The Inside Story of a Small Startup Acquisition (Part 1)


Photo by psiaki

Based on the title of this post you might be thinking I have mad stacks of money in the bank.

That I’ve had a few “exits” and instead of hunkering down and writing code for 6 months I opted to talk to a few of my buddies at the yacht club and purchase a primed and growing social network for somewhere in the mid-seven figures.

Indeed, I did buy my latest startup, but the deal was done from a spare bedroom of my suburban home in Fresno, California for less than most people pay for a new car. And the funds came from revenue generated by my portfolio of web applications and websites that I’ve built over the past several years.

This acquisition is a long story, but if you have a few minutes let me tell you the best parts.

My Background
If you haven’t followed this blog in the past, I’m a guy who launched several web startup/product ideas, acquired several more, had many failures and enough successes that I was able to shut down my consulting firm back in 2008.

My apps range from an SEO keyword tool, an ASP.NET invoicing system, a web application for creating wedding websites, and a handful of others.

If you’re interested you can read about one of my acquisitions from a few years back in a post titled The Inside Story of a Small Software Acquisition.

I’m all about figuring out what’s going to make a person happy and then going after that with ravenous determination, instead of pursuing what we’re told is going to make us happy by the tech press (raise funding! exit big! lose control of your company and get fired by the board!).

So I tend to focus on ideas that have a 1000x higher chance of success than the next un-monetizable social website you have in mind, but the success I strive for is a bit more modest. Probably close to 1/1000th of the payout of a big exit.

But I believe this approach is far more likely to make you happy, and far more likely to actually make a difference in the lives of more than the handful of people who hit the startup lottery each year.

I believe this so much that I’ve written a manifesto and a book and hundreds of blog posts on the topic, and hold a conference every spring that focuses on self-funding your startup. I’ve put all my eggs in one basket, and that basket and the eggs were bought with money from my own self-funded pockets.

In Search Of…
So that’s an intro to my startup philosophy, but where was I? Aaaah yes…the search.

After co-hosting MicroConf in early 2011 I was on the prowl for the next big thing. After a few weeks of soul searching I determined I was going to build a SaaS app. Another week left me with a short list of problems that entrepreneurs need help with (since I’m pretty familiar with the space), and after another few days had them ranked in order of my interest.

In the top 3 was the following problem: entrepreneurs need more organic search traffic to their websites. That phrase may sound exciting to you, or it may be a complete snooze-fest.

The bottom line is that many successful startups (far more than you hear about) are masters at SEO. People don’t tend to talk about SEO as a sexy marketing approach, but it can generate enormous amounts of highly-targeted, high-converting traffic.

Depending on your market, the ROI can be better any other traffic source you can find (with viral traffic the most common exception).

As I pondered the entrepreneur SEO question I realized there was an application I’d been using for years that pretty much fit into everything I mentioned above, and it was all but abandoned. Imagine the luck!

HitTail is a tool that tells you the most promising organic search terms you should target based on your existing traffic. It has an algorithm that analyzes your visitor stream in real-time and provides you with a simple list of precisely which keywords you should be targeting to maximize your organic search growth.

And I’d been a user since 2006. Even through the five day outtage in early 2011, and the semi-regular downtime throughout 2010 and 2011.

Customers were bailing on the service because of the frequent downtime. But there was a hard-core customer base that had been around for years and had stuck with the service because the main algorithm that provided recommendations had never stopped working, even though everything around it had crashed and burned.

Closing
On a warm day in early June I cold emailed the owner through the website contact form. I have to admit – I didn’t know if I would get a response at all. But within 24 hours we were off and running, discussing a potential acquisition.

The site was once great; marketed by a high-end NYC PR firm. But when the firm had focused its attention on other things the site was neglected, and the technical headaches ballooned as the original developers left the company. Needless to say, the owner was definitely interested in discussing an acquisition.

