The founding, growth and eventual acquisition of the ILINC Corporation is a typical small example of technological entrepreneurship.  ILINC was founded in 1993 by a professor (the author) and two students at Rensselaer Polytechnic Institute.  Later the name was changed to LearnLinc to match the name of its popular product and eventually LearnLinc entered a triple merger in early 2000 with Gilat Communications and Allen Communications to form the Mentergy Corporation (NASDAQ).

It all began with an idea, and that idea eventually became a research project.  In the late 80’s and early 90’s, Wilson and his scientific colleagues were working on the application of computing and communication technologies to science and engineering education.  After producing several multimedia projects, Wilson turned his attention to the management of large quantities of educational materials on networks.  The early focus was on the modularization of materials and the ability to store and retrieve those modules in an object oriented fashion.

Wilson had served as an IBM Consulting Scholar and was a frequent speaker at conferences on multimedia on networks.  At one point he was invited to present his vision of the future of networked multimedia education to a group of executives that included several key executives from AT&T.  That speech led to an invitation to Bell Laboratories to discuss potential cooperation and to present his vision to a broader and more technical audience.

Apparently the speech was a great hit with the audience, because Wilson was asked to create a prototype of the vision in partial collaboration with scientists from Bell Laboratories.  The negotiation of the contract for this work took longer than most since Wilson felt he had a significant interest in the pre-existing intellectual property and also wanted to maintain the rights to derivative work from the earlier work.  Eventually an agreement was reached which granted rights to AT&T for all software created newly for this project, but protected the earlier work and allowed further developments based upon it.  The contract was written as a contract with deliverables and due dates rather than as a ”best efforts” grant.  The contract and deliverables caused several faculty to decline to participate because of the difficulty of working under the pressure of deadlines in an academic environment.  Nevertheless, Wilson and Rensselaer entered the contract with AT&T and began work on the project.  The resulting prototype would allow distant learning on networks by using ISDN video conferencing and by using the same ISDN lines to network the distant learning sites.  Wilson and his team of students and staff also managed to make several of the multimedia projects work in this environment.

Wilson was pressed into service for presentation after presentation to AT&T executives, engineers, and customers over the next few months.  At the same time, the Bell laboratory engineers began to port the code into potential AT&T products including the WorldWorx project.

No technical person is ever satisfied with the first version of any software product and Wilson was no exception.  So much had happened in computing and communications over the course of the project and the ensuing months, that Wilson became convinced that it needed to be done quite differently to take advantage in the advances in object communication and multicasting -just to name two items.  He went back to his colleagues at AT&T and proposed that they start all over from scratch to create a different kind of prototype that would take advantage of all the new things.  He was easily able to get the technical staff at Bell labs excited.  They could see exactly what he was talking about, but the proposal went absolutely nowhere with the business units.  They wanted to focus on getting out product, and (in their opinion) they had what they needed.  The Rensselaer and Bell Laboratories technical staffs commiserated and schemed, but no further options presented themselves, and Wilson moved on into other projects while continuing to work on the preliminary design - adding new features with each advance in computing.

One of the other projects in Wilson’s laboratory, The Design and Manufacturing Learning Environment, had a bright young graduate student working on it, and he became fascinated with Wilson’s plan for a network of educational objects -all communicating across the internet and distributing voice, video, and data to every site.  Degerhan Usluel had been an undergraduate electrical engineering student who decided to come back for an MBA in entrepreneurship.  As a student he had already founded one computing company that he turned over to his father before leaving for graduate school.  Young, brilliant, naïve, and fearless, Degerhan was the ideal person for discussions about the future of collaboration on networks. 

One day, Degerhan showed up in Wilson’s office to announce that he was beginning to plan for his upcoming graduation and that he wanted to share that plan with Wilson.  He explained that he did not want to go to work for a large company and that he wanted to start a business in software and that he wanted to do that in collaboration with Wilson.  Moreover, he had recruited one of his classmates, Mark Bernstein to join him in the venture.  Mark had been a “Top Gun” salesperson for Computer Associates prior to joining some friends in a start up computer disaster recovery firm called CPR.  The firm had been a reasonable success, and Mark’s sales skills were certainly a factor.

After discussing several different possibilities, Wilson pulled out a file that he had been keeping with the details of the design for a distributed learning environment that would run on the internet and utilize communicating objects on students and faculty machines in a peer – to peer architecture.  Wilson also pointed out that they could use multicasting to distribute the video and audio while using that and agent technology to manage the bandwidth on the network and keep it from getting out of hand as more and more sites were added.  He did not point out to Usluel that no one had really been able to make multicasting work reliably and that most of the Internet did not support it anyway.  He was confident (foolishly) that these were all solvable problems.

