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Focus Interactive beat dot-com odds
By ALLAN DRURY
THE JOURNAL NEWS
(Original publication: June 19, 2003)
IRVINGTON — In November 2000, the names of busted Internet companies were dotting bankruptcy court dockets across the nation, as the technology boom turned to broken dreams.
Some dot-com companies weren't even trying to reorganize under the protection of the bankruptcy code. Their Web sites went dark and they went out of business without warning.
Bill Daugherty and Jonas Steinman, a pair of old college buddies who founded Web portal Iwon.com, were determined to be different. The co-chief executives held the first of what would become twice-weekly meetings to review every aspect of their 230-employee operation and cut where they could.
Nearly three years later, Iwon's corporate successor, Focus Interactive, is ranked as one of the top 10 Web properties in the nation and is about to finish its seventh straight profitable quarter.
The company is a case study in the acumen it took to run an Internet business back when investors and advertisers still fawned over dot-coms. It then survived the wrenching downturn and become an industry power.
Focus Interactive, which operates out of a renovated former furnace factory on Bridge Street, still owns Iwon.com, a site that offers search capability and extensive content. Iwon.com also offers a feature the founders conjured up to set the site apart from other portals: a daily $10,000 sweepstakes that users enter just by surfing the site.
Cautious growth
While other New Economy companies spent the technology boom pouring big money into the race to capture marketshare, Steinman and Daugherty waited until after the boom went bust to expand their company's holdings.
Last October, the company started a site called MySearch.com, and in January, it started MyWay.com. Neither site has banner or pop-up ads and both allow their users to scan the Web for information using any one of five search engines provided by Google, AltaVista, Ask Jeeves, AlltheWeb and LookSmart.
Focus Interactive makes money when a user performs a search and clicks on a sponsored listing. For instance, someone who searches "computer" on MyWay.com using Google as the search engine would find six sponsored listings for other Web sites, such as www.BizRate.com.
Those sponsors pay Google to have their sites placed there. Focus Interactive, through contracts with the search-engine companies, gets a share of that money.
The company also owns Excite.com, a Web portal it bought at a cut-rate price from a bankrupt owner in 2001.
The company, which Daugherty and Steinman started in 1999 with backing from CBS, is closing on the purchase of MaxOnline, an online advertising network. The buy price could be up to $6 million, according to a release the seller, online ad sales company MaxWorldwide Inc., issued when the sides reached the agreement.
Focus Interactive is privately held and does not disclose its revenue or profit figures, though The New York Times reported in December 2001 that the company had $100 million in annual sales.
Unlike many other young Internet entrepreneurs who tried to parlay a geeky fascination with the Web into a business, Daugherty and Steinman had serious business backgrounds when they started Iwon.
Daugherty was a senior vice president of business development with the National Basketball Association, while Steinman had just become a partner with a Manhattan venture capital firm the day they decided over lunch at Burger Heaven, a midtown eatery, that they might make it big with an Internet company.
The two knew CBS and Fox were interested in purchasing an existing Web portal. They also knew that there were few differences between the portals that existed, which included Yahoo!, Lycos, Go and AltaVista.
"Marrying a portal with a sweepstakes seemed like a point of differentiation," Daugherty said.
They pitched their idea to CBS, which agreed to provide $70 million worth of advertising and $30 million in cash backing.
After months of secret planning — the partners were paranoid another entrepreneur would hear about their idea and swipe it — Iwon.com went online in October 1999.
Sweepstakes a big draw
The money giveaways made the site an instant hit with a national reputation. By April 2000, the site was ranked by Media Matrix as the 26th most visited site in the United States, with 7.6 million visitors.
Although many other dot-com chieftains were pouring huge sums of money into their companies and expanding at a breakneck pace, Daugherty and Steinman stayed conservative. Their careful approach would pay off later when the market crashed.
"We didn't hire excessive numbers of people, we didn't overextend financially" Steinman said. "We didn't pursue international growth, we didn't pursue a far-flung and vague broadband or wireless strategy. There were plenty of things people were doing in that period of time that we in retrospect prudently stayed away from."
Others in the dot-com industry respect the approach the Iwon founders took.
"They did a bunch of things right," said Jeffrey Cohen, vice president of ImageWorks LLC, a Connecticut-based company that designs sites, offers business and technical consulting and other services to Internet companies. "The first thing I see is the great marketing, and giving away money is a great incentive for people to look at the site."
