An Entrepreneur’s Perspective – A Serial Entrepreneur Shares His Secrets

March 31st, 2023


It has certainly been an eventful time since I last wrote you.

Recap of Silicon Valley Bank Short Call

In our last newsletter, our top highlighted Tweet was my ten-part thread from January 18, 2023 on the “big problems” I saw with Silicon Valley Bank’s “held-to-maturity” securities portfolio.  I specifically highlighted that the bank had nearly -$16 billion of mark-to-market losses on this portfolio (compared to just $11.5 billion of tangible equity), in large part due to the $88 billion worth of 10+ year mortgages with an average yield of around 1.63% that management had bought primarily at the top of the bond market in 2021.

With SIVB’s carrying costs increasing and deposit outflows accelerating due to the Fed’s interest rate hikes, I noted that the risk for SIVB was that “deposit outflows accelerate at such a pace that it is forced to either raise equity capital and/or sell down its HTM securities portfolio, thus realizing substantial losses.”  I concluded by saying, “You can bet that $SIVB is praying for a Fed pivot!”

As it turned out, while SIVB’s management was out trying to “whistle past the graveyard”, Moody’s saw the same risks that I did and warned the bank that it would be downgrading its credit unless it raised equity capital.  This led SIVB to try to raise capital, but the bank’s  newly sober financial outlook brought SIVB’s problems into focus for both customers and investors, sparking a remarkable bank run that put the bank out of business in just a few short days.  It was a breathtaking collapse, the ripple effects of which the market and economy are going to be dealing with for a long time to come.

Later in the newsletter, I recap some of the recent media coverage (including a Power Lunch CNBC interview) of my SIVB work, as well as a recent podcast and extended CNBC Pro interview.

Michael Merhej Interview 

Turning to the main event of this newsletter, I’m super excited to share this interview with Michael Merhej, who is not only one of the best entrepreneurs I know, but also one of my best friends.

I first met Michael in early 2000 while visiting SXSW in Austin, Texas, where Michael and his emerging music sharing community, Audiogalaxy, were based.  I had just recently sold and left Raging Bull (a leading financial web site & community at that time), and Michael and I immediately discovered that we shared a common entrepreneurial passion.  Luckily, we hit it off and we have been collaborating, investing together, and sharing ideas ever since.  Michael was also literally my first outside investor when I decided to start Raging Capital – thank you, Michael!

Michael’s track record as an entrepreneur is incredible.  Audiogalaxy grew to be a top 10 web site in the early 2000s, with Michael and his team solving many difficult compute and scalability challenges well before the era of outsourced cloud computing.  Later, Michael started FolderShare, which leveraged original peer-to-peer technology from Audiogalaxy to develop a software offering that, after Microsoft acquired FolderShare, became the basis for Windows OneDrive.  Michael’s third company, also branded Audiogalaxy, was a music streaming service that DropBox ultimately acquired.  What an impressive list of acquirers!

I know you will enjoy this interview and benefit from Michael’s wisdom.  For more on Michael’s background, you might enjoy this podcast on Audiogalaxy’s early history:

Have a great weekend!

Best Regards, 

William C. Martin

Topics in this Issue of An Entrepreneur’s Perspective:


Interview with Michael Merhej: A Serial Entrepreneur Shares His Secrets

Welcome, Michael! To start, can you please tell us a bit about how you got your start with Audiogalaxy?  What sparked your idea for the business and how did you put it into motion?

The genesis of Audiogalaxy was a natural evolution of what I had created several years prior – an FTP search engine that found people who hosted music on their computers.  This was run out of the Physics department at a University as a simple search service.  The popularity of the search engine grew and I eventually outgrew the University hosting and moved it to a commercial server where I could host ads and make money from the page impressions.  The Audiogalaxy that people knew circa 1999-2002 was the realization that people were willing to self-host music files, essentially combining the upload and download process in the same client and greatly expanding the number of file servers.  

Online music sharing was one of the most controversial areas of the Internet in the early 2000s, made famous by Napster.  What was your approach to online music and how was it different than Napster or Kazaa, etc?

Our ethos was to help people discover new music they may like; similar to how radio exposes people to new music.  We thought of Audiogalaxy as an amazing promotional tool that helped younger bands gain exposure to potential fans on Audiogalaxy by promoting their music and writing critical reviews.   At the time, radio was a push-to-many selection tool where the only user input was the genre selection which limits your ability to fine-tune music that you will truly enjoy.  Since Audiogalaxy knew what music you had on your computer, and what you listened to, we were able to recommend artists and songs you have never heard before, but that you had a good chance of enjoying. 

Today, this is done via machine learning techniques, but we accomplished the same result via large scale crowd-sourcing techniques that still required a large amount of compute power.   Napster and Kazaa’s networks were broken into many different server silo clusters which allowed people to find popular tracks, but rare tracks were hard to find since you could not search across all of Napster’s users – just your siloed server.  Despite our large scale and having over 1 million people online and connected at any one time, we never siloed our system due to our unique design.  We even had the ability to remember if only a few people had a very rare track and they were not currently online. We then presented the user with the ability to request it automatically when it became available.  People naturally gravitated towards Audiogalaxy with eclectic collections of music with a large quantity of multi-lingual music, homemade tracks, and dance music, which was popular overseas but just starting to gain a following in the US.  I believe we helped to usher in the modern DJ/Dance revolution from Europe to the U.S. with Audiogalaxy. 

