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The 500px Team

The Scary Choice This Startup Made Before Raising $8.8 Million

Posted by Jamie Schneiderman on

500px Team

In February 2013, Evgeny Tchebotarev met with his four-person leadership team at 500px, an online photography community he had co-founded in 2009 with Oleg Gutsol, a longtime friend. They were in the middle of a fundraising campaign but hadn’t found a single interested investor. Some of Tchebotarev’s leaders felt that there was a change that 500px could make that would have investors banging down the doors. Others thought that change could ruin the business they all worked so hard for and cared deeply about.

Before we get into what that change was, we need to backtrack to 2009.

What started as a hobby …

Evgeny Tchebotarev, 500px co-founder (middle), with team members.

Evgeny Tchebotarev, 500px co-founder (middle), with team members.

In 2009, Tchebotarev and Gutsol chose to turn the online photography community that Tchebotarev ran as a hobby since 2004 into a legitimate business. Their initial plan was to focus on building out the site’s features and growing a large enough community to raise venture capital.

They worked on 500px part-time and funded the venture out of savings, personal credit, and income from jobs–Tchebotarev worked as an extra in movies. They were growing, but slowly, and both felt they would have to focus completely on 500px to give it a chance to hit it big. In 2010, Gutsol quit his job and both started working on 500px full time.

To pay business expenses, they included paid subscription plans for premium features. Because charging users would mean attracting fewer of them, they went with a $5 monthly plan, which was enough to bring in just the amount of revenue they needed to keep the startup going, but not so much that it would prevent decent growth in users.

In 2011, despite the fact that all their plans weren’t free, they hit some impressive growth numbers–about a million page views and 70,000 unique visitors monthly–and raised half a million in seed capital from John Frankel, a New York-based venture capitalist at ff Venture Capital, who was impressed with how beautiful the site was and by its traction with professional photographers. The funds gave the startup a big boost, but it still needed to generate revenue. However, the continued emphasis on driving growth rather than revenue led to several financial crises and Tchebotarev and Gutsol had to seek bridge financing from their seed investor to keep them alive through 2012.

In 2013, with over 2.5 million users, they decided the time had come to look for a bigger round–a Series A financing. Because they were based in Toronto, they spent the first few months approaching Canadian VCs. The results were discouraging. Each investor they met with looked at the revenue numbers and wanted to value the business based on its sales, using a standard valuation formula. Because 500px hadn’t optimized its revenue potential, valuing the company this way didn’t make it win-win for both parties.

Kill revenue?!

And this brings us to that Monday-morning leadership meeting in February 2013. 500px was about to turn its fundraising campaign from Canadian VCs to U.S. VCs. It was going to pitch to some of the top firms in Silicon Valley. A couple of the leaders thought they could dramatically improve their chances of success with one simple change–kill the revenue stream.

Doing that, they argued, would focus an investor’s attention on growth, not revenue. Going free would also massively increase the site’s growth numbers–probably by as much as 10 times. Of course, without revenue, 500px would have to eke it out until it raised the funds, but raising capital would be so much easier. Huge success, some argued, wasn’t going to come without making this kind of bold entrepreneurial move. To win big, 500px had to risk big.

Tchebotarev knew the argument was compelling. Consumer startups like 500px–those with users who are people rather than businesses–usually raise their seed capital based on hope, and then raise their next round–a Series A–based on growth in the number of users and their use of the service. If they can afford to, most consumer startups don’t try to generate revenue before a Series A round, because doing so can hamper growth. For many, the thinking is “Let’s get millions and millions of people using our service, and then once we’re ridiculously popular, there’ll be lots of ways to generate revenue.” It’s the grow-first, monetize-later approach of mega-successes like Instagram and Facebook.

Risky business.

It was a compelling argument, but Tchebotarev and Gutsol knew that even with dramatically more attractive growth numbers, fundraising was risky and they could potentially find themselves months deep into a campaign with no bites. And then what? They’d have to turn the revenue stream back on and try to recover–but there was no guarantee they’d be able to pull that off. The truth was, for every Instagram and Facebook, there were dozens and dozens of consumer startups that went the pure growth route only to crash and burn.

