Cathie Anderson

Early bet pays off for Nevada City’s Telestream

Telestream CEO Dan Castles.
Telestream CEO Dan Castles. Telestream

Just as Netflix began shipping DVDs to U.S. households in little red envelopes, Nevada City engineers Steve Tilly and Shawn Carnahan were developing equipment that would allow broadcasters to transmit video over the Internet.

They founded their company, Telestream, with business guru Dan Castles in 1998, seven years before the birth of YouTube. It took about 18 months for Carnahan and Tilly to develop Telestream’s proprietary technology, but it would take the three partners even longer to gain broad industry acceptance and awareness.

“When we launched at a trade show, we probably had more people come by than we do now ... because it was such a learning curve,” said Castles, Telestream’s chief executive officer. “They weren’t going to buy the product, but it was just, ‘You’re going to do what? I don’t get it.’ ”

He and others would spend an hour in a theoretical discussion about how the product worked, Castles said, then realize the prospects didn’t plan to buy anything. They had to learn how to better assess potential customers, he said. By 2004, however, major broadcast, entertainment and technology companies called the engineers at Telestream for assistance with video transmission or formatting challenges.

When the team at Apple Computer was struggling to compete with the Windows Media Player, Carnahan said, they asked Telestream to figure out how to make video formatted for that Microsoft program play on Mac computers. Telestream bridged the two technologies so successfully that Microsoft asked whether it could distribute Telestream’s Flip4Mac product to consumers.

In 2011, NASCAR officials approached the Nevada City company and asked whether it could create a high-definition instant replay system for its race officials. The Telestream system debuted at the Daytona 500 in 2012. Time-stamped images from multiple cameras are available for immediate playback, allowing officials to do things like check the order of cars, assess whether penalties are needed and even review action in the pits.

Late last year, the National Academy of Television Arts and Sciences awarded Telestream an Emmy for technology that solves many challenges of transcribing and editing closed captions for programming transmitted via television or Internet.

The accolades and respect were hard-won for Carnahan, Castles and Tilly. When they initially sought $20 million in venture capital funding, Castles said, they realized they were going to the wrong trough. Bay Area VCs told them that if they invested in such small amounts, they’d have to sit on the boards of too many startups.

A few others told Castles that they might make an exception for Telestream if the founders would move the company to the Bay Area. But all seven of Telestream’s engineers lived in Nevada County, loved the lifestyle and didn’t want to move westward.

Plus, Carnahan said, Nevada County was the birthplace of the Grass Valley Group, the company that had gained the worldwide recognition of broadcasters for vastly improving the technology of television transmission. Consequently, he said, television executives and job seekers equated the area with their industry.

Castles didn’t give up. In total, he said, he spoke with 31 venture capital firms before finding two willing to invest in Telestream. After nine months, he inked deals worth a combined $5 million from Shaw Venture Partners of Portland, Ore., and Sacramento’s Hallador Venture Partners. Other funding came from Intel Capital and 55 angel investors.

Before television, advertising and entertainment companies widely adopted Telestream’s products, the company’s biggest and most reliable customer was the federal government in its first few years, Castles said. The company’s ClipMail Pro allowed military officials to transmit video via the Web, making feeds from surveillance videos much easier to see and assess. The U.S. Defense Department placed the devices on Air Force One, aircraft carriers and in other spaces where critical mission decisions had to be made.

The Pentagon had much faster and more accessible Internet connections than TV stations, Castles and Carnahan said. When television executives wanted to share film or video with colleagues in other locales, they copied tapes and shipped them overnight around the world or across the country. Advertising executives were doing the same thing when sharing commercials with clients.

“You’d go into a broadcaster, and they ... probably had some Internet because they had a guy who was running their website or they had email connectivity,” said Carnahan, Telestream’s chief technology officer, “but that was completely separate from people at the main TV operation. In we’d walk and say, ‘We’re going to put this piece of gear in your TV facility, but we’re going to get this guy over there to plug it into the Internet.’ ”

Carnahan said ClipMail Pro quickly changed the production process once companies installed it: “I was at a studio in L.A., and they were doing a lot of shoots at the time in Australia. They had ClipMail in Australia, and every day after they’d do the shoots, they’d do the dailies, probably two or three hours’ worth of dailies, and they’d send it back to Los Angeles through our ClipMail. It was great because, at that point, it was a three-day turnaround to get dailies from Australia to L.A. With ClipMail Pro, the L.A. studio had the dailies overnight.”

The Telestream team continually worked to improve their product and make it more indispensable. For instance, Carnahan and Castles said, they noted on client visits that people were making copies of video in different formats because various executives used different equipment to view the programs. So, they created a centralized data center where videos could be sent, converted to the necessary format and transmitted to each user.

In November, they acquired a company called PandaStream, which does cloud-based encoding, because companies didn’t feel secure about transmitting their programming over the Internet. It’s the fifth company that Telestream has acquired since 2006. The company self-financed every one of those purchases.

Telestream’s original investors held on to their interest until 2012, when they and employee shareholders opted to sell to San Francisco-based private equity firm Thoma Bravo. The firm’s partners set high expectations on financial performance, Castles said, and Telestream was able to meet those benchmarks in just three years. In 2015, private equity firm Genstar Capital acquired Telestream.

None of the sales prices was disclosed, but Castles said that if you were to add each of the sales figures, the company would have created in excess of $1 billion in aggregate value. Annual revenue has surpassed the $50 million mark, he said, and the company employs roughly 250 people worldwide, 165 of them in Nevada City.

“We see lots of room for growth because more and more content is being created and viewed,” Castles said. “People want to view it on more devices ... and the number of formats is getting more and more complicated.”

Besides its growing arsenal of media, captioning and cloud-based encoding software, Telestream offers companies and nonprofits the ability to stream their video broadcasts live over the Internet, said Barbara DeHart, vice president of corporate marketing. Right now, she said, Telestream engineers are developing software to allow people to stream live broadcasts from their smartphones.

Cathie Anderson: 916-321-1193, @CathieA_SacBee