So I made my offer and she countered with 5x the amount. Choke! I’ve acquired many web apps in the past, and I wasn’t prepared to pay “dot com” pricing for it. Although it had been mentioned in Inc Magazine, BusinessWeek, The Wall Street Journal, PC World, and many other mainstream news outlets, given what I know about rehabbing applications I had a firm figure in mind.

The site generated revenue but it was losing customers and the hosting bill was hefty given the performance requirements of the site (it’s basically performing real-time analytics).

It took three months emails before we settled on the final terms. The close was swift: I had a lawyer draw up an agreement, and we used an escrow service to handle the money transfer. It was a clean deal as deals go, and at the end of August, 2011 I was the new owner of HitTail.

And I was running scared…

Step 1: Like a Chicken With No Head
The big issue is that the server hardware was sketchy at best. It had ancient hard drives, an installation of Windows Server 2003 that hadn’t been refreshed for 5 or 6 years, and two SQL Server databases that had not been re-indexed (or had any visible maintenance) for 3 years.

All the while continuing to handle 10-30 DB inserts per second. Every day. For years. There are literally over a billion rows in the database and no one had touched it since 2008.

So I scrambled. I found an awesome DBA on oDesk and moved the 250GB database to a new cloud server infrastructure. A few weeks of prep and an all-nighter later I was feeling much better about HitTail’s stability.

Step 2: The Funnel
The next step was plugging the funnel. To give you an idea of the state of the site, here’s a glimpse of the home page from a month ago (and I think this is how it had looked since 2006):

Keyword tool

In addition to design issues there were major leaks in the sales funnel. Examples include:

  • Many 60-day trials had never ended. There was no script running that ended them so people continued to use the site for free for years.
  • During the trial period a user received exactly zero emails. No reminders to check out their fancy new suggestions. No inquiry as to why they never installed the code. Zip.
  • The website was architected such that it was easy to just wander off into the sunset and never be heard from again. No effort had been put into moving people from content pages back into the main marketing website that promoted the benefits of using the product.

Beyond that there were broken features. Oy vey, were there broken features. I commented out 3 or 4 “top line” features that were such a big deal they appeared on the pricing plan page. But no one had used them in years because they didn’t work!

And the algorithm that made suggestions was operating at around 10-20% effectiveness. In other words, due to the way Google had changed the way it passed URLs in the querystring, the algorithm was missing a slew of valuable keyword suggestions.

I can almost hear the voice in your head: “Something must be done!”

And that something involved me hiring a developer and a designer to help me revamp this thing (both contractors, of course, since I don’t hire employees). I also put in quite a bit of coding time myself.

And three months later, the joyous visage you see below you was unveiled upon the world (this is the new HitTail home page, replacing the one I showed above):

Keyword tool

I’ll be the first to admit: it’s blue. But I like it. And so do people who need organic keyword suggestions, apparently, because it’s converting very well so far.

Conclusion
Those are the highlight of how, 4 months after acquiring a dying web property, I brought it back from the dead with the help of my ragtag team of intrepid oDesk contractors.

And you may be wondering why I bought a startup instead of building it from scratch. Stick around for that; I cover it in part 2.

There are far too many details to include in a blog post, so if you like audio and want to hear even more about the acquisition, I was interviewed on this very subject for 90 minutes on TechZing. Check out episode 165.

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45 comments ↓

#1 Lee on 01.25.12 at 4:16 pm

I’ve really enjoyed following the HitTail story here & on your podcast. What I appreciate the most is being brought “inside” and shown some of the nitty gritty – both the good & bad. Anyway, just wanted to send a huge thanks to you (and Mike!) for being so awesome.

Rob Reply:

This might be my favorite comment of the last month :-)

Certainly appreciate it; thanks for letting me know!

#2 chris kluis on 01.25.12 at 4:26 pm

Excellent post! Can’t wait to see the results article.

#3 The Inside Story of a Small Startup Acquisition (Part 1) | Software by Rob | VC Ramesh on 01.25.12 at 5:17 pm

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#4 Damir on 01.25.12 at 5:55 pm

You ask for credit card details on a non-secure (non https) page. Ouch.

