Case # 144-C06-A-U

Arthur M. Blank Center for Entrepreneurship

November 2006 Babson Park, MA Phone: 781-239-4420 02457-0310 Fax: 781-239-4178 URL: http://www.babson.edu/eship

Matt Coffin
Lunchtime: Los Angeles, January 11, 2005. Following the early morning birth of his daughter Orchid, Matt Coffin was back on his Blackberry keeping close tabs on his other baby; LowerMyBills.com. His company was poised to post its first million-dollar revenue day, and the talented motivator was doing what he did best: charging around among his 250 best of the best employees to inspire passion and extreme wins. What better day to be selling his business? That night, at a favored Hollywood diner, hed be meeting with one of his key people to detail the sale to a corporate buyer that was prepared to pay a sizable fortune for the closely held venture. So why was Matt filled with such trepidation about the harvest? Was this really the time to sell, or were there better options? Down East Roots Matt Coffin, the oldest of three enterprising children, grew up on the coast of Northern Maine, not far from the Canadian border. His parents, Greg and Marcia, were hardware store proprietors, and Matt witnessed early on the challenges and benefits of business ownership. By his teens hed become fascinated by the creative process of building a profitable enterprise from nothing more than an innovative idea. Drawn to the small-school environment and its focus on entrepreneurship, Matt attended Babson College in Wellesley, Massachusetts. Not one to wait for anything like graduation to get down to business, he developed a dorm room venture called Bostons Best Storagea summertime operation that served to defray many of his college expenses. In a new venture creation module at Babson, Matt developed a business plan for a jobs newsletter listing summer employment in places that were the place to be: Nantucket,

This case was prepared by Carl Hedberg under the direction of Professor William Bygrave. Copyright Babson College, 2005. Funding provided by Babson College. All rights reserved.

Cape Cod, Marthas Vineyard and the like. Although he never launched the business, those investigations served to spark an interest in publishing and creative advertising vehicles. From Boston Bars to New York Fashion Matt graduated from Babson in 1990 with a steady mate (Natasha Esch, a fellow Babson student with a similar interest in enterprise), and a unique idea: Right after I graduated, I started a business placing display ads and billboards in local barsinside the bathrooms where I figured Id have a captive audience. I signed up around 15 bars and nightclubs in Boston, and then went out and found advertisers. The biggest challenge, of course, was that on Friday and Saturday nights college kids being crazy would deface and even tear down my boards, so every week I had to run around replacing them. We got sales and it got off the ground, but it wasnt a success. It was a great example of not a big idea. An interesting one, but not big. And it really showed me; wow, I didnt know the first thing about building a real business. Intent on enhancing his advertising and sales skills, Matt accepted a job from Natashas father at a small marketing firm in New York City. After she graduated, Natasha joined him in NYC to run Wilhelmina Models, an agency her father had purchased. While Matt enjoyed his work, it wasnt long before he was off on a new challenge: The bar thing was an early instigator around advertising and media, and that experience led me to start a magazine in New York called Fashion Reporter. The idea was Entertainment Weekly meets Womens Wear Daily. Glossy paper, lots of brief articles geared for short attention spans, and a trade focus in the fashion business. The modest publishing venture was a partnership with Brett Markinson, a friend from Babson who had graduated a year earlier than Matt. Brett, who was doing well building his own business interests out in Los Angeles, was able to serve as Matts primary financial supporter. Matt raised a total of $200,000, hired a competent team, and after a few very challenging months, was able to break even. By that time, however, Matt felt that hed gained a clearer understanding of what constitutes an attractive opportunity: Fashion Reporter was a great and amazing experience, but I didnt know anything about fashion and I didnt care. I was really just chasing the money and trying to grow it so I could sell it off. We had raised about a tenth of what we should have, we had a limited upside-potential, and we were in an industry that was massively consolidating in response to the emerging Internet.