As the debate raged on in the boardroom, Tchebotarev agonized over where he would come down. Revenue had been an essential part of 500px’s history, supporting it in the early stages, and sustaining it over the years. Should they risk dropping it? 500px was his baby, and he cared deeply for his team, their current investors, and the community of the photographers. Contemplating the end of 500px was terrifying. But if they didn’t raise a Series A, they would never really grow. They’d never fully take advantage of the opportunity they had created for themselves. Maybe they needed to take this wild risk so everybody could win.

The scary choice.

Tchebotarev kept going back and forth in his head on what to do. At last he made his decision, and told the leaders, who eventually agreed to support it. The meeting wrapped up, and with the question of whether or not to kill revenue behind them, 500px pursued Series A financing. As you read on, try to guess what Tchebotarev and the leaders decided.

A few months later, Harrison Metal along with Andreessen Horowitz, the Silicon Valley VC firm that has famously invested in Twitter, Skype, Buzzfeed, and Airbnb, led a Series A investment round of $8.8 million, which closed in August 2013. Since that time, 500px has grown its team to over 50 and has launched a commercial licensing marketplace, where businesses can license photographs from a curated collection by 100,000 of its five million photographers–moving 500px into a position to more fully monetize the community it has built.

In July 2015, 500px raised another $13 million in a Series B round led by Visual China Group, with participation from existing investors, such as Andreessen Horowitz and Harrison Metal.

So what decision did the leadership team make in that boardroom in February 2013?

Keep the revenue stream!

Tchebotarev and his team didn’t make the go-for-broke choice, which might make a better story. Their conservative, hedge-your-bets decision to keep the revenue stream wasn’t the kind of heroic decision we often read about in stories of entrepreneurs. And that’s the point of this particular story. 500px took the safer path and still managed to woo one of the Valley’s most legendary firms. Yes, without revenue 500px could have had more impressive growth numbers, but Andreessen Horowitz was still enamored of the growth 500px had achieved, and saw the massive potential in what Jeff Jordan, partner at Andreessen Horowitz, has referred to as “one of the most beautiful online sites in the world.”

The myth of the entrepreneur.

The 500px story appealed to us because it debunks the myth that successful entrepreneurs are wild risk takers. That’s quite a sexy image, but the truth is that many entrepreneurs who build growing companies take calculated risks. They hedge their bets, the way Tchebotarev and his team did. They try to navigate a course that puts them in the most control. The point is, you don’t have to risk it all to build a successful company. The history of our own venture, ClearFit, is a story of calculated risks. There was a point in time several years ago when our revenue was keeping us afloat–not investors. Many startups make the unfortunate mistake of forgetting the importance of revenue until it’s too late.

This post, “The Scary Choice This Startup Made Before Raising $8.8 Million” appeared first on Inc.

The Brave Strategy That Finally Helped These Two Startup Founders Dominate Their Market

Posted by Jamie Schneiderman on

Bluesun Founders

In 2009, Simon Tomlinson and Stewart Wigg, the cofounders of Bluesun, a technology consulting business, came to a disturbing conclusion–they had created the wrong company. They had gone into business eight years prior with the dream to build a thriving market leader, but had ended up with a small lifestyle business. It was a conclusion that prompted Tomlinson to ask his partner a scary question: “Is the dream over?”

Big Ambition

The dream began for the two men in 2001, when they founded Bluesun in the basement of Tomlinson’s new home in Canada. Both men were expats from the UK, where tech solutions had transformed the financial services industry by helping big enterprises sell more insurance and investment products to their existing clients. Tomlinson and Wigg knew there was a huge opportunity for similar services in North America, where banks and insurance companies were notorious for underserving their customers. Their plan was to take their expertise in cutting-edge customer relationship management solutions and become a leading provider in North America.

Culture Shock

Tomlinson and Wigg soon discovered that the financial institutions in the new market moved slower than those back home and that each state or province had its own operating constraints. These differences were going to choke their ability to grow. So they decided, for the time being, to narrow their focus to Canada, with the hope that they could expand faster in a smaller target market.

