Todd Merrill:

Hi, welcome to Tales from the SkyLounge. It’s a podcast about business, consulting, and venture investing. We get out there in the world, and we talk to people who are making it happen and we get their stories. If you can like and subscribe, our producer, James, gets really happy about that.

So, today’s guest in the SkyLounge, Steve Subar. Hi, Steve. How are you?

Steve Subar:

Hello, Todd. How are you?

Todd Merrill:

Hey, doing well. So Steve, who are you and what are you working on?

Steve Subar:

At present, this doesn’t make great cocktail conversation. I’m the inventor and patent holder of the world’s first fully automated yoga mat cleaning machine.

Todd Merrill:

Ha ha ha. That’s awesome. And you’re an entrepreneur, and you can’t get away from it, right? It’s truly a disease where you kind of have to go back to the well and start companies. But like, tell us about Matt Refresher or MatFresher?

Steve Subar:

MatFresher.

Todd Merrill:

Okay

Steve Subar:

But good point. That is what it does. So, I’ve been building and exited companies almost my entire career, 30-plus years. And no doubt, yes, there’s sort of an addiction to the thrill of that experience. And when I said to myself more recently, if I start another company, what’s it going to be? I didn’t take the usual approach of thinking about a problem and a solution. I started with what if I could create a business model for whatever that business would be? What would be the business model I’d want to build?

So, I thought about building a business model first and a company second. When I thought about building the business model, I was thinking through, all right, well, you know, what are the key elements based on my experience, things that have gone well, things haven’t gone well. What are the elements that I’d want to preserve in a new company? And there were really three elements, almost really three constraints around ideas. One is that it needed to have recurring revenue, much akin to what all of us in the enterprise SaaS industry are familiar with. Two, it had to have high gross margins, also an attribute that’s attractive for valuation. One reason software is so highly valued. And third, and this was going to be the element most different than anything I’ve done, it had to have essentially zero B2B sales friction.

My entire career has been B2B sales friction. Everything I’ve done has been large systems, complex systems, expensive systems, long sales cycles. And so I thought, you know, at this stage of my life, at this stage of my career, I’m kind of done with that. So, those are the constraints, recurring revenue, high gross margin, and no B2B sales friction. So, with that in mind, the question was, you know, well, what would that be?

Todd Merrill:

Okay. And then what is it?

Steve Subar:

Well, this is also my 20th anniversary of having done hot yoga. And I never really understood why this practice that’s built on the Indian word is Niyama of Saucha, which has to do with cleanliness; cleanliness of the spirit, cleanliness of the mind, cleanliness of the body. We’re done on these dirty, disgusting things that smell like the inside of an old hockey equipment bag, yoga mats. And so I began thinking about, you know, all right, well, is that a problem that anybody cares about? And if they care about it, would they spend any money? And that was the genesis.

Todd Merrill:

Okay. Okay. So, I want to hear about the thing, but I want to get into the mind of the entrepreneur. So, many people have an idea and they just go build the product and then they start talking to people. You did what experienced entrepreneurs do, and go, man, I don’t want to have any trouble selling this thing. I want to know if people want, need, desire this thing and we’ll exchange money for it, I guess. So, what does that process look like for you? Like, you got this idea. It’s probably wasn’t the first idea probably, right? You know, this one was different because why? Like, what did you do to go figure out if this is something that’s going to catch fire, not going to have a huge sales burden?

Steve Subar:

The last company I founded and was acquired in 2012 by General Dynamics and for the last essentially 13 years, I’ve been operating as a management consultant, almost like an operating partner for tech companies. And one of the common mistakes that is made when thinking of a new idea is to validate product market fit by building the thing and then seeing if somebody wants to buy it. And the problem with that is that it can be very expensive and almost always takes twice as long and costs three times as much as you may have planned. And it turns out that you can actually get a lot of market sounding, a lot of feedback, a lot of knowledge, a lot of validation, early validation of product market fit without investing very much in the product at all. So, yeah, that was the approach that I took. And here’s what it looked like.

So, the question was, would people spend money to get their yoga mat cleaned? And the strategy for doing that was really simple. I got a folding table, some rubber gloves, some antiseptic spray from Whole Foods. I got a square reader for my iPhone. I got a T-shirt with a company logo. And I asked yoga studios if I could hang out and see if people wanted to spend two bucks to get their mat cleaned. And that’s what I did. People would come in, I’d greet them, people would leave, I’d greet them. And I was able to determine, yeah, guess what? People will spend money to do that. But something important happened along the way that wasn’t planned that was actually more valuable and has a lot to do with product market fit.

So, in between the 10 minutes before class and 10 minutes after yoga class, the 50 minutes in between, I essentially don’t have anything to do, but I can talk up the front desk staff, the owner, the operator, the instructors. And what I really learned was what it means to own and operate a gym, a health club, a yoga studio, a Pilates studio. And it turns out that a bigger problem than hygiene are unit economics. And that gets to how to make money. So, that began to evolve my thinking about would there be this intersection between providing economic benefit on the one hand and improving brand identity by improving hygiene on the other? So,  that was all done before having built a product.

Todd Merrill:

So, a lot of fancy words. So, break it down. So, make friends with the gym people and they can help you sell it, right? If they get a little piece of the action, I guess, is where you’re going with this or how does, what’s the thought?

Steve Subar:

Well, if I just take yoga as an example, yoga and Pilates are about 43,000 studios in the U.S. And according to the industry association that tracks this information, something like only 10% of operators make or net more than one hundred thousand dollars a year. So, it’s not something you do because you want to get rich. It’s something you do because you want to help people.