After a series of accolades in the press, Fashion Reporter stabilized. Ad revenue climbed, and to his delight, Matt began to receive general interest from a few potential buyersincluding a consolidating publisher who would come to play a dramatic role in Matts career trajectory. New Horizons Based in Los Angeles, Bob Miller had been a highly regarded publishing executive at Time Inc when he began his own company, Miller Publishing Group (MPG), by purchasing Vibe, Spin, Where, and four other special-interest magazines from The New York Times Company. Matt set up an appointment to pitch Fashion Reporter to MPG, and in the fall of 1997, he and Natasha flew out to Southern California. While Matt was unable to close the deal, the visit marked a sea change in his thinking: After seeing Bobs operation, I came to the conclusion that I wasnt getting any pleasure out of bootstrapping. Being the owner of an underfinanced, marginally profitable magazine in a non-high-growth category just wasnt a lot of fun. I wanted a situation like MPG where I could attract the greatest peoplereal killers. Often times in a bootstrap situation it is really tough to find excellent people because killers tend to be doing big things, they have family obligations, and they have a base of experience they expect to get paid for. At that time, only the dot-coms were able to attract superior talent for short money and promises. Natasha was feeling burnt out as well: I had been running Wilhelmina for five years. The company was doing well, but I wasnt having much fun at it. Any business that is talentoriented is going to be a really tough place to manageprimarily because the expectations and demands of the talent are often completely unreasonable. Matt was saying that if I was up for quitting my job, we could move to LA and he could run Fashion Reporter from there until he was able to find a buyer. We returned home to a garbage strike in New York City. The street to our apartment was lined with trash. We looked at each other and knew we were out of there. When Matt informed Bob Miller of the decision to move west, the publisher offered him a job as director of development at MPG. Bob added that although he was not interested in acquiring Fashion Reporter, he did like the idea of adding a hard-core startup entrepreneur to his corporate group of former Time Inc veterans. Matt easily decided to close down his small venture so that he could give full attention to his work at MPG.

Pain-Point and Opportunity Working at MPG proved very enlightening. Internet companies were all the rage, and e-versions of established magazines were fetching as much as twice the price of the printed parents that had spawned them. During this time, Matt was getting calls from recruiters with big opportunities in a variety of dot-coms; he always turned them down and got back to work. Matt and Natasha were married in May of 1999. Life in LA was far from cheap, and substantial bills began to roll inincluding their hefty new mortgage and a cell phone charge fattened to $1,300 by roaming fees. Matt recalled the situation: I was looking at our bills relative to how much I was making, and said Whoa, this is not good! So I started calling a bunch of cell phone providers and mortgage companies to find out their rates. I have always been good with numbers, so I figured it wouldnt be hard to create a spreadsheet that would help me determine the best deals. After calling lots of companies, hanging on hold for hours, and tracking all of the figures I had gathered, I still didnt seem any closer to a solution. I screamed, This is so painful! I have to do something about these bills; I have to lower my bills I decided to search for a one-stop service where I could comparison shop to get a better deal and lower my bills. What would such a business be called? Lower My Bills. I typed that into my browsers and got nothing. Remember; this is 1999, at the peak of the Internet boom. So I bought LowerMyBills.com, LowerYourBills.com, as well as a few misspellings. My initial investment was about $70. Matt added that his fevered Internet opportunity investigation resulted in a pair of pivotal calls: I thought maybe there is a storefront business called Lower My Bills. I dialed 411 for LA and for NY, figuring that if something like that existed it would be there. Both operators said the exact same thing. They started laughing and said, No we dont have it, but I need that, so when you find it you call me back. It was uncanny. Almost immediately, I decided to quit my job. But before he gave up his steady income at a job he enjoyed, Matt decided to investigate a bit further. What he discovered was all good:

