by Don Hamilton

I met Ari Engelberg, one of the three founders of Stamps.com, in a giant lobby with one small chair in the corner. He was 6 foot 3 or taller. Stamps.com's president and CEO, John Payne, and I have played handball together before at the University Athletic Club, and John is a well-known handball player. Turns out Ari plays a version of handball with a bigger ball on a basketball-style court. John and Ari are about the same size, and I wondered how big you have to be to work here.

By now most of you have heard of Stamps.com. Face it—when you hire a good PR firm the word begins to get out, and if you have a real product it happens even faster. What you may not know is the story behind the story. Who started this company? How savvy do you have to be to team with the United States Post Office, compete with large worldwide companies and still come out on top and be first with the hottest new product? It turns out that sometimes you have to not be smart enough to realize how much work it will be, and still be sharp enough to hire and team with the right people.

With Stamps.com you don’t need a dongel (a device that hangs on the back of your computer, generally on the printer port), a CD or a leased machine. You can get stamps directly from the Web and print your postage directly on your letter or package. The only downside would be if you lost your Web connection during the process because you must be connected to Stamps.com. On the other hand, you can print stamps with E-stamp.com when you're not online but you have to have the post office CD in your drive and a dongel on the back where the stamps are stored when they're downloaded.

Neopost, another player in this arena, is one of the big guys in the postage market and is based in Paris, France. They have a full system of office postage equipment available today. They're the other company working on a fully Web software system, according to John Kim, director of Marketing. They're currently in beta with the post office. They also have a PC stamps version that is very similar to the E-stamp system. Their "full blown" Internet solution with no hardware is coming, they hope, by the end of this year. According to the Vice President of Neopost’s new technology group U.S., J.P. Leon, they have an advantage over the other competitors in that they have a complete system, from machines that stuff envelopes to the coming Web solution. With their system you can mail overseas; with Stamps.com you will not be able to do that for a while.

However, Stamp.com will roll out general availability on September 29, 1999. We asked Ari, one of the founders of Stamps.com, what it takes to jump out in front of everyone else with a fully Web solution.

Ari: With e-stamps.com it's all online; you don’t need the CD the post office requires to verify correct addresses, or a dongel which hangs off the back of the computer, without either of which your system won’t operate. We take care of that all on our servers. It's all invisible to the users. When the USPO issues a new CD-ROM we install it on our servers and it’s a system-wide change for all the people who subscribe to our system. Let me run a test of the database of addresses for yours. [He put in our address at WWWiz and purposely used a wrong ZIP code, and in about one second the system came back with several choices; first one on the list was the right one.]

Ari: When you click OK it puts it in the address book completely correctly. What this means is perfect address quality and a pre-bar-coded mail piece. Which means it will get there faster and more efficiently. I can send a first-class mail piece, priority or express mail now; we'll be rolling out parcel post, certified and others over time. We're probably a year away from international mail because it requires the cooperation of international organizations.

Ari: Avery will be rolling out Internet postage-specific labels later this year, which will be offered through our site and sites of our competitors. Avery currently has labels that are available for this process.

Ari: In the next version, when you click on it, it will know that your address book, for example, is Microsoft Outlook and it will actually pull up the Microsoft interface, and you will be able to select addresses out of that interface. You click Print and it will grab those addresses and uses Stamps.com to print. It will be seamless to the users. It will look like your normal interface, which you're familiar with, and you'll feel comfortable with it. Currently you'll be able to import data from standard programs with the import feature. You save your file as a comma-separated file and then just import it into Stamps.com. Our support staff will be able to help people who have problems doing that to convert the files into a phone list.

Ari: We don’t think that most people will want the hardware solution. What we have is a system that's free to the user. It doesn’t cost them anything. It’s very low maintenance; you don’t have to climb under the desk, unplug wires or install anything. There are no long-term leasing arrangements like you have with Pitney Bowes. There are no usury fees, like if you lose your dongel you have to pay $500. Those are all inconveniences that you don’t have to worry about with our system.

The bad thing about this business is that it’s a regulated business, that you have to push through, which has taken a long time.

Ari: Exactly! What that means on the flip side is that we're in a regulated industry and competition can’t just come storming through. We feel strongly that we have good long lead times to market. We will be the de facto exclusive software-only postage provider. E-stamp launched its hardware device and received approval for their initial distribution at the same time we received approval for our software solution. We don’t see a software solution in the marketplace for a good long time. Again, because the postal service is pretty closed-lipped about the progress of other vendors, we don’t know if it's three months or three years.

Ari: We have our pricing on the Web site. We have two basic plans—the personal service and the business plan. The personal plan is for individuals who use $25 or less in a month. Anything above that and you're really a small business. At least you mail like a small business, whether you consider yourself that or not. It may in fact be a home user and he just does a lot of sweepstakes or something. At the home user level you pay $2 a month and that’s a flat rate. If you're a personal user it's very unlikely you'll exceed that amount.

Ari: You'll know that your next stamp will cost you 15% more. You'll know exactly how much it is going to cost. So for two bucks a month the average consumer will get all the postage they really need in a month. We think that's pretty favorable when you compare it to the opportunity cost of going to the post office for a half-hour or an hour, and people value their time. You don’t have the aggravation, and in many places you pay a premium anyway. At Mailboxes Etc. or your ATM you pay a substantial premium. We make it so that people can save time and money.

In the business category we charge a 10% fee with a floor and a ceiling. The minimum you'll pay in the business category is $4 per month. The most you'll ever pay is $19.99 a month. If you pay $250 a month or $10,000 per month [in stamps], all you're going to pay is $19.99 [to use the service].

