Leadership

Conversation with Kent Plunkett, Founder, Salary.com

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It is a well kept secret that some of the leading companies arrived at the top without taking early venture capital funding. I sat down with Kent Plunkett, founder and CEO of Salary.com to learn how he created a company that achieved an almost 22x ratio of exit value to capital used.

Headquartered in Needham, Mass., and founded in April 1999, Salary.com s a leading provider of on-demand compensation and talent management solutions for helping businesses and individuals manage pay and performance. Salary.com’s highly configurable software applications, proprietary data and consulting services help HR and compensation professionals automate, streamline and optimize critical talent management processes including: market pricing, compensation planning, performance management, competency management and succession planning. Built with compensation and competency data at the core, Salary.com solutions provide businesses of all sizes with the most productive and cost-effective way to manage and inspire their most important asset – their people.

Venture Capital Raised/Used: $8 million
Exit Value: IPO – $175 million
Exit Value to Capital Used: almost 22x

For Kent Plunkett, the inspiration for a new entrepreneurial venture arose out of frustration. In the late 1990s, he was interested in hiring a secretary. But he could not find a good resource that would help him figure out how much he should being paying someone in this position. As a result, he started looking into the compensation data market and realized there was a data oligopoly, with a handful of key players controlling most of the key data.

The idea for this new company sat on the back burner for a few months, until Kent discovered the Salary.com domain for sale. He knew this would be the brand that could easily explain the offering and lead potential customers to the service. “We thought this had big legs and could be a major brand in the U.S.,” he noted. So, Kent – who funded the company initially by working without pay – raised his initial angel money to buy the domain name and started building the company.

In less than eight years, Kent was able to build a company from just himself and a partner into one that had successfully raised $175 million in an IPO.

Javier Rojas: How much angel funding did you first receive?

Kent Plunkett: We got our first angel money – a total of $150,000 – in the summer of 1999. This allowed us to purchase the domain name and begin building the product, which included hiring three people – one to do customer service, a web site designer and a junior sales and product manager. We raised another $350,000 in January 2000, and ultimately launched the consumer site – Salary Wizard – in June 2000.

JR: What set Salary.com apart at the time?

KP: Offering a compensation database on the Internet was unique back in 2000. We invested heavily in developing our database. I would estimate that we’ve spent about $20 million on it since inception, primarily funded by revenues. Most of the capital went toward labor. In 2001, we built proprietary algorithms that allowed us to calculate about 60 million data points. Today we combine the data we purchase with public surveys, surveys we develop and payroll data.

Also, as we were researching the idea for Salary.com, we found that a handful of consulting firms had an oligopoly on compensation data. They were willing to sell it to a limited scope of clients – really only those clients who were large enough to pay thousands of dollars for consulting engagements. They were not interested in the small businesses or individuals who we thought could benefit from having access to that information.

Since no other company was providing salary information online to the broader market, we were able to sign syndication deals with both AOL and Yahoo! and take a share of advertising revenue, as well. Within three months of our June 2000 launch, we were one of the top five career sites according to Media Metrix.

JR: How did business progress after the launch?

KP: When we started selling the on-demand software, we knew we had a hit within 90 days, and that we needed capital to continue to grow. With a $500,000 investment we were able to develop the only site with this source of data, ink two great distribution deals with top portals and see significant traffic growth almost from the outset. We raised another $800,000 on the strength of our product launch, and that funding lasted until June 2001, when we launched the enterprise application. Around this time investors stopped funding virtually all B-to-C companies. We had missed the window for venture funding at that point.

However, we had taken some strategic steps to ensure that we could continue operating the business. First, we structured the enterprise business on an annual subscription model, so we were being paid upfront and would have the cash to operate the business. And, we realized it may take five years to reach a position where we were cash-flow positive. So we determined that the first year of our product offering – in 2001 – we needed to spend under $1 to bring in $1 of revenue, and the second year, we only wanted to spend 5 cents to renew that same $1.

At this point, too, we had revenue of about $600,000, which was significant enough to run the company.

JR: Did you later pursue venture funding?

KP: No, we used a combination of customer revenues and additional angel funding to help fund customer acquisition. Eventually we changed the sales model for the enterprise version to multi-year subscriptions, which brought even more cash up front and further helped cover the expenses.

Then, after 9/11, no one could raise capital. Still, we felt we needed to have more capital to continue on our growth trajectory and expand our sales activities. We knew we had a winner of a concept, but couldn’t afford to charge forward.

In late 2001, we were able to secure another angel round of $4 million, which enabled us to ramp up our corporate sales team and further grow the business. By the end of 2002, we had grown to a couple million in revenue, but our fourth round of angel funding had pretty much run out. At that point, I put $3 million of personal money into the company in a fifth angel round. I don’t think the company would have gone out of business without that last round, but we would have had to downsize. I have no doubt that would have resulted in a slowdown in our momentum.

By fiscal 2004, we became cash-flow positive with revenues of $6.4 million and were able to fund our growth until we went public in February 2007.

At the time of our IPO, about 67 percent of the company’s stock was held by Salary.com employees. In the eight years prior to the IPO, we paid bonuses in stock and encouraged our employees to trade salary for stock so they would have a vested interest in the company’s success. The goal from the beginning was to make at least 50 people millionaires with their stake in helping us grow our business. While we’ve evolved into a more traditional compensation structure now that we’re public, we still see the motivation associated with being an employee-owned company in our early days.

JR: What advice do you have for other founders of bootstrapped companies?

KP: If there was one piece of advice I’d share, it would be this: never stop raising money. The leading cause of death of a company is running out of money at a key point of growth. So in order to ensure that you can support your business throughout its growth cycles, you should not be afraid to raise money. We were able to do this by raising relatively small amounts of cash to fund proven business models, as you can see from our progression of angel rounds and what we were able to accomplish with the funding we raised.

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.

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