At its peak, Audiogalaxy was one of the top 10 largest web sites on the Internet. How did you manage to scale your technology in the era before cloud computing?  

Very simply, we created our own cloud.  We had over 500 servers operating in clusters.  We hand built our own machines since we were on a budget.  I would have loved it if there was a cloud service, but I’m not sure I could have afforded it!  Most large businesses on the Internet at the time purchased several large machines from Sun or other vendors, but we were scrappy and built our own high-end boxes running Linux.  Our core backend code was “C”, where we were able to control memory management and run very efficient code whereas others at the time were running java in its many forms.  We used techniques like RedHat’s Direct Routing on Linux boxes to load balance incoming TCP traffic vs. paying for off-the-shelf solutions that would have cost over $50,000.  We learned several things during this time too – don’t buy consumer grade motherboards vs. server class motherboards.  We generally ran machines hot and near 100% CPU utilization and the consumer grade motherboards would sometimes literally start smoking from cheap capacitors used on the boards.  We sought out the best components because we ran everything to the max.   The list goes on!

What happened to Audiogalaxy?  Do you wish you had tackled the online music opportunity differently?

Audiogalaxy was ultimately shutdown because the music industry didn’t know how to work with us.  And we didn’t know how to work with them.  Napster set a bad adversarial relationship precedent with the recording industry and we were viewed as next in line.  We tried to figure out a way to work with them since we thought, and I believe they did too (several large labels paid us money to promote their music), that Audiogalaxy was a great way to expose people to specific types of music.  At the time, we believed the ultimate vision would be some sort of all-you-can-eat streaming service where any type of music you desire can be delivered to you.  And if you don’t know what you want to hear, the service will automatically know what you want.  There are now some great providers like Spotify today.

From there, you launched FolderShare, utilizing the peer-to-peer knowledge that you learned at Audiogalaxy. Tell us about that idea and how you built that business?

I always had the problem of using multiple computers, yet my data is a single set.  If I want to work on an excel file at work and take that same file home to edit, the best practice of the day was to either email the file to yourself or copy it to a USB stick.  This baffled me because there should be no reason why I can’t work on a document at work and automatically resume my work on a different PC at home.  When I’m done, I just hit save, and when I go back to my work PC, my latest changes are there and I can resume my work.  After Audiogalaxy, I figured we could build this.  We started building it and even tried to raise funding from some local VCs.  Everybody who I talked to thought I was crazy and asked why I didn’t just email the file to myself.  I gave up on everybody because nobody got it.  I funded the business and we stayed very lean and scrappy for a few years until we started to get paid subscribers and reached breakeven.  

Microsoft ultimately acquired FolderShare and you joined Microsoft for a period of time.  Tell us about the acquisition and how Microsoft utilized your tech. What was it like working at Microsoft and what did you learn?

Microsoft cold called us because apparently many people at Microsoft understood the power of the idea and thought we had a fantastic implementation of the idea.  FolderShare was pitched to us as becoming a way to share files with others and yourself in Microsoft Windows Live Messenger.  I wasn’t completely sold on it, but figured that once we got inside Microsoft, we could figure out the best way to bring FolderShare to Microsoft’s massive customer base.  Initially, Microsoft did nothing with FolderShare as the original Linux servers were kept running across the country without nobody but myself maintaining the current customer base.

I’ve always been focused on delivering products and customer solutions, but I learned that being successful in a large enterprise is much more than a sole-minded obsession with customer satisfaction. Microsoft is filled with amazingly brilliant talent, but due to its size and internal competition at the time, sometimes the ideal customer solution didn’t always get delivered.  Delivering customer success is a team effort and I didn’t always know where the chess pieces were.  I learned a lot and I really enjoyed my time and I met some of the most brilliant people at Microsoft.  After I left, I heard from some several developers that FolderShare became the genesis for OneDrive (previously named SkyDrive).  Some of the original FolderShare code became part of OneDrive.  

After leaving Microsoft, you launched another project in the music space – again using the name Audiogalaxy – that was eventually acquired by DropBox.  Please share some details of that idea with us.

Audiogalaxy version 2, let’s call it, was allowing you to play your own digital music anywhere.  You could easily stream music to your phone at the time from a service, but streaming your own music to your phone was very difficult.  We made it work very well for both Android and IOS devices and gathered a niche following for folks who wanted to stream their own music collection.   We also did some creative acoustical fingerprinting that allowed us to automatically tag and organize your collection even if the music files were not named correctly or spread across many volumes. 

You continue to be an active entrepreneur and investor, particularly in the audio space.  What are you working on today?

