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From Boom to Bust and Back Again: What Startups Can Learn from Monty Schmidt $200M loss during the 2000 tech bubble

October 20, 2023

March 20, 2023


Written by

Nathan Lustig


Managing Partner


Magma Partners

From Boom to Bust and Back Again: What Startups Can Learn from Monty Schmidt $200M loss during the 2000 tech bubble
From Boom to Bust and Back Again: What Startups Can Learn from Monty Schmidt $200M loss during the 2000 tech bubble

Our most recent guest for our monthly Founder Zoom was Monty Schmidt, serial entrepreneur and CTO who co-founded Sonic Foundry, a music tools startup, and grew it to $50M+ in revenue. After taking it public at the peak of the tech bubble, Monty was worth $200M on paper, but when the bubble burst, his net worth plummeted to ~$0.

Monty helped create some of the first audio software for Windows in the early-mid 90s, which eventually became Sonic Foundry. He sold half the company to a business partner for $70k in 1994, and the two of them went on to build Sonic Foundry. 

Despite being offered $1M for the company, Monty and his partner declined and instead sold over $1M in software the following year. Between 1995 and 1998, Sonic Foundry experienced hyper-growth under Monty's leadership as President and CEO. In 1998, they went public, raising ~$25M, which would have been similar to a Series B round today. By 2000, Sonic Foundry was valued at $1.2B with annual revenue of $30M and had about 400 employees.

At this point, Monty's business partner called him and asked if they were really both worth $200M on paper. They couldn’t believe it. 

The market crash came shortly thereafter, and they found themselves with only 6 months of runway after the $150M of funding they were about to close fell through. Monty and his team took a few weeks to strategize and then laid off half the company to extend runway. They then took on some high interest debt and cut more employees, and were able to sell the media part of their business to Sony in early 2003. After the sale, they were left with 30 employees and $12M in the bank. They had to start from scratch and they were able to grow and become profitable over time.

Lessons learned

  • It would’ve been much better if they never went public
  • Bring on the right board members
  • Your IT person should be an important hire.
  • As a founder, what is the # of months of Runway that makes you freak out? This number should be 18 months.
  • Delaying your growth right now for the next 6-12 months is not gonna kill your company. It is much better to play it more conservatively right now. You can always readjust in 6 months, or 1 year and be more aggressive.

Monty believes that it would have been better if Sonic Foundry never went public. He also emphasizes the importance of bringing on the right board members and making sure your IT team is truly top quality early on. 

Monty believes that current founders should ask themselves how short of runway would make them freak out. Most founders will say 6-9 months. Monty’s suggestion is to force yourself to make 18 months of runway your panic number so that you can survive unexpected market downturns. 

In Monty's opinion, slowing growth for the next 6-12 months and playing it more conservatively will not kill your company. You just need to survive. You can always hire people and start growing faster again once the market turns.

Lastly, Monty shares how they made the tough decision to lay off half the company back in 2000. They were trying to extend their revenue by a certain amount of months and planned to raise more money, but eventually realized that the market wasn't getting better. In retrospect, Monty believes they should have cut even more employees to start.

Overall, Monty's experience with Sonic Foundry provides valuable insights for startup founders today. By learning from past mistakes and taking a conservative approach, you can increase your chances of success in the long run.

Portfolio Company
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