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The Believer: Henry Kaestner on Profit and Principles

How Henry Kaestner Found Success Through Principled Entrepreneurship

“Do I have the right balance?” Henry Kaestner asked. “To tell you the truth, I don't know that I've ever had it.”

It was a Tuesday morning in late July. Kaestner, managing principal of Sovereign’s Capital and father of three boys, was sitting on the terrace of his rental house in Saratoga, a Silicon Valley hideaway just south of Palo Alto, California.

It was early out, breezeless, not yet bright. The famous golden hills were more brown, ashen even, than gold. Around the swimming pool, dragonflies flitted from ornamental orange tree to ornamental orange tree, there and then not there and then right there again.

Kaestner, for his part, was already dialed in, cranking. Protein shake and morning devotional behind him—Kaestner, a Christian, reads four chapters of the Bible each morning—he had commenced “triage,” his term for sifting through email, calendars, and spreadsheets to prioritize the day's most pressing matters.

In the web browser on his MacBook Pro, nineteen tabs were open. He had board meetings to prep for, decks to proof, funds to transfer, speeches to draft, flights to book, calls to make, and a couple hundred emails to clear out of his inbox.

Even the logo stickers on his laptop presented a visual catalog of vying concerns. CloudFactory and Bridestory, two Asia-based web companies Kaestner backs, were represented, along with a sticker for Boosted, the skateboard company whose electric models Kaestner calls his “favorite toy.”

Skateboarding, truth be told, was the last thing I expected Kaestner to be into. I had traveled to Northern California to understand the distinguishing characteristics of his principled brand of entrepreneurship. As the co-founder of Bandwidth.com, a Durham, North Carolina-based company whose VoIP technology almost single-handedly transformed American telecommunications, Kaestner, in my mind, was synonymous with classiness. In the pictures and videos I'd seen, he appeared debonair, coiffed, a touch WASPy. He is tall and rectilinear and has swept-over, prep school blond hair.

Even now, dressed down in khaki shorts and a blue polo, his bare feet bouncing on the brick patio, the 46-year-old looked more yachtsman than skate punk.

And yet skateboarding, strangely enough, did indeed seem like an analog of Kaestner's routine: a synthesis of energy, balance, and occasional outburst.

In fact, much of his life has been about striving for balance—between work and family, business and faith, aggressive entrepreneurship and deep-rooted principles. Kaestner’s principled balancing act has been tested along the way, but of the many traits that set him apart, from his breezy intellect to his disarming personal charisma, he is quick to credit this particular ability for his entrepreneurial success.

On this morning, the competing priorities were already accumulating. Kaestner, who retired from Bandwidth.com in 2009, was in the final week of raising a new round of funding for Sovereign’s Capital, a values-based private equity firm that invests in IT, health care, and service-related businesses in the U.S. and Asia. He had rallied $36 million, three times the amount he'd raised for Sovereign's initial fund. He had a few days left to raise a couple million more.

But it was also summer, the boys were out of school, and so Kaestner needed to get Graham, his youngest, to lacrosse camp in Atherton, and he needed to have him there—as his wife, Kimberley, stepped onto the patio to remind him—ten minutes ago. Balance, energy, the occasional outburst.

“Right,” Kaestner said, standing and clapping shut his computer, “And just like that, we’re off.”

ENTREPRENEURS THE world over wrestle with balance. For Kaestner, the juggle is something of a professional litmus test. At Bandwidth.com, Kaestner worked to make family life, as well as faith and fitness, an integral part of the corporate M.O.

His priorities weren’t always so focused in life or business. Kaestner began his career in the fast-paced world of Wall Street, where money motivated and priorities were set more by profit than principles.

Kaestner's sister, Betsey, told me that one of her first memories of her brother was hearing him tell their father that he had a cool job but wasn't making nearly enough money. He started pursuing his ambitions early.

While attending the University of Delaware, Kaestner started making his own money by way of two companies: College Design Group and Campus Enterprises. In his freshman year, he bought stacks of T-shirts, hired sorority girls to tie-dye them, and started selling the shirts out of his trunk. It cost $5 to make them. He sold them for $10. By the time he graduated, he had sales teams on fifty different campuses.

Only when officials at Virginia Tech brought copyright charges against him did he begin to realize the hazards of unchecked growth. "You can plead naïveté when you're 20," Kaestner's dad told him, "but you can't when you're 21. You need to get a job."

At Arthur Andersen and then Merrill Lynch, Kaestner soon learned that a job wasn't the only thing he needed. He made money but wasn't happy. "First it was, 'If I only have a house I'll be happy,'” he says now. “Then it was, 'If I only have a beach house,' and on it went."

It wasn't until Kaestner met Kimberley, moved to North Carolina to set up his own brokerage firm, and started regularly attending a local Presbyterian church that the pieces began to fall into place for him.

"If I'm completely honest," Kaestner told a group of business leaders at the Silicon Valley Prayer Breakfast in April, "it didn't end with the beach house, but I'm coming to understand with increasing degrees that when I'm freed to work out of gratitude for the gift given to me, I find that that hunger I've had, that hole, is filled."

