After six months in Israel, working as a cook on a kibbutz and keeping up with financial news through the editions of the Wall Street Journal my father Fed Ex-ed me, I returned to Wall Street. But it wasn’t the same place I left. Although I thought I’d be diving right back into the risk arbitrage department, I found that everything at Oppenheimer was different. The firm had been sold and risk arbitrage spun off to be its own entity, now called Junction Partners.

For me, the upshot of the change was that I was the recipient of a promotion. I became an assistant trader at 22 years old. I continued to be driven by my passion to make the operations more efficient, and this time, in this new firm, my ideas were well received.

Management was interested in improving efficiency with new technologies, and I started working with computer consultants to automate the calculation of the spreads for every deal, which would give us an unfair competitive advantage. I built spreadsheets and put in data such as “probability of completion and date of close” so we could get probability-based annualized returns and sort the best opportunities. These things were just common sense to me. And although this introduced new methods and practices that required changes, everyone was open to adopting them because they gave us such an edge.

The following year was marked by a bigger transformation—technology was now viewed as invaluable, and adopting it was a company-wide imperative. The CEO delivered a presentation to the investors on the firm’s goals to amplify the level of automation. He included a slide that had a mandate for the number of computers in the firm and the number of people to be 2:1. There was only one computer in the office just a year before.

With the new directive, we all fully embraced the PC. We leveraged the power of computing to track stock quotes and run analytics. Deals went from paper to the screen. We now gained the ability to calculate spreads in real time and were able to find more opportunities to invest profitably and make more money. Automating this process gave us a very clear, unfair competitive advantage.

Two years later, at 24 years old, I became head trader. It was not because I was a great trader or even because of my ideas to increase efficiency. It was because my immediate boss, who had reported to the head of the firm for 14 years, asked for a raise, which instigated an argument and resulted in my boss getting fired. I didn’t get fired because I was making $25,000 a year and therefore not exactly putting a dent in the company coffers.

While being head trader sounds like a dream gig, it didn’t turn out to be such a coup. In fact, it was awful. Instead of being able to do more from my new post, I was more penned in than ever. The head of the firm was a forward thinker in that he loved the idea of automation, but he also came from the more traditional command-and-control school of management, which made him difficult to work for.

I was miserable. I lamented that I was able to be more creative when I was not in the spotlight. Now, I had to report everything to my boss, and I couldn’t get him to agree to anything. Every idea I had was “stupid.” Everything I brought up, he shot down.

There weren’t that many hedge fund managers at the time, and most of them had terrible reputations as people managers. Making so much money yielded a sense of entitlement; they saw themselves as the ones making money and everyone else as costing them money. As a result, some treated people incredibly poorly. I found the environment to be debilitating, and it turned me off from ever wanting to work for anyone else ever again. I swore that if I ever had my own firm, I would never run it that way. It was formative—almost like having abusive parents and swearing one day you’d be the exact opposite kind of parent.

My frustration built up over six months until I couldn’t take the day-to-day insults. I went to his office and quit. He accepted my resignation. Amazingly, he then asked me to continue in a different capacity, working as an independent consultant to collaborate with the computer consultants and advise them on the business aspects we needed to automate. There was still a huge divide between people who understood the business and people who understood technology and I could serve as that bridge. For this, he offered me more than I was paid as an employee. I didn’t have any better opportunities lined up, so I accepted the offer.

Stacking the Deck

At this time, trading still worked in a rather convoluted way, and this backward process still confounded me. A trader picked up the phone to call a broker with a symbol and a number of shares to buy or sell, and as the trade was executed, the trader would write down how much was traded. Sometimes the whole trade went through and it was very straightforward. Other times, it was more complicated, with traders having to prorate different amounts and write tickets for every account managed. Those tickets had to be keypunched into multiple systems such as the accounting and clearing systems. As you’d imagine, there were often mistakes made with manual input into multiple systems. Traders blamed the people entering the data and vice versa. Everything was reconciled the next day, and mistakes were corrected. But this is how things had been done for years and likely how they were going to continue.

