David Morken’s faith in fiber grows Raleigh-based Bandwidth

 In July 2019

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By Dan Barkin

Photos By Christer Berg

In the lore of American business, there are the humble places where companies are born. Garages, such as the one at Steve Jobs’ childhood home, or the one where Bill Hewlett and David Packard invented Silicon Valley. Some were college dorm rooms, where Mark Zuckerberg and Michael Dell launched their fortunes. To this tradition, add a walk-in closet in a Park City, Utah, duplex where a newly discharged Marine named David Morken created Bandwidth.com to bring faster internet connections to businesses in 1999. The explosion of fiber was making broadband more available, but small and medium-sized businesses weren’t the focus of big telecoms. Morken built a website for companies trying to figure out how to ditch their dial-up, sending them to carriers.

Bandwidth and David MorkenChrister Berg

Bandwidth CEO David Morken, third from right, says the company’s success reflects a culture focused on three Ps —purpose, people and principles. Vendor manager Diane Johnston, second from right, joined the company in 2011.

Today, Bandwidth (the “.com” was dropped in 2017) has more than 700 employees — two times as many as just two years ago — and an early June stock-market value of more than $1.7 billion. With spacious offices at N.C. State University’s high-tech Centennial Campus, Bandwidth little resembles the broadband broker of its infancy. It is one of the largest players in the fast-growing telecom sector known by the arcane acronym CPaaS — Communications Platform as a Service.

If you have clicked on a phone number in the Rover app to interview a dog walker, you have used a CPaaS. If you have gotten a message on your phone about a job opening from ZipRecruiter, you’ve used the technology. Two-factor authentication, that little code to verify that you are you, is possible because of companies like Bandwidth.

Businesses have jumped all over the technology that lets them communicate with customers instantly.

Along the way, Bandwidth also created mobile-phone company Republic Wireless, which emphasizes ultra-low monthly rates and a heavy reliance on Wi-Fi.

Unlike most CPaaS companies. Bandwidth operates its own nationwide internet-based voice and data network, built a decade ago when its business was providing more responsive and cheaper phone service for companies than the big carriers. It survived the dot-com and telecom collapses of the late ’90s and early 2000s, and for most of its existence, had little access to outside capital.

But it survived because of Morken’s faith — in God and himself — and his vision, tenacity and inspirational leadership, friends and colleagues say. And a few breaks that some might call luck, others might call answered prayers.

“You want to understand David Morken?” asks longtime friend and former Bandwidth President John Murdock. “He’s a preacher who happens to be a businessman.”

Religious roots

Chief Marketing Officer Noreen Allen has worked for Triangle tech companies since the 1990s and joined Bandwidth in 2012. When CEO Morken tells staffers to turn off their electronic devices during vacations, he actually means it, she says.

Morken was born in Los Angeles 50 years ago into a family of faith. His missionary grandparents barely made it out of the Indonesian island of Sumatra after Pearl Harbor. His paternal grandfather, the Rev. David Enoch Morken, accompanied a young Billy Graham during a mission to soldiers in Korea in 1952. Morken’s father, Hubert, was a professor of religion and politics at Oral Roberts University in Tulsa in the 1980s, where David went to college.

David had just gained admission to Notre Dame Law School when Operation Desert Storm began in 1991. TV images from the war made an impression on Morken, who joined the Marines and attended Officer Candidate School. “I graduated [from Oral Roberts] in May,” Morken recalls, “ went to Quantico for 10 weeks, got out in August and a week later I’m sitting in the front row of Constitutional Law with a shaved head at Notre Dame, a second lieutenant.”

As he was finishing law school, Morken encountered the technology that would shape his career and make his fortune. The internet, developed for government and academic researchers, burst into widespread public use with web browsers. Next-generation fiber-optic networks were coming into view, with almost limitless transmission capacity compared with copper wires and dial-up modems.

The light went on for Morken when he read an article by George Gilder, a conservative futurist who predicted that this fiber-driven exponential growth in bandwidth would transform the economy. Murdock, a Marine veteran of Desert Storm, was a Notre Dame classmate of Morken’s and remembers that moment.

“David had started with the Wild West of reserving domain names,” Murdock says. “David’s like, ‘I reserved all of these domain names, one of which is bandwidth.’ I’m like, ‘Bandwidth?’ And he says, ‘You know, there’s this World Wide Web, and there’s this guy Gilder … and you gotta read this stuff.’”

While his active duty was delayed, Morken started two online ventures, a tax-filing service and a company marketing mutual funds. Just as those were gaining traction, Morken got his call-up. He sold his fledgling businesses and spent the next four-and-a-half years as a prosecutor. In the summer of 1999, with three children, a fourth on the way and his time in the Marines coming to an end, Morken was turning 30 and needed a next move. His assets consisted of three months paid leave, some domain names and an idea. So he built a website, bandwidth.com.

A million-dollar offer

The business model was simple: Companies were looking for faster internet connections, and when they plugged the word “bandwidth” into search engines, Morken’s website came up. Big telecom companies would pay Morken a cut of deals he sent them.

