Editor’s note: This article, by Inman News Publisher Bradley Inman, was originally published at BradInman.com. Click here to view the original item, and click here to view Part 1.
Over the years, I have worked with many remarkable people.
Take Andrew Coleman, who earned a master’s degree in business administration from Northwestern University’s Kellogg School of Management before joining HomeGain in 1999 as head of business development.
He is smart, hard-working and packed with passion. And his courage saved the company.
One day in the Spring of 2000, he came into my office to tell me that things were upside down at HomeGain. I can be intimidating, so I know this was not an easy conversation.
"We are acquiring customers for $400-plus and making $12 — that does not work," he said This might affectionately be called the dot-com new math, or less affectionately: stupid.
At the time, we were spending $2 million a month on a radio campaign that was driving people to our free home-valuation tool, which was registering about 10,000 people a day. We were trying to cross-sell these homeowners to use HomeGain to select a real estate agent.
Cross-selling gets a lot of buzz but rarely works. In our case, homeowners looking to get an estimate on the value of their home were not necessarily selling their house.
The decision we faced: slash our ad spend or continue the folly.
Around that time, we planned an offsite strategy meeting where we decided to partner with Yahoo and other portals and vertical sites to private-label our agent-selection tool and home-valuation feature and split revenue, radically cutting our acquisition costs. The idea was simple: pay for customer acquisition when you make money.
I called my primary venture capital contact and told him what we were planning. Always supportive, he at first challenged the new strategy, arguing that our traffic growth and registrations were propelling us forward and recommended we ease into any decision to change paths.
I riffed some "what ifs," asking what would happen if we didn’t close the gap between customer-acquisition costs and transactions. And then, "What if we ran out of money?"
I quickly cut the entire ad spend and fired our ad agency. …CONTINUED
We got lucky. Many fellow entrepreneurs continued their offline ad spends (a popular strategy back then) for another six months or so and perished. At the time, the business models and their founders were roundly criticized as idiots. That was sometimes the case. But more often, good ideas and their inventors did not have the runway they needed to figure out a business model before their companies ran out of money.
And the same venture capital firms that were throwing money at entrepreneurs in 1999 suddenly became tighter than Scrooge. It took HomeGain another two years to master a successful business model.
For me, business is simple. If you hold out your hands, you must have more checks in one hand than you have bills in the other. There are other attributes to a business, such as brand and engagement, but they alone do not make a business.
Somewhere in the equation must be revenue and profits. When you raise venture capital, you want to race hard because often there is a land grab. But you also want to get as quickly as you can to a business model that generates revenue and protects the enterprise against externalities that you cannot control.
During bubbles, rationality is sorely missed. The idea that you could take a company public without revenue may seem unbelievable now, but in 1999 it was not unusual. Other notions from that period were just as bizarre, like the idea that in the "new economy" the up and down business cycle had been rubbed out.
When you are in a bubble it is difficult to think clearly. Keeping your ears open to the Andrew Colemans helps.
Click here to view the original post at Brad’s Blog, and click here to view Part 1.
Brad Inman is the founder and publisher of Inman News; he created and later sold online real estate lead-generation and marketing site HomeGain.com; and is the founder of TurnHere.com and Vook.com.
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