Kee Nethery: Inventor, Accomplished Developer; Founder and President of Kagi

This week, Stephen Ibaraki has an exclusive interview with Kee Nethery.

Nethery founded Kagi in September 1994 and developed the initial systems for the Company. Kagi, which means “key” in Japanese, is a leading provider of patented end-to-end outsourced electronic commerce solutions that operates online stores for software publishers and sellers of hard goods. Their technology and tools provide a broad range of services, including online store development and deployment, store sales processing, worldwide payment processing, delivery of digital goods, integration to physical fulfillment providers, fraud protection, and outsourced sales service. As one example, their Kagi Registration System Module (KRM) eliminates added Web browser procedures for final registration and purchase for trial-use downloaded software applications. KRM provides for automatic registration [activation] code insertion, which eliminates most of the e-customer support e-mail exchanges of past systems.

Kagi’s current customer base represents over 3000 active suppliers worldwide, offering over 6000 active product titles. Approximately 50% of the company’s suppliers and transactions are international.

Prior to founding Kagi, Nethery was already an accomplished large-scale network designer and held key positions at Apple Computer and Farallon Computing (now Netopia). As a product marketer for Apple from 1994 to 1995, Nethery specified and delivered Apple’s first internet server; the Apple Internet Server Solution for the Web. Nethery founded and ran Kagi Engineering from July 1988 to June 1994, where he designed and optimized large AppleTalk networks. While at Farallon from 1986 to 1988, he designed, installed, and operated the first MacWorld and Dexpo trade show networks demonstrating interoperability between systems. From 1981 to 1986, Nethery worked as a Process Control System Engineer with Chevron USA.

Nethery holds three patents and has published numerous technical magazine articles. He holds a BSEE from Texas A&M University and is a Professional Registered Control Systems Engineer.

Discussion:

Q: Kee, you have a legendary reputation for outstanding service amongst your thousands of customers. We thank you for coming in to do this interview.

A: Thank you.

Q: Your company name is a bit of a twist on your name and its Japanese translation of “key” illustrates your mission with your partners and with consumers. Can you talk about how this name came about and what it means to you?

A: Naming a company is a bit like naming a child; the name you give it will shape its future. As I see it there are three types of company names; founders (Famous Amos Cookies), descriptive (Minnesota Mining and Manufacturing) and brands (Virgin Records). Although Famous Amos lost his company years ago, his name, and his fame still compete with whatever he is doing today. Naming a company after yourself is not such a good long term strategy. Descriptive names are good starter names if you can describe what the company does in a very short number of words. But ultimately, as a company morphs out of old businesses and into new ones, the descriptive name becomes a burden and the company changes it to a brand (3M, IBM, Ford, GE). Long term, the brand style name gives the company ultimate flexibility and the Virgin brand name is a prime example.

I like Kagi as a brand name because it comes from my name but is not my name, and the lock and key metaphor goes well with many aspects of any business. The brand name will serve us well as the company adapts to meet new needs. Consider that when I chose the name, 6 years before starting the Kagi that exists today, I was doing network consulting not e-commerce. The Kagi name originally had nothing to do with online stores. Because it’s a brand, it’s easy to describe what we do today and to tie it to the name.

For example: Global online e-commerce appears deceptively simple; you can start with an Ebay store and use PayPal for processing or get a merchant account at Costco. As you grow with a do-it-yourself solution you will reach limits, or as we refer to them, “locked doors”. Want to sell more than your merchant account allows in a month? Want to make it easy for people outside of North America to buy your products? Need a shopping cart to organize your products? Want to transfer customer product selections on your web site to your store? You can fight your way through each locked door as you encounter it or let Kagi’s keys unlock them for you. We have all the keys for online e-commerce.

Because it’s a brand, it was easy to switch the messaging and metaphors from 1988 Kagi networking consulting to 1994 Kagi e-commerce. Another aspect of the name that has never been a goal but is fun to ponder; stock ticker symbols are typically 4 letters and so is our name. The final fun thing about our name is that Scott Kim was gracious enough to design our logo. Look at our logo upside down sometime.

If it’s not obvious by now, yes, I did spend a lot of time thinking about what I wanted for a company name. I still like it.

Q: You hold several patents. What challenges originally triggered the patents? Can you describe the patent process for those who may have their own ideas that they want to patent?

A: The first part of a patent is solving a problem that no one else could solve or that no one else realized was a problem that needed to be solved. As humans, we all solve problems every day.

