Startup to IPO: Why Few Companies Make the Leap and What We Can Learn from Them (Part 2: Obstacles)
This is the second installment of the “Startup to IPO” series. Last time we talked about how Vistaprint, Rackspace, OpenTable and Salesforce.com have distinguished themselves as a very special and elite breed of institutions. Now we will look at the obstacles these companies have faced and how they overcame each of them.
As you can tell, leadership and vision alone won’t guarantee success. These four elite entrepreneurs have also gone through the ups and downs of a startup life. As Charles Dunstone, the founder of Carphone Warehouse, would say:
“It’s not supposed to be easy. If it was, then everyone would do it.”
Based on what I have learned from these four companies, I find out that, as an entrepreneur, you don’t have to do everything right all the time. You just have to keep asking questions and try different solutions. Never lose your heart. And above all else, don’t ever give in.
Transforming from the Mail Order Catalogue Model
When Vistaprint was founded in 1995, France was gripped by the largest strike movement in the past 40 years. Because of the strike and lack of financing, Vistaprint almost went out of business, forcing Robert Keane to restart his company again in the spring of 1996. Definitely not a smooth start for a startup.
In the beginning, Vistaprint was selling their products via direct marketing catalogue. Robert convinced Microsoft France to distribute their catalogues in every box of Microsoft Publisher. In this way, Vistaprint was able to reach their targeted small business customers with extremely low cost, 10 times cheaper than acquiring customers in a direct marketing model, allowing them to grow from zero revenues in 1995 to 2.5 million euros by 1999.
Yet the company saw a problem with their business model later on. Since Microsoft only wanted them to advertise to their new customers but not their existing user base, their revenue started falling and they could not grow as fast as they want. That was a love-hate relationship. On the one hand, Microsoft was a great partner leveraging their marketing effort, and on the other hand, Microsoft limited their growth.
The company knew that they need a new business plan if they want to grow larger. That was when the Internet came. Thus Robert decided to move away from the declining catalogue business to become an online marketer of small business printing.
To benefit from the near-zero cost distribution channel of the Internet, they decided to develop a web publishing program which makes you feel like the software you run on your desktop. Sounds familiar with all of the Web App Hype these days? And that was in 1999.
Robert later explained:
The idea was to give [the web publishing program] away free across the Internet and then utilize the Internet to conduct our direct marketing. We came up with a production technology where we aggregated orders together. Those three changes, in retrospect, were important in changing the trajectory of VistaPrint.
Not Getting VC Money
In fact, there is one more major strategic move contributing to their survival. Robert believes the fact that Vistaprint could not raise funding during the dot com crash actually saved the company. At that time, a lot of Internet bubble companies raised huge amount of money helping them to live until 2002-2003. When Vistaprint moved to the US in 2000, they could not raise money so they had to cut costs to keep profitability or they would go out of business. In other words, other companies did not have to face reality with their big venture capital money allowing them ignore operating costs and cash flow. Like Robert said:
“As much as I would like to say we were brilliant, I really think success is hard work combined with talent from a lot of different people, and some luck. We were lucky to not get venture capital because it forced us to work harder to get to profitability.”
Imagine you were in Robert’s position, will you have the gut to change your business model and leave your best partner, Microsoft, when facing crises? Or you will just stay put and give in? We can easily see that “change” is deeply embedded in Vistaprint’s corporate culture. They did not satisfy to be a merely profitable firm. They always want to survive and thrive in the long term. Without proactively looking for the next opportunity, Vistaprint probably would remain a small company working with Microsoft. How about your company? Do you want your company to survive in the short term or grow in the long term? Given the current economic crisis, may be it is a good time for your company to change.
Huge Consolidation and Commitment to True Profit
Similar to Vistaprint, Rackspace also went through the tough time during the dot com bubble. After some wild spending with big VC funding, Rackspace had barely enough cash to sustain the business for 3 months in the fall of 2000. Due to this experience, they have learned that, in order to survive, they have to stay lean and build the company organically.
While their richer rivals continued their wild spending on costly data centers, Rackspace had to grow cautiously, buying servers just enough to meet their customer demand, growing one customer at a time.
As most people know, the hosting industry is extremely competitive, causing a lot of consolidations, bankruptcies and failures. Besides providing their excellent “Fanatical Support“, Rackspace has developed a principle of achieving “true profit” which enables them to reach the top. They defines true profit as a company’s operating profit (after taxes) minus its total annual cost of capital. The management has decided that if a project generated lower than 15% profit margin, they would just shut it down.
Rejecting a $20 Million Deal
For example, Rackspace once sold a fast-growing, moneymaking subsidiary because it doesn’t meet the rule. They also passed a $20 million deal with Morgan Stanley which would put their little-known firm on the map. Their CEO explained:
“We could have made a profit on this deal, but not enough to risk our capital. Were we willing to let Morgan Stanley use our multimillion-dollar asset and make a profit of only $600,000? No. We are 100 percent committed to making a true profit.”
The company believes this strict financial discipline has helped them to avoid the dangers of rapid growth and stay in the reality.
If you was the CEO of Rackspace, would you pass the chance to work for a respected giant company? Is your company really creating real wealth or just growing for its own sake? Are you focusing on the right projects that give you true profit? If not, your company probably is wasting money. And the costs for fixing these missteps could be very high.
To many people, it is hard to believe OpenTable has survived the dot-com crash which put a lot of web companies out of business.
In 1999, not many restaurant owners could see the benefits of online reservation management, especially when they already had more business than they could handle. Consequently, the company took off very slowly. They have to hire an aggressive sales force to persuade each owners that online reservation process can actually increase the number of customers, improve customer service and lower their costs. Since they have to do that one restaurant at a time, it took a long, long time before this business model and concept were proven.
It took 3 years for OpenTable to serve its one-millionth user. Yet as their popularity increased, restaurants actually suffered if they were not listed on the site. They have to join OpenTable voluntarily, paying one dollar for each referred diner. Now the company seats an average of approximately 2.8 million diners every month.
OpenTable is a business that almost didn’t happen, constantly being told “no”, but getting things done anyway. Do you have the determination to prove the doubters wrong? Does your company have the patience to start slow and smart?
Last week, Marc Andreessen, the founder of Netscape and Ning, also talked about the fact that not many startups going to IPO these days. He urged venture capitalists stop whining about Sarbox and other factors that are hurting their ability to take companies public. So what is his solution?
“Build Companies More Valuable and You Won’t Have this Problem.”
It sounds so easy but is extremely hard to do
In the next post, let’s talk about the growth strategies of these companies.
Photo source: mikebaird @Flickr