would have been impossible.

I learned that no matter how easy a decision, always have a back-up plan - if we didn’t have that, we would have been unemployed and on the street like everyone else. Even today, for any big decision, we always go through the “what if” scenarios. That single call to make an offer to buy the company back from Winstar saved our jobs, our customers and the jobs of most of the people who built this company.