Wilson served as President and mentor while Usluel became Vice-President for Technology and Bernstein became Vice President for Sales, Marketing, and Business Development.  Wilson began serving as a part time President and full time Chairman of the Board using his 20% consulting time from Rensselaer, his weekends, his evenings, and his holidays.  It was agreed upon up front that at the end of 1-1.5 years, he would either quit Rensselaer and join ILINC LearnLinc or step down as President and CEO, recruit a replacement and serve on the board.  The decision would be a joint decision of the Founders.

Deciding what their exit strategy would be was one of the easiest tasks that they had to accomplish.  It took about ten minutes to decide that all three founders wanted to create a successful public company, that would define a new category of software and change the world.  If only the other tasks were as easy.  Now they had to create a prototype, develop the pitch, and raise the money.

The prototype was created out of bits and pieces of Wilson’s work augmented by some new materials prepared by both Wilson and Usluel.  Bernstein worked on the pitch with lots of kibitzing from Wilson and Usluel.

A Bootstrapping Process

Funding was a tougher problem.  After discussion with a number of other successful entrepreneurs, such as William Mow, founder of Bugle boy industries and Mike Marvin, co-founder and Chairman of MapInfo corporation, Paul Severino , founder of Bay networks, industry executives (especially from GE and IBM), and with lots of encouragement from Mark Rice, then Assistant Professor and Director of the Center for Technological Entrepreneurship, the founders decided to try to fund the company by bootstrapping the company through the sales of software for future delivery.  With Wilson’s contacts and Bernstein’s passion and sales experience, they felt that they had a chance to do this without having to go to venture capitalists at an early stage.  Wiser and more experienced executives counseled them on the futility of this approach, but they decided to give it a try anyway.

Bernstein’s passion and Wilson’s persistence carried the day.  They obtained enough contracts for future delivery of software to fund the company in the early days of growth.  First customers included IBM, AT&T, GTE, Sprint, Office Depot, and Harper Collins Publishing (news Corp.).

They were now to step eight of the entrepreneurship path.  They had to do it.  For that they turned to Usluel, because he had to build the product that Wilson envisioned and Bernstein promised.  And he did.

When the software was delivered, it managed to satisfy all but one of the early customers and eventually even that customer grudgingly conceded that ILINC LearnLinc had delivered what they had promised, if not quite exactly what the company wanted.

ILINC then entered a rapid growth phase with very little working capital, depending upon cash flow to finance the each new step.  When the monthly “burn rate” (the amount of cash spent each month) reached about $100,000 per month, the founders decided that it was finally time to visit the venture capitalists.  Because the company had no track record, the founders were financing the shortfalls in the cash flow with bridge loans against receivables, but these had to be personally guaranteed by the founders.  Signing monthly personal guarantees of $40,000 or so began to make them all a bit nervous, because none of them had the income to really handle this and only Wilson had any assets!

They went to a local venture capital firm called Exponential Investors who helped to arrange several hundred thousand dollars of financing in cooperation with some New York State business development funds.  It was also time for Wilson to decide. His partners encouraged him to come in full time, but he decided that it would be better to go back to Rensselaer and recruit a more experienced CEO for the company.  He felt that he would be able to continue to help with the vision and direction, but that the company would benefit from someone with past experience in creating new ventures.  A new CEO, Jim O’Keefe, was recruited who had just completed another start-up that had been acquired.

The next few years saw ILINC grow substantially, if not painlessly, and two more rounds of financing in single digit millions brought investments from GeoCapital Investors and the Intel Corporation.  As noted above product development and financing went through several cycles as ILINC released new versions of LearnLinc and arranged new rounds of financing.

Moreover, they now had some very significant competitors.  Without patents on the underlying technology, the fast followers were able to reverse engineer the LearnLinc product.  Although their earliest efforts were crude and unreliable, there was no reason to believe that they would not get steadily more powerful.  These competitors were also much better funded.   ILinc was founded in 1993 by people who knew the “old rules” of entrepreneurship.  They focused on revenues, tried to achieve positive cash flow, and minimized the acquisition of venture capital.   Their competitors were living in a “new-new world:” the dot-com era of the tech boom.   They raised ten times the venture capital and thus had a far more powerful sales and marketing enterprise.

