Startup Exits Podcast with Tim Gill, founder of Quark
The $500 million founder exit: how Tim started, ran and exited Quark
Founder of Quark
Tim Gill founded Quark in 1981, which built the world’s most popular enterprise publishing software and held 90% of the market share at its peak. After selling all his shares in Quark for $500 million in 2000, Tim became one of the wealthiest 400 people in America and the single largest individual donor to the LGBT rights movement in US history.
We chat with Tim about
- Early days of word processors
- Cost of shipping updates in the 80s & 90s
- Bringing in an external CEO
- Founders leaving the company
- How Tim negotiated to be bought out for $500 million
- Startups in the 80s vs now
- How to spend capital and control burn rate
- Current state of home automation
- Future of smart homes
ANDREW VASYLYK: Hey everybody. This is your host Andrew Vasylyk and you’re listening to Startup Exits. Today I’m joined by Tim Gill. Good morning Tim.
TIM GILL: Good morning.
VASYLYK: You’ve created a startup before the word “startup” itself even existed. You founded your first company, Quark, in 1981, which created the world’s most popular enterprise publishing software. You ended up selling all of your shares in Quark for half a billion dollars in 2000; a very positive outcome by any means. At one point you were one of the wealthiest 400 people in America and you’re also the largest single individual donor to the LGBT rights movement in U.S. history.
So a very incredible career. Was Quark your first company or have you started anything prior to that?
GILL: Quark was the first company I started. I had worked for a number of startups before. And every time I worked for those startups there was some problem. In one of them, the president ran off with all the money and the secretary. Starting Quark was my solution to not having those issues.
Early days of word processors
VASYLYK: How did you come up with an idea and how did you guys get started?
GILL: The first product we produced was actually not the desktop publishing program, it was a word processor for a computer you’ve probably never heard of, the Apple III.
Apple only ever made one 120,000 of them, but since we were the only word processor for the Apple III, we had a captive market. That allowed us to get to like around $5 million in sales a year.
And that was really quite a good start for us.
VASYLYK: So the first product you released was the word processor, you got a $2000 loan from your parents to start it. How long did it take from the idea of “we’re going to start a word processor” to actually launching that first product?
GILL: So that was like two months, maybe three months. I mean word processor especially back in the old days before you had graphics displays was a comparatively easy thing to do. So it was pretty quick.
In fact, they had no documentation for the Apple III on how to write software for it. As a result, I had to reverse-engineer the operating system. Actually, I was reverse-engineering ROM, building up an operating system and then building the word processor on top of that. So they were intense three months.
VASYLYK: When you guys launched the first product did you maintain the direction of word processing or when did this switch happen to a word publishing software?
GILL: The first thing we did was we switched from the Apple III, because it was kind of a dead-end, to the Apple IIe when it came out. And , there was a whole collection of word processors that already had good market share. So we entered that and it was a much, much larger market. We probably end up being the #3 word processor in that market.
It did better than five million dollars in sales, but certainly there were other word processors that were doing better. From there, we were going to do a word processor for a product that you may also never have heard of, called the Apple IIGS. The Apple IIGS was supposed to be the next generation of Apple II. In fact, they did ship it but it was kind of killed fairly early on because of the Mac emphasis.
Anyway, we started developing [the product] on the Macintosh so we could write in C. And by the time they got their C-compiler out for the Apple IIGS we had built something that was more than a word processor – it was a desktop publisher and it ran on Mac.
VASYLYK: When you launched the QuarkXPress and that’s your flagship product at that time that just was a wild success, it held over 90% of the market. Did you guys get the product right from the get-go?
GILL: Absolutely not.
All the 1.X series were not particularly good. And then right around version 2.1, we had a product that people actually started to like. And then the thing that really took off completely was when we released version 3 of QuarkXPress, because for the first time it had things like rotating text and all sorts of other things that no one else had.
Shipping updates used to cost millions in the 80s & 90s
VASYLYK: Nowadays there is the lean method – the process of launching and getting feedback, launching and getting feedback – and this feedback loop is not that long, especially if you’re building websites or If you’re building apps, where you can really launch like even every couple of days if you want to.