So, if you can figure out how to offer a solution or a system that helps with the bottom line, there’s an obvious benefit. And that’s not something I would have understood prior to doing some of this product market fit without the product. One of the things I learned was that it’s expensive for studios to keep their place clean. But it turns out that hygiene, especially in a hot yoga or hot Pilates environment, hygiene is the number one factor that improves NPS and also results in churn. So, cleanliness is a big deal. So, if you can do something to make visible that you’re invested in hygiene and cleanliness, which reinforces that element of your brand and at the same time reduce the amount of time that your staff need to spend cleaning yoga mats, then you’re actually enabling them to get kind of a return on investment by reducing their labor costs or being able to redirect those people to do other more important things.

Todd Merrill:

Got it. Got it. And everybody wants to go to a clean gym. They want the neat freak, you know, clean in the gym. Yeah, nobody wants to go to a dirty gym and roll around on a floor for sure.

Steve Subar:

Well, I think the bigger point was that I learned some things around what to imbue in brand values that I would have had no idea about hadn’t I spent that time talking to the people who own and operate the businesses.

Todd Merrill:

And then it seems like there are different voices, right? And when you’re talking about your ICP or, you know, who buys, it’s the gym buys it or let you put it in. And then there’s the end user, which is a different audience, right? And they both kind of have different motivations for getting involved with this product, right?

Steve Subar:

A 100%. Our business model is super simple. Basically, the gym or the studio just rents it, and they make it available as an amenity to their members and their clients, super simple.

Todd Merrill:

Okay. Okay. Yeah, that’s awesome. And then it’s just you just tap your phone, or you have an account, or how do you pay for it? Or how does that work?

Steve Subar:

Well, it’s free. It’s a free amenity. So, the operator, the studio, the gym just rents the mat fresher. They use it to clean their rental mats, which saves them an amazing amount of time and convenience. And then they make it available for free to their users. In fact, let me show you this video.

Todd Merrill:

Yeah. I’d love to see what it looks like. So, it looks like in that video everybody was pretty happy, and it was pretty easy to use, and you just kind of pop it in there and does its thing for a second, and then you get a clean mat and off you go. Like, what’s not to like?

Steve Subar:

One would think, yeah, the response has been amazing. People love it.

Todd Merrill:

Yeah. I’m intrigued by this thought process, you know, the mind of the master here. So, you want to go validate product market fit, and then you used a proxy product or service, right? Build a service, you know, hand cleaning the mats, I guess, in lieu of a formal product, which would have been a machine at the end. And then do what you have to do to figure out whether people care, and how inventive is that? That’s kind of, that’s a big deal, right? Is figuring out product market fit as cheaply as humanly possible as fast as you can.

Steve Subar:

Well, right, you know, and a lot of businesses talk about, particular software businesses talk about building their MVP. But somehow it seems like the idea, you know, the first letter in the word minimal gets taken out …

Todd Merrill:

… right

Steve Subar:

Yeah, and it ends up being a massive investment. And I think as well, you know, sometimes there can be misdirection by taking feedback from the customer verbatim in terms of what they want and then putting that, you know, feeling a pressure or a need to integrate that into the so-called MVP to eventually step your way towards product market fit. But you know, it turns out that if you’re innovating, it’s very hard for the customer to actually accurately describe to you what it is they want. Sometimes, what will happen is they’ll tell you what they want your product to do or not to do. But you always need to ask, what’s the question behind the question? In other words, do you want the customer to prescribe how to accomplish something, or do you want to understand fundamentally what they’re trying to accomplish? And then, as the expert in the technology or the technique or the business model, help them understand a better way to get to where they’re going. So, MVPs tend not to be minimal, and they tend to sort of evolve with this idea that if you only did what the customer said, they’d be lining up to spend money, and that usually turns out not to be true.

Todd Merrill:

So, a couple of things to react to that. I think you’re right. You know, so I get this new favorite product market fit metric. So, if you’ve got it in the market, whatever it is, and 40% of your customer base gets violently mad if you threaten to take it away, you know, you’ve got it, right? As opposed, you know, painkillers, not vitamins. So, if you got a nice little vitamin product, people will say nice things to you, and it’s almost the cruelest type of validation you can get. It’s like, yeah, it’s a good product. And then they never open their wallet, right? They get dinosaur arms when it’s time to pay. And then take it or leave it, and you’re not going to scale that kind of business. Right? And so it’s hard to differentiate between yeah, kind of, and versus hell yeah, please don’t take that away from me.

Steve Subar:

A 100%. You know, the other side of that is that oftentimes, the focus is on solving a problem. It seems like, you know, all the best advice on how to put to a pitch deck starts with describing the problem. Well, why does a great new business need to be about solving a problem? It doesn’t. The flip side of that coin is a great opportunity. 

And so, trying to solve a problem isn’t necessarily the rubric for how to build a successful company. It could be how to capture a new opportunity, or it could be a combination of both. But I’d like to say this, the thing itself is one element of it, the technology or the product or the service. And innovation is usually used interchangeably when describing what’s going to be a great idea. But what sometimes gets missed as well is the idea of innovating, not the technology, but also innovating the business model.

Todd Merrill:

Yes

Steve Subar:

And if you think about some of the most successful companies, their innovation was both. It was both a product and a business model. And so my view is that if you can think of a business where the business model innovation is as impactful as the technology itself, then you have the potential for something very special because it creates a kind of a flywheel in the business.