There were times that the LearnLinc product was only being discovered after one of its competitors had gone into a company and sold them on the concept.  For big companies like Aetna-United Health Care, there was a process to evaluate competitors for big purchases.  After Centra had sold them a pilot, LearnLinc was chosen as the corporate provider.  In general, it is difficult to rely on your competitors to sell your product.

By the summer of 1999, the founders felt that it was time for LearnLinc to raise much more funding and to grow substantially.  The new CEO had been replaced by an interim CEO, Mike Marvin, and then by Degerhan Usluel. Wilson continued to serve as Chairman.  The Board decided to hire an investment banker (Michael Kane and Associates of California) and met with a selection of other entrepreneurs to decide how to best go forward.  They identified three potential paths:

• Do an IPO.

• Get acquired by a complementary company

• Enter a partnership with (and receive an investment from) a complementary company that would build upon their joint strengths and allow them to grow faster.

From the beginning, the group leaned toward some kind of business alliance or acquisition.  Although the excitement and financial reward of the IPO was attractive, they felt that the glory might be short lived.  They knew that LearnLinc needed a much larger sales force and needed to be much larger financially to crack the very large enterprise accounts that could allow them to reach the next level of development.  Although they had sold product to IBM, AT&T, Lucent, MCI, Computer Associates, Aetna, United Health Care, Boeing, Flight Safety, and many other large accounts, these tended to top out at less than million dollar accounts.  In order to grow and dominate the market, they needed to be able to crack that barrier.  An IPO could bring them the funds necessary to grow, but it would take time and management attention to hire the people and create the systems needed to handle the growth.

The company’s advisors suggested that an IPO would likely value the company at $100 million to $200 million.  Perhaps it could be more, but that would depend upon timing and market excitement.  They also suggested that an acquisition would probably only bring about $50 million, but that the acquisition might leave the company better positioned to grow over the coming years.  Given the anticipated lock-up periods for founders stock, the founders tried to evaluate the options, as they would look one year into the future, rather than at the transaction date.

LearnLinc becomes Mentergy

Eventually they decided to agree to be acquired by Gilat Communications and the deal closed on February 29, 2000.  Gilat paid 1.5 million shares (gross before commissions) for LearnLinc.  On February 29, Gilat closed at $35 per share making the value of the deal $ 52.5 million at closing.  Because of the use of bootstrap start-up funding, venture capitalists held less than 50% of the company at the close.

During the same period, Gilat acquired Allen Communications from the Times Mirror group for $23 million in cash.  Over the next six months, the three companies were blended into one company -now know as Mentergy.  The companies had a complementary set of strengths.  LearnLinc was the market leader in live-on-line eLearning.  Allen Communications had an impressive established customer base, a large skilled sales force and specialized in web and CD-ROM based CBT.  Gilat brought expertise in satellite communications and interactive learning over satellites.  The plan was to create a blended learning approach that was “technology agnostic” and could provide the best eLearning solutions for a variety of different learning needs.  The target market continued to be corporations and corporate training.

At first the market loved the combination.  By March of 2000, Mentergy had a market capitalization of over $500 million.  Plans were developed for a secondary offering both to cover the expenses of the triple merger and to provide additional development and marketing resources, but the declining stock market made that a difficult task.  The situation was complicated further by a misguided effort to create a headquarters for Mentergy in Atlanta, Georgia (when most of the employees were in New York, Utah, and Israel) and by management confusion caused by the difficult communication process with key management personnel and the Board Chair in Israel. Wilson, Usluel, and Bernstein had agreed to remain involved for at least six months after the merger.  Wilson severed his ties in frustration as soon as allowable.  Usluel and Bernstein persisted longer in a futile attempt to get the company back on track.  By 2002, Mentergy was in bankruptcy.

In hindsight, there would be many things that might be done differently if we had to do them over again, but I hope that the reader can see how we were thinking as we made each decision.

1.       Where would you place LearnLinc on the spectrum of types of innovations?  Product or process; radical or incremental; architectural or component, competence enhancing or destroying?

2.      How would you place LearnLinc on the S curve of technology?  What does this imply for its adoption?

3.      LearnLinc offered a low cost universal way to bring learning to learners in a corporate training environment.  Were they operating in segment zero?  If so, what was the market they were disrupting?

4.      If you were advising ILINC as to how to manage its LearnLinc product just prior to its acquisition, what would you identify as major challenges they would need to face quickly?