How long was this feedback loop back then?
GILL: In the old days, you would ship people things on diskettes, later on, you would ship on CD-ROMs or DVDs.
The cost of me doing an upgrade was about a million dollars. The reason for it was that you had to make so many diskettes and manuals and all those other things, so the lead time was fairly long.
We would typically do a major release every 18 months or so, with a lot of betas in-between. It’s completely different now. You’re absolutely right as we can fix a bug within minutes when we find it now [whereas] before if we did a major release and there was a bug fix that was critical, the cost was a million dollars to get it out to all the customers.
VASYLYK: And how often would you guys push updates?
GILL: Like I said the major updates were every 12 to 18 months. Plus, we always assumed after a major update that there would be one bug fix release of some kind. The other difference is that we had a huge QA department exactly to avoid those costs.
Today you can get away with a smaller QA department because you can turn things so cheaply and so fast.
VASYLYK: Besides being able to push updates frequently, nowadays you have very sophisticated analytics platforms. You can know exactly what a user is doing, you get a bunch of different metrics based on which you can make future product decisions.
What were some of the analytical data that you guys had at that time?
GILL: Analytics was very, very minimal. When we started, the web as a commercial thing didn’t exist at all. It existed in research establishments but that was it. So we really just relied on what feedback users physically gave us by calling. We did the whole tech support part of Quark, which was one of the parts that I ran. It was very good about keeping track of all the bugs, all the feature requests. Basically, that’s how we guided ourselves, along with what the competition was doing.
New CEO comes in, founders exit
VASYLYK: A couple of years after you got started Fred Ebrahimi joined your team. He eventually became the CEO of the company. What made you guys want to bring in an external CEO?
GILL: Originally, it was me and my boyfriend (Mark) that did it. Mark was really great for a small company. He was super good at controlling costs and getting good deals on products. But the problem with him was that when we got to a certain level in sales (around $5 to 7 million per year), he would get panicked that we could lose everything. So he would do things that essentially leveled off our growth.
What happened, in the end, was that I said: “We have to do one of two things, because I really can’t work with you anymore. I can give you the company and be done with it or we can arrange to have you bought out”. Then he said, “Yeah, arrange to have me bought out”.
So we brought Fred in and he bought an equal number of shares from both of us so that the company’s ownership was split into three equal parts. Over time the company bought back Mark’s third so that it was just me and Fred having 50 percent of the company each.
VASYLYK: So Mark left and a few years later, in the year 2000, you left as well and sold your share of the company for $500 million. I want to emphasize that this was not an acquisition of the company, you do not sell a company that was worth half a billion dollars.
Rather, you cashed out personally at half a billion. Calling this a life-changing amount of money would be an understatement. Besides the financial side of things, what made you want to leave?
GILL: I had been working at Quark for 19 years at that point. My business partner, Fred, wanted to do something very different than what I wanted to do. I wanted to keep working in the markets we were in and he wanted to get into new markets. In particular, he was very interested in providing systems to people that did accounting and metrics in the publishing industry. Meanwhile, I put myself through college doing accounting software and I love numbers, my degree is in mathematics, but I do not love numbers when they represent dollar figures. Those problems are not so interesting, at least to me personally.
So we were actually at Fred’s house having drinks and talking about what we were going to do. And I said: “Well you know, you could buy me out.” We talked about that for a little while and we came up with the price. Some of it was cash fairly immediately and some of it was cash paid out over time. But it worked out really quite well.
So the time when it happened was the year 2000, which was immediately before the tech crash. At the time, Fred had a ton of stocks that were in high-tech companies and he sold a lot of them in order to pay me off. He sold them at the peak, just before the crash.
So he won and I won, it was perfect.
How founder’s shares worth $500 million are negotiated and paid
VASYLYK: Yeah, it looks like it was a win-win. So I guess the price per share was matter of negotiation. You didn’t raise capital before then so you don’t have like a VC-backed valuation.
Was there any sort of kind of third-party that came in and said: “OK, the value the company is this”? Did you have an idea what the company was worth at the time or was it just purely a matter of negotiation?