Today, I’m fascinated by how popular hybrid meetings are, yet the experience is still pretty poor.  There isn’t a good reason for the experience to be poor.  If I’m in a conference room or sitting around in a lounge with a couple of colleagues, and we have another colleague who is remote, what do I do?  If we all open our phones or laptops and connect to the remote colleague via Zoom/Teams the scenario blows up due to audio synchronization issues and various types of audio feedback.   I either need specialized hardware to solve this, or I turn off all laptops/phones except for the one which we all have to shout into.  I’m able to solve this – everybody already brings the needed hardware to every meeting since every phone and laptop contain a mic, a speaker, and a camera.  Software as a service!  You don’t need to buy tons of specialized equipment to have a great experience.   I don’t know why Zoom and Teams haven’t built this into their product offerings, but we can solve this inside Zoom/Teams as well as any other conference provider.

Are there any other opportunities that you are excited about?  

Yes, I, like many others, am excited about the future of AI, which has been a highly anticipated area for several decades. However, it has lacked a breakthrough application that people could easily comprehend and directly interact with.  OpenAI has done an incredible job by introducing ChatGPT, which has given people a glimpse of what’s possible. The most significant aspect of ChatGPT is that it sparks people’s imaginations.  People will learn how to use ChatGPT and AI in ways that even the creators couldn’t have predicted. I’m sure OpenAI is learning a lot from how people are utilizing ChatGPT.  It’s  uncharted territory, and it’s exhilarating to witness.

Is there another startup in the works for you here?

Potentially – imagine a “chief of staff” that attends all of your business meetings.  Your chief of staff doesn’t speak unless spoken to, so he’s never a distraction, only a resource.  Have a question about the meeting last week?  Ask your chief of staff, they will know.  Want to know if you forgot about any customer leads that were previously mentioned, ask your chief of staff.  Didn’t get a chance to attend the meeting with your colleagues?  Ask your chief of staff what you missed.  You get the idea!

Given all of your amazing experience, do you have any advice for rising entrepreneurs on how to build and fund their businesses?  

Imagine what the future will look like.  Then ask yourself, why isn’t the present the future you imagine?  Finally ask yourself, can I gather a team to build that future now?  If the answer is yes, what are you waiting for?  The future will be built either by you or somebody else, so the choice is yours!  Ultimately, you must love what you do to ride the extreme highs and lows of starting and running a business.  Good luck!

Thank you, Michael, and good luck!


Silicon Valley Bank “Short Thesis” Media Coverage

Bill Martin on CNBC Power Lunch (with Jim Grant in studio to follow)


Bill Martin on CNBC Pro (longer length 45 minute interview, behind paywall)


New York Magazine Intelligencer: “There Were a Few Savvy Investors Who Saw Silicon Valley Bank’s Collapse Coming”


Bloomberg: “SVB’s Balance-Sheet Time Bomb Was ‘Sitting in Plain Sight,’ Short Seller Says


Favorite Media & Podcasts

Invest Like the Best: Sequoia Capital’s Doug Leone – Lessons from a Titan

A fantastic interview, Patrick O’Shaugnessy interviews Doug Leone, who helped build Sequoia Capital into a venture capital powerhouse over the last 25 years.  Leone shares many great stories, including how Sequoia deftly managed the Dot Com Bust.  Most interestingly, he shares many of his techniques on how to read people and identify “killer” entrepreneurs.


StrictlyVC Conversation with OpenAI’s Sam Altman

This is a fascinating recent interview with Sam Altman, which digs into the ongoing development of OpenAI’s ChatGPT technology, what the development roadmap for OpenAI looks like, and AI’s potential impact on business and society.  Sam also shares his thoughts on the development of future energy technologies and noting that, in time, sees a “massive drop in the cost of intelligence and energy.” 

Also, see Part I of the interview with Sam Altman:

As well as this interview of Sam Altman by Reid Hoffman:


Boaz Weinstein on Credit Investments

Mr. Weinstein is a legendary credit investor, most famous for being on the other side of the “London Whale” trade against J.P. Morgan.  In this podcast, he shares his background, approach to the markets, as well as thoughts on the current environment and opportunity set.  Boaz is also active with insightful posts on Twitter under the handle: @boazweinstein


“The Creative Act” by Rick Rubin, Podcast Interview & Book 

I thoroughly enjoyed reading legendary music producer Rick Rubin’s new book, “The Creative Act.”  In the book, which is super easy to read, he zeroes in on the act of being an artist and creator — how to source creative energy and ideas, how to develop self awareness and instincts, how to leverage the beauty of nature and the innocence of childhood, and so much more. Rubin said it took him 7-8 years to write this book.  I found the book inspiring and connected it to many aspects of investing. That is, like George Soros has talked about many times, how important it is to feel and trust what your body is “telling” you.  I highly recommend reading this book and/or listening to this podcast.


The Mike Wallace Interview of Ayn Rand (from 1959)

A wonderful throwback interview and debate with Ayn Rand, author of my favorite book, “Atlas Shrugged.”  The two parties cover a range of topics, including taxes, politics, entrepreneurship and the welfare state.  Rand is simply brilliant and amazingly articulate.


A Selection of Recent Tweets from @RagingVentures:


Fortuna Audaces Iuvat – Fortune Favors the Bold!