Tuesday, May 3, 2011

Lesson #29: No Matter How Bad It Gets, Persistence Wins

In my last post, we talked about iExplore's scary experience in the wake of 9/11/01, and the need for startups to expect the unexpected with enough cash cushion on hand.  I mentioned iExplore ultimately survived that negative impact on the travel industry, but did not give you the details of how we actually avoided bankruptcy and kept the business afloat.  I will highlight a few key points below, summarized as "no matter how bad it gets, persistence wins!"

To set the stage, here were the key datapoints for iExplore's business at 9/11/01.  The company had about $5MM in debt ($3.5MM from venture capitalists and $1.5MM from creditors), a cash burn rate of around $250K per month, no revenues coming in (due to low demand post 9/11/01), a low margin business and no cash in the bank (with our $4MM committed venture deal falling apart post 9/11/01).   To say the situation was bleak was an understatement, and any normal business would have called it a day and closed the business.  But, I was passionate about the business and our progress to date, and knew the markets would ultimately recover.  All I needed to do was to restructure our business to give it a chance to succeed long term.

It terms of the $250K burn rate, that was net of any discretionary spending like marketing that we had immediately cut.  It was largely the expenses related to our 45 person staff.  With no cash in the bank, and no cash in sight, I had no choice but to layoff 100% of our staff, including myself.  That got the burn down close to $50K per month, a much more reasonable level to find a "white knight".  I basically told nine of our employees, that if you are willing to volunteer your time over the next couple months, they would be rehired (and paid any unpaid back pay) if a new financing closes.  But, no promises, proceed at your own caution.  Believe it or not, those nine employees were as empassioned about iExplore as I was, and agreed to stay on for no pay, on the hopes of having a job on the back end.  Those were some really terrific people!

The second thing I needed to do was come up with an alternative revenue stream, to make the business more attractive to investors.  So, I evolved the business from a 15% travel agency (selling third party trips) to a 35% margin tour operator (selling iExplore branded trips).  And, at the same time, entered the 75% margin online advertising sales business, selling banner ads on the iExplore website.  Those two changes allowed us to present a profitable business plan, even in the low travel demand environment post 9/11/01.

The third thing I needed to do was to settle our debts at much reduced levels, as new investors would not touch our business with a $5MM noose around our neck.  For the $3.5MM of venture debt, those investors agreed to convert their stake into equity in the going forward business, if I could find new cash investors.  This debt was intended to convert to equity anyway, albeit not at the much reduced valuation that was required post 9/11/01, so the investors ultimately agreed given the company's dire straits. 

Settling the $1.5MM of creditor debt was a lot trickier, as they were not board members and did not have a vested equity stake.  The good news was, these creditors were not iExplore customers or going forward vendors.  They were 100 old vendors that we did not plan on using going forward (e.g., old advertising agency, unneeded software/hosting vendors post our reorganization).  So, we hired bankruptcy counsel who filled in a 75 page draft bankruptcy filing and sent it to the 100 creditors with a cover letter that basically said, "we all know what happened at 9/11/01, iExplore is illiquid and needs to raise cash, new cash has been identified but only if you settle your debts at $0.10 on the dollar, and if you don't agree, you are sitting behind $3.5MM of senior venture debt and will get zero when this draft document gets filed".  It was basically a huge game of "chicken" with what would become 100 hostile and pissed off creditors.  But, after lots of calls by myself and our CFO, we got 100% of the creditors to agree to the settlement, since $0.10 on the dollar was better than zero.  And, we turned $1.5MM of liabilities to $150K of liabilities, a lot easier for a new investor to digest.

The final thing we had to do was raise the new capital, which was torture in the wake of 9/11/01 when the whole financial market basically went on pause.  I had made 400 phone calls to my venture capital colleagues looking for anyone to listen, and they were just too worried about the long term impact on the travel industry in a world of increased terrorism.  So, I had no choice but to call my uncle, who was one of my advisors, that was willing to fund me $50K per month, assuming he could see material progress in our business.  That was our lifeline, that gave me the time to ultimately find $1MM of new venture capital that was willing to fund the business in January 2002.  These investors got more comfortable the longer we got away from 9/11/01 and they could actually see revenues starting to recover.  Not to mention, buying into established iExplore (with over 1MM visitors a month) at much reduced valuations, could lead to juicy financial returns when the market fully rebounded.

So, that was how iExplore survived 9/11/01 and lived to fight another day.  And, as we all know, it ultimately became the largest website in the adventure travel space, and was sold in 2007 to TUI Travel PLC, a $25BN company and largest seller of leisure travel in the world.  The investors who saved the business after 9/11/01 made a good return on their investment.  And, I now have a success story on my resume and not a failure.

This clearly demonstrates that no matter how bleak a position you think you are in, persistence will ultimately win the day.  And, with a lot of hard work and creative thinking, a phoenix can indeed rise from the ashes!

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