Friday, February 01, 2008

Lipstick on a Pig

My first experience working on a web-based media property was in 1995 at the dawn of the commercial Internet. I was one of the original members of the Sidewalk team that swelled to over 300 at one time. My original job was striking partnering deals with newspaper and other print partners which provided me a great education on the media business and print media, in particular. We genuinely wanted to strike favorable deals with them but most looked at Microsoft with great suspicion as Microsoft was reaching the height of its power so we couldn't expand as fast as we would have liked and contributing to an unfavorable financial picture. To the potential partners, they thought that we were putting lipstick on the Microsoft pig.

Despite the fact that I worked for the deepest pockets in the world (Microsoft/Bill Gates) and Bill had OK'ed that we'd go $500MM in the hole to go after the long-term prize of local ad $$, it was my first lesson that even deep pockets run short of patience. Lesson: The best way to build a long-term sustainable business isn't to build it banking on the ongoing largess of deep pockets. Rather, it's building it a step at a time building off of cashflow. With Sidewalk, we hemorrhaged money as planned. Even today, though it hasn't been around for years (Citysearch bought it; more on that later), I still have people tell me it was one of the best sites on the Internet. Sites like Seattle's Sidewalk were truly great websites. Unfortunately, they weren't great businesses due to their cost structure.

The following is the tale of the evolution of how the deep pockets start to cut off your "air supply" and how it relates to pigs and lipstick: I became the general manager of cities to ensure that Sidewalk got far more efficient in how we rolled out and ran Sidewalk city teams. My team consisted of a team rolling out cities far more efficiently (we cut the time and cost in half to get up & running) as well as the Publisher/GMs of each of the new cities. I had 1/3 to a 1/2 of the entire Sidewalk team under my purview and boy were we losing money. Rolling out cities less expensively wasn't enough. From corporate headquarters, the executive management team was indifferent as to which markets to remove or pare down. A city was either a source of losses or profits and the message was clear what to do about losses. To take pressure off, we tried to put Lipstick on the Pig to make Sidewalk look better internally. Thus, we made the difficult decisions to cut cities wholesale or reduce staff size. This despite the fact that Microsoft was more profitable and growing faster than virtually any company in history at that point in time. Unfortunately, they saw past the lipstick. Never forget that even deep pockets expect a strong return on investment and it's usually sooner rather than later.

Of course, it's hard to shrink your way to success. The Internet ad market was still years from taking off and it was time to cut the losses as far as senior management was concerned. What's next? "Investigate strategic options." That's corporate speak for either shutting down or selling off a business. Key Sidewalk leaders were tasked with putting "Lipstick on a Pig". In other words, try to make the business look at good as possible so we could salvage some money from a sale rather than simply shutting down the whole operation (and there was a short fuse). While everything was perfectly legal, you do all you can to try to boost revenues and reduce or shift costs so that the potential acquirer thinks it's a great business they are buying. All this is done while trying to keep the troops as in the dark as possible so they don't get de-focused and/or want to jump ship.

The ultimate example of putting Lipstick on the Pig is when it comes time to report to the industry and Wall Street what you have done. The deal was reported as a $240MM acquisition by Citysearch so it was perceived as a victory for Microsoft. The Citysearch guys were sharp guys so with a clever warrant security the Citysearch guys called the "weedwacker", they reduced the stated price by $150MM. In the end, the deal actually cost Citysearch less than $100MM yet Microsoft was able to save face and Citysearch eliminated its biggest competitive concern.

Businesses of all types small, medium and large are bought and sold here in the valley. If you are the acquirer, always be wary of Lipstick on a Pig. A business rarely, if ever, looks as good as it does on the day it is sold. Caveat emptor.

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