Todd Merrill:

So, I’ve got this idea around my head, had been going really hard on practical AI this year. But I have a software background, so rapidly coming to the conclusion that we’re headed toward fast-food software. Like, it’s no longer a big deal to get software. And then there’s going to be a bazillion, any idea you have, it can be put out there in a market in a week, maybe less. And so it’s no longer the differentiating layer. It’s not costly, it’s not hard. And then so what are you left with, right? So, , we used to, Silicon Valley play was, hey, go put $5 million into some really smart young folks, and then they’re going to grind like hell, and they get some kind of piece of software or piece of hardware or something. It’s not the game anymore, right? It’s kind of what you’re talking about as an experienced founder of product market fit, opportunity, business model, pricing, acquisition, you know, channel. I don’t want to do B2B SaaS ever again. It’s too complicated, you know, like it’s hard, right? And then so you only get that through bullets, sweat and tears and experience. So, maybe kind of reflect on that, like there’s a big kachunk that’s happening right now, real time, really fast, where the founders that are going to make it are the ones that are thinking like you do, where it’s business model first, you know, how am I going to distribute this? How do I know really, really fast and really, really cheaply, almost before I have a product, whether people care, right? And they’re going to separate from money?

Steve Subar:

Yeah, you know, there are a couple elements that the first is, I agree with you a 100% Todd. In this race, the swift will beat the slow more than the large will beat the small. There’s no doubt about that. So, there’s that. I guess, you know, the other third leg of the stool might be defensibility. So, if we’re talking about a great idea to solve a problem or create an opportunity for talking about innovating a business model as much as you’re innovating technology, and then you’ve got some real defensible mechanism, maybe those are the three key ingredients. But I think there’s a fourth as well. And this really comes from my consulting background. But it’s really interesting to see how generationally decisions are made, and mistakes are made. And I’d say, you know, there was a time when people worked in the office. And one of the advantages of that was being able to learn from one another. When that sort of broke down, when that construct broke down, and of course, now, you know, we’ve got work-from-home is probably the more popular mode. There became an issue in terms of learning. And one of the things I’ve noticed amongst founders is in describing their journey, when things didn’t go according to plan, oftentimes, whatever that little story is about something gone wrong, it’s very quickly followed at the end of the paragraph with a few common words, which is comma, but this is what we learned.

Todd Merrill:

Okay

Steve Subar:

The idea of making a lot of mistakes quickly, but this is what we learned. As if making the mistakes was a good enough result that having made the mistake in the first instance was, let’s just say, excused, because you learned something valuable. And obviously, you know, learning is critical. But I always say information is not the same as wisdom. And learning from making mistakes is not the same as good decision-making.

Todd Merrill:

Okay

Steve Subar:

And I think what has happened along the way is that now, and this is really just sort of force multiplied by perplexity or, you know, any of the different systems that can provide instant access to the world’s knowledge. The idea is that when trying to make a decision about something with which you’re not familiar, just go online, used to Google for it. Now you’ll look it up in your favorite LLM. And certainly, you know, treasure troves of information. But we talked before about the race will be won by the swift, if the measure of that is time, and time is shortest when making the fewest amount of mistakes, then the question is how to optimize for that. And when it comes to good decision-making, information is one, but only one of two important ingredients.

What’s the second most important ingredient? Experience. If you take information and you add experience, then the plus equals wisdom. And wisdom is the secret to making good decisions. So, it turns out that you don’t get that from anything you can look up online. You can look up information, but you can’t Google for experience. 

And so I think collaboration with those who have gone before, combined with the spirit of entrepreneurship for somebody who hasn’t done it before, is really like the superpower that adds to those other three elements I was mentioning. And when you can do all four of those things, then you’ve got something really special.

Todd Merrill:

So, you need experience and wisdom, really, is the word. And then, you know, we always used to say fail fast, fail forward, right? Just make a lot of mistakes, move fast, and break things. That’s the old kind of, and now, it’s like there’s no mulligans anymore. Like, you do not get mulligans in this market. And then you can’t afford to go figure it out and bump into stuff and blow through cash. Because nobody’s going to put up with that because we’re all used to this very, very rapid, you know, right down the middle of fairway execution. So, where are you going to get violent execution? Not, you know, not hit any of the potholes because you got to know where they are. It’s you got to have somebody on your team or be the person on the team that’s been there, done that a bunch of times, and then just know what you’re doing in this new company or it’s a new venture.

Steve Subar:

And there are so many ways that you can get that, right? It can be, I mean, no new tech, no new ideas here, can be advisors. It can be part of the leadership team. But yeah, this idea of we’re just going to go experiment together, that doesn’t work by itself so well anymore. And, you know, what I’d add to that is that if you think about all the decisions that leaders need to make, entrepreneurs need to make, founders need to make over the course of their company. But let’s focus on the earlier stages, the seed stages, the early growth stages.

If you looked across many, many companies, you’d probably find that a very large percentage of those decisions don’t require new information. They don’t. It might be new for a first-time founder, but it’s not necessarily new. It’s not like somebody hasn’t made this decision hundreds of thousands of or a million times before. And so for the vast majority of those, the 90 plus percent decisions where you don’t need to invent anything new, a new concept, a new idea, what have you. It’s best not to make those mistakes and then take all of the creative energy around invention and put that into the 5 or 10% of what your company is going to do that nobody’s ever done before. That usually goes much better.

