Howard Lerman Shares the Secrets of Starting Up

“This is crazy. Why are you doing this?”: Yext cofounder Howard Lerman knows when to pounce, when to fold

Dante had his Beatrice, and Keats, Fanny Brawne. Howard Lerman’s muse? It appeared after he stepped onto a treadmill at a Manhattan Upper West Side gym seven years ago. “So I’m looking at Al Sharpton’s Spandex butt, and I’m like, ‘I don’t want to look at that,’” recalls the 33-year-old CEO of Yext. “So I look out the window instead.” Outside he spotted a gym salesman spinning a ‘Wheel of Savings’ to lure pedestrians with free trials and discounts. “I walked out and said, ‘This is crazy. Why are you doing this?’” The rep told him nobody read the Yellow Pages anymore, so he had to find some way. Inspiration struck. Less than a year later Lerman’s GymTicket.com, a lead-generation service, had signed up 3,000 gyms around the country.

Epiphanies come in strange packages. The most successful entrepreneurs act on them— but also know when to let go. Lerman has been through that respiratory exercise three times. At his corner office near Madison Square Park, he’s now deep into his fourth company, the result of abrupt, decisive shifts in strategy—the sort that transformed GymTicket.com into Yext.
Investors, who have bet $66 million on two incarnations of the business since 2006, haven’t yet seen a dime. But with this latest iteration, Lerman is pretty sure he has it right.

Today his 250-person outfit sells cloud software that helps brick-and-mortar businesses manage online storefront data—addresses, phone numbers and business hours among them—to keep listings accurate while monitoring customer reviews and referral traffic from 46 websites, including Facebook, Yahoo and Yelp. They pay $500 per year for each location while massive enterprise customers like Citibank and FedEx get a discount. Just three years old, it should do $33 million in sales this year, with 70 percent gross margins, says Lerman. He’s confident sales will double again in 2014.

Growing up in Vienna, Lerman went to a magnet high school that had a $1 million supercomputer. He rigged a phone line to his PC to access an online network of local hackers. (Sean Parker grew up nearby and occasionally joined the chats.)

While at Duke University he studied history, the easiest major he could find, and teamed up as a sophomore in 2000 with high school classmates Tom Dixon and Sean MacIsaac, now Yext’s COO and CTO, to launch JustATip.com. Based on a whim—prank calls from high school days—the service let users send ‘tips’ anonymously, e-mailing friends about, say, their offensive body odour or lack of rhythm. An intern at the White House at the time, Lerman says he “may or may not have used government computers to build it”. The gag caught fire on college campuses. Jon Stewart used the website on The Daily Show in 2001 and usage rocketed to a million visitors per month. But token revenue from banner ads barely made a dent in server bills, and the founders searched for an acquirer. Two deals fell through before Traffix, a publicly traded online marketer, bought the site for $150,000.

After “a couple of roaring keg parties”, the trio launched Intwine, a consulting firm that specialised in Microsoft’s .NET programming language. Within three years it grew to 30 consultants and $5 million in sales. It sold to Datran Media, a digital marketer, for $7 million in 2005.

Next up, GymTicket.com. It worked like this: Web surfers on the hunt for a gym found the site through ads and search engines, entered their Zip codes, then viewed a list of local gyms. When they called to sign up for a trial membership, GymTicket pocketed a fee. Lerman enlisted Brent Metz, a high school friend and IBM speech scientist, and Brian Distelburger, a colleague at Traffix, as co-founders. Sales jumped to $1 million within a year, and soon they expanded to nine more categories, including LocalVets.com and TVRepairman.com.

With the sites rolled into Yext, they developed transcription technology that recorded customer phone calls and charged clients based on keywords in conversations. For vets, ‘spay’ might incur an $80 charge, ‘checkup’ just $5. By 2009 the company was nearly profitable and approaching $20 million in sales, yet few had heard of it. Lerman and company did the rounds on Sand Hill Road, emerging with $25 million from Institutional Venture Partners.

Yet after just a couple months Lerman saw he was on the wrong path. “We f---ed up,” he concedes. “We should have never raised that money.” The model turned into a “quagmire”, as clients disputed charges and tied up account managers. Growth slowed; managing 10 websites grew untenable. Instead of folding up or searching for a sucker to buy the operation, Lerman decided to start an entirely new company within Yext.

In the spring of 2010 he grabbed three employees, appointed Metz de facto CEO of the old operation and holed up in a separate room. For years his customers had told him how hard it was to keep tabs on different online listings. When the cloud software debuted in January 2011, it was an immediate hit. Sales were $2.7 million in 2011, $14.2 million last year. The old business, meanwhile, known as ‘Felix’, looked like deadweight.

At the suggestion of venture capitalist Ben Horowitz, who declined to invest in Yext, Lerman decided to spin out Felix, selling it to IAC’s CityGrid Media for $30 million in April 2012. The proceeds went directly to Yext’s balance sheet. Two months later Lerman raised a $27 million round, at a $270 million valuation, from existing investors, plus Marker and CrunchFund. (Lerman’s worth: An estimated $50 million.) Lerman is positioning Yext beyond local data. He talks of Starbucks managers using it to post pictures and specials on each location’s Facebook page. And when retailers start pinging in-store shoppers with geo-targeted ads, Yext might serve as the platform for managing such campaigns. Meantime, he can fish among the estimated 20 million storefronts in the US and 50 million globally.

His current muse is his wife, Wendy. Just months ago he sported shoulder-length curls and a beard that ran untrimmed down his neck. “One day my wife was like, ‘You’re starting to look like a homeless guy,’ ” he says.

Today, coiffed, he looks like tens of millions.