The Industry Standard – Lessons Learned

One of Flatiron Partners’ more high profile failed investments was The Industry Standard, "the bible of web 1.0". I learned a bunch of lessons from that investment but the two that stick with me most are:

1) Unsustainable revenues will kill you if you build your costs to match them.

2) Don’t invest as a minority investor in a company controlled by a corporate entity.

The corporate entity in that deal was IDG, and John Battelle, who was the CEO of The Industry Standard, points to this bit of revisionist history on the part of Pat McGovern, founder and CEO of IDG:

Why did the Industry Standard die?

McGovern: In 1997, the magazine was launched as many big Internet
companies were launched, and investors needed a weekly publication
covering the industry. In its first year, ‘97, the magazine made $9
million in revenues, and in its second year it made $25 million. And
then at that point, there was $800 billion invested in Internet
companies.

But then the bubble burst. The magazine went from making $200
million in revenues in 1999 to making only $50 million in 2000.
Unfortunately the management had put the magazine on an IPO track. They bought very expensive CRM software,
and had $120 million in fixed costs per year. It was a hopeless
situation. The gap between costs and revenues was too large.

The magazine had made a volcanic rise and fall. We’d
never seen anything like that before or since. In 1999 the magazine set
a record for the number of ad pages, and the next year it set a record
for the largest drop in ad pages.

The paradox was that in 1999, we were approached by Time Warner and
Hearst, who wanted to buy the Standard for $400 million or $500
million. But [then-CEO] John Battelle had a plan to be making $1
billion a year by 2006, wanted to take the company public, and planned
to make a tender offer to buy Dow Jones. It was a plan for world
domination, and we should have taken the money from the magazine
publishers and run. Business 2.0 sold for $350 million right before the
bust.

I edited that a bit to take out the less relevant parts. Click on the link if you want to read the whole thing. What Pat says is largely true about the fundamentals of the business. Try as we might (and my partner Jerry Colonna who was on the board did try a rescue financing), there really was no way to save The Industry Standard. That big of a whipsaw will kill most companies.

But that part about turning down the $400 to $500mm offer is pure revisionist history on Pat’s part. I recall very clearly Jerry coming back from a board meeting and telling us that IDG was blocking the sale, that they didn’t want the magazine to end up in a competitor’s hands. That was very frustrating to the investors because we would have made a significant gain in a very short period of time. But when you invest as a minority in a company controlled by a corporate entity, you have no control over such things.

Lesson learned. Never doing that again.