The second part of a patent is realizing that your solution is unique. This doesn’t happen that frequently because to know that something is unique requires that you are aware of all the other solutions to the same problem. Most people focus on solving the problem in front of them and don’t know or care if anyone does the same thing or if they are the first. A several thousand dollar patent search is used to verify that a solution truly is unique.

The third part is actually getting a patent, and that is an expensive legal process. It’s really common for people to see some company grow around an idea that they thought of long ago and to regret not having started that company themselves. I think the better way to view it is as validation that your brain comes up with patentable ideas and it’s a sign that you should educate yourself on how the patent process works so that your next unique idea can get protected.

The final aspect is commercialization. The entire patent system was created to protect the commercialization of new ideas so that our country would be enhanced by them. Turning a new idea into a company is a business problem and most inventors are not very good at business. Consequently they patent ideas that have little commercial potential (a bird diaper) or the idea becomes wildly successful after the patent ends (Velcro).

My first patent solved the problem of how to dynamically determine the most economical fuel to air ratio when burning a fuel; useful in cars, furnaces, etc. Pete Congdon at Fisher Controls tossed this problem at me my first year out of college. When I came back with a solution, he smiled and told me it was patentable. I didn’t know it was a previously unsolved problem, but he did. Thank you, Pete. I then decided to educate myself about patents.

The first patents we got at Kagi came about because no one else had stumbled into e-commerce with the acceptance of checks and cash problems we were running into. We do what a traditional “lock-box” service does at a fraction of their cost. People enter their purchase information online and print a form that summarizes their data. That form includes a multi-stripe bar code that identifies their order. Bar code fonts are typically designed for specific printer types but our multi-stripe bar code prints correctly regardless what type printer they have. We receive the payment, scan the readable bar code, and we’re done. A lock-box service would have to retype all that customer information which costs money and introduces errors.

It’s too early to talk about the other patents Kagi has in process, but I can say that although one is mine, the others come from two employees who are very smart people.

Q: Can you describe three of your customers and the business value your service brings to them?

A: Case study 1: halfkeyboard.com is a pretty large company that sells a really nice set of unusual keyboards. Their expertise is keyboards, ours is e-commerce. Using Kagi gives them an up-to-date e-commerce infrastructure without worry. We carry the pagers, we keep up with the tax law changes, we handle the multi-currency bank accounts; they make the keyboards. 

Case study 2: skatemate.com is a small family operated business. They do one thing and they do it well, they make ice skate sharpeners that you can carry in your pocket. They sell all over the world, marketing their product in many different languages. We handle all the back-end system infrastructure, order management, payment processing, multiple languages and currencies so that they can focus on marketing, product development and growing their business.

Case study 3: semicolon.com is a guy who has been perfecting Solitaire Till Dawn for over 10 years. His day job is for a large well-known software company. For an hour or two each day after work, he codes on his product. He first decided to use Kagi years ago because it was taking him hours each day just to process the payment checks people were sending him. He was one of the early adopters of the Kagi Registration Module (KRM) which lets his customer buy the software while they are playing it, without leaving the game. The instant gratification makes his customers happy and the automatic installation of the registration activation code eliminates a huge percentage of the customer support emails he used to get.

Q: What business value will your company be offering in the future in terms of new services and solutions?

A: We currently have a very comprehensive suite of services and solutions. It’s become obvious to us all that the value we’ll offer in the near future will be in getting the word out, so that more companies can take advantage of them. After a decade of business we thought it might be a good idea to do sales and marketing instead of relying upon word of mouth advertising. The reason for this is that lately we’ve noticed that when our suppliers say “Gee, sure do wish you could do XYZ, I really need that.” Our response is typically, “We do XYZ, we’ve had that service for years. Here’s the link to all the details and contact me if you have any questions or need help turning it on.”  We hired our first product marketing expert to help us to productize our services and make it easier for clients to understand all the capabilities that we have so that they can take advantage of them.

Q: Now going back in time. Share with us your early history and how you got into computing? Also, what valuable lessons did you learn from your time at Apple?

A: Back in the 5th grade, I took summer school class on computer programming and slide rules. This was BASIC computer programming on a teletype connected to “the” Houston mainframe with our programs stored on paper punch tape. After about two weeks, I realized that although the math capabilities of a slide rule were outstanding, computers were the future and I spent the summer writing a program to alphabetize three words. Later my dad exposed me to the IBM 360 mainframe at Dow Chemical, where he worked. When I graduated from high school, he bought me a used personal computer, a Southwest Technical Products 6800.

That summer school class was my only formal computing class. Like most active programmers, I’m self taught through trial and error. The main thing I learned was that computers were tools that could be modified to solve a problem and Kagi was formed around that idea. If Kagi cannot create a way to automate the solution to a problem, it’s not something Kagi should do because it will not scale up when hundreds of people want that problem solved.

