Entrepreneurs

Red Hat's co-founder was unemployed and working in a closet when he started the company IBM is buying for $34 billion 

Red Hat co-founder and Lulu.com CEO Bob Young
Source: Lulu.com
Red Hat co-founder and Lulu.com CEO Bob Young

In 1993, Bob Young was unemployed and working out of his wife's sewing closet on a new company he co-founded. This week, that company sold to IBM for $34 billion in the tech giant's largest acquisition ever.

"It's, no question, an out of body experience," Young tells CNBC Make It.

Young, the co-founder and former CEO of Red Hat, the open-source, enterprise software provider IBM is using to expand its cloud computing business, is now 64. He stepped down as Red Hat CEO after the company went public in 1999. He also left the company's board in 2005 to launch Lulu.com, an online self-publishing company, where he is still the CEO.

But it was Young who first started the company that would become the multi-billion dollar Red Hat roughly 25 years ago. At the time, Young tells CNBC Make It, he had no job and was out of money after selling his previous business, a computer leasing company.

"I'm an entrepreneurial businessman, that's just how my mind is wired. It's not that I'm a smart guy or a risk-taker. I was actually a terrible student," says Young, who majored in history at the University of Toronto. Because of his poor track record in school, Young assumed he would have more luck starting his own company instead of applying for jobs, he says. "So, in my case, starting a business was the low-risk activity to do in my career."

In fact, Young started a string of businesses after graduating from college in 1976. He first rented out typewriters from an office outside of Toronto that happened to be next-door to a factory farm raising fishing worms. Meanwhile, his college friends were beginning careers as accountants and lawyers at large firms. "My friends were not overly impressed with my career choices back then," he says.

He transitioned to leasing computers by launching Vernon Computer Rentals in 1984. After struggling financially during the 1989 recession, Young sold the company to Greyvest Capital for roughly $20 million, from which he got a cut of about $4 million as the CEO, he says. But, the deal called for Young to work at Greyvest and use his share of the proceeds to take a stake in the acquirer. Unfortunately, only months after the deal closed, Greyvest found itself in "serious financial distress" and the company's stock declined dramatically, leaving Young with a stake in the company that was practically worthless, he says.

Greyvest eventually laid Young off.

"Now, I'm unemployed with three kids, a big mortgage and a net worth of something below what it had been when I graduated from college 15 years earlier," Young says of that period in 1993. "But for that disaster, though, I wouldn't have stumbled into the open-source opportunity and founded Red Hat, and the rest is history."

Fortunately, Young's experience in the computer business allowed him to spot a hole in the software sales market for a product that let tech businesses modify and customize software to fit their needs. "The benefit that having the source code, and a license to modify the source code, gives you as an engineer, is it gives you control over the technology that you are using," Young says.

In the early 1990s, Young says, Red Hat was the only company offering open-source software, as larger competitors like Oracle, Microsoft, and even IBM, were reluctant to relinquish the valuable source code to clients. "I'm an old typewriter sales guy," Young says. "I like selling things my customers can't get anywhere else."

In 1993, Young started a business out of his home selling software on the open-source Linux and Unix operating systems. Young joined forces with North Carolina-based software engineer Marc Ewing (who gave the company the name Red Hat, a reference to a red baseball cap Ewing wore in college). Young merged his fledgling company with Ewing's own open-source Linux software distributor and moved to Durham, North Carolina (Red Hat is currently headquartered in Raleigh).

Young served as CEO, using his sales background to focus on the company's operations, while Ewing handled the software engineering.

Because of his lack of money, Young had to get creative when it came to funding this bootstrapped venture. So, he took steps that, in hindsight, might seem ill-advised: he and Ewing racked up credit card debt.

"The banks used to spam the world with credit card applications, and I would fill them out and send them in and they would send me another $5,000 credit card," Young tells CNBC Make It. "And, I would use the $5,000 to pay off the previous credit card I had signed up for. I got these credit cards up to $50,000, which in 1994 was a lot of money."

Young's credit card debt eventually reached about $50,000, spread across at least eight different cards. "I thought of it as creative finance," Young says. His wife thought he should "go to jail," he jokes. In fact, it was Young's wife, Nancy, who made the credit card ploy work, thanks to the fact that she had a better credit rating than Young.

Young now calls his wife "probably the single-most important contributor" to the initial success of Red Hat. "Without my wife Nancy's sterling credit rating, I wouldn't been able to raise the money that got us to profitability," he says.

Young and Ewing were able to fund the company with their mounting credit card debt through the fall of 1995, when the company released a new version of its open-source software that first started turning a profit, which allowed them to finally pay off the cards.

By 1998, Red Hat was generating sales of more than $5 million per year, and that number doubled to more than $10 million by the following year. Young remained CEO through Red Hat's 1999 IPO, which gave the company a multi-billion dollar valuation.

Young stepped down as CEO after the IPO, handing the reins to Matthew Szulik, who had helped take the company public as Red Hat's president. (Szulik led Red Hat until 2007, when former Delta Airlines COO Jim Whitehurst took over.)

Despite his success, Young has no problem expressing humility and a sense of humor about his career (his LinkedIn profile lists his title at Lulu.com as "Coffee Mug Washer"), and he is quick to give the credit for Red Hat's massive exit to his partners and successors, including Ewing, Szulik and current CEO Whitehurst.

"The $34 billion success has nothing to do with me. I will take some credit for spotting the initial opportunity. The actual execution of that opportunity, the credit goes to much smarter guys than me."

Young also left Red Hat's board of directors for good in 2005, explaining at the time that he was better suited to the life of a serial entrepreneur than a corporate director with a less hands-on role.

For that reason, Young founded Lulu.com in 2002 and he continues to serve as the company's CEO. The following year, he bought his hometown Canadian Football League team, the Hamilton Tiger-Cats. And, he's also spent his time investing in projects like drone technology company PrecisionHawk (where he served as CEO from 2015 to 2017) and his wife's craft supplies company, Needlepoint.com.

Young sold all of his shares in Red Hat after leaving the company, he says, so he cashed out at a time when the company was worth a fraction of what IBM is paying. Young, who still walked away from Red Hat with a net worth of several hundred million dollars, tells CNBC Make It that he does not regret selling his Red Hat shares years before the company's big sale to IBM. He used that money to do "a huge number of fun things," he says, from founding Lulu.com to supporting his local CFL team.

"Had I hung on to my Red Hat stake, I might have done better than I did by selling when I did," he says. "But I do not regret for five minutes my decision, because my last 15 year have [gone] very differently than if I had just been a manager of a big Red Hat investment."

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