With Bandwidth.com, Kaestner wanted to fashion an environment where a person of his convictions could flourish in the marketplace without feeling compromised; to prove that serious entrepreneurship, personal health, and deep faith and principles weren't incompatible with running a successful business.

Bandwidth.com had gone a long way toward validating that hypothesis, though success was far from given. The company started slowly, posting no revenue in its first two years. When a member of its sales team finally landed Bandwidth.com's first major contract, the excitement was quickly curtailed by the revelation that the client was a front for a major purveyor of online pornography, an industry that, along with online scammers, Kaestner and his partner David Morken had vowed not to serve.

Kaestner had a choice to make—support the financial interests of his struggling startup or stand by his set principles. He looked to the long game. In a move that made little sense financially but all the difference for office morale, Kaestner killed the deal but still paid the salesman, who had followed company protocol to the letter, the full commission.

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His instincts and commitment paid off. Other contracts followed, and from 2003 to 2007, Bandwidth.com was the fourth-fastest-growing privately owned company in America. Google farmed out its voice operations to the company, which launched a mobility brand called Republic Wireless. This year Bandwidth.com is on target for revenue north of $250 million, and it’s slated to go public in the second quarter of 2017.

Kaestner is as proud of the corporate culture he and Morken helped build at Bandwidth.com as he is of the company’s financial success. He emphasizes the company’s generous paid leave program, and a culture where two-thirds of its nearly 500 employees work out every day at lunch. Importantly, it is also a culture that supports dozens of service projects and Bible studies around its Durham campus. Employees raise money for Big Brothers Big Sisters, do landscaping for Raleigh Parks and Recreation, and supply meals to the city’s poor through Meals on Wheels. All told, Bandwidth employees logged more than 1,300 volunteer hours in 2015. Kaestner credits all these programs with helping bolster Bandwidth.com’s impressively high employee retention rate.

With Sovereign's, Kaestner hopes to turn the Bandwidth.com model into a movement and prove that principled entrepreneurship can scale. With the fund's first round of capital, he and his partners at Sovereign’s invested in 16 startups, including Man Crates, a California-based online retailer of bundled gifts for men, and CloudFactory, an on-demand data processing business that seeks to equip a million workers in Nepal and other developing countries with highly skilled technical jobs.

That monetary investment allows Kaestner to build deep and meaningful relationships with like-minded entrepreneurs. CloudFactory CEO Mark Sears, who lives in Kathmandu, Nepal, said that he was inspired early on by Kaestner's concern for the personal lives of his co-workers and customers. On a trip to Hong Kong, the two met with a table full of Chinese executives at a private restaurant in a fancy hotel.

"Everything about that meeting was intended to be cold and formal, but before it could even head in that direction, Henry pulled out his cellphone and started showing pictures of his wife and kids, and then they all started pulling out their phones and doing the same,” remembers Sears. “Ten minutes in, we were all laughing and talking like we had been friends forever."

Once, Kaestner traveled to Kathmandu with two duffel bags full of high-end cheese wheels, having heard from one of Sears' associates that good cheese was hard to come by in Nepal.

"It's one thing to even be able to identify those sorts of things; it’s another to actually act on them and to do so with such extravagance,” Sears said. “It made it clear that he wanted to see us prosper not just in business, but in every aspect of our lives."

But Kaestner still cared about the bottom line, too. Early on, as CloudFactory struggled to hook customers, he went through the sales pipeline lead-by-lead with Sears. When they landed on a Los Angeles-based company wanting to digitize a decade's worth of Japanese census records, a major job that Sears had all but dismissed as being too big, too complicated, and too labor-intensive for his shop, Kaestner lit up.

"He was like, 'That's it,'" Sears recounted, "That's the one. And you're going to L.A." Sears suggested the sales guy go in his stead.

"No," Kaestner pressed. "It's you, Mark. You're the founder. And you're going to get on a plane to L.A., and even if you have to sit outside of his office and wait for him to come outside so you can meet him, that's what's you're going to do."

Sears went. CloudFactory, which has since partnered with Microsoft and Amazon, landed a multimillion-dollar deal. Sears, who had a workforce of about 200 people at the time, had to hire an additional 3,000.

"It stretched everything," Sears said. "It absolutely set the stage for the company to explode."

Sears sought to adopt Kaestner's balanced and principled approach, stressing personal character and community-building along with business productivity. CloudFactory workers are required to do a community service project each quarter. When a major earthquake rocked Nepal in 2015, Sears raised more than $100,000 in relief. Through a total of 1,200 different projects throughout the year, his team delivered food and water to victims and helped rebuild schools and houses.

"The company is born out of a very serious social mission, and yet it's also highly competitive and highly technology-based,” Sears said. “It's also born out of my personal faith, and so it's been invaluable to find an entrepreneur like Henry who understands and challenges me on all of those fronts."

KAESTNER DRIVES a tan Tesla. A potential provocation in Durham, it seems like a fairly modest, almost practical, solution in Northern California, where winding roads lined with palms and live oaks roll out like rugs before custom-built luxury cars and vintage grand tourers. Electric vehicles are allowed in the HOV lanes here. And because the Tesla drives itself, Kaestner’s long stretches in transit allow him to multitask.