Todd Merrill:

So, are, you know, there’s a sea change in the world of investing, right? So, we talked about like venture capital seems to be stuck or sick or like something’s going on where, you know, I don’t know why, but we’re not getting as many unicorns. We’re not getting as many exits as we did. Maybe that’s part of it. Maybe we don’t need a whole bunch of capital to get started or there’s fewer funds, you know, and therefore fewer less money. So, it’s harder. Do you think people are going to start different kinds of companies than they did maybe 10 or 20 years ago? You know, it used to be you go get a big check, get in business, buy a bunch of computers, you know, get the work grinding away. You know, and then pour money on and go fast. Are we in a different era now where, you know, product is so quick? It’s not the problem anymore. It’s be really careful, be really methodical about getting into the market and then go like hell once you pull the trigger, you know, in a very capital efficient way?

Steve Subar:

Well, it’s hard to talk about venture capital without, I think, dissecting some of the different elements.

Todd Merrill:

There’s a lot there, right? There’s a lot of different gears in that whole ecosystem.

Steve Subar:

So, I think it’s still true that a very small number of VCs represent a highly disproportionate percentage of the returns.

Todd Merrill:

Sure. No doubt.

Steve Subar:

If you’re looking at, you know, the top 10 or 15 or 20 firms, if that’s trying to be characterized, I think one of the things that can’t be ignored is their ability to make a market, right? That they have such vast resources, experience, and connections. They can see around corners in a way that others can’t. And in part, that’s because their investment strategy enables a market to evolve in a particular way. Right? So, winners sometimes get picked really, really early. And although the tombstone might say XYZ invested in ABC company, it’s obviously much more thought-through, complicated, and strategic, which has to do with how an entire ecosystem is going to involve having a crystal ball about that. And then investing in the things that make that happen. And indeed, throwing billions of dollars at those businesses tends to name some, you know, they can King companies, essentially.

So, if you want to be one of those, I don’t think, you know, if it’s something remarkable, I don’t think it’s hard to raise money. It doesn’t seem like it, you know? There’s plenty of that money being put to work on mass. And then if you go down to sort of the next, let’s just say everybody else, you know, the tier 2 through N funds of which there are thousands, I don’t know that they’re … I mean, certainly deploying less. They’re not deploying capital at the same rate, but I think they are like exceedingly clear about what the profile is of the deal they’re looking for and their biggest challenge isn’t being capital constrained. Their biggest challenge is finding the deal. I mean, I think there’s more valuable contribution one can make to a VC than helping them source great deals. And so, you know, whereas entrepreneurs might focus on the dearth of capital available today compared to a few years ago. I think investors would look at that from a different perspective and saying, it’s just harder to find a good deal than it ever was because there’s so much more that we need to sift through.

Todd Merrill:

Yeah. A lot of noise, for sure.

Steve Subar:

Yeah

Todd Merrill:

Yeah. I just, you know, reflect on our angel group, you know, some of the deals we see go by, it’s like, man, you know, I don’t know about this one. You know?

Steve Subar:

Hey, you want to … I’ll just tell you personally, how do you think it is raising money for an automated yoga mat cleaning machine? It’s not easy.

Todd Merrill:

Ha ha ha. Yeah.

Steve Subar:

It’s not easy. And I’ll tell you why it’s not easy. First of all, most of the available investors, they do software. And if they’re doing software, they’re probably doing AI. MatFresher has a lot of embedded software built into it to make it work, and it operates over a private NB-IOT network connecting to a rather sophisticated cloud-based application that receives all the telemetry data and other important information. But it’s a piece of hardware. So, people look at that and go, you know, I don’t do hardware. And I’ll say, well, wait a minute. Like, let’s just say it wasn’t a yoga mat cleaning machine. Let’s say, as a machine that printed money, would you be interested? No, we don’t do hardware. So, you know, so that’s a challenge.

There’s not a huge intersection of institutional investors in hardware as a services business. We don’t sell hardware. We happen to make a piece of hardware. What we’re selling as a service. Software as a service, hardware as a service. Hardware as a service is not an investment thesis for, you know, 98% of institutional venture capital investors in the U.S. So, you’ve got to be creative and look to other sources. And that could be family offices. It could also be strategic partners. You know, the fitness tech industry is undergoing a lot of change. Having a one-and-done is, you know, selling a machine is not really a great business model. They’re all looking for recurring revenue.

Todd Merrill:

Sure, right.

Steve Subar:

So, you start to have to get creative about who would want to write a check because it’s going to be strategic to their business, and you know, that’s just a different way of dealing with the scarcity of potential institutional investors.

Todd Merrill:

You said something that was interesting. You said the number one thing you can do to help impact a VC fund is to help them source great deals. So, how do you think about where those deals come from? Do you see the traditional incubator accelerator type model? Do you think venture studio is a thing that we need to be looking at? That’s kind of a new, an old thing that’s new again. Is it like having a bunch of people out there in the world that, you know, know that you’re a good person and bring you deals, and it’s relationship-based, or how do VCs get those great deals, or maybe it’s all the above? I don’t know.

Steve Subar:

Well, you know, if you’re a top-tier firm, then you’re getting to look at the best deals, and you’re competing with other top-tier funds, but I don’t think they have a problem in terms of deal flow. If you’re everybody else, you know, you hire a bevy of young, really bright MBA graduates who want to get into venture, and they’re smiling and dialing, pounding the phone and doing web searches all day long, you know, looking for those conferences, all the various ways they network to try to come up with them. Yep.

Todd Merrill:

A lot of outbound. I think that’s one of the things that’s interesting is I think 90, 95% of the sourcing is outbound out of the venture fund, them tapping you on the shoulder, saying, “Hey, can I take a look at your company?”

Steve Subar:

Yep. Yep.