But I saw an opportunity—something that if done right could give investment firms a significant edge. I proposed creating an automated order management system (OMS) that could run on computers. The OMS would track this information automatically and provide up-to-the-minute data. I initially called it the Paperless Trading System. I pitched it to my old boss, saying traders and portfolio managers were doing far too much clerical work and computers could do a better job. While he once thought all of my ideas were stupid, he liked this one right away. “Yeah, let’s do it,” he said.

My former boss saw in the OMS the ability to use technology to grow assets without growing staff. In Chapter 1 we saw how Cemex stacked the deck by innovating with a “just-in-time” system that enabled efficiencies and cut costs. We also saw how Dell stacked the deck with the same strategy that allowed it to compete on price and flexibility and win. Apple stacked the deck with its music player. It was not the first to come to that party. In fact, it was quite late. But it stacked the deck by coupling the music player with its own platform to download and access music easily. With that, it instantly owned the music player and digital music markets. In another example, as Amazon grew from selling books to selling everything, it needed a way to stack the deck in its favor and it found it with its annual subscription program Amazon Prime. The big problem it had to overcome was competing against brick-and-mortar retailers that offered customers the instant gratification of leaving the store with the item. By combining its huge selection with the ability for customers to receive the item the next day for no additional cost, Amazon minimized this issue and forever changed retail.

Getting Started on My Own

Although I was grateful that I had this consulting gig, it wasn’t really what I had intended on doing when I quit Junction Partners. I wasn’t thinking about starting my own financial software firm. I liked working on deals and had been scouring for jobs in corporate finance at various financial institutions.

Merrin Financial—the name I had given my consultancy—was just me working in the back of Dad’s gallery with a computer, an answering machine, and some business cards.

I gained clients one by one. During my search for a job, someone at Soros, the massive hedge fund, heard what I was doing with computer systems at Junction and asked me to come in and meet with them. (Junction was affiliated with Odyssey, one of the largest hedge funds at time, and all of the big hedge fund managers spoke to one another.)

I was 24 years old and found myself in the same room as the legendary George Soros, explaining the benefits of my proposed OMS to him. I was sweating profusely, but he was really nice, and as expected, he was really intelligent. Soros had a lot of questions, but it was obvious that he clearly saw the benefit of automating the trading aspects of his business. After that meeting, they asked me to come on as a consultant.

Around the same time, I met a renowned hedge fund manager, who was having lunch with his wife at my parents’ country house north of New York City. I was visiting, and as they were leaving I asked them if they could give me a lift back to the city. I recognized this as an opportunity I couldn’t pass up. It was a calculated move, as I would have them as a captive audience for the whole hour back. I was sitting in the backseat of the car and the wife asked what I was doing for a living. After I finished explaining the concept of the OMS, she said to her husband, “Don’t you need something like this?”

It wasn’t that my pitch was perfect; in fact, I wasn’t really pitching them at all. This was a one-hour conversation about what I was up to with my parents’ friend. I won her sympathy.

I never would have been successful selling this hedge fund manager directly, but because of his wife’s insistence, he asked me to come in the next day, and soon after, he too engaged me as a computer consultant. None of this was what I planned on doing, but I was making money and too busy to think about searching for employment in mergers and acquisitions or corporate finance.

When, finally, I received a full-time job offer, I was so entrenched in my consulting activities that I turned it down. It was an easy decision, actually. There was a wide-open field to explore, and working for myself was much more exciting.

Learning on the Job Is One Way to Do It . . .

Now that I had a few clients interested in the OMS, I had to figure out how to build it. Every time a new client signed on, I was euphoric and then I was scared senseless. “Oh, s!#t, what do I do now” was the refrain of the time.

I didn’t know the first thing about where to start. I didn’t have a business plan or a budget, nor did I understand sales or how to build a technology product. After all, I hadn’t exactly excelled in that one computer course I registered for at Tufts.

My biggest problem was that I didn’t have any kind of business plan. I was just drifting from one consulting project to another. I liked the projects and found them rewarding, but none of them were the kinds of projects that could be rinsed and repeated.

