By Patrick Lee
Patrick Lee is the CEO of alivenotdead.com, an online community for artists and their fans. Previously, Mr. Lee co-founded and served as CEO of Rotten Tomatoes (rottentomatoes.com), a leading entertainment website focused on movie reviews and news and one of the top 800 most trafficked sites in the world (according to Alexa). Mr. Lee also co-founded and served as CEO for Design Reactor (designreactor.com). He holds a BA in Cognitive Science from the University of California at Berkeley.
We raised a small angel round for Rotten Tomatoes back in January 2000 and shortly after, everything went to hell. At the time we had identified over a hundred potential competitors in the entertainment space including companies like Den.net, Entertaindom, and Pop.com with all-star teams and huge backing. After the bubble burst, competitors started going belly up left and right and within a few years nearly all of them had gone out of business. Some spectacularly so. During that time, rather than hoping your company was covered on a site like Techcrunch (which didn’t exist back then), your goal was to make sure your company was NOT covered on F^*%&d company.
Watching all those companies go under, I learned two important lessons:
#1: Bigger Isn’t Always Better.
When times are good, the well-funded startups can hire more people, be more aggressive, and buy market share to get big fast, raise more money, and go for an IPO. When times are tough, these tactics often lead to an early grave. Which entertainment companies survived the crash? For the most part the companies fell into one of two types — the ones already bought or owned by the big players, such as Yahoo! Movies, movies.com (Disney), or IMDb (Amazon); or the lean independent websites run by a handful of enthusiasts, such as Ain’t It Cool News or Dark Horizons. If you don’t have unlimited funds at your disposal, you can’t maintain a huge burn rate in tough times and not expect to get burned. Which leads me to my second point…
#2: What You CAN Control
Especially for young startups, revenue can be hard to predict and even harder to control. One month you might be pulling in some decent revenue and the next month might be completely dry. What not every startup realizes is there is one thing you can control 100%, and that is your expenses. How many people you hire, what salaries you are paying, your office space, etc … all of these things you can control. If you want to get to breakeven, your revenue has to match your expenses. If your expenses are double your revenue, you can either double your revenue or half your expenses (or some combination thereof). Guess which one is easier?
For Rotten Tomatoes, we transitioned our 20+ person team over from our web design firm and within a year had to cut back to just seven people with reduced salaries. We subleased out half our office space to a friend’s startup. We renegotiated our hosting, licensing, and other recurring monthly fees. We got ourselves “ramen profitable”.
When you are breakeven or ramen profitable, you have an unlimited runway. You don’t need to raise more money in order to survive because you can’t die. At that point your challenge is to figure out how to grow and scale the business into something big without dipping into the red, but at least you’ll have some breathing room and the luxury of time to make mistakes and figure things out.
Times Are Changing
These days, it’s easier than ever to get funding to get started. There are incubutors and accelerators all over the country that will provide you with initial capital, connections, and (sometimes) office space. There are crowdfunding and consumer discovery sources such as Kickstarter and AppStori. More importantly, it’s cheaper than ever to start a startup so it doesn’t take much to get to breakeven. I know of some bootstrapping companies that have gotten to ramen profitability just by subleasing out their excess office space! The only reason why startups should be going under these days is because the founders decide they don’t want to do it anymore. Point being: you have no excuse. You only fail when you give up.
For those of you that want to hear more, here is a talk I gave to a startup club in Hong Kong (appropriately named StartupsHK —www.startupshk.com) about the ups and downs of all the startups I’ve been involved with, including Rotten Tomatoes: