The Rise & Fall & Rise (Again) of David Steinberg – INC Magazine

He rose to the top of the Inc. 500, then failed spectacularly. Now he’s back with another fast-growing company–no less ambitious but a lot wiser.

http://www.inc.com/magazine/201209/leigh-buchanan/rise-and-fall-of-david-steinberg.html

Momentum is like cholesterol. There’s a good kind and a bad kind.
In the mid-2000s, David Steinberg grappled with the bad kind. InPhonic, his seller of mobile phones and services, was No. 1 on the Inc. 500 in 2004. It went public that year. But as Steinberg pounded furiously toward revenue of $400 million, the company started to sway beneath him like a rope bridge on a windy day. Ultimately, it collapsed, filing for Chapter 11 in November 2007 to facilitate the sale of its assets to an investment firm.

Within 30 days of resigning as CEO–not long before the filing–Steinberg had moved the furniture out of his old office in Washington, D.C.’s Georgetown neighborhood and into his new office in a building right next door. While InPhonic expired nearby, David Steinberg was giving birth to a new company, which he holds up as an exemplar of good momentum. XL Marketing provides lead-generation and customer-acquisition services for companies in several industries and for big brands; Steinberg projects it will do $100 million this year.

The business, now based in New York City, is growing so fast that had Steinberg launched six months earlier and thus qualified for the 2011 Inc. 500, he would have become the first founder ever to land two companies in the top spot. (Why isn’t XL Marketing on this year’s list? Steinberg chose not to apply. The company wouldn’t be No. 1, and so really, what would be the point?)
F. Scott Fitzgerald was wrong: There are second acts in American lives. And the most resilient entrepreneurs don’t even require intermissions.

We are sitting in Steinberg’s sparsely decorated Manhattan office, our conversation occasionally drowned out by the banshee shriek of sirens tearing down Madison Avenue below. Loose limbed and genial, Steinberg is giving his first substantial interview in more than three years. With so much going right, he is, understandably, not eager to revisit InPhonic’s last days. But we cannot talk about the sanguine present without acknowledging the sanguinary past.

So Steinberg answers–more or less patiently–questions about the series of unfortunate events that commenced in 2006, two years after InPhonic’s IPO. In relatively short order, the District of Columbia attorney general’s office and the Federal Trade Commission, or FTC, filed lawsuits over InPhonic’s rebate programs; accounting errors forced the company to restate several quarters’ worth of earnings; a strategic partnership collapsed; and shareholders filed a class action (later dismissed). In November 2007, InPhonic filed for Chapter 11, and its assets were sold to Versa Capital Management, which relaunched it as Simplexity. (Simplexity still operates Wirefly, the popular wireless-services retailer that Steinberg built inside InPhonic.)

Steinberg’s take on all of this squares with that of most commentators. Growth: too fast. Focus on profit: insufficient. “I wouldn’t say we didn’t care about profit,” says David Steinberg. “We did. But we were more focused on growing the business.” Unfortunately, infrastructure wasn’t scaling as fast as sales. “We had effectively the same finance team as a $20 million company as we had as a $400 million company,” he says. “We were processing millions of transactions. And quite frankly, we had not built the internal controls and systems.”

The company also carried too much debt. When a deal that would have given InPhonic some cash and allowed it to spin off distribution fell apart, the bank called its loan. “We had the wrong balance sheet,” says Steinberg. “And in August 2007, there was no refinancing of anything.”

Steinberg also blames InPhonic’s status as a public company for inflating the problems. “Had we not been public when a lot of that stuff happened, it would have been no big deal at all,” he says. “But we were a sizable public company and attracted the attention of certain lawyers who like to sue sizable public companies.” (Both the FTC’s and the D.C. attorney general’s lawsuits were settled.)

But Steinberg never stopped believing that with InPhonic, he had built a great company. “When I left I was, if not the largest shareholder, in the top three,” he says. “Nobody lost more money than me. I’m a believer. And I don’t regret that.
“The guys who bought it got an incredible deal.”

Steinberg is the quintessential analytic leader, his reliance on metrics in part a consequence of his dyslexia. Four years ago, he studied the trends at private equity firms and saw that fewer partners were investing more dollars. That translated into the pursuit of ever-larger deals: a feast of capital for bigger companies and famine for smaller ones. Steinberg saw an opportunity for a whole-is-greater-than-the-sum-of-its-parts play. He planned to build a holding company to acquire, consolidate, and invest in those left-behind firms, focusing on his specialty–Internet marketing.

Steinberg named the original version of the business Caivis Acquisition. (XL Marketing is technically a spinoff.) For funding, he called on two InPhonic investors: his longtime mentor, the former Apple and Pepsi CEO John Sculley, and Bill Landman, a partner in Philadelphia-based Renovus Capital. Both now sit on XL Marketing’s board. (A fourth board member is Robert Niehaus, chairman of Greenhill Capital Partners, one of two firms that invested a total of $70 million in XL Marketing this summer.) “You always have a fond memory of a CEO that made you such a high multiple of your dollars invested,” says Landman, an early InPhonic investor who profited handsomely from the IPO.

