Dane Madsen has proved to be an incredible deal maker. He not only built one of the most famous companies twice, but sold his startup for $100 million. Here’s what it took, and his essential advice for today’s entrepreneurs.
Cofounder of YellowPages.com Dane Madsen recently appeared as a special guest on the DealMakers podcast. In this exclusive interview he revealed the process of building and exiting one of the most famous companies ever built (listen to the full episode here).
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Taking on the Titans: Yellow Pages vs. Google and the Telecom Giants
Dane Madsen grew up in startups. His father ran a small business, and he eventually started and ran his own small business. That was before donning a suit and tie for a stint with Lehman Brothers. That was a big “wake-up“ call in the difference between the advertising budgets and options for Wall Street and the big guys, and everyone else.
This really hit home when launching a division for a San Francisco based NYSE traded company. Sprint called, demanding ad copy “by Friday,” to get into the Yellow Pages. It was that, or waiting a whole year. If you weren’t in the Yellow Pages back then, you didn’t exist. It was like not having a website today. You had no credibility. That was a gamble for a company that was still trying to ink a lease and concrete its own address.
There was AOL, and Yahoo had just gone public, but Facebook didn’t even exist yet. Then one of Dane’s cofounders called him excitedly to announce he had found something called Network Solutions. After seven hours on hold and an investment of $132, the cofounders had secured the domain YellowPages.com.
After two years of working through the night, building the first search engines, and selling the product, despite the fact no one believed the internet would ever become anything, Dane’s company landed a serious investor. A big capital group acquired a controlling interest in the company in 1998. Just before everything fell apart in 2000
Dane jumped back in to take back the company. Unfortunately, the $5 million originally raised was burned up, and the company was another $2 million in debt. There were threats of the servers being shut off. That’s when there was no AWS and a server was going to cost $80,000 to run.
Despite a lot of pessimism that Yahoo or Google would put the company out of business, it raised $32.5 million from very high-net-worth individuals.
Selling Your Company for $100 Million
By 2004 the company was doing $13 million to $14 million in annual revenues. Growth was strong, with a loyal group of customers, and a user base marching upward at close to 10% per month. Dane says they were exploring a new funding round for $20 million to $30 million, but didn’t like the dilution potential.
It was then that other companies were becoming scared of Google’s threat to their own organizations. AT&T stepped up and brought their checkbook. Having kept strong relationships with all of the telecom companies, including AT&T and BellSouth, Dane turned this into an auction and pitted them against each other.
The company sold in an all-cash deal for $100 million. There was a small 10% holdback in escrow for two years, which is pretty standard.
Essential Advice for New Startups
After receiving the check from that exit Dane told DealMakers that he managed to retire for 90 days. Then he had to get back in the saddle and action. That now means being a CEO and advisor.
From his experiences, Dane shares some of the foundational advice that is quickly becoming “make-or-break“ for today’s new startups.
Cofounders
Picking your cofounders is very important. Around 64% of startups fail due to cofounder issues. Dane states this is someone who really needs to be willing to be in the trenches with you.
Branding
On branding, Dane says “Branding isn’t the logo. Branding is not advertising. Branding is the DNA of how you operate a company.”
Product Market Fit
One of the factors raised in this episode of the DealMakers podcast was the need for startup entrepreneurs to get out of their own head. It’s too easy to get caught up in your own tunnel vision.
You’ve got to get out and talk to your customers and users. They say if less than 60% of your users wouldn’t be ‘very disappointed’ if they couldn’t use your product anymore, you need to go back to the whiteboard
If you are building a marketplace, remember that advertisers will always show up where the users are, but users won’t always show up where the advertisers are.
Dane also advises that startups need to have an enterprise version of their product. That’s where the big names and numbers are, and that’s what gets potential investors excited about funding you.
Forming a Board
When it comes to forming a board, Dane Madsen says diversity is essential. It’s no use having all smart techies on the board. Not if they don’t have business governance experience and no one excels in marketing and advertising.
He also recommends the CEO should always be on the board, as well as keeping the board seats an odd number, and making sure a CFO is one of your first hires.
The Real Job of a CEO
Dane says “The CEO has one job, and that’s to make sure nobody runs out of money.” In fact, he suggests that some founders may need to seriously consider if they should really be their own CEOs at all.
That’s a full-time job, on the road, putting on the show, and securing the funding, and making calls that are in the best interest of the user. If you want to be working on product, then you might not be your best CEO.
How to Survive the Next Crash
Whether it was 2000 or 2008, entrepreneurs need to realize that when markets flinch, all term sheets are taken off the table. There isn’t going to be any funding out there. If you’ve been following the new model of relying on new funding rounds every 12 months to stay alive, you’ll be out of business within 12 months.
Scale like crazy right now, but have a model that allows you to be profitable and shed extra expenses in hours. Then you won’t need funding. If you can get it to fuel more growth, that’s great, but it will never control your survival.
Listen to the rest of the story and tips from Dane on the DealMakers podcast, and get his direct email address for posing your own questions and building your network of professionals (listen to the full episode here).
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