It is a well kept secret that some of the leading companies arrived at the top without taking early venture capital funding. I spoke with Heidi Messer, a founder and president and COO of LinkShare Corporation, to discuss how the company was able to achieve an exit value 47x the capital used since inception through its sale to Rakuten Inc. in 2005.
Founded in 1996 and headquartered in New York City, LinkShare Corporation provided e-commerce businesses with a wide range of online marketing services including search marketing (SEM), lead generation and affiliate marketing.
Venture Capital Raised/Used: $17 million raised/ $9 million used (Est.)
Exit: Purchased by Rakuten Inc. for $425 million
Exit Value to Capital Used: 47.2x
The year was 1996. The location, a small studio apartment in New York City, the East Coast version of the storied Amazon.com garage. That’s where Heidi Messer and her brother Stephen founded their first company, LinkShare Corporation. Sensing the opportunity to capitalize on the impending growth of the Internet, Heidi and Stephen, with two part-time employees, invented and patented a way to show the value of advertising on the Web and created an affiliate network for advertisers.
The venture, which was ” self-funded for two years through frugal living and reinvestment of every dollar earned,” was wildly successful and is widely considered a pioneer in online affiliate marketing. LinkShare became the largest pay-for-performance affiliate network on the Internet with over 10 million partnerships and was the first affiliate network provider to achieve sustained profitability. At its peak, roughly five percent of U.S. e-commerce traffic went through LinkShare’s network, and the company estimated that it tracked more aggregate transactions daily than the NASDAQ, NYSE and Nikkei.
The company was launched with seed funding from the founders and reached $10 million in revenues having only raised a $4 million growth equity round. After a final financing of $13 million, the company became a profitable, thriving business. Four years later Heidi and Stephen were considering taking LinkShare public when they received an offer from a top Japanese shopping portal, Rakuten Inc, in 2005. They reached agreement to sell the company to Rakuten for $425 million in cash.
In this interview, Heidi discusses the company”s humble beginnings, its investment strategy and how she and Stephen grew such a successful business.
Javier Rojas: How did you and Stephen initially fund the business?
Heidi Messer: We founded the company using personal savings. For the first six months, only my brother and I were full-time. We had two part-time employees, one tech person and another who did marketing. Every dollar we had went straight into the business. This was very good training for us, and set a cultural foundation for the company. Every dollar we took in, we invested back in the business.
JR: What made LinkShare unique?
HM: We were the first in the ad network space to invest in analytics. A lot of the reason advertisers used us is because we helped them be more efficient in advertising. We also offered analytics to content sites, which helped them determine the value of their real estate.
JR: When did you take the first round of venture financing?
HM: We self-funded for about two years and didn’t technically have an angel round, as we were investing sweat equity in the business. We took our first round of $4 million in 1998, from Internet Capital Group (ICG) and Comcast. At that time we had about $1 million in revenue, with a modest burn rate and less than 10 full-time employees. We weren’t profitable yet because we were constantly investing in the company in anticipation of the growth we knew was to come.
The first round was spent on sales and technology, because we needed the first-mover advantage, since the winner typically takes all. At this point, Stephen and I also started taking modest salaries, because we thought it was unrealistic that a company would not pay the CEO and president.
JR: Your second round was about two years later. It seems you were able to get a lot of mileage out of that first round?
HM: Yes, the $4 million lasted us a long time. We were very frugal, much like when we first started the company. In our second round, in 2000, we raised $13 million from ICG, Comcast, and new investors Mitsui and an individual, who ultimately became a board member. At that time, our revenue was about $20 million, with an 85+ percent gross margin. About six months after this round we reached profitability.
Again, we invested that round in sales and technology. We walked a tight line on both because we believed we needed to be doing two things: generating revenue by growing a customer base and continuing to establish our technology leadership.
That was the last round we did. We were slated to go public soon after that, but the public markets dried up.
JR: LinkShare amassed an interesting line-up of venture capital partners. Why did you feel it necessary to work with such a diverse group?
HM: As I mentioned earlier, ICG and Comcast invested in our first and second rounds, and we added Mitsui and a former corporate executive in the second round. We felt like each investor brought us a unique group of contacts and experience that could benefit the business. For instance, ICG connected us with Comcast, which offered us contacts that had experience building a network. The individual investor was incredibly insightful in dealing with general business matters, and his experience was valuable because he had weathered economic ups and downs. And, we had done a phenomenally successful joint venture with Mitsui in Japan, which is a great market, but challenging to break into if you don”t have the experience.
JR: I”m sure you could have raised more venture capital. Why didn’t you?
HM: We were always fiscally disciplined. There is a problem with taking in too much money. As we were getting the second round of funding, we looked back at our original business plan, and realized it had never changed from the beginning. We knew then what capital we needed and how we were going to spend it. By not taking in too much money, we knew we wouldn’t spend it on things we didn’t need. For a lot of companies in 2000, the amount of money they could raise was a badge of honor. But we believe you need a plan for how you”re going to spend it. Raising money can”t be the measure of how successful you are.
JR: Did you eventually reconsider an IPO?
HM: Yes. In 2004, we began the process to take the company public. But at the same time, a number of companies made offers to purchase LinkShare. So we ended up going down a dual path “working on an IPO filing and considering offers. Finally, we decided that the offer from Rakuten was the best for the company. Not only was it good for investors, it would enable the business to grow as we had envisioned.”
JR: What advice would you give to founders of other bootstrapped companies?
HM: There are two things I would say: 1) make sure you have good discipline in how you spend your capital; and 2) choose partners wisely. We were lucky to have the mix of partners we had, because they had faith in our management styles.
I’m wary of investors who want to bring in professional management. If an investor isn’t willing to invest in you and your vision, it’s something that should give you pause. The companies “like Apple, Microsoft and Oracle” that have been so successful all have been run by their founders.
JR: Now that you have left LinkShare, what are your plans?
HM: I tried retirement for about three months, but that didn’t work out. Right now I’m working with my brother on starting another business.
Javier Rojas is a Managing Director of Kennet Partners in Silicon Valley. Kennet provides growth equity capital to bootstrapped companies in the US and in Europe. Kennet focuses on capital efficient businesses with annual revenues of $5M to $50M. Kennet works with founders to build high value outcomes and preserve equity value through capital efficient growth strategies.