GILL: If negotiations take five minutes then yes it was a matter of negotiations. But it was really pretty much that quick, it was five or 10 minutes worth of discussion. Quark was selling anywhere between $300 and $350 million dollars worth of stuff a year with a 60 percent pre-tax profit margin.
So we thought of the value more in terms of the cash flow and not in terms of how you would think of it for a company that was on the public market. So Fred just thought of it in terms of what percentage of the cash flow would this acquisition consume. In the end, half a billion dollars is what it worked out to.
VASYLYK: You mentioned that part of the cash was upfront and the other part was paid overtime. How much was upfront and how much was over time?
GILL: It was mostly upfront. When I use that half a billion-dollar figure, that includes the bonuses we’d had up to the point of sale, it includes the sale amount and some of my shares that were given to family members, so it includes all of that. So it’s not like it all personally went to me.
Of the stuff that did go to me, about 60% of that ended up going to the Gill Foundation for doing philanthropic things. A lot of the payout over time was associated with the Gill Foundation because it was from a tax point of view a cheaper way to transfer that money.
VASYLYK: That’s an insane amount of money and I got to ask – when that first cheque hit your bank account, what was the first thing that you did or bought?
GILL: We had been having distributions of multiple millions of dollars a year, so it’s not like I really all of a sudden needed to buy some big fancy things. So I don’t think I did anything.
VASYLYK: Did you give back that $2000 loan?
GILL: Oh, the $2000 loan I paid back within about two weeks. And then when we set up the European operation, the way that we did that I sold a portion of the European operation to my parents and my sisters and so on for like $50a piece or something because it had no value at the point when we set it up. But they ended up getting essentially 10% of that, that was something that went to my family.
Startups in the 80s vs now
VASYLYK: You started another company just a couple of years ago, in 2015. The company is called Josh.ai, it is a voice-controlled artificial intelligence home automation system. I feel like you have a very interesting perspective because you started Quark in the 1980s and then Josh in 2015, so it’s almost 40 years apart.
I want to ask a couple of questions about how different are things between what it was then and what it is now when it comes to starting companies. What was the startup environment back in the 80s like?
GILL: So I didn’t know any other startups. I started it because I was fired from the company which was composed of people I went to high school with because they ran out of money, so it was either me or one of their board of directors. That was my only exposure to startups.
For me, it was like starting up in my bedroom. I was sending letters to the dealers because at the time most computers were purchased through local dealers and that was kind of a marketing mechanism. Then using some ads in the magazines.
And of course today there is no point in sending letters to dealers because computer dealers don’t exist in that way anymore. It’s very different now.
VASYLYK: What was the financial environment like in the 80s? Were there any VC firms and were startups raising capital?
GILL: I’m sure there were but I have no idea.
My friends had started their company just with whatever money they had in their bank account and I essentially did the same. The costs back then were lower and the development time for that class of product was lower so it’s something that you could do [back then].
VASYLYK: And now that you’ve have a success under your belt with Quark and you’re running Josh. You guys are raising capital right now, so do you find it much easier to raise capital because of the previous success or what’s your experience with raising capital at Josh?
GILL: That whole process has really just started for us. I think it gives you a level of credibility because we have a product that people can see, touch and play with, and also they see that there’s somebody who knows how to actually run a company and understands accounting and metrics.
Quark was different in that it actually made money and it didn’t have any venture financing. In the end, what you want is to have a company that can be profitable and grow. Those are the things that VCs are looking for and those are skills that I’ve developed in the process of running Quark.
The skill I didn’t develop was asking for money. So that’s a skill I’m just learning.
VASYLYK: So you didn’t raise money for Quark and you guys are now raising money for Josh. Do you feel like raising capital is a necessity for startups or can startups avoid it?
GILL: I think you should avoid it as long as you can. With Josh, we got to 4 years with personal investments from me. The longer you can do that, the more dilution you can avoid. That’s probably a good thing most of the time.
In the end, especially if your exit is based on either an acquisition or an IPO, having people with skills in [raising capital] is terribly useful. It’s worth it to have them on your side when you’re pursuing those exits.
