By Sarah Lacy Last summer, Patrick Grady's 5-year-old daughter proposed opening a lemonade stand in the family's driveway. In response, the tech entrepreneur helped her draft a business plan -- a document so complete that it included costs for gas and wear and tear on the vehicle used to pick up supplies from the supermarket.
Grady even negotiated a driveway fee. After all, the Gradys live on a street in San Francisco's swanky Marina district that's heavily trafficked by thirsty tourists and joggers. You have to pay for visibility, he explained to her.
While the attention to detail might appear excessive to some, it reflects a passion for business that fuels much of what Grady does -- most notably, running the company he's built from the ground up, Rearden Commerce.
LONGTIME OBSESSION. Rearden is an online marketplace that helps businesspeople with a wide range of services -- booking a flight, shipping a package, planning a night on the town -- and has it all synced to e-mail, a personal digital assistant, or cell phone. In the same way that eBay (EBAY) and Amazon.com (AMZN) aggregate items for purchase online, Rearden pulls together service providers in one portal -- so far, more than 130,000 of them. What's more, it learns preferences and suggests services a company's employee may need most.
The idea for such a business has obsessed the 38-year-old Grady since the early days of the Web. He has spent 15 years thinking about it, five years and $3 million of his own money building it, and wants to spend the next 30 years running it.
Grady is a former venture capitalist, but he's not plotting his exit strategy. The idea isn't to sell Rearden to a larger company in a few years. Grady considers Rearden his third child, after his two daughters. "This is it for me," he says.
Venture capitalists are rewarding that sense of commitment. Rearden plans to announce today a $25 million cash infusion by Oak Investment Partners and existing investor Foundation Capital, bringing the total raised by the company to $67 million -- double what most software startups raise these days, experts say. And Oak hasn't finished yet. It's prepared to pony up another $15 million if Rearden's discussions with corporate investors don't pan out.
"To me, it's not a question of whether Rearden makes it or not," says Fred Harman, general partner at Oak. "It's a question of: Can this be a truly great company?"
VERY SELECTIVE FUNDING. These days investors are raising more money that can be directed toward startups like Grady's. In the second quarter of 2005 alone, 43 venture firms raised $6.1 billion, and 38 buyout firms raised $22.1 billion, according to Venture Economics and the National Venture Capital Assn. (NVCA). That stands as the highest quarterly figure since the year 2000.
And while venture-capital investment has held steady over the past two years -- startups have been raising between $4.6 billion and $6 billion a quarter -- invested money is heading toward more-established companies. The total raised by late-stage companies reached a four-year high in the second quarter, according to Venture Economics and the NVCA.
And when it comes to enterprise-software startups, venture capitalists are being especially selective. Once a venture capitalist's home run, most software deals are lucky to hit a single. Infrastructure software and applications are mature businesses now. Startups in those areas once went public, becoming billion-dollar companies. These days, they're lucky if they get snapped up for a measly $100 million or so. That's frustrated investors sitting on billions of uninvested cash.
BIG PLATFORMS RARE. To be sure, there has been excitement around software-as-a-service companies that deliver applications over the Web, but so far just Salesforce.com (CRM) and RightNow Technologies (RNOW) have made it to the public markets.
A flurry of attention is also being paid to open-source software, but MySQL is one of the only ones to generate more than $20 million in annual revenues. Still, aggressive companies with plans to build big platforms like Rearden's don't come along often in Silicon Valley these days, and Oak wasn't going to let this one slip by.
Rearden's potential seemed evident to others, including Ravi Chiruvolu, Grady's first outside investor, as far back as 2000. At the time, Chiruvolu was serving as a general partner at a small Palo Alto (Calif.) venture capital firm, Charter Ventures. His sister was working at a company that was subletting space from a very young Rearden, then named Gazoo, after the diminutive green alien that did Fred's and Barney's bidding on The Flintstones.
TOUGH SELL. Every day as she left the glass-paneled offices, she could see Grady frantically talking and waving his hands, scribbling notes on a whiteboard, or high-fiving his only employee at the time, the chief technology officer. At one point, she told Grady he should meet her brother the venture capitalist, and Grady was politely condescending.
