News Column

Two for the Money

May 2006, HISPANIC BUSINESS Magazine

Andrea Siedsma

Technology

"Serial entrepreneur" Frank Huerta built success in Internet security, then turned to biomedical engineering.

Intel Corp. co-founder Andy Grove claimed "only the paranoid survive" in the aggressively competitive tech industry. But serial entrepreneur Frank Huerta has his own advice for successful business building: Have a lot of humility, accept and understand the risks you run, and still maintain high ethical standards and integrity.

It must be working for him. In just a few years, Mr. Huerta has launched and grown a successful Internet security company (Recourse Technologies), sold it to industry giant Symantec for $135 million, and founded another start-up in a space he hadn't been familiar with – biomedical engineering.

Mr. Huerta's foray into business creation came in the late 1990s while he was working as director of business development for Exodus Communications, a Web-hosting provider. At the time, the whole Internet space was going nuts and security became a concern. Security breaches became more of a problem for Mr. Huerta when hackers busted into the Exodus system, slowing the company down for days. Exodus engineering and Internet wunderkind Mike Lyle, then age 19, designed an electronic trap for the hacker, which worked.

That's when a light bulb went on over Mr. Huerta's head. "We thought, people were going to need more security beyond firewalls as the Internet grew," he says. Mr. Huerta and Mr. Lyle decided they could build a better mousetrap, so to speak, and formed their own company – Recourse Technologies Inc. – which designed a high-speed intrusion detection device and another product to "trap" hackers.

The pair may have had a good solution for the market, but it wasn't an easy sell at first. Since the Internet space was so hot, competition for talent was fierce.

No Deals on Napkins

"Some people were raising $40 million off an idea on a napkin and they were buying people BMWs," says Mr. Huerta, who holds a physics degree from Harvard and an MBA from Stanford. "We weren't doing that. We raised some money but we spent it competitively. We made sure we were giving people fair salaries, but we weren't going to buy toys for people. We wanted people who believed in what we were doing."

It was this smart growth and keen business focus that hooked venture capitalist David Chao, who also happened to be a fellow Stanford alum. After reading Recourse's business plan, Mr. Chao's firm – Doll Capital Management (DCM) in Menlo Park, California – wanted to be the first to invest in Recourse. (The firm's subsequent investment totaled $12 million).

The year was 1999, and the Internet security market wasn't experiencing the kind of exuberance that animated the typical dot-com. After Mr. Chao made the initial investment in Recourse, a lot of people in the industry, including the media, questioned his decision. But he was still convinced that Mr. Huerta was on to something.

Not About Being Safe

"It was clear that as the Internet grew there were going to be a lot of hackers, and there was no way at the time to detect high-speed intrusions," Mr. Chao says. "These guys were going to make one of the fastest real-time intrusion detection systems. It was exactly what the world needed."

Another plus for Mr. Huerta was that he surrounded himself with the right team and a clear vision, says Mr. Chao, DCM's co-founder and managing general partner. "If you invest in things that are safe and in what everybody else is doing, you may make a little bit of money but it's not going to be an extraordinary outcome," Mr. Chao observes. "It's like those who invested in Yahoo! In the beginning, people have no clue what it's going to turn out to be. For Recourse, Frank's vision was right on. It's about trying to see what others don't see."

"At the end of the day it's whether the people you're betting on have a huge desire to win," Mr. Chao adds. "Frank is one of the most competitive people I know. Most competitive people tend to figure out a way to win." A trait dramatized during Mr. Huerta's squash days at Harvard, when he was part of a national championship team in 1988 and was co-captain of the Ivy League university's squash team in 1989. The same sort of leadership and teamwork helped fuel the success of Recourse.

Lot of Fear, Lot of Pressure

Smart growth was the name of the game for this technology start-up, says Recourse co-founder Mr. Lyle. "We started building our company at the peak of the dot-com boom in 1999, when cost structures were ridiculous and capital was cheap but employees were very expensive. We were looking at office space that was $10 per square foot per month. We were selling software into a market that had bottomed out. But the security sector was very resilient. There was a problem that needed to be solved, and budgets could be found for security, which certainly worked in our favor."

For those young tech entrepreneurs who have stars in their eyes, Mr. Lyle wants to inject some reality into visions of the exuberant dot-com boom days. He says Recourse achieved fast growth by limiting its marketing budget and even sending engineers out on sales calls so they could understand customer requirements.

"It's a roller coaster ride," Mr. Lyle says. "You never know what things are going to be like three months later when you're doubling in size every six months and you have to raise capital more than once a year. There's a lot of fear. There are a lot of pressures to build the right team, the right set of executives. You give away product for free just to get people to use it and then you try to build some buzz around that product."

Once Recourse created that buzz, recruited the right people, and began building critical mass, the path to success became a little smoother. Having Mr. Huerta at the helm certainly helped, Mr. Lyle says. "Frank was instrumental in keeping everyone on the same page, and he understood the company's business objectives and prevented things from falling apart," he recalls.

Recourse grew rapidly (up to 115 employees in three years) as Internet security became the hot topic. The company began gaining more attention in 2000 when it was instrumental in providing information that caught the hacker known as "Mafia Boy," who attacked CNN.com, Yahoo!, and eBay. Two years later, Internet security giant Symantec came knocking on Recourse's door. Mr. Huerta, who hadn't planned on selling his company, had a decision to make. At the time, his bankers told him that no company at this stage would think of going public for at least 18 to 24 more months (it was during what they called the telecommunications industry's "Nuclear Winter").

"We had to decide, do we put more money in or do we get taken out by a good partner?" Mr. Huerta says.
Recourse had had strong revenue growth over three years, but in 2002 the market was pretty bad and the company even had a couple of its customers go bankrupt. Selling to Symantec was "the best thing for the company, for the shareholders, and for our employees," Mr. Huerta says.

Where Inventions Are Needed

Mr. Huerta stayed with Symantec for a little more than a year. But once an entrepreneur, always an entrepreneur. This time, however, he would delve into the biomedical engineering field. Doctors told Mr. Huerta, who had injured his hip playing basketball a few years ago, that he'd need a hip replacement. But the surgery would have prevented him from playing competitive sports, so he set out to find a better solution for his pain.

During his research on cartilage repair, Mr. Huerta came across Jennifer Elisseeff, a biomedical engineering professor and researcher at Johns Hopkins University. In 2004, together with an orthopedic surgeon named Norman Marcus, the three launched Cartilix, which is working on commercializing novel biomaterials to repair damaged tissue in articular joints. The company may also develop its biomaterials for use in the spine and eye, and reconstructive plastic surgery. Cartilix just closed its second round of funding in March 2006, led by De Novo Ventures.

No matter what the industry, Mr. Huerta concludes, entrepreneurs need two key tools to be successful: money and good people who know what they are doing. "I'm a firm believer in the entrepreneurial process," he says. "If you can take that risk, and put the right team together, and figure out the most efficient way to get a solution to the market, then you'll be successful."



Source: HISPANIC BUSINESS Magazine and Hispanicbusiness.com, Copyright (c) 2006 All Rights reserved.


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