I flew to New York for my MPG work, and in my off-time I took a meeting with a venture capitalist that a friend had introduced me to. There were a few young Ivy League MBAs there, and before I had gotten back to LA, one of them had called a friend of his who worked for the largest investor in Miller Publishing. That guy called Bob Miller to let him know that I was thinking about starting a business. Matt got a heads up on what his boss knew, and immediately set up a time to talk: Bob was so gracious. He said, I hired you to come here and think about new ideas, and the risk of doing that was that youd come up with one that didnt fit with what were doing. Then about my idea, he said, I get it; good luck. Rising with the Tide Matt charged ahead on Internet time. Within a couple of days he had parlayed lunch with a friend who founded e-hobbies into a meeting with Sky Dayton; the founder of Earthlink and e-companies, a high-profile incubator. Using 10 basic Powerpoint slides, Matt presented his idea to the investor arm at e-companies. Less than two weeks later, he received a $4 million term sheet1but not before hed had an odd encounter on the way to the money: As an entrepreneur there are funny things you have to fight through. We were talking about saving people money on a wide range of different categories of bills, and one of their analysts wanted to know why were not also in drinking water. He harps on that one thing; poking at it, poking at it. I started to argue with himbut only for about a minute before I realized that you dont need to convince everyone in the world that youre right. One of their team members however, Len Vickers, a long time ad industry expert, said `I get it. I dont get many of these dot-coms, but Lower My Bills could be on a billboard and consumers will get it instantly Matt accepted the investment but declined their offer to start up as a tenant within the incubator: The incubator terms were not something that I was interested in. They were asking for a much larger equity stake than I wanted to give up. The space and technical expertise they were offering might have been very helpful, but really expensive if your company takes off. Plus, I am a
Earlier, Matt had received a $250,000 commitment from an investor group that included fellow Babson graduates Brett Markinson and Konstantin Glasmacher. He had not called the money until the deal with ecompanies was finalized. Although the $4 million deal with Daytons group significantly increased the pre-money valuation of the company, Matt rolled the $250,000 investment into the deal at the original valuation of $2.5 million.
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squeaky wheel, so I would just prod them for free help whenever I needed it. Instead, I found some really cheap office space in North Hollywood. It was so run down that on one side the heat worked, and on the other side the air conditioning worked. It was one or the other. That space built into the culture of LowerMyBills; we were going to focus on the stuff that was really importantand everyone could see that I was ridiculously on top of the numbers. Matt had grown to dislike two aspects of new venturing; negative cash flows, and trading equity for investment capital. Even so, he was not interested in high-concept solutions: Everybody was encouraging us to go and sign a multi-million dollar deal with someone like America Online, or to concentrate mainly on building revenue. We didnt do any of that. Instead, I hired the best people I could find who were connected with our mission of becoming profitable as soon as possible. Matt described an aggressive hiring technique that had proved highly effective: I was hiring teams rather than individuals. Our initial tech team, for example, was seven guys from US Web who were interested in a more entrepreneurial challenge. That was a big win for us because they walked in and were able to help us make a lot of fast headway. Some owners see a talented team of four and feel they can only afford to hire two of them. But if you hire all four, youll get the power of six. Its a smart investment. Matt pointed out that his role as the lead entrepreneur reflected the fact that his hires were passionate individuals who understood their areas of expertise a lot better than he did: What I can do that no one else can do at the company is to run around and pump people up. I am passionate, and from the beginning I have been rallying employees to get wins every day. That evolved to the idea of krushing; we know we are getting wins, but are we getting extreme wins? Now every employee goes through an orientation program called Krushing 101. LowerMyBills was a free online service that worked by enabling consumers to enter their pertinent information, which was then used to match them with participating companies across 18 categories, including home mortgage, home equity loans, purchase loans, debt consolidation loans, credit cards, auto loans, insurance, and cell phones (see Web site: www.lowermybills.com). Revenues were derived by charging those service companies on a pay for performance basis, either for a new customer, or a lead. LowerMyBills.com

