Washington, D.C.-based Inphonic, a company aiding large carriers and e-commerce organizations activating wireless subscribers onto the carriers' networks, raised $56 million in mezzanine funding on July 1, 2003. It was the largest wireless investment since January 1, 2002 and the sixth largest overall investment since January 1, 2003.  Technology Crossover Ventures provided the funding, which Inphonic predominately plans to use for working capital.
 
"The thing that's great is that you have wireless local number portability coming down the pipe and InPhonic is going to be the place where the consumers can go and put in their exact usage patterns."
 

Education
B.S. from Washington & Jefferson College

Prior Executive
Experience
Chairman, President, Founder and CEO, Sterling Cellular

Hobbies
Reading
Playing Tennis
Spending Time With His Children

This CEO Profile excerpted from Venture Reporter's Wireless Investments, Mergers and
Acquisitions for Q3 '03 report

Venture Reporter's CEO of the Week spotlight is provided as a complimentary service
for our e-mail subscribers.

VR: What is your company's mission?

Steinberg: InPhonic today is the largest wireless solutions provider in the United States and we help very large carriers and e-commerce companies activate wireless subscribers onto the carriers' networks. We work with most of the large e-commerce companies. We built private-branded, wireless distribution businesses for them. We run them for everyone from America Online to Microsoft to eBay to Yahoo! and so on. We work with the seven largest wireless carriers in the United States and with a total of 23 in North America. We activate the customers onto the carrier's wireless network. We've also built software and services to do everything from ring tones to content distribution to [providing] the ability to do private-branded mobile virtual network operators for large e-commerce companies. We have 5,400 clients with America Online, Microsoft and Yahoo! being three of them.

How is your sales chain set up?

We activate and distribute wireless products and services over the Internet and, as a business-to-business play, we help guys do those things. We sell directly to AOL and work with them directly to activate their millions of subscribers.

How difficult was it to raise this particular round of funding?

I hate to go against the tide, but we did not have a difficult time raising funds. We didn't go out to raise money. [Despite that], we raised the largest private equity round this year, according to E&Y. We went out to raise $10 million of subordinated debt. We are on file with the Securities and Exchange Commission in the process of going public. We wanted to do a little mezzanine round to bridge us through because we thought that a little extra capital on the balance sheet would have been a positive thing for us. As a part of that diligence process, we met Jay Hoag, from TCV, who blew us away. The guy is unbelievable. We met with him and he felt like the type of political and intellectual capital he could bring to the table was more valuable than the money.  You hear that a lot because a lot of people like to talk about smart money versus dumb money and so forth. I've never met a guy that can deliver on the promises like Jay can.  He convinced us to take a big pile of money, which was a difficult sell to my board because we didn't need it.

Did you know Jay prior to this round?

No. We were introduced by a friend in California who knew both companies pretty well. I knew TCV very well and had heard of Jay, but didn't really know of him that much, until I got to spend some time with him.

Why didn't you end up going with subordinated debt? Was it based on Jay and his story?

Yes. It really was. We looked at the deals he's done. We're an e-commerce company. Ninety-two percent of our sales come through the Internet and he's the guy that really got behind Expedia, NetFlix, Fandago and Ariba. So we said, 'This is the guy that we want behind us.' It was not a complicated decision. The big problem was trying to figure out how to make so much money work for [us]. We wanted $10 million and they ended up investing $58 million. They wanted to invest $70 million or more.  We can't talk about revenues because of the filing, but we were in a unique situation because TCV is a fund that every entrepreneur should want to work with.  He has already gotten me together with three guys that you would dream about even saying hello to, [and we're] having meeting and talking about projects [like we have had]. The limited partners in their funds are like a keiretsu of who's who in American business.

What do you look for in an investor?

One of the great things about our board is that we have a great balance of guys who can do long term vision, operating prowess and relationship management. Those are the types of things you need from your board. We have guys like Warner Company CEO Bob Fox who is one of the best operators I've worked with. He understands the business and understands how to make it work. You have guys like Jay Hoag and John Sculley (former CEO of Apple) who are visionaries. Then you have people like Former Secretary of HUD Jack Kemp whose Roladex goes longer than most peoples' legs.
 We have other interesting guys who sit on our board like Ira Brind, who ran a big leasing company and who is an unbelievable operator and really understands finance. We have Mark Levine, who built a couple of startups and is now over at Core Capital. We feel really good about the fact that we've put together that type of a team to give us top-down leadership on an operation, finance, visionary and management perspective.

What was the most challenging part of the fundraising process? Is it taking away from the daily operations of the business?

It's that and the pain of dealing with Venture Capitalists. A lot of entrepreneurs talk about this privately, but some of the Venture Capitalists that we've run into over the past couple of years have been tough for tough's sake. It's nice that the guys we're working with are the anthesis of this. [Some] want to be the guy in the room who puts the entrepreneur down [so that] it makes him or her feel good. I'm glad we've never had anyone [like that] directly invest in the company because we've always been in a situation where we could walk away. I personally funded the company in the first round with a $10 million cash and equity contribution. That being said, we've had great partners. Three years ago when we were funding our business, our premise was predicated on the fact that advertising on the Internet was going to slow down and they would need alternative products to sell through unsold ad space. Everyone was saying that the market was going to the moon - that [everything] was great. We had people laugh us out of the office, which was disheartening.

So do you salute the return to more diligence from investors?

The markets are traditionally like a pendulum. They very rarely stop in the middle. Two years ago, we were probably too far one way. Right now, we're probably too far another way. You have to make a place in the marketplace for growth companies that are going to drive huge, long-term profits, but it takes it a couple years to do it. Amazon is now breaking into profitability, which is an unbelievable example. It took them five to six years, but now they're going to throw off more profit in the next few years than anybody could ever imagine. I think the craziness of three or four years ago was bad. We even said it at the time. We were one of the unusual ones. Over the last three years, InPhonic has taken advantage of the downturn and acquired nine companies to the tune of $250 million plus [that, for] cash-based research and development [was] less than 10 cents on the dollar. We've managed to look at great companies with great business plans and technologies that couldn't get funding. We've brought them into our business.

Do you think the wireless market is where you thought it would in 2003?

It would be easy for me to say that it is where I expected it to be. The reality is that InPhonic has always been on voice. When we started our business in 1999, it was predicated on the fact that 99.9 percent of the wireless revenue in the U.S. was voice-based. The last couple of years, we bet pretty heavily on data, which has failed to proliferate to the levels that we would have hoped. That being said, because we always intending on driving 90 percent of revenue [from data] and ten percent from voice, we're still growing dramatically. [By contrast], the guys that bet 100 percent on data are now gone. We always figured we could pick up additional revenues in the data space that have not yet materialized to the levels we thought they would. The thing that's great is that you have wireless local number portability coming down the pipe and InPhonic is going to be the place where the consumers can go and put in their exact usage patterns. We'll sort through every rate plan for every carrier in their market and customize rates for them on the guaranteed lowest price.

What do you see in the future of the wireless industry?

I see a lot of those camera phones move this fourth quarter. I think you are going to see a lot of people begin to use data applications. But in moving from such a huge base of voice revenue, it's difficult for carriers to move the needle on data. VR
 
 

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