Consider the work I did with Laura Sloate, a legendary investment manager who has been blind since she was 6 years old. Laura, an investor in Junction Partners, had someone read all of the financial reports and newspapers to her, but she craved more independence and asked me to help build a technology that could read everything to her. There was some existing technology that could read to you in the 1980s, so I took that and worked with people from quote systems and news services to hook those up and have it read aloud. With this, Laura could enter stock quotes and hear how they were doing, and she could listen to news stories, delivered in computerized voices, which she could speed up and slow down. It provided her a whole new level of independence.

In another one-off project, I helped my parents’ neighbor, Bill Jacobs, who had a reinsurance company, to utilize new online services to access data he needed about companies he was insuring. (This was years before the Internet we know today). I thought a lot about how to structure the service, but I hadn’t thought a lot about how to structure the pricing.

“How much will this consulting project cost?” Bill asked, excited about the solution I was offering.

“A thousand dollars,” I said.

We were in a group of people and he asked me to leave the room with him.

“For $1,000 it’s not worth anything,” he said. “You should charge $10,000 and people will take it seriously.”

That was a lot of money, especially considering that I had no clue what I was doing, but I realized not only was he right, but also that doing bespoke custom work was not building long-term value and not what I wanted to do.

Price Right

A very common mistake made by many first-time entrepreneurs is underpricing their service. At least that’s what happened to me—twice. I priced my solution too low for Bill Jacobs’s data project, and I did it again when coming up with how to price the OMS. But I learned my lesson fast and figured out not just how much to charge but, more importantly, a new pricing strategy.

The OMS wasn’t ready for launch yet, but we couldn’t wait until it was finished to start marketing it. We knew the sales cycle would be long—perhaps six months—so we needed to start selling it in advance. You can’t wait until a product is perfectly packaged to start selling it; you start selling it when it’s close to being ready.

But that meant we needed to determine a price when we still had no idea about our costs. All of the variables we needed to establish a pricing structure were still unknown: How many would we sell? How much would it take to support the product? How much did it cost to sell the product?

I didn’t know how much to sell it for, but I did know I didn’t want to start every year with the same hurdle over my head to have to make more sales each year to grow the business. Besides, with the OMS, we were introducing a new type of software, and it would be a hard sell because the market didn’t know yet that it needed it. I didn’t want to just sell it for a fixed fee, so we came up with a new model for software, one that charged an ongoing monthly fee. Charging a monthly fee—which was much less in the short term than a large up-front payment, but which would be charged in perpetuity—would grow our revenue with each new account and could be increased as we added new features, modules—and users. While we would make less money up front, building a recurring revenue model was attractive from both a cash flow and enterprise value perspective. Today, of course, this “subscription model” is commonly used for software, but it was not done at the time.

It was a smart idea—and one that later gave us a much needed lifeline for survival—but initially we priced the product too cheaply, charging $1,000 a month. We had no idea what it would take to support and maintain these systems, nor did we know how many systems we would sell. We soon learned that we had to do a lot of customization for each account. We kept the monthly recurring charge, which was the right strategy, but we found a way to fix the wrong price we had set by charging consulting and customization fees. With that, we were able to build more functionality into the product with someone else paying for its development.

As our product progressed, we added more functionality, we added more clients and references, and the market started understanding that it needed this service. We were able to increase pricing every year. We also broke the product into different modules such as domestic and international equities, and compliance. We charged different amounts for the different modules and added a per-user fee. Our pricing offered our customers the elasticity to add services and seats as they went, and that flexibility made us a more attractive offering.

But everyone’s pricing was the same. We stayed away from doing special deals because I never wanted my existing clients to feel that someone else got a better deal. It also made every negotiation much easier. We raised our prices over time as we increased our feature set, and we didn’t bundle special packages that favored one client over another.

The enterprise software company Salesforce, which was founded later and built on a subscription model, also found that pricing mechanism to be a key differentiator. Salesforce helped pioneer “Software as a Service,” offering its users the opportunity to use its software without the customary up-front investment costs required to buy, implement, and maintain the software. The service grew virally. It was so inexpensive that users were able to get started by just purchasing it on their credit cards, without having to get approval from their department heads. And once they were on it, they found it invaluable and Salesforce had an “in,” which allowed it to execute its “land and expand” strategy.