Unfortunately, even with this narrowed focus, they faced long sales cycles, heavy implementation costs, tough competition for the client’s budget, and so on. As the founders tackled this challenging market, they drew on personal savings, tapped lines of credit, sold assets, and remortgaged their homes–sacrifices that allowed them to hire a few employees, land projects with half a dozen big Canadian financial institutions, move from their basement office into some real space, and–by 2009–break through to seven-figure annual revenue. They were reasonably comfortable, but they were far from being a market leader. And they knew that if they didn’t try something dramatic, something that could break them out of their rut and blow open the doors to growth, they were just going to continue on their slow, plodding path–a path that would never lead to their dream.

An Attractive Idea

But where was this door to growth? As Tomlinson and Wigg tried to answer this question, Wigg brought up the idea of moving down the supply chain: selling their services not just to the couple dozen large national institutions, but to the hundreds of independent distributors and wholesalers who sold financial products through a field force of agents and brokers. This distributor channel represented a big chunk of the financial services market–about half the life insurance sold in the country, for example. Targeting them would be another way into the market, and one with shorter sales cycles. It was an attractive idea…but they had tried it before, with unfavorable results.

Revisiting History

A couple years earlier, Tomlinson had approached several distributors. Although the distributors agreed they had untapped potential in their databases, they couldn’t take advantage of Bluesun’s offering. The big stumbling block was that Bluesun’s solutions were designed for organizations like the banks and insurance companies that marketed directly to consumers, which wasn’t something the independent distributors did. They only sold financial products through their agents and brokers, and they didn’t want to consider a solution that undercut their field force. The result: Tomlinson had spent several months without acquiring a single distributor. It was an expensive investment of time, and worse still, Tomlinson and Wigg had to stop paying themselves for a few weeks until revenue rebounded–not an experience Tomlinson wanted to repeat.

That failed attempt was a shame, because Wigg and Tomlinson both felt that moving down the supply chain was really the only path to cracking the market. As they reflected on their experience, it hit them that they hadn’t succeeded because they had merely tried to take what worked at one level of the market and apply it to another. The value didn’t translate. They knew that if they wanted to sell to distributors they had to offer them something designed specifically for how the distributor operated.

The Perfect Solution

By drawing on Tomlinson’s previous experience and what he’d learned from the distributors, Wigg and Tomlinson came up with what they felt was the perfect solution for the distributor and their field forces–back-office software that housed and managed the data for the distributor, combined with front-office software that leveraged the data to generate leads for the field force. The back-office software would have value in itself, so Bluesun could sell that on its own before developing front-office software that worked on top of it.

Great idea. Big problem–Bluesun’s expertise lay in the front-office side, not the back-office side. They’d have to buy an existing back-office solution. The good news–they had an opportunity to acquire WealthServ, a cloud-based back-office solution for distributors. The bad news–WealthServ was losing a lot of money every single month and had some very unhappy clients. They would be taking on a massive amount of risk. For months, maybe years, they would be operating way out of their current comfort zone. But Tomlinson and Wigg knew that if they could turn WealthServ around, they would inherit not just the back-office software but also a client base of distributors and a flow of revenue–a valuable beachhead in the market. It would finally give them a shot at their dream, and because of that, the two founders decided to go for it.

First Step

After purchasing WealthServ in 2009, Bluesun spent the next couple of years securing the existing ten client relationships, improving the software and service, and selling to new distributors. The turnaround was a success–Bluesun’s revenue tripled in this time period and so did its staff. Tomlinson and Wigg felt the time was right to move on to the next leg of their strategy–front-office software that the distributors could roll out to their field force. If they could gain traction with it, Bluesun could truly be a dominant player in the Canadian market.

The Stumble

Bluesun invested heavily in developing front-office software they called SalesDrive, a tool designed to help an advisor double or triple their revenue by showing them which clients were ready to buy which products. In 2012, Bluesun launched SalesDrive with their top distributor client, expecting at least a 50 percent uptake in the field. The result, however, was below 10 percent. A serious setback.

