Interview with GEMM CEO Roger Raffee about GEMM, Stig Leschly, and Amazon

Interview with GEMM.com CEO, Roger Raffee.

October 8th, 2009 .

Interviewer: I’d like to talk with you today about GEMM and how you got started.
Roger: OK
Interviewer: So, you started back in 1994. That seems like forever ago in internet terms. How did it come about?
Roger: I was a record collector. I used to have garage sales where I’d sell my records. Mostly my extras and stuff I didn’t want. After a while I got the inclination to start selling through a magazine called Goldmine. My mother suggested I get a computer so I could keep track of which records I sold, where they were stored, etc. She knew a programmer who had done some work for her business. I contacted him. He wasn’t available so he suggested Jim Hall. He told me Jim was the best programmer he knew.
So, Jim and I met for lunch. I showed him Goldmine magazine. The magazine charges you by the size of the space you use. So, many sellers were putting their listings in the magazine in tiny print. I said to Jim “you know, I think I have an idea that might be better than this. What if you could put your listings searchable in the computer, and then someone else on another computer somewhere could see what you have for sale, and vice-versa.”

About a week later I got a call from Jim. He reminded me of my idea. He said he searched the internet. At the time I had no idea what an “internet” was. I had to ask him what it meant. He said he searched it and couldn’t find anything like what I described. He asked if I’d like to go in 50/50 with him on this idea.

Interviewer: When was that?

Roger: That was in March of 1994.

Interviewer: How long did it take for him to get something online?

Roger: In August we were listed as a BBS (bulletin board on telnet). In September we had a searchable database marketplace on the web.

Interviewer: How did you get people to start using it?

Roger: We bought Goldmine magazines and called up every seller listed in the magazine asking them to send us their listings.

Interviewer: You and Jim?

Roger: No, I hired a girl I knew.

Interviewer: Did you get many sellers to send you their listings?

Roger: We created a database of about a thousand Goldmine sellers. We called them all. Most of them didn’t even know what the internet was, or barely heard of it. We got one-hundred of them to send us floppy discs and printed lists, which we hand-typed in to our database. Of the hundred only one had AOL email. The rest weren’t even online. Those hundred sellers sent us an average of about one-thousand items.

Interviewer: Did you start getting internet browsers coming along, interested in your catalog?

Roger: Yes, and of course, one-hundred percent of them were online, yet only one of our sellers was.

Interviewer: That sounds like it must have been a bit of a problem.

Roger: Yes, I had potential customers emailing me all the time wanting to buy what they saw online. I’d then call the sellers asking them if they wanted to sell. I was spending a fortune in phone bills trying to get the site popular by facilitating sales between the online buyers and the offline sellers . We weren’t even charging anything for our service but we were listed as a cool site on Yahoo.

Interviewer: That sounds expensive.

Roger: Yeah, I was going pretty deep in debt.

Interviewer: How did you solve that problem?

Roger: Well, I knew I had to get a shopping cart on the site but taking money for sales from our online customers to send to our off-line sellers proved to be a bit of a conundrum.

Interviewer: Why’s that?

Roger: Because you had to get permission from the credit card companies to do so. With the help of our credit card processing company I approached Visa International with my idea for a marketplace and worked with them to develop our internet marketplace. The only reason I was able to do it was because we were the first.

Interviewer: They liked your idea?

Roger: Apparently so..It was pretty exciting.

Interviewer: How did it go from there?

Roger: Slowly. I started out working with just a few sellers for about a year to get it wired, and then we opened up the marketplace to all sellers. After that, it took another year for Jim to automate the check-out so it kept track of which sellers needed to be paid for their sales. The ringing up of sales and keeping track of who needed to be paid was all done by hand for the first couple of years. It was a big hassle and it impeded our growth. Unfortunately, it took me a year to convince Jim that the business was worth his putting his time in to developing an automated version of the business process I had developed. However, once that was done we started to grow pretty quickly.

Interviewer: When was that?

Roger: You mean when Jim finished the automated version of the check-out and payments system? That was in the Fall of 1997. Once that was finished we started to grow pretty fast. About 100% growth each year.

