Beginner's Luck

OOMA would only be able to get a leg up if it could nail down an exclusive partnership with the industry's biggest player, eBay, which controlled more than 90% of auction market sales and, therefore, the bulk of the online-pricing information. "We could have just done what the other guys were doing and spidered eBay's site for data. But I believed that we could make a strong case to eBay that sharing its data with us would be in the company's best interest," says Landress, whose business plan called for eBAy to receive licensing fees and perhaps even an equity stake in OOMA.

Inking the eBay agreement was not only crucial to OOMA's long-term business model; it would also bolster the founders' hands in negotiations with their venture investors. "The company's valuation would likely rise by three or four times after it partnered with eBay," says Elliot Levine, an angel investor who had enthusiastically offered to take a stake in OOMA. "If they raised the money first, the company's valuation would be very low and they'd have to give up a big portion of the company. So I suggested that they nail down the eBay partnership first."

Others, however, counseled the partners to take the financial bird in hand. "People though that we would be crazy not to accept the funding and get things started," says Landress, who had already begun searching for office space in San Francisco's SOMA district and interviewing candidates for the executive team. "They said, 'If you've got the pledges, you shouldn't keep them waiting.'"

But with new competitors rapidly encroaching on their idea, Rosmarin and Landress felt that the prospect of raising money, hiring a staff, and ramping up the complex site -- all in hopes of landing the eBay deal -- was both daunting and too time-consuming. Determined to secure the linchpin relationship quickly -- and to nail down the fat equity stake that went along with it -- the two soon agreed to go double down on their Internet bet and to delay OOMA's seed funding. They then recruited a small team that was willing to aid the eBay pitch and to sign on if the deal went through. In the meantime, Rosmarin quit his day job as director of marketing at Geometrix Inc., sold his eppraisals.com domain name for $10,000, and committed the proceeds to help the team woo eBay with a slamdunk presentation.

The strategy that they had chosen piled risk on top of risk. They were betting all of their chips on one bold roll of the dice, rather than playing a game with more conventional odds, such as placing smaller bets backed by traditional venture funding. The logic behind their gamble was clear: If they could strike a deal with eBay quickly, they would vault ahead of the competition and ensure their substantial stake in OOMA. But, at the same time, there was a potential downside: If they failed to win such an agreement, or if the deal took too long to consummate, they would fall behind the growing horde of competitors and seriously compromise their chances of ever receiving funding from investors.

But the one-throw-of-the-dice plan also had an upside: Whether the plan hit or missed, Landress could always say that he had done his best to deliver on his promises to his investment buddies. "One of my biggest risks going into this was asking my friends and colleagues for seed capital," he says. "I could go to them once, maybe twice in a lifetime with this kind of proposition. So before I played that card, I wanted to make sure that we had the best possible chance for a payday."

Meanwhile, the decision to forego both building a live Web site and hiring a staff kept OOMA's expenses at almost nothing and allowed the partners to focus solely on the eBay pitch. "We've reduced our risk by minimizing what we're risking," says Rosmarin. "Yeah, I quit my job and invested some time into this. But Scott and I have invested very little money so far. So if things don't work out, all we'll have lost is time. And I could live with that."

But in the high-risk, high-speed world of Internet startups, time is often more precious than money. And although the partners approached eBay within a month, the auction behemoth proved preoccupied with other, more pressing issues. Software glitches had taxed its ability to keep the site up and running, and users had complained about fee increases. Meanwhile, the company had become embroiled in a running battle with upstart auction aggregates, whose spiders had begun combing eBay's listing and displaying the results on their own sites.

Eager to protect what it considered its proprietary data and to ensure that OOMA's pricing data didn't rile eBayers, who use the site in hopes of getting top dollar for their items, the company put off OOMA's initial overtures. As negotiations stretched from weeks into months, OOMA and eBay finally reached an agreement. But weeks later, in February, the U.S. Department of Justice opened an antitrust investigation into what it alleges to be eBay's efforts to thwart aggregates -- and that legal development has the potential to derail OOMA's deal.