I’m an engineer by training and I had never been exposed to a formal traditional marketing process prior to working at Apple. My boss, Doug McLean, and his boss, Jim Groff, were excellent and through them I learned a great deal about launching a new product and managing a large business. They tossed a great deal of responsibility at me, probably because the internet was still in its infancy (Al Gore had recently changed the internet from a research network into a commercial resource) and there just were not that many people who had full time internet connectivity with their own servers in their home. I was lucky to be in the right place at the right time.

Q: You and Brad Adams [Kagi Director] have a common history at Farallon (Netopia). What were the top challenges you faced and how did you resolve them?

A: While I was at Farallon, the top challenge was growth. Rapid growth is not something that most companies experience and when they do, it is frequently something that overwhelms them and kills them. It’s a situation very similar to the Alice in Wonderland quote of the Queen saying, “Why, sometimes I've believed as many as six impossible things before breakfast.” On one hand, you prepare for the growth to end and for sales to drop drastically to the level it was two months ago. On the other hand, you prepare for the growth to continue and for sales to double two months from now. It’s a delicate balancing act and if the company is going to survive, you have to plan for both possibilities. It is a fun ride if you like challenges.

Q: Looking back, can you share your insights from the MacCrypto Conference?

A: Funny you should mention that, my wife wears that conference T-shirt when she works out so I am reminded of it on a frequent basis. There were two aspects of that conference that were fascinating.

The first was that Vinnie Moscaritolo (who was at Apple at the time), decided that the world needed that conference and he made it happen. The presentations were top notch, the attendees were extremely knowledgeable, and the conversations were amazing.

The second was that cryptography is very personal and fanatically important to the people who deal with it. For a group that deals with secrecy, they are extremely open in helping others find the best security.

The security model in the Kagi Registration Module was architected to take advantage of all the information that group could provide. The best information at the conference for me was the helpful hints on how to obtain an encryption export licence. Back then you called the Commerce Department, and for technical issues they would connect you with “Tony” who would not tell you his last name and would not Name the Specific Agency he worked for, but he knew cryptography. He could help you pick the cryptography solution that would meet your needs and be approved for export. That was a very entertaining conversation.

Q: Since you have been involved with the Internet for so long and have seen it evolve, what top tips produce success?

It’s a challenge to answer an open ended question like this. If it’s OK, I’ll narrow it down to creating and selling a product on the Internet. Literally anyone, anywhere in the world can create and sell a product to a global market from any cybercafe, and at Kagi, we’re committed to helping them succeed.

Let’s take the fictional example of a woman in a third world country getting a Grameen bank micro loan of $100 to buy a sewing machine and cloth. She can get a free email account. She can sign up with Kagi for free and describe on her shopping cart page what products she can create, how much she would charge, and ask people to email her if they wish to purchase something from her. Then she can go to each search engine and submit her web page for indexing.

If there are people who want what she has to offer, they will find her through a search engine, contact her via her free email, and then she can arrange to produce the articles they desire. Once she has made them, she can ask them to purchase through the Kagi store. Once Kagi receives payment, she ships the goods and Kagi pays her.

As with any business it requires the normal skills of finding a niche that no one else is filling, and then filling it. The trick for Internet success is to leverage all the free services and to reach out to a global market.

Eventually she is going to repeat this cycle enough times to where she develops a standard set of products and has enough cash that she’ll be able to make them in advance and start selling them in bulk.

In many ways, this scenario applies to large companies also. They describe the unique capabilities of their existing products, and make sure that search engines index their product pages. When people want to buy their products, they either point customers to the various brick and mortar stores that sell their products or they point customers to a shopping cart based store that they, or a company like Kagi operates for them. Having a company like Kagi, being the online store, eliminates all the sales tax issues that a manufacturing company might not want to deal with, eliminates the need for staff with all the technology expertise needed to do e-commerce, and eliminates sales channel conflicts, since Kagi is just another sales channel.

From my view, the big lesson of the Internet is to leverage the services that are offered and focus most of your efforts on the things that are unique to you.

Q: As an industry leader and innovator, you are ideally situated to identify areas requiring change. Please describe them and your solutions?

A: For me, “requiring change” implies that if change does not happen immediately for some specific problem, the world falls apart, and that’s not the way I see things. I believe that many problems have existing solutions currently in use somewhere in the world and that other problems will eventually get solved. So how about solutions to problems that I find interesting?