Ari: A Pitney Bowes meter by contrast, even the small meter called the personal post office postage meter that they sell at Staples and a few other places, starts at $24.95 per month. It has a long-term lease so you can’t cancel whenever you want. They have reset fees, which means that every time you want to fill the meter up with postage there's an additional charge on top of that. So I pay $24.95 per month and I want to put another $100 dollars worth of postage in—I have to pay $10. Then they have proprietary ink cartridges with special inks. It’s a red ink and costs $30 a cartridge, which dries up after three months, so you're going to buy at least four of those per year whether you use it or not. It can cost you per month what our system costs per year to operate.

Ari: Yes, they have, but we don’t think the lawsuit has any merit. The Department of Justice civil investigation asked us to explain our relationship to Pitney Bowes, and they've launched an investigation into Pitney Bowes' business practices. That's all a matter of public record. Our focus is on rolling out our service. Pitney Bowes will follow on with legal action and with product. We'll fight a war on many fronts.

Ari: I’m Ari [chuckles]. The other two founders are Jeff Green, our VP of Marketing, and Jim McDermott, who's a VP in our Business Development Group.

Ari: I'm VP of what we call Web Operations. Broadly defined as "in charge of our Web site, e-commerce, customer support and other related activities."

Ari: We met at UCLA just by chance. We were all in business school classes. In 1996 Jim McDermott was looking for a job as an investment banker. He wanted to go into finance. He was stuffing résumés in envelopes late one night at one of the labs at UCLA and ran out of stamps for the envelopes. Next day he was riding his bike up past the post office and it sort of dawned on him that he’s got all this computer equipment and he's doing online stock, online banking—why can’t he print a 32-cent stamp [1996] with his PC? He ran into me at school that day and told me about his idea, and I thought it was a pretty good idea, but we had both arranged summer internships. We both went off for work.

In late September we came back for our second year of business school. I was in the law business program, and both Jeff and Jim were in business school. We met at the gym, and I asked if he had done any work on the stamp deal over the summer and he said no. I said, "Well, we’ve got a couple of days to kick around before school starts so why don’t we do a little research?" We spent the next few days online, went to the post office and all the places you would expect to look. It turned out that between the time of the idea and the research, the U.S. Post Office had put out a specification for the hardware postage products that E-stamp and Pitney Bowes are building. We looked at the specification and thought that if you're trying to bring convenience into the consumer and home office marketplace, you'd do it with a hardware solution. It's very expensive, it’s cumbersome, it breaks, drivers have to be replaced and batteries run out. We thought a much more elegant solution would be to aggregate the functionality of each of these individual dongels onto a server somewhere, secure it very tightly and then allow people to access it over the Internet. The idea is if you have a dongel attached to the PC by a wire of some length, say two inches, we would aggregate that functionality onto a server and connect it to a server that has a wire that might be 2,000 miles. Who cares how long the wire is as long as it's secure?

We immediately began to look for technical people to help spec the system. That’s when Jeff Green came onboard. The three of us approached the Post Office in March of 1997, along with a man named Mohan Ananda, who is now on our board of directors and was our founding CEO. The Postal Service in March said it was a great idea and they agreed that it could be done "but you need to prove it yourselves so go out and build the product. You have to prove that it's secure financially and secure operationally." First thing we had to do was raise money. It took about nine months, from March of '97 to January '98.

Ari: The three of us with Mohan put together a business plan and a good presentation that would attract the type of investors we needed: angel, corporate, VCs. We ultimately received an offer that we accepted from three different venture vapital firms, all in Southern California: Brentwood Venture Capital; Enterprise Partners; and Forrest, Binkley and Brown from down in Orange County.

Ari: It was six million dollars. During the time we spent raising the money very little progress was made on product development because we didn’t have the resources. Once we raised the money we grew to about eight people right away and built a prototype system. This allowed entry into beta testing in August of last year, almost a year ago to the day; it was August 24, 1998.

Ari: Yes, that's correct. They're at least 90 days long and they can be longer. In our case they were about 100 days. When we started beta testing that’s when things started to pick up speed. For starters, that’s when John Payne came on as president and CEO.

Ari: He had worked on a consulting basis for a couple of months prior to that. At that time the venture capitalist added additional money to the company. We moved to our new offices in Santa Monica from West Lake Village. We quickly grew to about 40 people by the end of 1998. We now have 150 employees, and we have completed our beta testing and have been approved for national distribution on August 9. We also received a private round of equity in February of this year, of 30 million dollars. It included some pretty impressive investors such as Paul Allen from Microsoft; Chase Capital Partners; David Benett, founder of GeoCities; Marvin Runyon, the former Postmaster General; and Warren Smith, who was the chief marketing officer of the Postal Service.

We completed our initial public offering in June. Through all this history we have, for the most part, maintained our roles. I've worn the most hats, so I've bounced around a little bit more than most.

Ari: A lot of it was credit cards. We obviously didn’t pay ourselves anything. We went without salary for a year and a half. We borrowed some money from family but not a lot, and Mohan put up some money. We had some developers who were willing to work on contingency. We worked out of offices that Mohan had that had some extra cubicles, so we lived there for a while. We flew the red-eye on Southwest Airlines to Washington, and did everything we could to save money. None of us had money or cash flow. We couldn’t even spend 20 bucks a month. We believed in the idea enough to stretch ourselves to whatever it took.

Ari: It's all hard. Raising the money took about a year and was difficult because we were young. I was 24 and Jeff was the old guy at 26. I had never worked before; school was all I knew. It took a long time for people to take us seriously. We were a bunch of college screw-offs and we were facing a large government bureaucracy, a monopolistic competitor in Pitney Bowes, and a long road to market. We were considered a big risk, and justifiably so.

Ari: Yeah! If we had seen the hurdles as substantial, as some of the investors saw them, I'm sure we wouldn’t be here. We were naive.