The Industry Standard - Lessons Learned

One of Flatiron Partners' more high profile failed investments was The Industry Standard, "the bible of web 1.0". I learned a bunch of lessons from that investment but the two that stick with me most are:

1) Unsustainable revenues will kill you if you build your costs to match them.

2) Don't invest as a minority investor in a company controlled by a corporate entity.

The corporate entity in that deal was IDG, and John Battelle, who was the CEO of The Industry Standard, points to this bit of revisionist history on the part of Pat McGovern, founder and CEO of IDG:

Why did the Industry Standard die?

McGovern: In 1997, the magazine was launched as many big Internet companies were launched, and investors needed a weekly publication covering the industry. In its first year, ‘97, the magazine made $9 million in revenues, and in its second year it made $25 million. And then at that point, there was $800 billion invested in Internet companies.

But then the bubble burst. The magazine went from making $200 million in revenues in 1999 to making only $50 million in 2000. Unfortunately the management had put the magazine on an IPO track. They bought very expensive CRM software, and had $120 million in fixed costs per year. It was a hopeless situation. The gap between costs and revenues was too large.

The magazine had made a volcanic rise and fall. We’d never seen anything like that before or since. In 1999 the magazine set a record for the number of ad pages, and the next year it set a record for the largest drop in ad pages.

The paradox was that in 1999, we were approached by Time Warner and Hearst, who wanted to buy the Standard for $400 million or $500 million. But [then-CEO] John Battelle had a plan to be making $1 billion a year by 2006, wanted to take the company public, and planned to make a tender offer to buy Dow Jones. It was a plan for world domination, and we should have taken the money from the magazine publishers and run. Business 2.0 sold for $350 million right before the bust.

I edited that a bit to take out the less relevant parts. Click on the link if you want to read the whole thing. What Pat says is largely true about the fundamentals of the business. Try as we might (and my partner Jerry Colonna who was on the board did try a rescue financing), there really was no way to save The Industry Standard. That big of a whipsaw will kill most companies.

But that part about turning down the $400 to $500mm offer is pure revisionist history on Pat's part. I recall very clearly Jerry coming back from a board meeting and telling us that IDG was blocking the sale, that they didn't want the magazine to end up in a competitor's hands. That was very frustrating to the investors because we would have made a significant gain in a very short period of time. But when you invest as a minority in a company controlled by a corporate entity, you have no control over such things.

Lesson learned. Never doing that again.

Comments

[Berislav Lopac]

So in other words, one person who was at the meeting claims one thing, and the other who presumably was there claims something else. And, as I understand, you weren't there.

[Josh Quittner]

And one other correction to McGovern's apparently foggy memory: Business 2.0 didn't sell for anything close to "$350 million right before the bust." I think he's confusing us with FastCompany...

[Dorrian]

I don't get it. He says that they turned down the sale... which is what you claim you remember them doing? How is that revisionist? Are you just saying that Battelle himself was fighting harder for the sale than he lets on?

[Simon]

I agree with your lesson #1 (damn right).
#2 However I don't get it. I see your point that you had a bad experience with a corporate entity, but at the end of the day if the thing wasn't going to survive, it wasn't going to. It is easy to blame a poor investment assessment on the corporate entity; even if you'd have been able to flip it for $400 - $500m. It is like saying broadcast.com was a smart investment cuz they were able to sell at the top.

[Thomas]

It's such a shame to see all of these inept baby boomers in positions of power making horrible decisions about how to run a company. They just run them straight into the ground...

[Rick]

The Industry Standard was a great magazine. I remember trying desperately to get our company mentioned in it and failing on multiple occasions.

Some people made millions in the first boom. The rest of us made valuable memories.

[sandybutt]

It's all a Flipping Game. It was then. It is now. Winners gloat about how clever they were, start other companies believing their own koolaid and lose a lot of money. Losers go about "oprahizing" their failures; blaming any others that come their way.

The smartest and the most honest ones are like Mark Cuban, who acknowledged that he could not believe the amount of money Yahoo offered him for his online music streaming company, took the money and ran as fast as could!

You would think that everybody learned lessons from the Dot com debacle. Not so. Now it's You Tube look alikes and social networking sites for left handed base ball pitchers between the ages of 45 and 47 waiting for an appropriate business model to emerge!