At the time, Morken, his wife and children shared one side of a rented duplex with his parents. “I was making phone calls from a clothes closet so you [couldn’t] hear my 1-year-old screaming in the next room.”

Morken knew the modest early success wouldn’t last as bandwidth became a commodity, but in the beginning it paid the bills. After one month, he caught a break. Forbes decided to write a story about him. “The day before the article comes out, I’m under my desk praying. ‘Lord, I need a business partner. I can’t carry this pack alone.’”

After the article appeared in September 1999, the closet phone started ringing. Gary Winnick, billionaire founder of network giant Global Crossing Holdings Ltd., offered Morken $1 million for the domain name.

Another call came from North Carolina — a guy named Henry Kaestner was also interested in the domain. Kaestner had a company that traded electricity on the wholesale markets through the internet. That phone call is why Bandwidth is in Raleigh today.

The Kaestner connection

Kaestner was working at a brokerage in New York City, trading energy derivatives, but wanted to set up his own shop. He couldn’t afford to pay New York salaries, so he needed to relocate. At the same time, his wife was interested in pursuing her doctorate.

So they pulled out a map. “My only prerequisite was that there needed to be a nonstop flight to New York and one to Houston,” says Kaestner, referring to the centers of energy finance. Kimberly Kaestner wanted to get her Ph.D. at UNC Chapel Hill, and Raleigh-Durham International had the flights.

After Kaestner learned the domain was priced way out of his range, the two men talked about another idea, big bandwidth prospects Morken might be able to send Kaestner. They also shared a mutual interest in biking. The two entrepreneurs hit it off.

Morken flew to the Triangle and they went mountain biking in Chapel Hill. Several months later, Kaestner traveled to Utah. Mountain biking in Park City “is infinitely more fun than mountain biking in Chapel Hill,” Kaestner says.

A few years later, broadband commodity trading had stalled out, so the two decided to join forces. Morken persuaded Kaestner that, despite Utah’s pronounced edge in skiing and mountain-bike trails, proximity to the Triangle’s universities and Research Triangle Park made it the place to grow a company. “I won the argument,” Morken says.

The evolution of Bandwidth

Bandwidth invested $21 million for research and development in 2018. Morken is with Murali Medikonda, left, vice president of network operations and engineering, and Ed Hintz, vice president of software development.

Recall the million-dollar offer from Winnick? “I sat with Chrishelle, my bride, and said, ‘I think God wants us to build this company.’ And she said, ‘I agree, let’s do it.’”

But what kind of company? The 1.0 version of Bandwidth — matching broadband customers with big telephone companies — wasn’t enough.

“At first I was just generating leads,” Morken says. “I would never know if anything closed. I had to depend on a sales rep at AT&T to confirm: ‘Did you close?’

“So that was a key moment, to go from just generating a lead … to being a sales organization, then a sales and support organization, and billing, and ultimately I built our own network.”

In 2003, the company began buying bandwidth in bulk from large carriers and reselling it to corporate customers. The significance was that Bandwidth had the relationships with customers, or as Kaestner put it, “Now we had paper on the deal.

“So we loved that model. We went from an average of probably 12% [margins] to around 18-20%. A significant step up.”

The rapidly evolving telecom environment had other ideas. Competitors began selling voice in addition to data over the same lines, and Bandwidth needed to enter the voice business. It was going to have to become a competitive local exchange carrier, known as a CLEC and more simply called a phone company. Bandwidth was late to the game, which wasn’t a bad thing.

The telecom landscape was littered with the wreckage of companies — like Winnick’s Global Crossing, bankrupt by 2002 — that had spent billions to build out fiber-optic networks, chasing the same customers. The crash left behind underused fiber and telecom data centers where Bandwidth could plug in and create a national internet-based network.

“That became the focus of our growth,” Morken says. “We realized we could build a network, a voice network, and this was the important moment in 2007, 2008 … kind of in the middle of the financial crisis. Out of those ashes we built the last really CLEC ever built. Out of the ashes of the largest value-destruction ever. The CLEC wipeout. The dot-com wipeout,” he says.

“We had the last-mover advantage,” Morken recalls. “The forest fire burns, and this little green shoot pops up.”

Getting Google

By now, Bandwidth had grown from a small office outside RTP with 10 employees and Morken and Kaestner sitting across a desk working the phones all day long to a building in Cary on Weston Parkway.

In the earliest days, Kaestner led sales, and Morken handled product delivery. Kaestner was a major reason Bandwidth survived its first decade, Morken says. “He is going to change the status quo in an early-stage company where everything is uncertain, and you must knock down every obstacle.” Kaestner would step down as CEO in 2009 to launch a private-equity fund focusing on faith-driven entrepreneurs.

Morken’s Notre Dame classmate, Murdock, joined Bandwidth, initially as general counsel to oversee dealings with carriers and state and federal regulators that were required to set up a national footprint.

Bandwidth’s timing was good because major internet giants such as Google and Microsoft needed help integrating software and telecom.

As Murdock put it, “Silicon Valley [was] getting into voice.”