Out of Control

In an effort to grow the business into something with a little more structure, I teamed up with Richard Stein, a friend I had met in summer camp when I was a teenager. The first thing Rich did was balance my checkbook and untangle the mess I made. I’d been paying business expenses out of my personal checkbook and not doing a great job of separating my personal and corporate accounts.

We moved into our first office—an 800-square-foot space in a very old building on Fifth Avenue in New York City. Rich and I shared an office. Our office was so small that we couldn’t close the door and we shared one desk. I sat at the desk and he sat at the return. Both of us couldn’t get up at same time. One day, a mouse fell from the ceiling onto a computer keyboard.

We used a coffee machine that must have been in the office for years before we got there. We didn’t think to clean it and the coffee came out green. We were so tired and cheap, we drank it anyway. There were probably five years of mouse droppings in it. I look back and wonder how I could be so stupid and how we are still alive.

Even more stupid, developing the OMS took far longer than I anticipated—and promised. I had set unrealistic expectations. Not only did I have zero experience developing software, but we were creating a new product category that had no road map or fully defined feature set. I told our clients that we would have it built in six months.

After one year of waiting for the product, my three clients, especially my old boss at Junction Partners, were getting restless. We were constantly under the gun and getting grilled, “Where is it? What’s happening? Why isn’t it done yet?”

We had started in 1985. We delivered the first OMS to Junction in the middle of 1987—about one and a half years after I said I would deliver it.

It was a typical Version 1 product with all the bugs, and made worse because we didn’t know anything about version control or how to package for distribution. It was a massive amount of work to implement the product because we had to integrate it with so many other systems. We had not anticipated how complicated this would be or the differences in trading styles within each firm. We had to keep track of different securities with different rules. Clients had different commission rates. There were different allocation methodologies. It was challenging to customize the software for every client and at the same time try to sell the OMS to new potential clients.

Beyond Your Control

Then, all of those issues took a backseat to something beyond our control. The stock market crashed in October 1987, just a few months after we launched. It suddenly became impossible to sell the OMS at all. It was an entirely different climate. No one knew if they would stay in business. The mood was so extreme that many likened it to the stock market crash of 1929 all over again. People thought the world would end.

The only good news was that we did not lose the clients we had. The reason: once they started using our service, they would never go back to the old, manual way. The computerized system was so much more efficient than the paper-based system, and it was able to provide valuable data in real time. We could calculate so many things: you could see real-time positions, profit and loss, and whether you had enough cash to buy more stock.

Let me walk you through an example. Let’s say a portfolio manager decides he likes a stock and he wants it to represent 3 percent of his portfolio. If he manages a $100 million portfolio, he would buy $3 million worth of that stock. That ultimately has to be translated into a number of shares for the trader to buy. The OMS could figure that out instantly. Now, that’s not a hard example, but let’s say he wanted it to be 3.5 percent of the portfolio and he managed $147 million. And then you have to consider the complicating factors: suppose he already owns 1.5 percent and manages 10 different accounts and wants to bring all of the accounts up to a 3.5 percent position. The stock is trading at $22 a share. How many shares does he have to buy across all accounts? The portfolio manager or trader would have to spend time on this equation, but the OMS calculated it instantly.

It also kept track of everything, from what was ordered to what was completed, what remained to be bought or sold, and eventually all the regulatory and compliance requirements. Paper tickets could not do those calculations or keep track of any of this.

Once you have that kind of capability, you can never go back to paper and pen. It’s like Quicken®. Before Quicken came around, you wrote checks in your checkbook and you had to reconcile everything at the end of the month. You did not have any analysis, you could not produce reports that showed you “rent is 30% of expenses” or “you spent more on groceries this month than you did last month” or “one of your children is spending twice as much as the other children on her phone plan.” But now that we have that, would you ever go back to writing checks? Being able to provide this kind of leap in efficiency stacks the deck for your customers and for you.

