My advice to other start up CEOs: the Fon experience
Published by MartinVarsavsky.net in Fon with No Comments
Last Spring we cut our burn rate at Fon. We reduced our head count from close to 100 to 60. It was painful. It was sad. But it had to be done, since then Fon has grown faster than ever. Not because the people we let go were not doing anything. Quite the contrary, they had been doing a lot. But many times, a start up is about first building a platform and then managing it. And just as it takes hundreds of people to build an office building but less to run it, it also takes less people to run a platform like Fon than it took to build it. Bottom line is that when we went from 100 people to 60 we managed to grow revenues faster than ever before and to cut losses from over 1 million euros per month to 350 thousand. We also grew to one million foneros around the world. Our revenues grew from 20K euros per week to 50K and the good news is that these sales are mostly cash into the company (Fon is like a telco without capex or opex). What we also achieved is to stretch our investor´s money into 09 and to need a very small round to break even.
Looking back, I am very pleased we did our adjustments in the Spring, because if we had had to be raising money this October we would be in serious trouble. The markets simply suck right now, and even though VCs tell you that they are in this for the long run with Google, Yahoo, Apple down over 50% and no exit horizon, believe me, either they will pass or ask for a 50% or more haircut in valuation themselves.
My advice to CEOs of start ups then it´s tough, really tough, but it is to do what we did at Fon. We cut our burn rate by 70% mainly by reducing headcount, raising revenues, raising margins, and particularily by raising margins on the sale of the foneras themselves, which we used to give away practically for free. In our case, we discovered that the free mentality of the internet was not especially good for a wireless community, as most people who got their routers for free did not connect them, while those who paid were more serious about the whole thing. Moreover, we are now about to raise the rates we charge Aliens who connect to Fon. Partly because we need the money but also again to show the value of becoming a fonero and share and never have to pay. We only charge $2 per day while other WiFi companies charge way over $10. Plus the value of our passes increases as we have more hotspots. Fon now has 10 times more hotspots around the world than our second closest rival. In the UK and Japan our coverage is especially good. With this crisis, Fon cannot think of deep pocketed investors continuing to cover high burn rates, regardless of the fact that our investors are BT, Google, eBay, Itochu, and some of the largest VCs in the world. eBay for example, announced today that they are letting go 10% of their workforce and this is probably the beginning of many job reduction programs that will happen in the next 12 months at the big companies.
I know it´s hard to tell a start up CEO to fire half of the people he or she has in the company, because in a start up environment groups are small and strong emotional bonds develop. But the way I see things, we are on to a period similar to 2001-2005 and it´s either half, or all. And maybe it´s first half and then all but it´s worth the try.
Yahoo is an amazing company, with tremendous products and enormous potential. But Yahoo has been poorly managed for years first by Terry Semel, an alien to the internet, and by Jerry Yang, who is a remarkable individual in many ways but as a returning CEO he is no Steve Jobs. Still Yahoo has half a billion unique users per month and outstanding products and services: Yahoo mail has more mail users than Gmail, Yahoo Messenger has more members than Google Talk, My Yahoo is the number one start up page in the world, Flickr is the best photo service and Yahoo has wonderful products in many niches. In my view, what Yahoo really needs is an amazing CEO who can change the perception that many people have of this great company. Here´s two people I know who I think could pull this off. One is Chad Hurley of Youtube and the other Niklas Zennstrom of Skype. If Yahoo managed to attract either one to run the company, I am convinced that they would in turn put together a remarkable management team around them and turn Yahoo around. Both have worked very well with partners in the past (Niklas and Janus, Chad and Steve) and these partnership seem to perform superbly on the internet, with Larry and Sergey being the leading one.
I would like to clarify that neither Chad nor Niklas have told me they would be interested in running Yahoo and they are both very busy and happy with their own projects. But I wanted to use them as an example of what Yahoo could try to do. A committed board could at least try to recruit them or the very few people of their caliber that exist in the world and built a new and great management team to run the company.