Todd Merrill:

Hmm. Interesting. Well, let me ask you about your kind of origin story, you know, Open Kernel Labs, like boy, what a great run that was. So, tell us about how that one got started? That was definitely a different era. Things were different, and then you grew that company into some amazing stuff. So, how did that get started?

Steve Subar:

So, I was working on a turnaround of an Asia pack subsidiary for a U.S.-listed software company. And I was living in Sydney, Australia, at the time. Went there on essentially a one-year project to do a turnaround, and fell in love with Sydney and was trying to figure out how to stay longer. Needed to have a visa to do so. And there was an opportunity that came up to be the first executive in residence at a research and development lab that had been started by the federal government a few years prior to my arrival, called National ICT Australia. The government wrote a check for half a billion dollars, brought under five different labs, 800 researchers, 175 of whom were PhDs, all working on software projects, small teams. And my brief from the board of directors was to put together a model for spinning out companies.  At the time, Australia was trying to address a problem where they were a net importer of IT. So, a balance of trade deficit in IT spending. And they figured the only way to do that was to start spawning companies and licensing technology, acknowledging that Silicon Valley took 40 years to, you know, to get that going, but they had to start somewhere.

So, I had this amazing opportunity to stay in Australia and put together this model for spinning out companies, essentially stage-gating different steps in the process where then the lab would continue investing or moving into a pure research kind of in organization. So, I did that for a year and wanted to stay a third year and again, needed something to do. So, I hired an immigration lawyer and asked if he could figure out how to get me permanent residency. And throughout the Commonwealth, the way that happens is with a point system. Sometimes what’s recommended for solving some of our immigration challenges, a point system.

There were different categories to get points. And the number one category, the one that was heavily weighted was age. And I was, I aged out, I was too old. I was going to get like zero points for age you know, because when it comes to that, they want to know somebody is going to be productive for a certain amount of time, not just be a drain on the government. So, he said, “Look, you’re going to miss the largest category of points on age, but you know, we’ll see how well you can do on the others.” And I said, “Well, what’s the next highest weighted category?” And he said, “Profession.” And I thought, okay, well, this is fine. I’ll probably like bonus points, like CEO, software company, startup, creating national benefit, hiring people in Australia, you know, this will be great.

So anyway, he goes through the process and calls me one day, you know, obviously very disappointed, and he wanted to let me know that I didn’t make it. I wasn’t going to get it. And I said, “Well, what happened?” Like, I scored zero on the highest weighted category, age, but I thought I’d do really well on occupation, right? Cause they’re trying to create jobs in the tech industry, and that’s exactly what I’m doing. And he said, “Well, every year the weighting changes based on some census data and some government data around what kinds of people we need in the country, like what kinds of workers.”  And I said, “Okay.” So, I guess like software company, CEO that doesn’t need a lot of those. I didn’t score well. Like, what was the highest category? And I actually told this story to somebody at an Australian consulate office holiday party a couple of years ago, the time was about 15 years, and I was telling her the story, and she said, “Oh yeah, I know what it was.” And I said, “There’s no way you could have known what it was.” She goes, “No, I know what it was that year.” And I said, “What?” And she said, “Hairstylist.”

Todd Merrill:

Ha ha ha!

Steve Subar:

And I said, “You’re right. It was hairstylist.”

Todd Merrill:

Okay

Steve Subar:

They wanted a lot of hairstylists. So, I struck out on age, and I struck out on hairstylist.

Todd Merrill:

So, you went to beauty school, and then what happened?

Steve Subar:

Well, it turned out that if you could write a long enough essay, that was the, you know, you had a second bite at the apple. So, I stayed a third year, and that resulted in me spinning out a team of researchers from the lab to create Open Kernel Labs. They were working on ways of solving problems of embedded systems, which was not a new concept. ESX server wasn’t new, but those were all run on the server and, you know, up to mainframe-size devices. Nobody had figured out how to make it work on a power-constrained device, like an ARM9 processor. And the reason you’d want virtualization on a power-constrained device is because that’s what was embedded in an embedded system. And you could see the evolution of things like mobile phones. At the time there was no smartphone, but Linux was first coming out on phones. You could begin to see the evolution of devices as endpoints on networks that would have all this same kind of security flaws and holes, or maybe even worse than what we were used to in a walled environment you know, behind a firewall and a data center.

So, we figured out how to apply virtualization software on embedded devices that had certain very specific security properties that would secure those embedded devices. And we focused first on mobile. And over seven years became the most widely deployed cybersecurity software on mobile devices. By 2012, we were acquired. We’re in about 1.6 billion phones.

Todd Merrill:

That’s a lot of them. Yeah. And then and then General Dynamics, right? That was the exit?

Steve Subar:

Yeah, so that was kind of interesting. It wouldn’t seem like the usual acquirer for a company like ours. So, how we got a massive deployment was originally our biggest customer was Qualcomm. And they were shipping almost all their wireless chipsets with our software. And then we would have a second version of the software that could be upgraded from what came from the chipset OEM. So, this would be available to handset OEMs and wireless operators, and they could do more with our software and pay an additional fee to turn that functionality on, in essence. So, in thinking about our go-to-market strategy and raising the alarm about flaws in operating systems and architectures on mobile phones that could be serious cyber risks, we thought about, well, you know, who’s the most paranoid to start with them. And it wasn’t the consumer. It was the federal government.

Todd Merrill:

Yeah, ha ha ha!

Steve Subar:

It was the federal government. Actually, in our case, it was the NSA.

