Survivor Featured

10:01am EDT February 26, 2004
In February 2000, Pete Kight's online bill payment service CheckFree Corp. purchased its No. 1 competitor TransPoint, a joint venture of Microsoft and First Data, the world's largest processor of credit card payments.

That acquisition, combined with the craze that was the Internet bubble, shot Norcross-based CheckFree's NASDAQ-traded stock up to $114 a share. While many dot-com CEOs of that era would have thrown a million-dollar party to fete the feat, Kight - who started the company about a decade before anyone had even heard of the Internet -- was miserable.

"To me, it always seemed like that that was a number that I had to then go serve," Kight recalls. "The night that our stock hit $114, when I got in my car and I was driving home, I didn't feel excited -- I felt challenged because I'm driving home, thinking somebody bought CheckFree stock today for $114 a share, and I've got to go serve that person tomorrow with the expectation that they think the stock is going to go up from there."

The stock didn't rise.

It, like so many of the Internet stocks that CheckFree had the misfortune to be associated with, dropped throughout 2000 and 2001, dipping below $10 a share in the middle of 2002. Unlike many Internet companies, however, CheckFree was never near collapse. Kight admits that he dramatically increased spending and took his share of gambles during that heady time, but the company was never in danger.

"We spent a ton of money eating up a lot of things that we were doing because the Internet allowed us to do so," Kight says. "But we never lost sight of the fact that it was unreal."

The moment the bubble burst, he says, it took CheckFree less than six months to pare back its spending to pre-boom levels while not missing one payroll. At the close of its most recent fiscal year, CheckFree posted $551 million in sales, up 12 percent from the previous year, and earned $72.2 million in profits on a pro forma basis, up from $17.1 million from the previous year.

"Our growth strategy has always been, prove you can survive, and then progressively make bigger bets," Kight says. "But don't ever be in a position where those bets are going to take over."

Going public

Kight is glad the Internet bubble days are ancient tech history. He never liked being lumped in with the Pets.coms and Webvans of the world, not just because his company had been around for 15-plus years longer than most dot-coms, but because CheckFree was based on a proven business plan and wasn't reliant on millions of dollars of venture capital.

"The amount of money that was being poured into stupid ideas that were competing against us, (they)had no right to even exist, and yet we had to deal with it because they were muddying up the market," Kight says. "They were slowing down rational things that we were doing; they were confusing our customers."

It was in 1995, a few years before the peak of the Internet craze hit, when Kight decided he needed to take CheckFree public. One of its competitors - now out of business - had an unusual concept for electronic bill paying. Instead of waiting for PCs to connect, the founders thought, why not attach small computer screens to telephones and pay bills over the phone?

Believe it or not, investors bought into this concept and took the company public. Besides the fact that it was an absurd idea, the competitor was also poorly managed.

"They understood this clever idea of how to make the phone into a screen phone, but they didn't really know how to do bill payment," Kight says. "And yet, they were really causing a lot of problems in our market because they had gone public, sort of on a lot of bluff and dubious claims."

Yet the competitor was receiving generous media attention. And here was CheckFree, which had been in business since 1981 and was quietly forging partnerships with major banks, not to mention Internet forefathers CompuServe and Quantum Computers, later to become America Online.

"Everybody knew about them, and we discovered the difference between a private company that had invented this market and was doing good, solid things, versus a company that wasn't doing nearly as well, but was public," Kight says. "We were really concerned that they were going to create a big problem for us, and we needed to do a better job of selling our story."

Going public not only helped CheckFree gain more press, it brought much-needed attention from the banking community, which saw companies like CheckFree either as a fad or as a threat. But Kight knew that for CheckFree to achieve dynamic growth, it needed to be sold to consumers through their bank brand.

"For every one that signed up (with us), 10 were waiting for their bank to offer it because they felt safer," Kight says. "We needed to get bigger faster in order to sign up the banks, because the banks weren't going to deal with a company as small as ours."

It was a key acquisition in the Atlanta area that allowed CheckFree to get on the banks' radar screens. SSI, formerly Stockholders Systems Inc., provided the vast majority of electronic funds transfer software for banks. In fact, SSI's software was the reason CheckFree was even able to connect to the banks.

"Ultimately, we got to buy the company that enabled us to get founded in the first place," Kight says.

SSI also had a long history of being among the most bank-friendly and bank-supported software companies in the country.

"They were our No. 2 competitor because they had bought the only other bill payment company," Kight says. "So we both acquired the No. 2 competitor, and we immediately acquired a premier position as a bank-friendly organization, and we immediately signed up Nation's Bank."

With the acquisition of SSI, CheckFree moved from its Columbus, Ohio, headquarters to Atlanta.

"I hadn't intended to move down here," Kight says. "But when I came down here to head up the integration, over the course of six months, it became very clear that it was a lot easier to hire a higher level of business executive for the company."

Vision quest

Kight was managing Nautilus health clubs in Texas when the inspiration for CheckFree struck him.

Frustrated with having to renew members to yearlong contracts, Kight thought there must be a way they could pay off the yearly contracts monthly rather than in a lump sum, even though no one in the industry was doing it at the time.

"[I] kept looking for a better way to sell a membership, but obviously, you can't bill on the monthly basis because the health club is the only bill that gets paid after the dentist and cable," he says.

That's when Kight learned of the Automated Clearing House network. Established by the Federal Reserve in the early 1970s, the ACH network was created to combat the overwhelming growth of paper check transactions by allowing more electronic funds transfers. By 1981, though, the ACH network had not expanded widely in the private sector.

But when Kight heard about it, he knew it would be the future not only of the health club industry, but of all of bill payment.

Kight moved back to his hometown of Columbus, Ohio, to start working on the idea and pitched his business plan to then-Bank One president John McCoy.

"[He] kind of got this smile on his face and said, 'I don't think it's going to work, but I wouldn't miss the chance to see you try,'" Kight recalls. '"So as long as you apply by the rules, and follow what our guy says, I'll give you the shot and you can use the bank to try this.' The bank didn't give me any money or take any real risk, but they did give me the time of a guy who ran their electronic funds transfer system. And without that, I would've had a hard time getting started."

Working out of his grandmother's basement, Kight made a deal with a friend who owned apartment complexes. If he would buy a computer, Kight would sign up the friend's tenants to pay their rent electronically. The apartment owner agreed.

"I knew it wasn't going to happen overnight, and I'm sort of a Midwesterner - I'm as excitable about our vision as any other entrepreneur and as overly as optimistic as anybody else," Kight says. "But we always understood that we had to survive before we could do great things. We were always positioned to survive, never came close to missing a payroll, never funded the company with personal credit cards. We stayed in the basement until we could afford to rent a room. There are always ways you can figure out to get things done without spending money if you're willing to put in the sweat."

By CheckFree's industry projections, as many as 50 percent of households will be paying bills online in the next four years, while only about 10 percent do it now. Kight says CheckFree will be ready.

"Between now and then, that is a lot of growth that we have to understand in order to be able to continue to lead it and to be able to continue to drive it in the direction we want," Kight says. "It's obviously a nice challenge, but nonetheless, it's a big challenge, and it's humbling."

How to reach: CheckFree Corp., (678) 375-3000 or www.checkfree.com