By 1989, we had a total of seven clients. We were not growing, and we were not profitable. Between the state of the financial markets and educating the hard-to-change mind-set of status quo, we were hurting. Badly. We had no structure around the growth of the company or the management of technology, the quality of the software was poor, and we were constantly being yelled at by clients.

One day, I was with a customer installing a new version of the software. It was full of bugs and the lead programmer was on the telephone, on speakerphone, so the whole room of people could hear the conversation as he was running me through what I had to do. The software would not work and he got so frustrated that he announced that he was quitting on speakerphone in front of our client, leaving me high and dry without a working system and with no clue how to fix it. That was just how it went in those days. We lurched from one problem to the next, and every day seemed like a new low.

Rich and I took a walk around the block and had an honest and unsettling conversation.

“If we don’t see any light at the end of six months, we’ll have to close shop,” Rich said.

We were half a year away from having to shut down. Six months came and went, and if I had known how to file for bankruptcy, I would have. But I didn’t. (That’s how clueless I was.) I don’t recommend this but sometimes ignorance can work in your favor. Not knowing how to declare bankruptcy is what ultimately gave us the time we needed to have the business take off. A certain amount of ignorance is also why so many outsiders succeed at reinventing businesses and industries. They are not mired in the status quo or how things are typically done and, therefore, might bring different solutions to the common problems. Some ignorance is also necessary in starting a business. I’ve heard countless times from entrepreneurs that if they had known how hard it would be to start or build their business, they never would have started.

If You Fail to Plan, You Plan to Fail

Unaware of any other options, we kept on working on the OMS, making it better, faster, and adding necessary features. Just as important, my father helped me improve my own skill set and taught me the most important lessons of all—the value of serious preparation and how to sell. Maybe I didn’t know all of the answers, but I surely could make myself more prepared and learn some sales skills and that would give me and the company a better chance of success.

This all started on a sailboat somewhere off the Greek Islands. Every year, my parents took us sailing, exploring a different part of the world, and this time we were on the Aegean Sea. I was completely depressed about what was happening at work. It was obvious that Merrin Financial was not going anywhere, and I had to come up with some way to fix it. But instead of getting mired in why people weren’t buying the product (the market had tanked and people didn’t think they needed it), Dad worked with me on finding solutions.

“You gotta be a great salesperson,” he said.

That was easier said than done. I had no idea how to do this. Unlike my father or my brother Sam, I was not a natural salesperson. I was a terrible salesperson with a bad attitude toward selling. I felt that if someone were stupid enough to not buy my product pretty much on the spot, they were too stupid for me to call again. My selling skills and attitude had to change for me to succeed. Despite my attitude, it was not enough to make Dad give up on me.

“Pitch me,” he said. He would pretend to be the customer: “Why should I buy this? What good will it do me?”

I pitched to him. I was bad.

“Too long!” said Dad.

“You didn’t give the benefits!” said my brother Sam.

“You didn’t nail it,” Dad said.

It wasn’t easy hearing how much I sucked, but that was okay because they gave me pointers. “You have 30 seconds to make them understand why they need to buy it, or you haven’t done enough work,” Dad told me.

He was right. I hadn’t done enough work. Most people do not do enough work. I pitched constantly for the entire trip. By the time I got back, I was actually pretty good and learned incredibly valuable lessons about selling, preparation, and role-playing. I became so enthusiastic about the success of practicing through role-playing that I have made it a key part of all our sales training and even developed a negotiation strategy around it that I called the 3×3 that we’ll discuss in Chapter 8.

I learned a pivotal lesson in pitching from Dad and in the years since I’ve learned that perfecting a pitch is a continuous process. Today, every time we start a new product or launch a new line of business, I like to go on the pitches because it’s an opportunity to learn what resonates and what doesn’t. For example, if we hear the same questions more than a few times, we know we need to work it into the pitch and answer it before they ask it.

Sell, Sell, Sell

With my new selling skills semi-mastered, I gained the confidence to reach out to a potential giant customer. I also used Dad’s advice to “leverage any opportunity.”

This was exactly how we won over Michael Price, one of world’s most lauded value investors at that time. Michael ran Heine Securities and the Mutual Series set of mutual funds. I sent him a letter, unsolicited.