Rob Reply:

Do you mean https://www.hittail.com/register.asp ?

Not sure what browser you’re using, but it’s https in every mainstream browser on Mac and PC.

#5 Damir on 01.25.12 at 6:08 pm

It was http on my iPad. I went to PC to investigate and saw https, but striken-through.
Here is how to reproduce. Go to your website. Go to register a plan. Nice https, works well. Click on the HitTail logo. Invalid https, at least in Chrome. Go to register a plan. Invalid https.

Rob Reply:

Got it.

So you have to go to the page, then leave, then come back. So the invalid HTTPS is actually for the prior page, since it works on first visit. All right, we’ll have a look.

Re: iPad – I’m not able to reproduce. Is it the same: go to the page, leave and come back issue? Because first visit works great for me as https on iPad.

Damir Reply:

Sorry, iPad is fine. There is a small lock icon on the tab. Perhaps I missed it first time.

Damir Reply:

Just read your comment again. Invalid HTTPS will also show up on the register page if you come to it from the home on invalid HTTPS.

Rob Reply:

Got it – thanks! At least I know that SSL is working :-)

We’ll take care of this issue in the next few days. Thanks for letting me know.

Rob Reply:

Damir – I thought of an easy way to fix this and just implemented it. Should be all set now.

#6 Simon on 01.25.12 at 6:42 pm

I’m sold- signing up for hittail right now. Refreshing to hear a startup story without the b/s

#7 Patrick Foley on 01.25.12 at 6:49 pm

Great story, Rob – can’t wait for part 2 (guess I’ll have to check out the TechZing interview)

#8 Zack on 01.25.12 at 7:05 pm

The blue is just too much. It’s not horrible, but it would look better with out the blue.

My eyes needed to adjust from going to hittail back to here…

:-)

Katelyn Friedson Reply:

(don’t listen to him- the blue is fine)

Christi Johnson Reply:

lol!!

Yeah…the blue is not the absolute best, but at least it’s not pink.

Signing up now… :)

#9 Anthony V on 01.25.12 at 7:30 pm

Excited to read it’s not a https://gist.github.com/1641705 kind of story :)

#10 Dave on 01.25.12 at 8:59 pm

What escrow service did you use?

Rob Reply:

I linked to it in the post, but it’s escrow.com.

Dave Reply:

Oh right, I did click the link but though that site looked a bit dodgy with it’s ’90’s design.

#11 Anonymous on 01.25.12 at 11:43 pm

Typo in “moved the 250GB databse”.

#12 Chris Sherlock on 01.26.12 at 12:27 am

Seriously considering looking into your site… if only because you responded to someone’s enquiry about SSL issues and you found a solution in next to no time. Now THAT is responsive!

#13 David Krug on 01.26.12 at 2:35 am

This is beautiful. Thanks for sharing this story so encouraging to watch and see.

#14 Joseph Turian on 01.26.12 at 2:45 am

Could you talk a bit about the dilligence you did during the acquisition? How long into the discussion before you commenced dilligence? What did it entail and how did you verify what was told to you?

Rob Reply:

Sure; I’ll do that in part 2 or 3 of the series.

#15 Jef on 01.26.12 at 4:14 am

Thanks for this very inspiring article. A Micropreneur, buying himself into a startup .. I like that. Looking forward to reading part II and III.

#16 The Inside Story of a Small Startup Acquisition (Part 1) | Internets Best Hosting on 01.26.12 at 4:43 am

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#17 seni on 01.26.12 at 10:38 am

Hi Rob,

Great story. Wish you success with the venture and will be interested in signing up.

What did you pay odesk folks?

S

Rob Reply:

Thanks!

>>What did you pay odesk folks?

DBA was $35/hour. Developers are $8-12/hour. My VA that handles tier 1 email support is $11/hour.

#18 Hasan on 01.26.12 at 11:07 am

Pretty inspiring… not only on hearing your success story but to see successful people sharing the minute details of their success..