As the founders tried to figure out what went wrong, they wondered if they had made the same mistake as years earlier when they first approached distributors. Maybe they had failed to deliver true value to their target user–in this case the advisor? That didn’t seem to make sense, because Bluesun had involved advisors in their development process. But then Tomlinson remembered some wisdom often attributed to Henry Ford that allegedly went something like: “If I’d listened to my customers, I would’ve given them faster horses, not a car.”

No More Horsing Around

Tomlinson knew the wisdom from the quote was true, and that Bluesun didn’t have the market insights it needed at the advisor level that it had gained at the distributor level. Without those insights, Bluesun was never going to make any headway with solutions that involved the field force. Bluesun’s next move was to hire Ray Adamson, a leading expert in the advisor market who knew how to build tech solutions that fit with advisor behavior. With Adamson on board, Bluesun completely retooled SalesDrive. When they re-launched in 2013 with their leading distributor, uptake was over 90 percent. This was a clear sign that Bluesun now had the capacity to add value up and down the supply chain–from institution to distributor to the salesperson in the field.

Growth Explosion

It was at this time that Bluesun began to expand rapidly at all levels of the market, with distributors providing not just access to their field forces, but to the institutions that supplied them with the financial products.

Today, with a team of over 40 employees, Bluesun works with more than 50 institutional and distributor clients, and more than 17,000 advisors use one of its products daily. Fifty percent of life insurance products handled in the independent distributor channel in Canada now go through Bluesun’s technology, a metric that indicates that Bluesun has become a dominant player in its market.

How to Move Along the Supply Chain

We at ClearFit loved the Bluesun story because in our years of helping startups find the right people to grow, we have run across several ventures that have struggled to succeed at moving along the supply chain. Many of the ones that have struggled have tried to do what Bluesun first attempted–to take what works with one market stakeholder and apply it to another. As Bluesun discovered, a successful execution involves ensuring you have the insights you need to create distinct value for the new stakeholder. However, it’s important to recognize that Bluesun didn’t just acquire random software for the distributor; it acquired back-office software that it could later leverage with its expertise in front-office technology. This adds greater value not just for the distributor, but for the other stakeholders in the supply chain–the field force and the institution.

Moving along the supply chain isn’t the easiest strategy to execute, but if you can pull it off as Bluesun has, you can become a dominant player in your market.

This post, “The Brave Strategy That Finally Helped These Two Startup Founders Dominate Their Market” appeared first on Inc.

Why This Startup Bought a Struggling Product From Its Giant Competitor

Posted by Jamie Schneiderman on

Big Viking Games Team Photo

In the winter of 2014, serial entrepreneur Albert Lai sat alone waiting for a friend at a restaurant down the street from his latest venture, Big Viking Games. On the table in front of him lay his iPhone. He had just drafted an email and was debating whether to press send–it was a message that had the potential to rescue his company from a serious crisis … or to sink it.

Three years earlier, in 2011, Lai teamed up with veteran game developer Greg Thomson to found Big Viking Games (BVG). Their plan was to become a leader in the highly competitive mobile games industry by developing games using HTML5-games that could be played using a mobile browser as well as a game app. At the time, HTML5 was a relatively new programming language and no one was really using it for mobile game development, but Lai believed they could harness it to gain several advantages, especially when it came to distribution.

Instead of having to rely solely on competing in the crowded app stores where most games are distributed, HTML5 would allow BVG to easily distribute its games in other ways, such as through instant messenger platforms, where a game could potentially spread like wildfire. It was the kind of advantage that a small studio like BVG needed to compete with companies that routinely spent millions–sometimes tens of millions–to market a single game.

Using their own capital, Lai and Thomson began hiring a team of developers and pouring millions of dollars into their HTML5 strategy.

Reality stings.

Two years later, in 2013, BVG developed Tiny Kingdoms, a role-playing game that Lai believed would be their first HTML5 blockbuster and would easily generate $50,000 a day. But BVG couldn’t quite make the HTML5 technology work the way they wanted, and the experience for the players wasn’t on par with games developed on the standard game app technologies. The distribution explosion Lai had hoped for never happened and revenue was only a fraction of what they expected.