En route to lacrosse camp, as the car self-steered through Cupertino and then Sunnyvale and Menlo Park, Kaestner, who speaks in a glottal Baltimore accent allayed by years spent in the American South, chatted with his son about the Book of Ephesians, his fear of heights, and ’70s soul music, which played through the speakers.

He left a warm, effusive voicemail for a customer in North Carolina who had invested in the fund back in 2011. "You should feel zero pressure to participate this time," the message concluded, "but I wanted to make sure you felt invited and included. And I also wanted to let you know that the trust you placed in me by contributing to the first fund five years ago has always been a great encouragement to me, and I will never forget that."

The call lasted a minute and a half. "Kimberley says that people delete voicemails if you talk longer than thirty seconds,” Kaestner said, hanging up. “She may be right, but my response to that is that people don't delete Henry Kaestner's voicemails!" He laughed, then continued, "Yet another example of my hubris."

When he received an email that a fundraising event scheduled for that evening had been cancelled due to a death in the host's family, he prayed, eyes open and out loud, for comfort for his friend.

The Tesla turned off the highway, headed for the prep school. As if on cue Kaestner asked Graham, who he calls "Grammy," to pick out a song. Graham chose "Ain't No Mountain High Enough" by Marvin Gaye and Tammi Terrell, followed by "The Rubberband Man" by the Spinners, both from Kaestner's "100 Greatest Songs" playlist.

I asked Kaestner whether driving a Tesla and living in one of the wealthiest parts of one of the wealthiest countries in the history of the world was a betrayal of his convictions.

"I do feel a little uneasy about it," Kaestner admitted. "But, you know, there are a lot of Teslas out here and this, as it happens, is the context where God has placed us."

That context shift has come with its own set of new challenges, once again testing Kaestner’s commitment to principled entrepreneurship. The Kaestners were still in the process of selling their house back in Durham and closing on a place nearby. Buying a house signified, with something like finality, the family's resolve to make Silicon Valley home.

On a family vacation here a few years earlier, Kaestner leaned over to Kimberley on a particularly scenic section of I-280 and said, "We've got to move here." In the silence that followed, he had worked out a rationale. Silicon Valley, not Durham, was the center of venture capital. For both deal flow and professional development, NorCal was the sine qua non. It was also closer to Asia, where Sovereign's Capital was already doing a lot of investing in countries like Indonesia and China.

"More than anything, what I really got a sense for was that Bandwidth.com had enough of a platform through the success of the company that people would take me and my faith seriously and that this was going to be my mission field," Kaestner said.

Even so, he recognizes the difficulty in balancing the need to answer his mission’s call and the needs of his family. The kids called their Durham house Bag End, a Lord of the Rings reference symbolizing comfort, security, bliss. Saratoga wasn't Mordor, but it wasn't the Shire either. They had left their comfort zone for a liminal space of disorientation and anonymity. Kaestner and his family were starting over at a time when many entrepreneurs start to settle in.

Yet the uprooting thrilled him, and energized him in ways he hadn’t expected. He'd recently finished reading a book about Bretton Woods, the 1944 conference held in New Hampshire that established free trade as a bedrock of the post-World War II global economy, and he couldn't contain himself in discussing it.

"Free trade has allowed for the world to prosper,” he said. “It's allowed for poverty to be largely decimated. I mean, the guys behind Bretton Woods, they're heroes. And hardly anybody knows their names."

That kind of behind-the-scenes influence increasingly entrances Kaestner.

For all his talk about hubris, his work at Sovereign's seems, at one level, a concerted effort to subvert his pride and tap his past accomplishments to empower the next generation of values-based entrepreneurs.

When Bandwidth.com goes public next year, Kaestner, who owns a significant number of shares, is likely to receive a major payout. He is considering giving away the lion's share and tapping the rest to start an organization that promotes and encourages giving and volunteerism among his entrepreneurial peers.

"This is the best place to do it," Kaestner said. "The entrepreneurial mindset of scaling here, you don't get that other places. It's different than New York, where success is based on schooling and connections. Here, it's almost a complete meritocracy. You want to do something, do it, that's the mindset. There's no reason for you not to do it."

The Tesla pulled into the parking lot of the sports complex. Kaestner hurried Graham across the field, a good 45 minutes late.

"One of the big opportunities you have today,” Kaestner told Graham, “is to be able to encourage people, to compliment the kids that are on your team, and even kids who aren't on your team.”

On our way back to the house, we stopped at Stanford University in Palo Alto, incubator for so many young minds transforming the world through technology and business. We parked along the main quadrangle and hoofed past Rodin's Burghers of Calais sculpture toward the iconic Memorial Church. On the exterior, a Celtic cross, set among terra-cotta tiles, crowned a gabled mosaic of a gospel scene. The sun, at last cloud-shorn, had begun to burnish the hills all around.

"I'm telling you," Kaestner said, motioning away from the church and up and down the sidewalk, "this really is one of the greatest places on earth to go skateboarding."

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