How to spend capital and control burn rate
VASYLYK: Your first office at Quark was your apartment and you had about a dozen people working there. So obviously it’s a very frugal option and maybe part of the reason is that you guys didn’t raise huge VC rounds.
Nowadays, startups that do raise huge rounds can afford to have very nice offices. On one hand, it may seem like it’s a waste of money but on the other hand, it’s definitely helpful in some areas, such as attracting talent.
What advice would you give startups about how they should spend money?
GILL: I think it’s really easy to spend money inappropriately and it’s tempting. Maybe we’re all programmed to do it because we see super-duper flashy offices.
You don’t need something that’s that flashy. People should be coming to your company because you provide good benefits, a good salary, and a good working environment. The fact that you don’t have a 24/7 champagne fountain in the lobby is really not something that should matter.
VASYLYK: What are some of the things that startups can do to lower their burn rate?
GILL: I think there’s a couple of things.
One is that you need to have an appropriate employee incentive program. Of course, you need to have a salary but also you have to sweeten that with clever stock options. The other thing is that you really don’t need the flashy office or travel first class (if you want to use miles to travel first class that’s fine but you shouldn’t do it on the company’s dime).
There are cases where advertising is part of the process of making a name for yourself. At least for the companies I worked in, that’s [advertising] has always been a tiny percentage of our total spend because it’s really about getting people to talk about and recommend your product. That is actually a far more effective use of your time and money than doing advertising and other kinds of marketing activities.
Organic growth is king
VASYLYK: At Quark, your customers were your salesforce. They loved the product, so word of mouth worked very well.
On the topic of customer acquisition, you sold products to the enterprises. When you are a small unknown startup, how do you even get a foot in the door with these huge enterprise clients?
GILL: For us, it happened because the product we were selling was so much radically cheaper than the technologies they were using. And it didn’t always do everything that these technologies did. For example, we sold QuarkXPress to Time Magazine and to the New York Times very early, but it was probably like 5 or 6 years before they actually used it. That was not necessarily the case, for example the Сandy Nash publications were much quicker adopters.
So you just have to find the customers that are willing to buy you and push you and accept that there’s going to be others that are going to be laggards. And that’s perfectly OK because you need sales at that time too.
VASYLYK: At the time when you left Quark in the year 2000, you had about 300 employees in seven countries?
GILL: I think 300 employees in the US. Quark has actually peaked when I left at somewhere over a thousand employees because we had a large operation in India, we had an operation in Singapore and operations in a variety of European countries. Our biggest office other than India was in Ireland actually.
VASYLYK: What was it like to manage a remote team 20 years ago? Today, we have all sorts of different tools and conferencing software, which ironically we had trouble setting up before the call, but in most cases they work and they can make you feel like you’re working with somebody who is not thousands of kilometers away but in the same room working together with you.
How different was in the 80s and 90s?
GILL: Actually, it meant you had to get on a plane. Every month I would spend about a week in our main office in Germany at the time, working on our technology with them. So that was one of the things that drove me the most nuts, [the fact that] I ended up spending my time on planes critiquing other people’s software rather than writing my own. My sense of identity comes from writing software, always and still. When Fred and I were talking about an exit, I thought: “if I can get out of this that would be really nice. I can snowboard for a while and then a few years later start another company.”
Current state of home automation
VASYLYK: So you did start another company with Josh. What made you want to get into home automation?
GILL: Always since high school, I have been working on things where I could talk to the computer. Back then you typed to the computer and it typed back.
I was getting a house and there were technologies at the time that allowed you to talk to them and receive responses. So, I thought: “I should just make something so I can talk to the house because what boy doesn’t want to talk to their house, right?”. Every single science fiction book that talks about the future of humanity has a part, where you are talking to your spaceship or your house or whatever.
We have reached a point where that was possible and it was practical. That’s what I started to do and I was doing that on my own for a couple of years. There are so many things you have to control in order to do a good job. There are so many things you have to set up, so they required more than just me. That was kind of when I started talking to Alex, my business partner, about working together and make this more than just a product for my house. It was a product for other people’s houses and Alex was setting up a big house at the same time and he was kind of frustrated with the technology as well. So we decided we would make a good technology to do it.
