“Hi, I’m From the Government and I’m Here to Help”

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Image copyright Nataly Bannykh

A few weeks ago the tech company I helped start filed for bankruptcy protection. It’s certainly not what we expected in our holiday stockings when we set out on this wild entrepreneurial journey in 2003. In the beginning, the sky was the limit. We were pioneering a new industry and, as the first mover, revenue quickly took off, reaching more than $3 million a month, or nearly $100 million over the company’s lifetime. We were creating high-paying new jobs — almost 50 at peak — and having a blast.

But my experience — both on the way up and the way down — is a good window into one of the central questions facing President Obama as he prepares to take the oath of office for a second time on Jan. 21: What role, if any, should the government play in nurturing entrepreneurs and, by extension, jobs, in America? In our case, we really had no expectation that government would play any role whatsoever. Unfortunately, though, we were wrong. Dead wrong. It did play a role and, for the most part, it was not a good one. It doesn’t have to be that way; there are fixes that can be made.

The original idea was straightforward: Replace “error” pages, which are generated when you type a mistake in your web browser — “amazon,cm,” for instance — with search results that contained paid advertising. We figured, if there were enough such mistypes — indeed, it happens millions of times a day — the money could be substantial. The first challenge was to raise enough capital to turn our concept into reality. At the time, investors — still burned by the dot-com implosion of 2001 — were understandably wary of tech startups and a business based on errors sounded, well, decidedly unsexy.

Enter the government, specifically the state of Virginia, where we are based. At the time the state had just set up a $3 million “gap” fund, so named to fill the void, or gap in time, between the initial launch of a company and the time it’s ready to take on venture capital money. We applied and received $100,0000 — the first company to get such money — and the terms were good. That’s because the primary goal of such programs — which many states now run — is jobs and taxes, not just return on investment (although that’s nice, too). It was just what we needed to get going, and we did just that. We named the company Paxfire.

But what one arm of government giveth, another arm can quickly taketh away. We learned that government officials are often wary of, if not downright hostile to, the kind of disruption that is an all-but-inevitable consequence of innovation. We developed a unique approach for quickly capturing a boatload of errors, namely placing computer servers deep inside the heart of the Internet, specifically in front of domain name servers run by registries such as Verisign and Neustar.

It worked great, with one teeny tiny problem: A lot of techies — including the father of the Internet (and Google evangelist), Vint Cerf — didn’t like that we were mucking around with the guts of the Internet. More specifically, they thought what we were doing was a violation of “net neutrality,” an ever-evolving patchwork of rules that says that infrastructure providers shouldn’t mess around with traffic they handle, but, rather, simply pass it from Point A to Point B. By contrast, we argued the redirection of errors was specifically allowed by technical standards bodies like the IEEE under a provision known as “wildcarding.” Who was right? It’s a toss up. The mere debate, however, prompted tremulous bureaucrats at the U.S. Commerce Dept. — congenitally allergic to even the slightest whiff of controversy — to tell the registries (who are regulated by Commerce) to knock it off. We thought the complaints were nonsense. After all, how bad could it be to get rid of errors and replace them with relevant search results? But it didn’t matter. The government had, effectively, dealt us a death blow.

Then, largely out of necessity, we pivoted. Rather than play in an area of the Internet where Washington bureaucrats held sway, we moved the playing field to a different — and less regulated — part of the Internet. Here the players were Internet Services Providers, or ISPs, which, generally speaking, had fewer government masters to worry about. With thin margins and the promise of highly profitable revenue from errors (we didn’t charge anything for our technology, but, rather, took a revenue share) there was little resistance from the ISP community. The business took off: We quickly signed up nearly 50 ISPs, often splitting the revenue 50-50. We expanded internationally, to Europe, South America and Asia. The money started rolling in. Investment bankers, such as Allen & Co., came calling, offering to shop us to potential buyers.

We had struck gold, and wasted no time capitalizing on the opportunity. But if we were the proverbial hare, the government, specifically the U.S. Patent Office, was more like the tortoise in this Aesop fable. Early on, we had asked them to reward our innovation with a patent, effectively establishing a moat around our business that we hoped would deter competitors. It didn’t, in part because the patent office — blithely disconnected from the realities of a fast-moving marketplace — took nearly seven years to approve our application (a pending patent is about as useful as a car without wheels). Just to get a patent examiner to even look at our application took years (a problem that could easily be fixed by adding more examiners). In the meantime, at least four other companies jumped into the fray. In short order, the competition drove down our lucrative 50-50 deals to more like 80-20. Layoffs ensued. The competition was stomping all over our intellectual property with impunity and, with less money coming in the door, it was tougher to enforce our rights.

We knew we needed to come up with a second act, and fast. But, at this point, the consequences of government inaction came into sharp focus. Despite repeated efforts at reform, almost always stymied by political gridlock in Washington, federal rules make it a snap, and potentially quite lucrative, for people to file civil lawsuits, no matter how ludicrous. We became a target. Our legal bills began exceeding our R&D budget. One suit against us, a proposed class action, came from an elderly woman in New York City who claimed, in all seriousness, that we had wrongly taken away her errors. I kid you not. The unspoken message could have been plucked out of the HBO series “The Sopranos”: Pay up, or else. Almost overnight, a $10 million buyout offer, which we were prepared to accept, vanished, many of our customers bolted, though some have stayed. Though too late for us, the antidote to the problem of specious civil suits can be found in Britain (which has relatively few of them), namely, forcing the loser to pay all costs.

Nobody, least of all me, is suggesting that government should provide anything more than a level playing field in which anybody with a bright idea and a little pluck can succeed. The settlement between Google and the Federal Trade Commission on Jan. 3 was an attempt to do just that in search. Even with a level playing field, companies, ours included, succeed and fail for a variety of complex and unexpected reasons, but there are ways to shift the odds: More state and federal seed money would grease the skids, and clearing away structural impediments — like adding more patent examiners and following the British model to curb the number of specious civil suits — would probably help, too. A little luck never hurts but, ultimately, as any good entrepreneur should know, it’s up to the individual to succeed or fail on his own, regardless of the obstacles.

Mark Lewyn, a founder of Paxfire and several other technology companies, has written on media and technology topics for many years for a wide range of publications, including Businessweek, Newsweek, the Washington Post, The Wall Street Journal and USA Today. He can be reached at mark.lewyn@gmail.com.


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