Todd Merrill:

Yeah, yeah

Steve Subar:

At the time, you know, the thousands and thousands of civil servants and non-government workers who flow in and out of Fort Meade every day can’t bring a cell phone. Got to leave it in the car. So, like, how ineffective would we be as business people if we couldn’t use a cell phone? Right? It really slows the pace of communication. But that’s how it worked. There was one phone you could use at the time. It was affectionately known as the ObamaBerry, and it was essentially two BlackBerry phones glued together, one for unclassified and one for classified communications. And it was sold by General Dynamics. And I don’t at the time, I think it costs like 10 grand or something, but it wasn’t a very good device if you were an operator, cause it didn’t actually look like a regular mobile phone.

Todd Merrill:

That guy is weird.

Steve Subar:

Yeah, exactly. Yeah.

Todd Merrill:

Yeah. Let’s go talk to him.

Steve Subar:

What is that?

Todd Merrill:

Yeah

Steve Subar:

Yeah. So, we became sort of most notably the first method for the NSA to enable standard smartphones to work for their employees, and the way it would work is they could buy, like say a Samsung phone, where the software is designed in South Korea, and the phone is made in China. Ship it to the U.S. to a SCIF secure facility, wipe it clean, load our software as the first layer of software, then the operating system with the drivers on top, and all the other applications. And so then you can have essentially a standard off-the-shelf smartphone that could be used for top secret communications on the one hand and play Angry Birds on the other.

Todd Merrill:

Yeah, yeah. It’s a big deal, all right.

Steve Subar:

And so this architecture sort of became widely known as having, you know, stamped for approval by the NSA. The value of our deal with the NSA wasn’t in the dollars as much as it was in the reputation.

Todd Merrill:

Sure

Steve Subar:

And so this gained notoriety. We then came up with other use cases that didn’t have so much to do with security, but had to do with other properties, like how to reduce the bomb cost of the device, and these other use cases, and then took that to the commercial market. So, it was a little bit of the, you know, sort of in through the outdoor approach, which is maybe one of my favorite ways of thinking about, we were talking earlier, Todd, about not innovating just technology, but innovating business models. Oftentimes it starts with, you know, Alice in Wonderland thinking about, you know, I’m going to go in through the outdoor. It’s the person when they’re going into a crowded place, and there’s a line of people waiting in an orderly way to get in the door. And it’s the person who looks peripherally left and right and sees another door that might be open, but nobody’s using, totally legit entrance, walks up, opens the door, and goes right in. Right? So, you know, it’s that kind of in-through-the-outdoor thinking that I think is fundamental in being successful.

Todd Merrill:

Well, and its distribution too, right? Cause you have the reputation, you’re in the rooms where people were talking about this problem. And then, you know, how else are you going to figure this stuff out? And then there’s another door, is just around the corner. Nobody thought to go down that alley to look around the corner, so to speak, to the other door. But yeah, because you were in the business and then you got a reputation and then you had a lot of conversations, you could then probably stuff starts coming to you. A DeNovo startup is not going to have those same conversations or that same opportunity or the same insight. And then for you, though, as you know, the wise executioner, CEO, you’re like, oh yeah, that’s an opportunity right there, and then just jump on it and go, right?

Steve Subar:

Well, almost, almost, almost. A lot of the good ideas came from many other people, not me personally, but to the extent my role was to bring the right group of people together, create the environment for this to happen, and be a part of building those relationships and open doors, freeze up everybody else to actually come up with the good ideas. They did that.

Todd Merrill:

Yeah, yeah. So, I’ve got this kind of pet theory of accidental empires, where you know, there are three unique gears that companies go through in their evolution. And I’d love to kind of bounce this off you to see if you experienced this, but it’s like the committee, it’s like the army, right? Commandos, an army of invasion, and then an army of occupation. Right? And they should like selling to the federal government, DOD, like that’s definitely the last stage of don’t screw it up, don’t innovate. Like, just don’t, like, we don’t want to screw it up. And then like culturally, the way you execute changes, right? So, commandos, it’s like, that’s, that’s your lab guys, you know, and then they have one little goal. Don’t ask too many questions. It’s messy, get it done, get out the door, ship it. And then at some point, you started getting market traction, and then you kind of have to attract different personalities in some ways, right? It’s not that the commandos are going to go execute a new market analysis and rollout for this thing to go into a new division. But it’s a new set of people you have to bring in, and then it’s coordination and logistics and legal and marketing and sales. And then at some point, you win, right? And then those people, you don’t want to get too creative, right? So, now it’s a different set of people just to kind of make sure that your SLAs are honored and make sure it’s uptime and it’s just reliable, and we don’t want to shake up the product roadmap. Did you experience that kind of evolution of culture, or what was the culture like, you know, at the end or when you sold the General Dynamics, and then, you know, did a lot of those people kind of make it or did you experience like a lot of okay, we’re done, that was awesome, off to the next thing?

Steve Subar:

You know, I would probably be typified more as the commando. If you like your tip, you can be this one or that one. And I don’t think I could operate any other way. You know, I sort of failed at being an employee, which is how I became a founder. You know, if nobody can stand me to work for them, I’m going to have to figure it out, so I better develop some leadership skills and try to be a, you know, a founder and a CEO, and that’s worked out okay. And I think similar for people who are wired in the context of more orderly operations, if that’s one way to paraphrase what you were saying you know, I don’t see them turning into commandos, but I think a company needs both, but there’s something that gets lost along the way in this concept, because when you were giving me this sort of military analog, I just was thinking of movies. I was thinking of like action movies, right?