I like Lawrence Lessing’s proposal to create a bounty hunter kind of system for spam where if you can provide the evidence so that the government can prosecute and convict, you receive a substantial bounty for getting a spammer.

I really liked the Larry Walters solution to personal flight, a lawn chair with a bunch of helium weather balloons. When I heard about that ride on the news my first thought was “Wish I’d thought of that!” Simple solutions are so inspiring.

I liked James Cameron’s ideas on how NASA should sell its future missions by treating its robots as explorers, and having detachable camera systems to film their explorers in action. He’s right, we all want to share the moment.

I know it got cancelled for political reasons, but I liked the government idea to predict the future through a market where people buy and sell futures about future events. The Iowa Electronic Markets have been using this technique for years to predict the future and it turns out to be amazingly accurate.

There are tons of creative people coming up with imaginative solutions to problems. At Kagi the problems we see and the solutions we develop typically relate to Kagi and either they are deployed and I can talk about them or they are not and I cannot. Although the problems and solutions that Kagi has are important to our product suppliers, they aren’t in the “end world hunger” category, but we do see them making a huge difference in people’s lives.

It is very satisfying for us to see someone live the life they want, doing what they love, and making a living doing it. There’s the guy who built a solar racer and raced across Australia, managing his business while doing it. The guy who spent months traveling around the world and spent a little bit of time online each day managing his business from the most remote exotic locations. The couple who spent time figuring which country they wanted live in and then paid cash for their home from their product sales. The two women who live on opposite sides of the globe and collaborate to produce a beautiful product. We make it possible for them to focus on what they enjoy and that is very satisfying, even if it doesn’t end world hunger.

Q: Who are your top picks for future winners/losers and why?

A: I’ll give you a generic answer and a specific answer.

First the generic answer. When I was learning about venture capitalists (VCs) the lesson over and over was that VCs invest in teams not ideas. Like many others, that seemed wrong to me. If you have a better mousetrap, it seemed to me VCs should invest in your idea.

Over the years I’ve observed that investing in the team and not the idea is absolutely the right thing to do. Companies are not static, they evolve and change on a daily basis and if they do not, they die. If a VC was to invest in the better mousetrap and someone created a device that kept mice away so that there was no need for a mousetrap, that company would die. But if the VC invested in an experienced team that had a less than stellar mousetrap, that team would find something else to do, morph their company, survive and thrive. So my pick for future winners are companies with teams that have weathered adversity and come up with creative solutions to growing their business. Not to say once a success always a success, but that team experience is a good indicator for picking future winners, not the product idea.

Next, the specific answer. In the category of “putting your money where your mouth is”, the only team I’m investing money in is mine. I know my team. I’ve seen them deal with adversity and win. I’m sure there are other teams equally as qualified or even better, but I don’t know them. I know my team and they are my pick for future winners.

Q: Can you share four major challenges you have experienced in the last ten years and how you overcame them?

A: 1) I spent months thinking about how Kagi would work, what it could offer, how it would be structured, what kind of growth path was possible. When I was ready, I contacted software authors to see if they would utilize the service I envisioned and they all said no. I continued talking about it with people I knew and eventually, six months later, I hooked up with my first supplier, Peter Lewis in Perth, Australia. He had the exact problem I had envisioned that Kagi could solve. I got past the “getting it started” phase by continuing to talk to people until either I convinced myself it was never going to succeed or someone wanted the service.  Keep trying if you believe your idea is sound.

2) Initially Kagi operated out of my bedroom and was something I did part-time while doing other consulting jobs. I knew it could grow large but starting small and slow gave me time to encounter and solve technical and organizational problems in non-traditional ways. As the business grew, I added people and the way I handled growth was to hire people who wanted flexibility in their work hours. That way I could shrink or grow their hours as the company changed and that has continued to work well. Plan for flexibility.

3) As I brought on more employees, it became obvious that I needed to provide benefits such as medical, etc. Plus as we grew, the employment paperwork requirements got more complicated. When we had 5 employees I outsourced the Human Resources function by going with a Professional Employment Organization (Trinet). Everyone at Kagi, including me, officially works for Trinet. We have five medical plans to choose from and dental, vision, etc.  Best of all, all the employment paperwork is handled by Trinet. If there are any employee issues, they have a team that works with the appropriate parties to resolve the situation. Focus on core competencies and outsource everything else.