But she persisted. And after three months, Grady drove down to Chiruvolu's office and stunned the would-be investor by plopping into a chair, throwing his feet up on the desk, and asking why he should let Chiruvolu invest in Rearden. Chiruvolu was taken aback. "This is my lair," he says. "I've chewed up many an entrepreneur in here, and it's usually me asking the questions."
Yet Chiruvolu didn't throw him out. "The way he did it was so down to earth and so earnest," he says. "I decided by the end of the meeting no matter what it was -- unless it was illegal -- I would find a way to invest in Patrick."
But Grady wasn't immediately sold. Despite Chiruvolu's Harvard MBA and credentials at consulting firm McKinsey & Co., he had never built a company or invested in a bear market. "Bringing in the wrong VC can kill my company," Grady told him. "You are my worst nightmare, because times are going to get tough, and you're not going to have any winners in your portfolio, and you are going to want to sell me for 100 million bucks."
COLD-CALLING. Chiruvolu refuted his points, and invested. During the lean years that ensued, he proved Grady wrong-- even investing his own money alongside Grady's to meet payroll.
Rearden's board of advisers also reflects Grady's ability to lure top talent. Among marquee names: Jon Bosak -- the Sun Microsystems (SUNW) engineer who led the group that created XML, a language that forms the backbone of Web services -- and Adam Bosworth, Google's (GOOG) vice-president of engineering.
Grady already knew some of the advisers, but many he simply cold-called. Chuck Geiger, who helped build the first sites for eBay, PayPal (PAPXX), and Travelocity, took a meeting -- because he couldn't believe a small startup could have built something like this. He now spends at least a few days a month at Rearden.
"This is the most hands-on I have been in any advisory position by far," Geiger says. It was a similar story for Terell Jones, founder of Travelocity and former CIO for Sabre (TSG), which owns Travelocity and makes software and Web sites for booking and organizing travel. After a quick conversation with Grady, he uncharacteristically drove down to Silicon Valley and spent eight hours with Rearden's engineers vetting the technology.
PITCH TO EMPLOYEES. The ambitious company has even caught the attention of some Wall Streeters. Jason Maynard, analyst at CSFB, called on Rearden after hearing buzz about Grady's doings. "I said, 'You have what?'" he recalls. "I hadn't gotten excited about a private company in a long time."
While he's wowing potential investors and advisers, Grady is busy honing his business. To achieve this grand ambition, Grady is first going after people as employees -- where they work -- not as consumers. He's selling the Rearden application as a way for companies to get a handle on what employees spend -- and cut costs in the process. When employees go to the site to book a service, they're automatically offered discounts the company has already negotiated and are shown rates for competing vendors, so they can choose the lowest price.
Best of all, they can do all of this on one site, without entering separate user names and passwords. And Rearden delivers itself over the Web as a service -- no installing software on PCs, no updates. Rearden started selling the product in April and has about a dozen customers, including big names like Motorola (MOT) and midsize companies like Borland Software (BORL). Motorola is rolling it out to some 80,000 employees -- a huge deployment for Grady's small company.
ECONOMY RULES. Making the Web into a personal assistant isn't a new idea. Big companies like Hewlett-Packard (HPQ) and Microsoft (MSFT) tried the same idea and failed. So there's some healthy skepticism surrounding Rearden's odds. For this to work, the company will have to build what's known in Internet circles as "a network effect," which means so many people will be using Rearden's service that every restaurant or hotel will want to be part of the network -- lest it lose out to competitors.
And the more comprehensive the services, the more people will use Rearden -- paving the way for its planned move into the consumer market. But, of course, for every eBay or Amazon that has achieved the network effect online, hundreds more have died trying.
Nonetheless, after all he's weathered to get to this point, Grady will take the long odds. So will a growing list of customers. "People are making much more economical decisions merely by virtue of having the cost information in front of them," says Steve Strobel, Motorola's senior vice-president of finance. "The difference has been pretty startling in our favor."
Lacy is a correspondent for BusinessWeek Online in the Silicon Valley bureau