utilized aggressive direct business-to-business selling tactics to build a base of local and national players in each category. To attract consumers to the site, LowerMyBills developed a wide range of colorful and creative pop-ups and banner ads. Before long, others began to spot the opportunity. A Massachusetts company, Essential.com had raised nearly $75 million, and a Harvard Business School group was providing a similar bill-reduction service with their venture Get-connected. Matt recalled that for a long while he was too busy to think about what his challengers were up to: Early on its not as much about the competitors as it is about you. You have to stay focused. Running a high-growth start-up is like being a driver in a NASCAR race. During the race those cars get really beat up, and everyone out there is leaking oil. So what the race comes down to is being able to pull into the pit stops to quickly fix fix fix and get back out there. Winning the race is not about having the most expensive or the prettiest car, its about having a great team that knows how to execute under pressureand win. Matt explained that he developed a culture of peak performance by setting the bar high: When I talk to my teams or to individuals, I am always asking how we can double that aspect of the business. In Vegas its called doubling down. If you double down on the things that are working, and keep doubling down, you can grow a lot faster. For instance, a momentum strategy that works for me is: We have two sales people, lets go to four. Four? Lets go to eight. Eight? Take it to sixteen The idea is to double-down until you hit a wall. The key to doubling down is to make sure you have great metrics to measure so that you know what to focus your efforts on. In 2000, LowerMyBills lost $8 million on revenues of $600,000. By the third quarter of 2001, the company had cut its loss-rate in half while generating revenues in excess of $5 million. Seed investor Brett Markinson noted that these significant improvements were related to an opportunity focus: Interest rates were coming come down, the real estate market was cooking, and people were flocking to refinance their homes. All the stars were aligned. LowerMyBills was providing a service for people to lower their bills across a broad series of categories, but they had not been getting much traction. After looking at the relationship between their revenue lines and the growth lines relative to all of the other components of the business, Matt singularly focused on the mortgage niche. As soon as he began pouring a lot of focus into that domain, his business started to take off.

LowerMyBills had become an Internet star with over 50 employees and a need for additional capital. Thats when things got a bit ugly. Adverse Change When the capital markets softened in 2001, the irrational exuberance for Internetrelated concepts evaporated almost overnight. No matter that Matt had never subscribed to the revenues now, profits whenever culture that had contributed to the market downturn; with its dot-com affiliation, LowerMyBills was entirely out of favor. Although he had come a long way towards building a solid, profitable operation, suddenly he found himself in survival mode: This was the toughest situation I had ever dealt with. Investors didnt care that we were doing well; Internet companies were the devil. They wouldnt even return my phone calls. I was driving to work with a stomach ache every day for about nine months. It was so awful! I was going into the office and pumping people up, Are we getting wins? Then Id go back to the room with my finance guy and see that in very little time we werent going to be able to make payroll. Early-stage venture money was being diverted to prop up existing portfolio investments, even my current investors were shying away. In the late summer of 2001, Matt attracted the interest of Jim Simons at St. Paul Ventures. Just after they had presented a term sheet, Matt received a most unwelcome call from his bank: In the late 90s we had established a million-dollar line through Silicon Valley Bankwhich at the time was giving out credit lines like candy. We had drawn down that line and now our cash balance was $750,000 less than what we owed them. So they sent over what they call an adverse change notice. At the time I had signed the documents I didnt even know what that meant; yeah sure, just give me the million dollars. Now I realized that an adverse change notice is a small print clause that allows the bank to demand immediate repayment of the outstanding balancepretty much at any time they felt like it. If you cant do that, they can take all the cash on hand and begin calling in assets. So now, instead of running my business and raising money, I was meeting with lawyers and fighting with my bank just to stay alive. Over time, it became clear that they were basically trying to squeeze me for morethat is, warrant coverage as a percent of the loan.