He said the decision by Iwon and other dot-coms to grow at a moderate pace has been vindicated.
"All these companies that built their own buildings and didn't pay any attention to traditional business models are the ones that aren't around to talk about it any more," he said.
The Iwon site grew in popularity so fast that Daugherty and Steinman were ready to sell stock to the public through an initial public offering underwritten by Goldman Sachs.
Then the technology bubble burst, splashing pain everywhere. Internet stocks plummeted in value, venture capitalists and other investors who had poured huge sums of money into the New Economy stopped handing out money.
Shares of leading portal Yahoo! dropped from more than $237 to under $8. Working-class investors who had bought into the mirage and loaded their portfolios with tech stocks lost their life savings.
When advertising rates dropped 95 percent Daugherty and Steinman began holding budget review meetings that left nothing sacrosanct. Iwon went from 230 employees at its peak down to 143, the number it has now, mostly in Irvington and the rest in sales offices in several major cities.
The company moved quickly to cut its vendor costs and numerous other expenses. Daugherty and Steinman even cut back on the prize money, the lifeline of their business.
"Imagine if you're a milk producer and you're selling milk for $2 and the price goes down to 10 cents," Steinman said, pointing out the magnitude of the advertising decline.
Experience invaluable
Daugherty said the real-world business experience he and his partner had may have been their greatest asset. It saved them from being trapped in the romantic notion that the Internet would replace all other communication mediums and that it was their destiny to help make that happen.
"We were pragmatic," Daugherty said. "We always saw this as a real business. It was about delivering a great product, but it was mainly about being profitable eventually."
The partners began making cuts while other dot-com bosses clung to hopes the market would turn around as quickly as it had crashed.
"I think most Internet companies resisted, resisted and resisted, and then it was too late and by the time they started making cuts, they were in a downward spiral," Daugherty said. "Because we started earlier, we do it a little more thoughtfully."
But Daugherty and Steinman, who met while playing volleyball at Harvard University where they attended business school, were also careful not to cut so deep that they couldn't offer a site that would attract hits.
"On the flip side, we had to think about innovation and growth," Steinman said. "Nobody gets rich cutting costs."
They also stayed poised to pick up valuable assets from desperate Internet companies that were paying a painful price for being unprepared for the punishing downturn.
One was Excite@Home, an Iwon.com competitor that paid $7.8 billion for Excite.com in 1999, but sold it to Iwon for $10 million after filing for bankruptcy court protection.
Excite@Home expanded faster than Iwon did during the boom times but ended up with a crushing $1.3 billion in debt. The Silicon Valley company once had more than 3,000 employees and dreams of challenging America Online.
The purchase doubled the size of the company Daugherty and Steinman had started with eight employees just two years earlier.
The better news was that the company could operate Excite.com much cheaper than the previous owner because Iwon already had most of the resources it needed to run the new site.
"The proverbial light bulb went off," Steinman said. "We said, 'Gee, if we can operate one of these for a certain cost, what is really the incremental cost of operating a second?' "
Optimism about future
The strategy has made Focus Interactive a major but quiet player in the Internet industry. The company rarely tries to promote itself, preferring a low-key approach, Daugherty said.
Nielsen/NetRatings reported the company's sites drew 3.56 million average daily unique visitors in May, placing the company seventh, just behind the U.S. government, whose sites drew 3.68 million unique visitors on an average day. Yahoo! was second at 21.73 million.
Nielsen/NetRatings is a service of NetRatings Inc., a New York company, that tracks domestic site visits through software loaded onto the computers of 50,000 users.
Focus Interactive has no immediate plans to go public, though the partners do not rule it out in the future. They'll continue to look for more opportunities to expand both through acquisitions and its own new ventures.
Since such a large percentage of the company's costs are fixed, the revenue from any new venture falls disproportionately to the bottom line, Steinman said.
The leaders of the dot-com version of the tortoise that beat the hare are optimistic about the future.
"We know we made money in a very down market," Daugherty said. "Fortunately we were able to make a profit through two wars and a recession, so we know we're going to do well in just about any kind of market."
Reach Allan Drury at adrury@thejournalnews.com or 914-694-5069.Reach Allan Drury at adrury@thejournalnews.com or 914-694-5069.
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