Interviewer: This was before Amazon or Ebay had a marketplace type of business?

Roger: Yes. Ebay was strictly auctions up until around 2004. Amazon started their first marketplace at the end of the summer of 1999. They called it Z-shops at the time.

Interviewer: It seems kind of surprising that Amazon’s marketplace is so similar to your marketplace. I thought that you copied Amazon’s marketplace but from what you are telling me you guys were first.

Roger: Yes, and in my opinion it’s no coincidence that Amazon’s marketplace business model is similar to GEMM’s . There’s some history there.

Interviewer: What do mean?

Roger: It’s kind of a long story..

Interviewer: I got a few minutes.

Roger: Well, it started back in 1996. We were a cool site in Yahoo. You remember the Cool Sites? When they’d put your site at the top of search results with shades (sunglasses) around your link?

Interviewer: Yeah, I remember that..

Roger: The check-out payment system I was working on was still in its infancy but we had a searchable database with about 200,000 items by this time and getting a fair amount of traffic.

Interviewer: How much?

Roger: I’m not sure.. probably around one thousand to three thousand unique individuals per day. Not bad at the time. Anyway, a student at Harvard by the name of Stig Leschly contacted Jim. He said he was fascinated with what GEMM was doing. He talked with Jim on the phone. Jim told me about it but I wasn’t interested. I was too busy administering the shopping cart and payments, all by myself. Also, I was suspicious of anyone calling Jim asking Jim questions about GEMM.

Interviewer: What about the girl you hired?

Roger: I had to let her go. I was going broke. The shopping cart marketplace started making just enough to keep us in business and pay my minimums on my credit cards but it was a ton of work for me. Jim handled the technical stuff but I did all the administrative stuff by myself.

Interviewer: So, what happened with Stig?

Roger: He came out to visit us. Really he came out to visit Jim. He got the idea that Jim was the brains and brawn behind GEMM because Jim developed the site. He didn’t seem to notice or care about the administrative/business side of the site. I remember he took us to dinner and spent the whole time talking with Jim. I don’t think he barely said a word to me.

Interviewer: Did he travel far to meet with you?

Roger: Yeah, he came from the east coast. We were here in California. After he left Jim called me up and told me Stig wanted to buy me out for $20,000, and I could keep 10% of the ongoing business. Jim was really disappointed when I told him no way. I was working my ass off and really believed in what I was developing. Jim didn’t have much respect for me.

Interviewer: Why not? Jim also did a lot of work didn’t he?

Roger: Yeah, he did. He did a lot of work putting the technical side of GEMM together but he didn’t really know me that well. I just seemed like a long-haired semi-educated surfer to him. He never really trusted my opinion that this business would take off, or that I could create a business out of it that could compete. He thought Stig had better connections and a better pedigree.

Interviewer: What kind of education do you have?

Roger: A B.A. in micro-econ from UCSD.

Interviewer: So what happened next?

Roger: Not too much for a couple of years. We kept growing GEMM. It was growing nicely. By the summer of 1998 we had a small write-up in the New York Times and other national press. We were getting around five to ten thousand unique individuals per day coming to the site, and processing around $50,000 per month in sales transactions for our vendors. We had more than three thousand active vendors at the time with about three million listings. Jim called me up one day that summer and told me that we were going to sell to Stig. He didn’t ask me, he told me.

Interviewer: You didn’t sell?

Roger: No, I didn’t want to sell. GEMM was my baby. I had worked hard on it. I didn’t trust Stig.

Interviewer: Did that upset Jim?

Roger: Incredibly. Stig and he called me often. Stig came out to visit me, came to my little dump of an apartment. He took me to breakfast one morning and asked how I’d like to have $50,000 next week to use to go to Australia and go surfing. I don’t know.. To me it seemed he was being condescending. The offer was a half million in cash for Jim and I, and half million in stock to share between Jim and I in Stig’s company.

Interviewer: That wasn’t enough for you?

Roger: It wasn’t just that. I didn’t know Stig. To me he was just some guy from New York trying to get my business from me. Jim would go on and on about how well connected the guy was, about how we’d be on this incredible team. Not just the two of us. But I didn’t feel right about giving away my baby.

Interviewer: What happened next?

Roger: Stig set a time line for me to sell. It was around the end of December of 1998. As it got closer and closer to the deadline Jim got madder and madder. He’d call cussing and screaming but I refused to sell. Stig finally asked me to go visit a friend of his who was visiting La Jolla. Someone he said was very influential and powerful. He talked about this guy like he was the king of the venture capital people. Stig was calling me on the phone a lot. Asking me to talk to venture capital guys he said were the guys who funded Amazon. The guy he wanted me to see was the most powerful venture capital guy there was, according to Stig.

Interviewer: So you went to see him?

Roger: Yes.

Interviewer: Who was he?

Roger: At the time I didn’t even pay attention to who he was. All I remembered was that his name was John.

Interviewer: When was this?

Roger: Before Christmas, 1998 .

Interviewer: Did he impress you?

Roger: Somewhat. We met at a huge mansion in La Jolla, over-looking Black’s Beach, by UCSD. The part of the mansion we met in was under construction. I took my mom’s boyfriend with me. We sat in what seemed to be a large living room with no heat. I remember it was cold. I sat there at the table with John and my mom’s boyfriend, Richard. John was nice at first. He told me how Stig was well connected. Stig’s dad was a former famous tennis player, from Sweden I think. He told me that Stig’s dad was on the board of CBS Television, and was one of the most powerful men in America and a good friend of his. When I made it clear I wouldn’t sell his demeanor changed. He told me that he wanted me to understand in no uncertain terms that Stig had very powerful people backing him. If I didn’t sell to Stig he guaranteed me that Stig and his friends would roll right over me. He used that exact phrase, roll right over me.

Interviewer: And you don’t know who this “John” was?

Roger: For years I didn’t know and didn’t care but this past Spring I was browsing the internet and came across this article (http://www.bookpatrol.net/2008/08/amazon-and-bibliofind-history.html) that dealt with this very issue. It was written by this guy, Marion Meyer (http://marionmeyer.com/). I called him and told him my story. He asked me if the “John” I met could have been John Doerr. I didn’t know who John Doerr was, not by name anyway, or if I did I didn’t remember. He asked me to look up John Doerr on Youtube which I did. When I saw the videos of John Doerr on Youtube giving speeches I knew instantly that yes, this was the guy who met with me here in La Jolla back in December 1998, vouching for Stig Leschley, and threatening me if I didn’t sell to Stig.

Interviewer: So your partner Jim was really pissed off at you for not selling.

Roger: Oh God, that’s an understatement. Jim was so sure we’d sell to Stig that he gave Stig the contact information of all our vendors and gave Stig the OK to send them all an email introducing himself as our new partner. Stig then used that information to recruit all our vendors over to his new site, Musicfile.

Interviewer: You’re kidding..You’re saying Stig didn’t do any of that (gathering a data-base of music sellers) on his own.

Roger: Hell no! He got all that information from us. Jim gave it to him!

Interviewer: Geez..What happened next?

Roger: Well, the deadline came and went. We didn’t sell. Jim was beside himself. I told him we’d find another company to sell to, and do better than we would have with Stig, which I almost did, but that’s another story.

Interviewer: So what did this have to do with Amazon?

Roger: Well, about a month later, in January 1999. I was busy at home one evening, like usual, working on GEMM and the phone rings. On the other end of the line was Jeff Bezos. He introduces himself and tells me how he likes my site. He said he’d like to buy GEMM. He says he finds the payment processing system on our site fascinating. He really is interested in how I take payments from customers and send the funds to the sellers. How do I do that? What do I do if a seller doesn’t send the product?

Interviewer: What did you tell him?

