He rose to the top of the Inc. 500, then failed spectacularly. Now he's back with another fast-growing company--no less ambitious but a lot wiser.
Michael Lewis
David Steinberg near his New York City office
Momentum is like cholesterol. There's a good kind and a bad kind.
In the mid-2000s, David Steinberg grappled with the bad kind. InPhonic, his seller of mobile phones and services, was No. 1 on the Inc. 500 in 2004. It went public that year. But as Steinberg pounded furiously toward revenue of $400 million, the company started to sway beneath him like a rope bridge on a windy day. Ultimately, it collapsed, filing for Chapter 11 in November 2007 to facilitate the sale of its assets to an investment firm.
Within 30 days of resigning as CEO--not long before the filing--Steinberg had moved the furniture out of his old office in Washington, D.C.'s Georgetown neighborhood and into his new office in a building right next door. While InPhonic expired nearby, Steinberg was giving birth to a new company, which he holds up as an exemplar of good momentum. XL Marketing provides lead-generation and customer-acquisition services for companies in several industries and for big brands; Steinberg projects it will do $100 million this year. The business, now based in New York City, is growing so fast that had Steinberg launched six months earlier and thus qualified for the 2011 Inc. 500, he would have become the first founder ever to land two companies in the top spot. (Why isn't XL Marketing on this year's list? Steinberg chose not to apply. The company wouldn't be No. 1, and so really, what would be the point?)
F. Scott Fitzgerald was wrong: There are second acts in American lives. And the most resilient entrepreneurs don't even require intermissions.
We are sitting in Steinberg's sparsely decorated Manhattan office, our conversation occasionally drowned out by the banshee shriek of sirens tearing down Madison Avenue below. Loose limbed and genial, Steinberg is giving his first substantial interview in more than three years. With so much going right, he is, understandably, not eager to revisit InPhonic's last days. But we cannot talk about the sanguine present without acknowledging the sanguinary past.
So Steinberg answers--more or less patiently--questions about the series of unfortunate events that commenced in 2006, two years after InPhonic's IPO. In relatively short order, the District of Columbia attorney general's office and the Federal Trade Commission, or FTC, filed lawsuits over InPhonic's rebate programs; accounting errors forced the company to restate several quarters' worth of earnings; a strategic partnership collapsed; and shareholders filed a class action (later dismissed). In November 2007, InPhonic filed for Chapter 11, and its assets were sold to Versa Capital Management, which relaunched it as Simplexity. (Simplexity still operates Wirefly, the popular wireless-services retailer that Steinberg built inside InPhonic.)
Steinberg's take on all of this squares with that of most commentators. Growth: too fast. Focus on profit: insufficient. "I wouldn't say we didn't care about profit," says Steinberg. "We did. But we were more focused on growing the business." Unfortunately, infrastructure wasn't scaling as fast as sales. "We had effectively the same finance team as a $20 million company as we had as a $400 million company," he says. "We were processing millions of transactions. And quite frankly, we had not built the internal controls and systems."
The company also carried too much debt. When a deal that would have given InPhonic some cash and allowed it to spin off distribution fell apart, the bank called its loan. "We had the wrong balance sheet," says Steinberg. "And in August 2007, there was no refinancing of anything."
Steinberg also blames InPhonic's status as a public company for inflating the problems. "Had we not been public when a lot of that stuff happened, it would have been no big deal at all," he says. "But we were a sizable public company and attracted the attention of certain lawyers who like to sue sizable public companies." (Both the FTC's and the D.C. attorney general's lawsuits were settled.)
But Steinberg never stopped believing that with InPhonic, he had built a great company. "When I left I was, if not the largest shareholder, in the top three," he says. "Nobody lost more money than me. I'm a believer. And I don't regret that.
"The guys who bought it got an incredible deal."
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