Despite the poor results from Tiny Kingdoms, Lai still believed that the winning move in the mobile games industry would be HTML5, but that it was going to take longer for BVG to find a way to harness the potential of HTML5. Exactly how long, Lai didn’t know, and he worried that if he kept pouring the majority of BVG’s resources into HTML5, he might drive the company into the ground before his strategy paid off. He needed a source of revenue to buy more time.

An opportunity out of left field.

As Lai tried to figure out how to generate more revenue, some big news hit the games industry–Zynga, the largest developer of Facebook games, and the company that famously raised a billion dollars in an IPO in 2011, announced that it was going to discontinue YoVille, a game it had bought in 2008 from Lai’s business partner, Thomson. Many in the games industry saw the YoVille announcement as another in a long list of signs that Facebook games were dying. From 2012 through 2013, Zynga had seen its monthly active users drop from a high of over 300 million to below 200 million, and YoVille, which once boasted 19 million monthly users, now had only had a few hundred thousand.

Soon after the announcement, many die-hard YoVille fans reached out to BVG because of its association with the creation of the game and petitioned it to save the game. Lai felt bad for the fans, and wanted to help them. But that would mean buying the game from Zynga and putting a team together to operate it. It would be a big investment, and given that Zynga was obviously getting rid of the game for its tumbling performance, the move could quite possibly be a disastrous business decision for BVG at a time when it badly needed a revenue generator, not a money pit. But Lai, who had already sold two of his ventures for over seven figures and raised $20 million for another, was experienced at spotting opportunity where others didn’t, and he wondered if the prevailing wisdom that Facebook games were dying was premature. Maybe BVG could grow YoVille–not necessarily to the size it once was, but significantly enough to generate the revenue BVG needed at the time.

This was the question Lai wrestled with as he sat in the restaurant looking down at the email he had drafted-a note to Mark Pincus, co-founder of Zynga, whom Lai had met while involved in a previous venture that did work with Zynga. The note was an offer to buy YoVille. Lai knew that a lot of people would have thought sending that email was a bad business decision, but he also knew that going against the crowd was sometimes the right move. As well, BVG had a Facebook game called FishWorld that it had inherited from Thomson, which, despite expectations that its revenue would decline, had been growing year over year-indicating to Lai that his team had the ability to still breathe life into games on the social network. And so Lai decided to press send.

Game on.

By the time Lai and his friend finished dinner, Pincus had replied saying he was interested…and the game was on. In April 2014, BVG bought the game from Zynga for an undisclosed amount. A month later, BVG relaunched the game as YoWorld. Lai’s instincts would turn out to be right. Since the purchase, BVG has grown YoWorld’s audience by 40 percent and the revenue it has generated from the game has doubled BVG’s total revenue.

Although Lai’s vision hasn’t been fully realized yet, the YoWorld move has provided the startup with exactly what Lai hoped for–the time and resources to pursue the HTML5 strategy. BVG has now grown the team to 70, developed their third version of an in-house HTML5 game development engine, and prototyped or launched six games. According to Lai, with Apple and Google recently providing more support for HTML5 technology on mobile devices, momentum is building for the type of games BVG has expertise in-a sign that the HTML5 strategy will pay off soon.

When everyone is going right, turn left.

One of the key lessons we took away from BVG’s story is that great opportunities may exist in places where no one is looking–even markets that others are running from. As Lai himself puts it, in reference to the games industry’s rush toward mobile, “When everyone is turning right, sometimes turning left, as we did back into Facebook, is the best move.” Note, however, that Lai didn’t make a wild left turn–he based his decision in part on evidence from his own experience with FishWorld, and knew that success was possible.

Another aspect of BVG’s story, of course, is that when you pursue a disruptive solution, you may need more runway than you originally expected. That’s a lesson we can personally identify with at our company, ClearFit. When we launched in 2007 to disrupt the hiring space for growing businesses, it took longer than expected for customers to catch up in a market that was stuck with traditional hiring practices. Similar to BVG, we needed more time, and in our case had to turn left for a couple of years and incorporate some traditional technology into our offering. This helped us hold the market’s attention until it was ready to adopt our solution. Like BVG, had we not made that left turn, we might not be where we are today.

This post, “Why This Startup Bought a Struggling Product From Its Giant Competitor” appeared first on Inc.