Todd Merrill:

Yeah 

Steve Subar:

Act action movies like they’re all commandos. Like, you know, otherwise there’s no plot line, right? There’s no movie. There’s no, like, there’s no epic adventure.

Todd Merrill:

No tension. Right? Yeah.

Steve Subar:

And, it seems like in the description of that transition, it would almost be like the company loses that element, and I don’t think that’s the case. I think in order to thrive really at any size, there’s an element of commando that needs to be imbued with how you operate as a more mature, organized scalable business. And you mentioned a word in passing that I think is really the key to that. You said winning. And so I think, regardless of let’s say the persona of the individuals or the culture of the company, that aspect of winning, which obviously was there from the start to enable the company to get to where it is, that has to be as live and rich as part of the culture, regardless of what stage of maturity it’s at. And it’s interesting because when you meet a big company that has been able to not just preserve that, but build on it, it’s so obvious, but you don’t find it too often.

Todd Merrill:

Well, and I think people naturally progress through this, you know, companies age, right? And then if you don’t renew, then you inevitably are going to, you know, just kind of win and settle. And we’ve all seen these companies that are 20, 30, 40 years old that kind of had a good run, you know, and things change, and they just can’t or don’t want to, or do new things, and then they kind of die or get acquired, and that’s it, you know, like Sears. Great company, had a good run. Just couldn’t adapt. And maybe there’s external factors there, but just kind of didn’t adapt with the, you know, they owned mail order, you know, how come they weren’t the new Amazon, right? How come they didn’t innovate that new distribution channel when they kind of owned it?

Steve Subar:

Right

Todd Merrill:

I don’t know. And it’s interesting.

Steve Subar:

Well, I can tell you about General Dynamics. You know, when you meet somebody, maybe in the airport or at a restaurant or just wherever, you know, and somehow you learn that they were part of our military, and you say, “Thank you for your service.” So General Dynamics is like a whole company of that. It’s like, I don’t know how many people now, like at the time, maybe 85,000. That’s that company. I mean, you can’t but not have a deep heartfelt respect and appreciation for the business of what they do. Surely some people would differ, but that was my perspective. But the thing about a company that’s a defense contractor is that the leadership is oftentimes kind of a retirement path for former military leaders. And so the culture of the company is a little bit like that. And as a guy who failed as an employee, I can tell you, I suck at taking orders. I suck at taking orders. I’m just like court-martial myself, you know? So that was a very different culture. But you know, my plan was to make sure that everyone had a soft landing, and it was a good result, and they could make decisions in terms of what they wanted to do going forward after that.

Todd Merrill:

Yeah. May ask you about exits. You know, that’s obviously a good win. Get acquired. And that was like an overnight success. Just took a decade and a half. Right?

Steve Subar:

Right

Todd Merrill:

So, Mobius was one of the ones that you took public, right? Listed on the NASDAQ. No? Yes?

Steve Subar:

Yes, go ahead. Sorry.

Todd Merrill:

Yeah. So, in the roaring two thousands, you know, that everybody was going to start a company, take venture, scale it like crazy, go list it public, New York Stock Exchange, just great. NASDAQ is even better if you’re a tech company, right? So, it doesn’t seem like we’ve kind of got out of that habit. You know, where are we with exits? And then, do you think IPO are going to come back anytime soon? I was talking to Neal Miller. He just retired, but he said, you know, like there was one company that he took public that had like $3 million in revenue. It’s like that would be nuts like today. Right? Unheard of, you know? Is this a natural evolution? Are we going to have IPOs? Is there a different mechanism we should be looking at? You know, like SPACs was kind of cool for a minute and now it’s reverse mergers or, you know, are the big companies buying like they used to? Or it’s kind of a very confusing time in the market right now. Where do you think we’re headed? And then kind of like maybe comment on what you see as the viability for exits in liquidity in general for funds.

Steve Subar:

Well, the experience at Mobius had kind of an interesting epilogue. And just to be clear, I was not the founder nor the CEO. I was brought on board to help grow the company. So, I was earlier in my career. And it was part of the sales and marketing organization that led to an IPO. And so I got that notch in my belt at a fairly young age. I later left the company and then came back.

Todd Merrill:

Okay

Steve Subar:

And I came back not to work at Mobius but to be a CEO for the first time in my career, to create a new company. And this is right at the sort of apex of the internet boom and bust. So, you kind of know where this story is going, that Mobius was going to be the primary investor in. So, it was an opportunity for me to be my first startup CEO and have a strategic partner as a primary investor. And it was intended to be a financial play. So, at the time, software companies that had gone public, they were growing at a very respectable pace, they were profitable, that had defensible market share, you know, sort of all the key elements.

You knew exactly what were the metrics that went into the most highly valued software companies. It was sort of black and white, and this was the playbook, and if you could optimize on these variables, you were going to be in the top quartile or top decile or top 1% performing public companies. And so that was how everything was geared. And then there was the formation of the new business model, the internet companies. And a little bit like you were just mentioning, a company with 3 million in revenue that went public. You didn’t have to have a product necessarily, and you could raise a bunch of money, and you could go public. And so the idea was, is that with Mobius as the primary shareholder, the new company, the company was called Click and Done, which, by the way, was very poorly named because the emphasis ended up being on the done part.

Todd Merrill:

Okay

Steve Subar:

But we were innovators in electronic bill presentment and payment. The market eventually became dominated by check-free, but we were one of the first companies in EBPP (electronic bill presentment and payment). And the idea was that we were going to go public and then do a reverse acquisition of Mobius because the valuation of an internet startup was more than actually a proper mature and growing public software company. So, the strategy was to take Mobius public, but what’s better than going public, going public, and then selling. So, you get two bites at the apple.