Meaning that the big tech companies were going to be driving the next wave of growth in telecom, says Chris Chuang, who joined Bandwidth in 2008 and rose to chief operating officer. Google became the Bandwidth network’s first customer when it set up its Google Voice phone service in 2009, marking a significant coup.

“We were very fortunate early on to have some great customers, some big, recognizable customers,” says Brian Bailey, a Charlotte private-equity banker and Bandwidth director. “And for people to say, ‘Gosh, if they’re working with Google, they’ve got to be good.’”

Since turning on its phone network, Bandwidth has supplied businesses with 60 million phone numbers, 10% of the numbers in North America. Many of the numbers are used by traditional office phones. But many are at the heart of CPaaS.

Beyond a phone company

When Bandwidth built out its network a decade ago, it was unknowingly developing a communications platform that would transform it from a phone company into a software business. Companies desired to communicate instantly with customers through voice, text messages or other applications.

Rover wanted pet owners to easily — but cautiously — contact a prospective dog sitter by a voice call or text message.

“You might look at someone’s references,” says Adam Covati, Bandwidth’s head of research and development. “You might decide you want to call them. And you’re not sure you want to do business with this person. So what happens is, you’ll call an intermediary number, and the person who receives the call will receive the call from that intermediary number.

“You guys only know that number. You don’t know each other. And you have that conversation. Now, you may choose not to work with that person and you don’t want them harassing you.” So the phone number goes away.

But it was more complicated than just quickly supplying an abundant inventory of phone numbers for clients to embed in applications. The trick was also developing easy-to-use libraries of code called application programming interfaces, which sat in front of Bandwidth’s servers so the clients’ applications — click here to place a call, click there to send a text message — could talk to the servers and get to work.

Google, Microsoft and others “needed both the network and a software-friendly way to interface with the network,” says Chuang, who is now CEO of spinoff Republic Wireless. “We had to expose the network to them in ways that were easy for web developers to use.”

There wasn’t a high-level meeting to launch a new business model. “We were just solving problems for customers and we were writing code,” Murdock says. “We backed into CPaaS.”

Going public

Bandwidth IPOKelsey Ayres / Nasdaq Inc.

Bandwidth made an initial public offering in November 2017 priced at $20. The shares fetched about $70 in early June. The company sought capital to take advantage of the current “golden age of communications,” CEO David Morken told investors.

While it had raised $4.75 million in “friends and family” capital in 2005, Bandwidth didn’t secure its first major round of outside money until 2011. Charlotte-based Carmichael Partners, run by Bailey and former Federal Communications Commission Chairman Kevin Martin, put up $22 million to help Bandwidth buy a Colorado-based 911 provider. Bailey is a former managing partner at Carousel Capital Partners LLC in Charlotte, while Martin is now Facebook’s vice president for U.S. public policy.

“We believed that over time … software would disrupt the industry,” Bailey says. The big carriers weren’t going away but were “going to get nibbled at consistently for the next 10 years, 20 years, 50 years,” he says.

Bandwidth was doing its share of the nibbling. Revenue of $2.5 million in 2003 expanded to more than $204 million by 2018. It’s profitable growth, unlike some other players in the CPaaS space. Shares of rival San Francisco-based Twilio have risen nearly 10 times since a 2016 initial public offering and the company is now valued at about 10 times Bandwidth’s market cap, but it has never posted an annual profit.

Bandwidth stock chart

North Carolina entrepreneurs have never had access to the magnitude of venture capital showered on Silicon Valley area startups, so positive cash flow is more hard-wired into companies here. “The small amount of capital that Bandwidth has raised versus a lot of other companies in similar type spaces is pretty striking,” Bailey says.

But the potential of the CPaaS market, perhaps $10 billion globally by 2025, according to IDC analyst Courtney Munroe, holds out lucrative opportunities if Bandwidth can scale up, especially overseas.

“I realized that we could go faster than our cash flow was providing if we raised capital,” Morken says. So Bandwidth went public at the end of 2017, netting about $74 million. A follow-on stock offering netted $147 million this year. The results of expanded sales and marketing: Active CPaaS customers grew by nearly a third, year over year, in the first quarter of 2019.

The growth has been noticed by investors. In early June, Bandwidth — which went public at $20 a share — was trading in the $70s.

Today, Morken’s nearly 12% stake is worth about $200 million. His ownership of Class B stock gives him around 33% control of the voting shares and his long-time friend, Kaestner, controls another 25%. So even after going public, Morken is in control.

Nearly two decades ago, after the Forbes article ran, Morken got a call from Sequoia Capital, famous for its early investments in Apple, Google and Oracle. The company wanted him to come out for a meeting. When he visited the Menlo Park-based investment group, executives showed him a term sheet. They wanted him to merge his company into one of their companies. “And I’d have to give up control,” Morken says. “So I said no.”

Morken wasn’t flying out until the next day, but he went to the airport anyway and drove his rental car into a parking deck. He put the seat back so folks walking by the car couldn’t see him, and he went to sleep. That way, he would be out only $8 for the parking space and not the price of a hotel room, which he couldn’t afford at the time, having walked away once again from a deal.

And that’s why Bandwidth is still Morken’s business, just like it was back in Utah when all he had was a phone, a closet and prayer.

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