VASYLYK: Josh is quite a high-end product. I believe the cost is somewhere north of tens of thousands. Do you guys have any plans of releasing more affordable options?
GILL: Actually, it’s less than that. The original version that we shipped was ten thousand dollars but we shipped a version called Josh Micro awhile back. And it’s still in the high-end though, it’s not like Alexa, where you can go out and buy one for $25 on sale.
But you can get a very basic system in a house for a thousand dollars and that’s a professionally installed system. Therefore, it provides a lot more sophistication than what you get from off-the-shelf DIY products. For example, my dad or my mom would never be able to set stuff up in their house to let them control it, but they still would benefit from it.
So the idea is that there are people that are out there that can install something and make it work without everyone having to be a technologist is a really great way to sell stuff.
VASYLYK: So at that price point, I would imagine that the product is not meant for the masses. Besides cost, what sort of things do you feel that need to be done for home automation to truly hit the masses?
GILL: You can do a limited amount of automation with products like Amazon Echo. Once you get into a multi-room situation, once you have AV (Audio/Visual) systems that are distributed, very complicated audio setups, then those kinds of DIY systems start to fall apart.
If you look at the traditional systems, there’s like three main companies that do that. They’re called Crestron, Savant, and Control4. Their costs are higher, the installation time is higher and the technical level is higher. So what we want to do is find a way over time to make the process of installing these things much simpler.
We all heard the hype around the Internet of Things, and my original theory when I got into this business was that every device was going to be connected, it was going to have an open API and it was going to be clever, so I thought “this will be a piece of cake.”
It turns out that kind of none of those things were true. So it’s a difficult problem to solve, to integrate with all those devices. But when you do, the experience can be magical.
VASYLYK: I think some of the barriers to entry from some people’s point of view in building high-tech homes is the fact that tech changes very rapidly. So if you’re really pimping out your house with tech and you have speakers everywhere and all sorts of different setups, and if, let’s say, a couple of years go by and the technology changes – you essentially have to rip the whole house apart, replace those things and then put it back together.
How do you respond to that? How do you overcome this issue that, unlike an iPhone, which you can throw away and replace, you can’t throw away a house. What sort of advances do you think are going to happen to tackle this issue?
GILL: There are technologies that don’t change that quickly. In the lighting realm, there’s a company called Neutron. They’ve been around forever. Their technology has progressed but it’s done it in a way that doesn’t obsolete the old stuff.
And you can keep the same lighting and shades forever. That’s actually one of the bigger, more expensive parts of an automated home other than whatever kind of theater you have. The theater on the other hand, especially the video stuff, changes fairly quickly.
You just have to decide this for yourself. So you just want to decide to do a refresh every X years, depending on what your budget looks like.
Future of smart homes
VASYLYK: How many years away would you say that we are from a truly smart home reality for the masses? Do you think this is in the distant future or are we almost there?
GILL: I think it’s not going to be some magical point in time that that happens. But what you see happening is people who are doing MDUs, multiple dwelling units (basically condos), they are pre-wiring some of those with this tech.
So for new units, it’s going to become more and more prevalent. But for the retrofit market that’s going to take a long time. There are houses that were built 50 or 60 years ago and putting any tech in them is really difficult.
VASYLYK: What do you think does the future of smart homes or home automation or artificial intelligence in the home look like in general?
GILL: One of the preeminent features in Josh is that you could control the house by voice. But that doesn’t get rid of switches or remotes. I think the future is that all those things are integrated together.
I think the idea that the way you talk to your house is with a puck that sits there on your desktop is going to go away. It’s just ideally good looking. You really want the whole voice experience built into the house in a way that’s not visible at all. You should just be able to go into a room and talk and the system should figure it out, and you shouldn’t have to have some clearly present device that you talk at.
VASYLYK: Tim, it was a pleasure to have you on the show. Thanks for coming on.
GILL: Thank you very much.