I knew that he knew my old boss. I introduced myself, and wrote about how Merrin Financial did all of Junction Partners’ computer systems. I wrote that I had a system that I thought he would be interested in.

Just a few days later I received a call from his assistant, inviting me to come to his office downtown. The office was not what I expected. There was only one old computer in the entire place. I did a demo on my laptop with the whole firm crowded around. Then, Michael walked in and asked, “Which one of you is Seth Merrin?”

I thought it was strange for him not to be able to identify me, as everyone else worked for him, but I wasn’t about to say anything that could get me on his bad side. “That would be me,” I replied.

“You did all of Junction’s computer systems?” he asked.

“Yes,” I responded.

And that was it. It was the easiest sales pitch ever, and Michael Price signed on and became our biggest customer. This very large new account would serve as a pivotal endorsement. Where we were once six months away from going out of business, we began to experience an exciting turnaround. As the 1980s ended and a new decade began, it seemed that people’s mind-set changed: investors started to believe that the world wasn’t coming to an end. And Merrin Financial was given a second chance.

We saw the value of hard work and the returns it could bring. We had brought on a few more clients and spent the past two years enhancing the product, and now people wanted it. We ended the decade with a total of seven clients and 20 employees. In 1990 we signed 18 new clients, and Merrin Financial braced for rapid growth.

We moved from the terrible mouse-infested building to a bigger office vacated by a garment showroom. We couldn’t afford movers, so we put everything on office chairs and rolled them down Fifth Avenue a few blocks away.

That year we hit an inflection point and our system became a MUST-have. We held on for dear life. It was a confluence of events; we hired better salespeople, and we built enough functionality to satisfy the needs of more clients and minimize the amount of customization needed. We added clients and employees, and we had to move again.

We made progress with big companies, including getting very close to finalizing a deal with the asset management arm of a Fortune 500 company. They wanted to see our office. The new place was better than the rodent hotels and garment showrooms, but it was still a dump. The weekend before the meeting, we went to Ikea and bought furniture and had everyone come in and assemble it. We also had to paint the place. I felt like we were building a stage. By Monday it looked presentable. I was a bit worried they would smell wet paint or the furniture would collapse.

We were such a little company; this prospect was coming in to kick the tires. The tires were not even bolted onto the car! Still, somehow, they liked what they saw and they became our next major milestone client. We had customers that managed tens of billions of dollars. They managed hundreds of billions of dollars.

Now, we had a new head of sales and hired additional salespeople. We had new products for international trading and compliance. We had amazing references, such as Michael Price, who stated that he went from $2 billion to $20 billion—which he said he couldn’t have done without Merrin Financial. We also evolved from the narrow scope of being for the equity desks to serving fixed-income, foreign exchange, and portfolio managers.

My first five years creating the OMS were marked by my having to convince companies that they needed this product. But, eventually, the industry fully adopted this system as the central hub of information flow. Portfolio managers could connect to traders and traders could connect to the back office—all electronically. The entire investment process for capital markets could be conducted electronically without the need for manual intervention; the OMS became the spinal cord of these firms. I was invited to speak at conferences designed around this whole idea I invented. Today, the industry calls it straight-through processing (STP), and companies pay hundreds of thousands or millions of dollars a year for their OMS systems.

Our sales took off and we hired more experienced people, who put in better processes and quality control. We stabilized our business and grew to create an industry that enabled the start of the electronic trading era because we provided a solution that gave our clients a much better way to manage their business, which gave us an unfair competitive advantage and we didn’t quit.

You have to have 100 percent conviction to get you through the ups and downs of a start-up, and if you don’t, you should probably get out of it. I knew absolutely this was the way Wall Street had to go. Money was flowing into the industry, and our customers were growing quickly. Our OMS would help them manage their growth much more efficiently, with better information, fewer errors, and fewer people, and help avoid any compliance issues. We were selling companies an unfair competitive advantage—and they needed that. I knew this was going to happen, it was just a question of whether we would make it happen or if it would be someone else. Why shouldn’t it be us?