How America's Web 1.0 Companies Survived

Two weeks into his new job, Stamps.com’s CFO Ken McBride started slashing the first of 485 workers—87 percent of the staff. It was October 2000, six months after the initial popping sounds of the dotcom implosion, and the electronic-postage company was spurting gobs of red ink. Just a year earlier Stamps.com had gone public, raising a staggering $450 million in two offerings.

Back then investors didn’t seem to care that the company had lost $56 million on revenue of $358,000 in 1999; they bid up the share price to $88. But within a year the price had fallen to $2.25. Stamps.com finished out 2000 losing $213 million on $15 million in revenue. “It was not a fun time,” says McBride, 45, who has been CEO since 2001.

But today, after years of refocusing, Stamps.com has determinedly pulled out of a death spiral, netting $33 million on revenue of $123 million over the most recent 12 months. So, too, have a couple of other members of our annual list of America’s Best Small Companies—online photo printer Shutterfly and j2 Global, the messaging and communications company. All three were conceived during Web 1.0. And like many of their dot-bomb brethren, they raised obscene amounts of money on the strength of a story, rather than a business plan, much less a real product or service. All nearly perished during the meltdown. But the best entrepreneurial companies have always lived by their wits and can sometimes outlive their founders. By pivoting, refocusing and acquiring other key companies, Stamps.com (No. 32 on our list), Shutterfly (31) and j2 Global (39) have all found ways to reinvent themselves, to survive—and thrive.

Revisiting the 1997–2000 tech boom is a cringe-provoking history lesson. At the height of the frenzy on March 10, 2000, when the Nasdaq closed at 5048.62, just under 400 internet companies had a total market capitalisation of $1.3 trillion. By October 9, 2002 the tech-heavy index had scraped 1114.11. Helping to pull it down were some hideous ideas and paragons of miserable execution. Among them:
•Pets.com raised $83 million in a February 2000 IPO and spent millions in TV commercials. It didn’t sell much in the way of dog food and kitty litter, though, and had to liquidate that November.

•Backed by gold-plated venture capital firms, online grocery business Webvan went public in March 2000, raising $375 million, but expanded far too quickly and went bankrupt in July 2001. Jeff Bezos resurrected it in 2007 as Amazon-Fresh.

•Founded in 1994 as Beverly Hills Internet, GeoCities grew into the third-most-popular website (as a way for users to group content) when Yahoo bought it for $3.6 billion in January 1999. It died slowly over a decade.
 
But out of the wreckage there also emerged some notable public and private survivors. Priceline.com, Pandora, eHarmony and Angie’s List were all created in those frothy times and adapted repeatedly to stay alive.

Shutterfly learned to reboot the hard way. Founded in 1999, it sold and mailed prints of digital photos back when an Olympus C-2500L, with an astonishing 2.5 megapixels, sold for just under $2,500. The startup had pedigreed backers who included Netscape billionaire Jim Clark and Silicon Graphics’ George Zachary, who led venture rounds eventually totaling almost $90 million.

The tech crash was damaging but not fatal. Shutterfly lost $18.5 million on sales of $7.5 million in 2001, cut 25 percent of its workforce and recovered enough to post its first annual profit in 2003. A far greater threat came from much larger competitors: HP’s Snapfish, Kodak’s Ofoto and Sony’s ImageStation, which started price wars as early as 2000, forcing Shutterfly to give away 85 percent of the 4-by-6-inch prints for which it otherwise charged 49 cents. By 2005, when Jeffrey Housenbold, 44, became Shutterfly’s fourth CEO, 58 percent of the company’s sales came from prints, the 4-by-6s now down to 19 cents an image. “Our margins were shrinking, and we had to diversify,” Housenbold recalls.

He had to do it quickly, too, since investors were nudging Shutterfly to go public. “The first day on the job I had a 30-minute introduction to the company, and I spent the rest of the day interviewing banks.” A closer look at the finances revealed the obvious: The photo print business was rapidly approaching a vanishing point.

Housenbold, an eBay and AltaVista veteran, had the stature to sway investors and rethink the company. Shutterfly had recently launched, but not pushed, a $29.99 photo book. Why not also offer an array of high-margin personalised products—calendars, greeting cards, slide shows, apparel and photo-based items? “If we hadn’t pivoted,” says Housenbold, “we’d be out of business today.”

Shutterfly also made strategic acquisitions—seven of them in the last two years. There must have been some survivor’s glee in snapping up Kodak Gallery (formerly Ofoto), Fuji’s SeeHere and Sony’s ImageStation. Its most critical buy may have been the $333 million it spent in 2011 for Tiny Prints, which makes cards for weddings and births. In the first seven months 1 million customers spent $93 million. Turns out that Tiny Prints also feeds new revenue for photo books and other products.

The recent purchase of Penguin Digital, a mobile-app-development company, and This-Life, a cloud-based photo-sharing and storage service, is nudging Shutterfly in promising new directions. The company is investing $35 million or so in new smartphone and tablet services. And to level out seasonal bumps—more than half its revenue comes in the fourth quarter and 30 percent between Thanksgiving and Christmas—Shutterfly is now earmarking production in offpeak months for so-called enterprise printing: Direct mail for the likes of Dell, AT&T and the Gap. While this segment has recently doubled, it still makes up only 5 percent of its $700 million in sales.

J2 Global has also been buying its way into higher-margin businesses. Founded in 1995 as a way to deliver faxes through email, the company began as a cheaper alternative to owning and operating a fax machine. Today, incredibly, it still processes more than 1 billion faxes a year for lawyers, doctors and others who rely on delivery confirmation and phone records.

During its yeasty days “everyone was reading every day about everybody making millions online,” recalls Hemi Zucker, j2’s CEO, who joined in 1996. Co-founded a year earlier by Jaye Muller, a musician who kept missing his faxes and voicemails while on tour, JFax (as it was then known) began in a one-room office in Manhattan’s SoHo. After receiving $25 million in private rounds of funding, the company moved to Los Angeles and went public in July 1999, raising $74 million.

The good times didn’t last. J2 racked up losses as its stock price plunged 97 percent to 28 cents. Under threat of being delisted by Nasdaq, the company did a 4-for-1 reverse split of its shares in February 2001. To stay alive, j2 acquired its chief rival, eFax, in late 2000 and jacked up prices on eFax’s 100,000 customers. Zucker also halved his $8.7 million ad budget, equivalent to 62 percent of its revenue. Profits came in 2002.

Cost-cutting carried j2 only so far. EFax added branded products to a mix of email, fax and voice messages over the internet. Zucker has bought 40 or so companies since, taking j2 into document management, email hosting and marketing services, conference calls, business cloud services, even digital media (the company now owns publisher Ziff Davis). “Everybody says fax is not sexy, but it makes a tonne of cash,” says Zucker, 66. That ancient mode of communication still accounts for 58 percent of j2’s $446 million in annual sales and more than 50 percent of its $121 million in net income.

Like j2, Stamps.com rediscovered its greatest strength in a core business. Between 2000 and 2006 Stamps.com went on very expensive detours into a shipping company, an outfit to print tickets and vouchers, a venture in Dutch postage and, most notoriously, personalised Photo-Stamps (which it still sells). Focussed on small and home businesses, Stamps.com now offers lots of services around postage, including printers, toner, scales, labels and insurance.

Just one little problem, of course: The company’s total reliance on the US Postal Service, which lost $15.9 billion in the latest fiscal year—and just defaulted again on the $5.6 billion it owes its health care fund for retirees. “It’s a challenge,” concedes McBride, the CEO. But having hopped from crisis to crisis for more than a decade, he’ll probably figure something out.

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