Todd Merrill:

Oh, wow!

Steve Subar:

And so that was the strategy. And all was going swimmingly until the bottom fell out, at which point, then Mobius bought back the portion that they didn’t already own. But the experience for me was I got to learn what it was to start up a company essentially with a big brother helping, and that was my transition to becoming a CEO and a startup founder, which is what I’ve been doing for essentially the second half of my career.

Todd Merrill:

Wow. What year was that? It was like 2005?

Steve Subar:

‘99 to 2001.

Todd Merrill:

Okay. 2001. Okay. Yeah. 2001, 2002. The stock market didn’t do great.

Steve Subar:

Yeah

Todd Merrill:

Wow. What a ride. That’s awesome.

Steve Subar:

So, to your question about markets today. I think, you know, a couple of obvious distinctions. One is the percentage of businesses owned by private equity. So, there are many other good strategies to maximize shareholder value in addition to going public, and there are a lot of enormously large private companies that create huge value in wealth for their investors, none the least of which would be somebody like SpaceX.

Todd Merrill:

Oh, yeah. You know, I was having cocktails with somebody last week. And you know, their phone pinged, and it was Anthropic SPV, you know?

Steve Subar:

Right

Todd Merrill:

That owns a part that has something in it, you know, and then Anthropic is private. But they’re like, is this a good company? And I’m like, well, it’s a good company. I don’t know about the investment cause you know, devil’s in the details, but like why isn’t a company like that, that’s clearly got market leadership, part of a duopoly or triopoly or like definitely one of the 400-pound gorillas in the ring, why aren’t they public? Why is that not, you know, there was a time when it would have been fall all over yourself to get public as fast as possible so you can raise money to go faster, that doesn’t seem to be the play and there’s certainly an appetite to invest in it. Like, what’s going on, and then what’s the future look like?

Steve Subar:

Well, I mean, you know, the spigot for companies like that’s only getting bigger, right? So, why would you want to go public? I mean, you have so much more flexibility. It’s not hard to get, you know, to raise capital. I’m not sure what the advantage is at this stage when nobody really knows how this thing’s going to play out.

Todd Merrill:

Yeah. So, stay private, stay away from the regulatory compliance burden of being a public company, right? And then just go faster while you can.

Steve Subar:

Right. And the reason they’re stretching those SPVs as you described is because they can only have up to a certain number of shareholders before then they become regulated under Sarbanes-Oxley and in other accounting and financial reporting standards. So, I think it just gives a whole lot more flexibility in a market that’s moving very quickly, where, you know, fast pivots are important and regulatory constraints can’t make that go faster.

Todd Merrill:

Hmm. Neat. Well, Steve, it’s been great having you. And it’s all about travel and getting out there in the world and seeing stuff, making stuff happen. Any great travel stories you want to share with us?

Steve Subar:

Yeah. The dumbest trip I ever took.

Todd Merrill:

Ha ha ha. Okay.

Steve Subar:

The dumbest and not dumbest. So, I mentioned that I lived in Australia for three years when I started Open Kernel Labs, and we were raising a B round. The company was being very successful. I mentioned one of our early customers is Qualcomm, and we had just come up with a new use case that was going to lower, or not was, did lower the bomb costs of the device by 15 to $20. This is when taking a penny out of the phone was a big deal. And we were getting traction with many of the leading handset OEMs, LG, Samsung, others. So, we were doing a B round, and I was living in Sydney, and we caught the interest of Benchmark. And so we were going through the process of raising capital and got all the way up to the partner meeting, you know, through the gauntlets, this is going to be like the last presentation we needed to do. And Peter Fenton, it was Peter Fenton, Bill Gurley, Mitch Lasky.

I mean, these were like, you know, the denizens of Venture Capital, and I was going to be presenting to them. And he said, we’re getting ready to go on summer break. And so, we’re not going to be in the office as much as we usually would. And we happen to be redoing the offices. So, you know, we’re going to be gone for a little longer than usual. So, if you want to, like, you know, be here next week, we can make time for you. Otherwise, it’s probably going to be about three months. And I had no other business in the U.S. at that time. So, I’m thinking, okay, I’m literally going to fly from Sydney to San Fran for an hour meeting.

Todd Merrill:

Ha ha ha. Go have lunch. Yeah.

Steve Subar:

So, I did the obvious thing. I got on the plane.

Todd Merrill:

Yeah, sure.

Steve Subar:

I had the meeting. We had the presentation. We did not get the nod. So, you know, it was sort of like, essentially like 24 hours of air travel for an hour and a half meeting. We didn’t get the money. But having said that, we did get introduced to Citrix, which became a strategic investor, which was later instrumental in the outcome for the eventual exit. So, you never know where these trips are going to take you or where they’re going to lead. Oftentimes, it’s not something that’s on a map or an itinerary. But it’s some eventuality, some sort of what would seem like a serendipitous outcome that you’re so happy about. And it all resulted from, you know, a shitty travel experience.

Todd Merrill:

Ha ha ha. That’s awesome. Well, Steve, how can people follow up with you after this on the internet if they want to get in touch with you?

Steve Subar:

The best way to reach me is steveatmatfresher.com. M-A-T-F-R-E-S-H-E-R. matfresher.com. Check us out and you can find me there.

Todd Merrill:

All right. Well, Steve, it’s been great having you.

Steve Subar:

Thank you, Todd. It’s been my pleasure. I’ve been looking forward to this.

Todd Merrill:

Thank you. Bye for now.