Seeing how dire the situation was becoming at LowerMyBillsand how close the venture had been to turning the corneroriginal investors came forward to help out. Investor Brett Markinson said that they all understood that Matt was the type of individual to support in a down market: Everyone, including myself, had gotten sucked into the idea of raising as much money as you could and spending it on making noise. Matt had focused on raising as little as possible; he just kept his head down and concerned himself with driving value. Since Matt hadnt raised too much money, and had maintained a lean infrastructure, he was in a good position to really take advantage of the circumstances. While everyone else was cutting back or going out of business, Matt was able to rent space at a great price, and hire excellent talent at a great price. With a couple of investors putting in their own money, LowerMyBills was able to pay off the bank and secure the round. In the last quarter of 2001, LowerMyBills posted its first profit. Investor financing totaled $13 million, and Matt still owned nearly 33 percent of the company. While he and his team saw profitability as a significant milestone for the business, they also understood that their big win was still a long way off. High Speed Turns The early 2000s at LowerMyBills became a long series of cliffhangerseach a test of the companys ability to remain flexible and execute on the fly. Rob Gabel, one of Matts first hires2, recalled one such critical turning point: By 2002, eighty percent of our business was coming from pop-under ad units on the Internet. All of a sudden, Microsoft announces that the next version of Internet Explorer will have a pop-up blocker. Oh my gosh; losing eighty percent of new customer inflow while youre trying to double the business each year isnt going to work We quickly got focused on getting active in the search space and in designing other types of banner unitsand that reliance we had on popups went away pretty quickly.
Rob, an MBA from Stanford, who served as VP of Product & Consumer Experience, explained how he chose LowerMyBills from a number of other promising opportunities: I was interested in the model where you didnt need to ship a box or have any physical goods. I had met with GoTo which later became Overture, and a couple of other companies. One of the people at GoTo referred me to Matt as a generalist who could help him grow the business. Matt and I met on a Saturday at his office and had a free-ranging conversation for a couple of hours. He knew a lot about the Internet; he had some opinions and wanted to know my opinions as well. It was a conversation about searching for a better joint understanding about the market and what models were going to win. Matt is one of the most curious people Ive ever met, and one of the fastest learners.
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We were always coming up against fundamental challenges like that. In fact, if you took any point in the last five yearsif we had stayed as the same business and mode then as we werewe would have not made it. You have to grow and change, or die by getting sucked up and supplanted by your competition. A similar situation arose as the revenue from one customer topped 50 percent of sales. The company swung into focused action, and within 12 months that customer contribution had been brought down significantly. Once again, Matt attributed the win to the team he had assembled: Something that Google is really good at is attracting really smart, high brain-horsepower people who can think outside of the box. You need to be able to hire good mental athletes, and we have tons of people like that here. But those people arent cheap; you have to pay them and you have to motivate them so they dont get picked off by some other opportunity. I never realized that when you get your company to this level, you become the biggest target for recruiters trying to steal away your best employees. In 2003, Matt broke from his own doubling tactic and increased the size of the tech department substantially in a short amount of timefrom 10 to 50 employees. The problems stemming from that moveincluding a dip in morale and a severe lessening of effectivenessnearly brought the company down. On the other side of that growth surge chasm, however, Matt and his team would arrive at the place theyd been pushing so hard to reach. In the Money In the last quarter of 2003, LowerMyBills posted a $2.3 million profit on sales of $17 million (see Exhibit 1). While Matt was now certain that hed built a business of considerable value, at the same time he was concerned about his exposure to risk: By 2004, I knew personally that I was way in the money, but I also knew that I had 99 percent of my net worth tied up in the business. Back when the Internet crashed, I had a bunch of friends that had started online companies that had gone up and come down fast. One guy who had turned down an offer for $700 million went bankrupt a year later. Investment banks were calling me like crazy to say it was time for us to go public. We looked at the possibility of raising additional capital from new investorsrecapitalize with new shareholders so that current stakeholders could get some liquidity. There was also the option of selling to a corporate buyer while staying on in some sort of earn-out arrangement.