Roger: Well, by this time I was really suspicious of telling him anything about how I do business. I told him he would have to send me a non-refundable cash advance of $100,000 which he could wire to my bank account as a show of good faith if he was really interested. After that, he could negotiate the sale of my company with my step-dad (my mom’s boyfriend). I had told my mom’s boyfriend at the time that he could be my business manager if we engaged in negotiations regarding selling the company. Needless to say, Jeff didn’t wire me the $100,000 .

Interviewer: Wow! What happened next?

Roger: We kept growing and doing good business but I was curious and a bit worried what Stig was going to do with his Musicfile site. I had heard from several of our vendors that he and his employees had been contacting them, asking them to send Musicfile their catalogs. I kept logging in to musicfile.com but it wasn’t a functioning site until March of 1999. At that time it did finally go live but it still wasn’t a functioning marketplace. There was no payment processing of any kind. The shopping cart really didn’t work at all. You basically just had to contact the vendor to send the vendor a payment but you had to register to be a user before you could do that, and it was kind of a clumsy sign-up process. I realized that they were no threat at all, at least not yet, but I was perturbed that Jim had given Stig all our vendors.

Interviewer: So, they launched in March of 1999.

Roger: Yes, and then they were bought by Amazon in April of 1999 for $200 million dollars!!

Interviewer: Amazing, and you say they didn’t even have a functioning site?

Roger: Barely. The amazing thing was that the article in the front pages of the business sections of newspapers across the country had this story about how Stig was a record collector, bought and sold records in Goldmine magazine where he got the idea for his marketplace, had accumulated hundreds of record stores with three million items etc. etc..

Interviewer: You mean he took your story.

Roger: Yeah, like his own story wasn’t good enough so he had to use mine, and he used our catalog!

Interviewer: Incredible, and Amazon gave him 200 million dollars.

Roger: Right. It seemed like a sweetheart deal to me. The venture capital guys who were buddies with Stig’s dad took care of their friend’s son, and somewhat at my expense.

Interviewer: But they did make you offers.

Roger: Yeah, but not really if you think about it. I was offered a pittance really, and it seemed to me I was treated with disdain, like I wasn’t really qualified to be in their company. They were too good to associate with the lowly likes of me. That’s the impression I got from Stig and his friend John, like I was lucky to get any scraps they were offering me. They weren’t really offering me a fair deal and they didn’t want to. They’d rather take what they want without having to deal fairly and honestly.

Interviewer: Right, but if what you’re saying is true they didn’t have too much value for you and what you had done. The real value for them was in inflating the value of Musicfile and doing that deal with Stig. The rest was just window-dressing. It was probably just an accident that your business model turned out to be a perfect alternative to their book-selling business. They apparently realized that the reason you wouldn’t sell was because your marketplace payment processing was the missing piece to Stig’s model and Stig’s model couldn’t compete with yours without it, and therefore a perfect model for them to develop.

Roger: Right. If you read about it now, more recent contemporary reports about it, you’ll see Amazon’s emphasis is more on Stig’s over-all corporate name, Exchange.com and their acquisition of Bibliofind. A book finding site that Stig bought just before he launched Musicfile. But, at the time, the press about this story centered more on Musicfile as the basis of the value of Exchange.com . I think in retrospect they’re trying to play down the emphasis on Musicfile.

Interviewer: Is there more?
Roger: A bit more. That summer, in 1999, I was getting a lot of ordering from one customer in Seattle, a woman by the name of Jennifer, if I remember right. I’m not sure. Anyway, one day a seller had a problem with one of her orders so I called the phone number on her account. A secretary at Amazon answered the phone. I asked who Jennifer was. The secretary told me she was the head of Amazon’s auction department. They were making purchases at GEMM as part of their research in to starting their own marketplace, which they then launched at the end of the summer of 1999. It was called Z-shops and it included all our vendors and their catalogs, which they got from Stig, which Stig got from Jim..

Interviewer: That’s a wild story.

Roger: Yeah. I think it’s kind of sad really.

Interviewer: Yeah but it’s really an interesting and amazing story. Look, I’m going to have to wrap this up for today. I’d like to interview you about how GEMM grew after the year 2000. Can we talk about that next time?

Roger: Sure thing..