Maybe it’s age; maybe it’s maturity and experience. For whatever reason, Steinberg finds the prospect of starting companies from scratch less appealing than he did when he launched InPhonic and two smaller businesses in the ’90s. That change in attitude, as well as market insight, guides XL Marketing’s growth strategy. Although more than 90 percent of InPhonic’s growth was organic, at XL Marketing that number is below 30 percent. “I like this idea of buying businesses where the management teams have taken it as far as they can go and taking those businesses to the next level,” says Steinberg. “I’m really good at that.”

XL Marketing–which specializes in the education, insurance, financial-services, and health care sectors–targets companies in the $10 million to $20 million range. To date, it has acquired and combined an education-industry call-center business, an e-mail and affiliate marketing business, a social-media-marketing business, an e-mail service provider, and a few much smaller companies. It also built a search business from scratch and picked up the assets of a defunct $2.5 million call center in Florida for $50,000. XL Marketing’s beating heart is a 121-million-record database of consumers who have opted in for marketing messages.

Steinberg isn’t just shopping for client rosters and technology platforms. He is shopping for entrepreneurs as well. To lure founders on board and anchor them there, he offers a mix of cash, stock in the parent company, and earn-outs for making their numbers. Perhaps more important, he runs XL Marketing like a collective, letting the founders continue to run their own businesses within the larger company. At a weekly management meeting, Steinberg lobs a few pointed questions but otherwise sits back munching cheese cubes and pretzels while his division heads update and debate one another. “It’s very difficult to hire an entrepreneur,” he says, “but they’re the guys I love to work with.”
Mike DiMaio became co-vice chairman and executive vice president of sales after selling his e-mail business, Spire Vision, to XL Marketing in 2009. DiMaio and his co-founder–now XL’s chief strategy officer–weren’t planning to sell so soon, DiMaio says. But Steinberg’s vision, experience, and connections persuaded them. “David lets us keep doing what we’ve been doing to get to this point of success, and then rolls our energy and enthusiasm into the overall company,” says DiMaio.

Steinberg wants to expand XL Marketing to $250 million to $300 million over the next three to five years while maintaining or improving margins. Although he doesn’t rule out another IPO, the bad taste from InPhonic lingers. As a public-company CEO, he says, “I ended up having not enough time to run my company and had to focus most of my time on dealing with Wall Street and analysts and a lot of different shareholders. That’s not something I’m anxious to run back and do again.”

Sculley says that whatever XL Marketing’s status, it will “continue to look better and better. This is a business with legs.” As for what happened at InPhonic, he believes the experience made his mentee only stronger.

“That’s the great thing about America,” says Sculley. “There’s permission to fail. You pick yourself back up and people say, ‘OK, what did you learn? And why don’t you go try again?’ ”

Bigger and Better

“The best thing about InPhonic for me,” says David Steinberg about his failed company, “was that I learned so much about how to build something, what can hurt you, and how you take lessons from what causes pain.” Here are some of Steinberg’s lessons from InPhonic and how he is applying them at XL Marketing.

1. Focus on profit Steinberg sometimes sacrificed gross profit for mere growth at InPhonic. No more. He now buys only companies that are profitable or that he can get to profitability very quickly. “We’re growing these businesses by 106 percent top line and 244 percent on the bottom line within six months of buying them,” he says.
2.  Hire big brains In the early stages of InPhonic, Steinberg was able to keep a close eye on the hiring process and assure himself that only first-rate people came on board. But as the company grew, “we didn’t have a program to make sure new people were keeping with the same intelligence and aptitude level,” he says. That affected the quality of his leadership bench. All candidates at XL Marketing are subject to intelligence and problem-solving tests so rigorous that only slightly more than 10 percent qualify.
3. Replace people Steinberg says some managers’ job responsibilities outgrew their skills and experience at InPhonic. The financial function, in particular, suffered. Steinberg says he now continually reviews his management to make sure it is “expert in what you’re currently doing, not what you were doing two years ago.”
4.  Keep the board small The 12-member board at InPhonic was a veritable constellation, lit up by stars like former senator and vice presidential candidate Jack Kemp. XL Marketing’s board consists of just four people, including Steinberg—and he wants to keep it that way. “I have the contractual right to add two more anytime I want. But I don’t want to do it,” he says.
5.  Get a life At InPhonic, Steinberg’s 100-hour weeks had a corrosive effect on his family life. Even though he now splits his week between New York and Washington, D.C., where his children live, he spends more time with them than he did back then. “I love XL Marketing, and I love what we do,” he says. “But it’s not my life. It’s not my entire makeup. At InPhonic, at one point, it really was.”

Source: http://www.5wpr.net/?p=7178