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The team hired an investment bank and considered all of its strategic alternatives. The team began the process with the partial buyout route, gave eight presentations, and within short order had received five offers from private equity funds Private equity firms that were interested in a partial buyout were putting forward valuations that were lower than what the acquirers were offering. Matt added that his decision was about a lot more than financial gain. Every employee owns stock in this business, and they have worked really hard to get us to this point. We did need some sort of harvest, but I also knew that we still had a lot of growth ahead of us, and every option has its own set of risks and potential ramifications. From his vantage point, VP Rob Gabel noted that while the corporate buyers were willing to pay more, the risk of losing something special was higher as well: By selling to a corporation, we all stand to make a significant amount of money. But then what happens to the culture when Matt lies four to five layers deep on an org chartreporting to a guy who reports to a woman who reports to a guy in London? There are plenty of examples of companies getting acquired and becoming ghost towns as talent leaves in search of the type of culture we have here right now. With competitors like Barry Diller3 out there, the last thing we need is to lose our edge. Harvest Time? The sun was low and bright as Matt hustled across Santa Monica Boulevard. With Natasha and Orchid resting comfortably at the hospital, he was now on his way to meet with what he had determined was the best fit of eight corporate suitors. It wasnt that he had any qualms about cashing out for millions, but what then? He was already making an excellent income running exactly the type of business hed set out to createand, today would be their first million dollar day. And what if this was all a flukemore the result of an alignment of market factors rather than his prowess as an entrepreneur? If selling to a multinational doused the flame, could he do it again; build a dynamic company from nothing more than an innovative idea? And if he did leave, what would become of LowerMyBills and the team hed assembled? Matt walked into Jerrys Famous Deli in West Hollywood, still uncertain as to the outcome of this pivotal scene in his life. He took another deep breath and thought of the feedback Natasha had given him; just do whatever you feel is best
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Barry Diller was a long-time media magnate and CEO of IAC/InterActiveCorp. One of the many online businesses in his group was LendingTree, a leading financial services marketplace that provided consumers with the tools to efficiently manage their finances and access competitive financial products and services through a single online destination. Consumers could explore a range of products including mortgages, home equity loans, auto loans, and credit cards.

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QUESTIONS

1. Apply the Timmons entrepreneurship framework (entrepreneur-opportunityresources) to frame this case. Pay particular attention to the Matt Coffins traits, experience, mindset, leadership, and team building skills and to how he pursued the opportunity and attracted resources. 2. Discuss the issues that Matt is facing with regard to the harvest. Is this the right time to be selling? 3. Discuss their competitive position in this market and strategies for maintaining it.

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Exhibit 1: Income Statement

2000 Revenues Expenses Sales and marketing Technology and Website General and administrative Total operating expenses Income from operations Other income (expense) Interest expense Interest and other income Total other income Income before taxes Income tax (provision) benefit Net income $569,812 2001 $7,090,527 2002 $18,440,227 2003 $49,618,508 2004 $93,632,254

$3,914,799 1,595,917 2,837,239 $8,347,955 ($7,778,143)

$7,053,959 1,891,605 2,087,691 $11,033,255 ($3,942,728)

$12,084,566 2,056,469 2,617,218 $16,758,253 $1,681,974

$28,058,426 5,516,200 5,332,908 $38,907,534 $10,710,974

$61,156,561 8,460,278 9,878,977 $79,495,816 $14,136,438

($151,422) 79,091 ($72,331) ($7,850,474) $0 ($7,850,474)

($179,352) 167,164 ($12,188) ($3,954,916) $0 ($3,954,916)

($155,461) 28,656 ($126,805) $1,555,169 ($35,206) $1,519,963

($49,546) 54,288 $4,742 $10,715,716 $100,230 $10,815,946

($40,187) 129,928 $89,741 $14,226,179 ($5,972,188) $8,253,991

Other financial information Depreciation and amortization EBITDA Cash flow from operations

443,820 (7,334,323) (5,753,646)

114,600 (3,828,128) (4,208,114)

233,370 1,915,344 1,970,923

328,283 11,039,257 10,861,857

1,320,169 15,456,607 10,911,811

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