#19 Mike Levin on 01.26.12 at 2:25 pm

Hi everyone. Creator of HitTail here. Rob’s 100% correct, and I thought I’d just drop my 2-cents. I was only very peripherally involved with HitTail towards the end there, helping the owner band-aid and keep it running, and trying to do right by the incredibly loyal core tribe. It’s just one of those phases of life thing—new job, new baby, new priorities. I could not be happier about it being in Rob’s capable hands. And yes, I am still a fan and user of HitTail myself, still using it on my sites to great effect.

Patrick Foley Reply:

That’s very cool of you to chime in. I appreciate having your perspective here.

#20 JamesJahttp://www.softwarebyrob.com/2012/01/25/the-inside-story-of-a-small-startup-acquisition-part-1/mes McGrath on 01.27.12 at 2:08 am

I wonder if NewsBerry could be your next acquisition?

http://news.ycombinator.com/item?id=3514244

Rob Reply:

It’s too late – they already shut it down. But it’s funny you would mention it…there’s some history there.

Christi Johnson Reply:

I would love to read that story too. Can you put it in mind to write about at some point? ;)

Btw…this is REALLY intriguing because I am seeing that being a programmer is just about the only way to go for myself. I am an entrepreneur who wants to solve lots of problems I see in the online world, but since I cannot code, I can’t solve the problems. Yet. I am rectifying that professional issue right now. It’s nice to read about someone who does what I want to do and who now is an entrepreneur I admire. Great work. Can’t wait to read more….

#21 Marco Demaio on 01.27.12 at 4:49 pm

This article is simpy superb. This is pure entrepreneurship. I agree with some of the comments, with my mind full of code i would have tried to copy the idea by coding up a new site/app by myself. You navigated in a completly opposite way, the real entrepreneur path: you bought it, and used a coder to fix it. And I have the feeling you navigated on the right path. Can’t wait to read the 2nd part (sorry by i don’t like audios it’s like tv, it’s too much noise, I prefer reading). Thanks for sharing this story.

matt Reply:

buying a company is pure entrepreneurship?!!?

Patrick Foley Reply:

It can be – I think in this case it was … Rob took a proven but beleaguered asset, bought it at a discount, revitalized it, and is working to make it profitable again. How is that NOT entrepreneurship?

Sometimes the best thing you can do as a programmer is pick the right library or service to call instead of writing your own … seems like the same thing here. Just because he didn’t create the company from scratch, he’s still being creative in its restoration.

#22 Yusuf on 01.29.12 at 12:54 am

Hi Rob,

I bought your book a while back and I re-read it from time to time. Congratulations on your new acquisition!

How are you able to trust a DBA you found from oDesk with 250GB of data?

Thanks!

Yusuf

Rob Walling Reply:

>>How are you able to trust a DBA you found from oDesk with 250GB of data?

Is basically the same question as “How are you able to trust a DBA you found on {Monster.com, Craigslist, from a local recruiter, your internal HR resume database} with 250GB of data?”

You research, talk to them, verify they’re experience and confirm that they can handle this kind of DB, and perform a vetting process. Anytime you give someone access to your code or data this has to happen.

In addition, the DB doesn’t contain credit card numbers or any kind of financial data; the most critical things are keywords. This particular DBA (as with most) has worked with information far more sensitive than what we have in the HitTail database.

#23 Keith on 01.30.12 at 7:20 am

Did your ASP guy also do the CSS/design? Would you be able to recommend him to me? Thanks!

Rob Walling Reply:

I had 2 designers and a separate ASP guy. I’ll drop you an email with their info.

#24 The Inside Story of a Small Startup Acquisition (Part 2) | Software by Rob on 02.02.12 at 12:02 pm

[...] ← The Inside Story of a Small Startup Acquisition (Part 1) [...]

#25 Katelyn Friedson on 02.02.12 at 5:59 pm

ha. “During the trial period a user received exactly zero emails.”