- When access to capital becomes difficult, be willing to re-examine every assumption underlying your startup.
- Retrenchment is always hard, but you can minimize the pain by acting decisively and transparently.
- Returning a company to its simpler and leaner startup roots can have its own rewards and can pay handsome dividends over time.
The dot-com crash nearly killed Business.com. Here's how Jake Winebaum led its revival
The financing deal was in the bag. Terms were confirmed. Documents were drafted. All that was missing was a ceremonial signing at the Silicon Valley offices of SoftBank.
It was a morning in March 2000. As Jake Winebaum and Sky Dayton, the founders of internet incubator eCompanies, flew from Los Angeles to San Francisco to ink the deal and celebrate, the shares of Yahoo, SoftBank's biggest holding, cratered. These shares lost about 30% of their value, marking the onset of the dot-com crash. When the pair arrived at SoftBank, a company employee met them in the lobby to deliver some news: The investment deal was off. Permanently.
Winebaum and Dayton were in shock. On the flight back, the seriousness of the situation sank in. If SoftBank, one of the most prolific and successful internet investors at the time, was pulling back, other investors would too, they concluded.
By the time they landed, they had come up with Plan B: They would shut down eCompanies, and the $5 million left in the bank would be distributed among the five portfolio companies that had the best shot of surviving.
Winebaum would take over as CEO of one of them, Business.com. It was an ambitious B2B portal that, given the sudden change in the availability of investment capital, was in urgent need of restructuring. With 135 employees, it was burning through $1 million every month, and was close to the abyss. “We had four months of runway,” Winebaum says.
The survival plan Winebaum put in place was radical. He re-evaluated every aspect of the company, narrowed its ambitions to a tiny but promising slice of the business, settled on a new revenue model, and laid off about 4 of every 5 employees. As a result of the changes, not only were expenses paired to the bone, but along with them revenue shrank from a run rate of millions to a total of $35 (that’s not a typo). “We had no choice but to get super lean and focused or to throw in the towel and quit,” Winebaum says.
Focusing proved to be the right decision. The much leaner Business.com homed in on its new mission with the zeal of a new startup and gradually clawed its way back to health. By 2007, Business.com had become a high-margin B2B juggernaut that Winebaum sold to RH Donnelley for $350 million.
Not every company facing an economic downturn will need such drastic restructuring. But amid the economic and financial uncertainty triggered by the COVID-19 crisis, Winebaum’s quick decision making, readiness to question assumptions, and willingness to jettison cherished ideas are skills entrepreneurs would do well to sharpen.
Reexamine the business top to bottomThe decision to narrow Business.com’s focus wasn’t driven solely by a need to reduce costs. Originally, Business.com had planned to build the B2B portal for the internet — something like a Yahoo or Excite, the top consumer search engines of that era, but for businesses.
To do so, the company took several steps, including:
- Hiring a small army of editors from top-tier publications like the Wall Street Journal
- Licensing scores of feeds of business data
- Bringing on library science experts to build taxonomies of business information
When it came time to cut costs, “We decided to eliminate the content side,” Winebaum says.
But that alone was not enough. Revenue came from digital ads and sponsorship deals that were priced based on how many times they were seen. It was a business that depended on expensive salespeople and was likely to be battered by the recession.
Winebaum decided to move the company to a new model known as cost-per-click, or CPC, in which advertisers paid only when someone clicked on their ad, which he believed would be more effective and was much better matched to the search and directory site activity. “It was quite a leap of faith that we were going to make that CPC business work,” he adds. “This was very early days of Overture and Google was just beginning to experiment with pay-per-click.”
A difficult retrenchment
The changes were painful, on many levels, starting with the job cuts. Winebaum gathered the entire company, including the employees who would be let go, to explain the dire situation it faced and the plan for surviving it. Then, each manager met with the affected workers to explain matters further.
“You have to be decisive and make those changes all at once, or you’ll die by 1,000 cuts,” he says. “And you have to be transparent. You have to have the courage to sit with the employees you’re laying off and explain exactly why the decision had to be made. It's not because of some failure on their part.” Business.com ended up cutting about 100 people, or nearly 80% of its total.
By moving quickly, Winebaum was able to provide severance and job placement assistance to departing workers. And by making the cuts as humanely as possible, he helped shore up morale among the employees who remained. “How you do the layoffs makes a huge difference with the employees who are staying,” Winebaum says. “They are losing good friends and they’re thinking, ‘Wait a second, you're asking me to stay when we are rebooting my company and my equity is completely underwater.’”
The pullback was also difficult on a personal level. “We started Business.com with an incredibly ambitious mission,” Winebaum says. “Then we were forced to downsize the vision to this achievable mission that fit with our now limited resources. Initially, I had the same trepidation that the remaining team had. But I put on a brave face and somehow convinced myself and the team that it's going to work and slowly but surely it did.”
Returning to startup roots
As it turned out, having a near-death experience ended up paying huge dividends. After putting together a zero-based budget — where every expense is re-examined — to focus exclusively on the search and directory services, Winebaum began the task of rebuilding Business.com.
The CPC revenue model that Winebaum bet on gained favor across the internet, driven by the success of search engines like Google and Yahoo. Monthly revenue began ticking up from $35, to $500, $5,000, and so on. Over time, as its capital resources stabilized and it understood its customers better, Business.com added back some products that it had cut during the crisis. Bill Gurley and Benchmark came in as investors.
“The cool thing about it is once you simplify things, and understand the drivers of the new business, you start to see little shoots come up,” Winebaum says. “It becomes a startup again, and it’s really exciting. Your team really coalesces around having gone through this war together.” Winebaum went on to work with some of these loyal employees for two decades at different companies he started.
For Winebaum, the return of Business.com to its entrepreneurial roots also helped to cement a lesson that applies both to new startups and to those that have to retrench and pivot: There are silver linings to a sharp downturn and to a scarcity of investment capital that goes along with it. It forces an entrepreneur to be lean and resourceful, and it allows a startup to perfect its business model with limited competition to ride the expansion cycle following a recession.
“Managing a young company through a financial crisis is really tough,” Winebaum says. “But if you can survive, it is also probably the best time to start a company.”
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