4) This is my first management position and although Kagi is doing quite well, several years ago it was obvious to me that Kagi needed someone with more experience than me to grow the company to the next level. So for the past several years I’ve been learning about how to find and hire someone to transition to without killing the company. I’ve found that professional organizations where I can talk with other CEOs have been invaluable. I’ve found that face to face networking with all the various professionals I deal with has been invaluable. I’ve been looking for years on how to solve this issue and a couple months ago we brought in a guy who has the background and skills to grow Kagi to the next level. Right now he is a consultant and over time, if things go as planned, I’ll be his boss providing top level direction, and he’ll be mine on the day to day activities needed to reach those goals. To quote a movie character, “A man’s gotta know his limitations.”

Q: This is a staple in all my interviews. Pick four topic areas of your choosing and provide commentary.

A: Area 1: The advice I give to suppliers who are just starting to build a product and company is to not quit the day job. I highly recommend keeping a normal job while you build your company. Building a company requires trial and error and that process takes a longer amount of time than most people expect. Live simply so that your cash flow requirements are small.  Eventually if you are successful, it will become obvious that you cannot afford to keep the day job because the company you’ve built pays much better. Don’t quit the day job until it’s painfully obvious that you cannot afford to stay there.

Area 2: Outsource things that you don’t like to do or things that you are not good at. The reverse of this is, you must spend time observing yourself and understanding what you do better than most. Spend your time doing that and hire others to do everything else.

Area 3: Do what you love and the money will come. And if the money doesn’t come, at least you’ll love what you are doing. The least happy folks I know are those who choose money over satisfaction. If you love it, you’ll spend all your time learning about it and figuring ways to do it better. You’ll be the best at it because it’s your passion. If you just do it for the money, someone with passion is always going to be better. Be that person who has the passion for the job.

Area 4: From a software development standpoint, there are two types of software, stuff that changes infrequently (desktop applications, firmware) and stuff that changes daily (IT infrastructure). In an IT infrastructure project, you will release new versions of your code on a weekly or daily basis and if a problem crops up, you’ll roll back, fix and then roll forward. In a desktop application development cycle, you create a huge list of new features and once or twice a year you release new code. For IT projects, you release one feature at a time and you build systems so that testing can be compartmentalized to one module rather than the entire system. Don’t use a desktop application development process for an IT infrastructure project.

Q: Can you share a story or two--something amusing, amazing, surprising?

A: 1) John Larroquette called up to retrieve a registration code for a game he had bought. I happened to be answering the phones and I asked him if he was “the actor” John Larroquette, and he said yes. Told him that he was in good company, even Drew Carey paid for shareware. He replied, “Well if we can’t afford it, who can?” Nice guy.

2) In the early years it occurred to me that I should send a thank you Kagi T-shirt to the very first customer to have bought something from us. I looked in the database and found that the person was adamsd@.... and that he was located in London. I wondered if he might be Douglas Adams of “Hitchhikers Guide to the Galaxy”. Tried the email and it bounced, tried the postal address and it came back. A year later I saw him at a MacWorld Expo book signing. Stood in line and asked him if he used to be adamsd@....and he said yes. Asked him if he had ever bought Anarchie (the product) and he said, absolutely, probably 5 times or so. Our very first sale could have been to anyone, it was to Douglas Adams. I’m glad to have met him.

3) You never really know when you are successful. Long ago when Kagi was not that old, my wife and I took a long weekend and went to a 4 room bed and breakfast on the northern California coast. The local town didn’t even have cell phone coverage. I spent time that evening talking to the host and he asked lots of questions about my business, I’m sure he did that with all his guests. The next morning we met the other three guests including a couple from Germany. When he explained what I did for a living, the guy from Germany asked “Is it anything like Kagi?”

Q: Kee, you have an incredible history of accomplishment. We thank you for sharing your unbounded talents and deep insights with our audience.

A: Thank you but “incredible history of accomplishment” seems a bit too extravagant. Anyone can do incredible stuff as long as they are willing to try and fail and then try again. I was very fortunate that my father recognized that success and failure were essentially the same thing, continually striving to achieve a goal. He let my brother, Scott Nethery, (who has been very successful in baseball scouting) and I try anything and he was always supportive. When I left Farallon back in 1988 and was talking to him about looking for some other job, he told me to stop looking for a job, to hang out for several months, to not worry about finances, and to see what opportunities came my way. Within two weeks I was swamped with work and I’ve essentially been self employed ever since. From where I sit, the people who succeed are the people who take a chance and refuse to be stopped by failure. Education, upbringing, nationality, whatever, none of those seem to determine success. It appears to me that anyone can succeed if they keep working at trying to succeed. I was lucky to have parents that supported all the unconventional choices I’ve made.

This has been a fascinating interview, thank you for the interesting questions. Mostly I spend time looking forward. It’s been a nice change of pace to look back. Thanks, I’ve enjoyed this.