10 Inglorious Years of Bootstrapping: Lessons Learnedby Dave Gooden on 31/08/2013
Note: I was holding off on posting this because I wanted to wait for our redesign to be finished…but alas, it is taking much longer than we thought it would…so as promised a while back, here is our story.
Our Story: 10 Years of Bootstrapping
In 2002, after several years of running a small but successful e-commerce business, my business partner (and friend since kindergarten) Cameron Henkel and I were both searching for vacation homes to purchase as family getaways. After a lot of hassle (I’ll spare you the details), we realized that there could be a big opportunity in the space. In 2002 the real estate industry was way, way behind the curve when it came to applying technology to the process, so we set out to fix the problem.
In 2003 we launched LakePlace.com, a niche classified ads website for lake homes & lake lots in Minnesota & Wisconsin. Like all marketplaces, we faced the chicken & the egg problem. We had no listings and no visitors. Common sense told us that we needed to build the supply side first and worry about the demand side later…so that’s what we set out to do.
We spent the next 12 months on the phones, sending emails, attending conferences & trade shows, and meeting with real estate agents in person to convince them to list their properties on LakePlace.com. We offered everyone a free trial and 100% satisfaction guarantee (people like 100% satisfaction guarantees). Our e-commerce success of the past was built on SEO, before it was called SEO, so we knew if we could get listings, we could get visitors…and that’s exactly what happened. We started getting some listings and then started getting some traffic, more listings, more traffic. Once we noticed specific agents getting multiple contacts on properties, we swooped in with the sales call. It was time to upgrade to a paid account or lose the service. By 2006 we had 600+ paying customers listing thousands of lakeshore properties on our site.
Along the way, something else happened. We noticed our visitors asking our listing agents if any of their listings were available for rent. After the 100th (or 500th) request, we decided to open up a vacation rental marketplace. Using what we learned the first time around, we got back on the phones and offered resort owners and vacation rental managers free trials. We went as far as inputing all of their information, uploading their pictures, etc…whatever it took to get them to try LakePlace.com. Once they received 10-20 inquiries, we let them know that the free trial was over and it was time to become a paying customer. I think we had a 99% retention rate when converting free trial users to paying customers. Today, LakePlace.com’s Minnesota vacation rental section is about the same size as Homeaway & VRBO…and waay bigger than AirBnB’s…and we are a very close 2nd in Wisconsin (I hope to fix that this year).
Lesson #1: What’s one way to make a free-to-pay (free trial) transition work? Base it on a success rate, not a time limit.
The (first) Big Pivot
In 2006, at the height of the real estate boom, some of our 600+ real estate advertisers were closing 6-8 transactions per month that could be directly attributed to LakePlace.com leads. If you multiply that number out, the top agents using our website were clearing $30k+ per month for a $59/mo investment. Crazy. After looking at all of our options, we decided that we needed to wiggle our way into a piece of the action, and there was only one way to do it – we needed to become a real estate brokerage.
We concluded that we should be “referring” leads to agents in exchange for a 25% referral fee on closed transactions. Because real estate is so heavily regulated, this required us to become a licensed real estate brokerage in two states, which presented a couple of problems:
1. My partner and I were not real estate agents. To become a broker/brokerage in MN & WI (besides a bunch of class hours and exams), you need to have at least two years of experience as a licensed agent.
2. We would have to cancel all of our subscriptions (lose most of our revenue and upset a lot of people).
We decided to make a call to the commercial banker who helped us purchase an office building during our e-commerce days. Not only was he the top commercial banker in the U.S. at a huge bank, he was also an attorney and licensed real estate broker. After a dozen meetings and several dinners with him and his wife, we convinced him to resign his position at the bank, invest some money, and join our team as the broker and CEO. Before jumping in though, he wanted to make sure that the idea for our new business model was sound…so he picked us up in his S600 and we drove 200 miles north to visit our biggest advertiser.
Our top advertiser was a young real estate broker in a popular resort town in northern Minnesota. Every time we launched a new advertising opportunity, he signed up (and paid up) almost immediately. He had just been named one of the “30 Under 30″ by Realtor Magazine and was selling $60M in lakeshore properties every year…if we could convince him to buy into our new model, everything else would probably fall into place pretty easily. When we asked him if he was willing to pay a $1,000 annual fee + a 25% referral fee in exchange for market exclusivity on LakePlace.com (vs. $59/mo flat fee and no exclusivity), he said “yes” without hesitation. The conversations on the drive back to the Twin Cities were filled with excitement as we solidified the deal with our new CEO and discussed the wire transfer and his start date.
In preparation for our new business model, Cam and I hit the phones hard. We studied the maps, carved out 53 unique lakeshore markets throughout Minnesota & Wisconsin, and called our top advertiser in each market. We let them all know that we were going to be changing our model and asked if they would be interested in joining LakePlace.com as our exclusive affiliate in their market (annual fee + 25% referral fee). In short order, we filled all 53 slots and validated our new model. On the other side of the coin, the news of our changes spread quickly throughout the real estate industry and we had to field a lot of calls and emails from angry advertisers. Some agents cancelled their advertising subscriptions immediately, others decided to continue advertising to the end and join a waiting list to become an affiliate.
The fuse was lit. In about a month our company would have a licensed broker and a healthy bank account. The plan was to join every MLS (19 in all) in Minnesota & Wisconsin (expensive), pull and combine all of the lakeshore listings from these different databases and build an easy-to-use, seamless search function (difficult). If we could make this happen we would be able to give our users a complete market overview…which is exactly what Cam and I wanted when we were searching for our vacation homes.
The night before our investor/CEO was to give his 30 day notice at the bank, Cam and I were working late. Cam’s cell phone rang at about 10pm, it was our investor/CEO’s wife. She asked if I was present and then asked Cam to put her on speaker. She started with “I need to have a difficult conversation with you guys…” She went on to tell us that her husband left his law practice because of heart problems, he was put on beta blockers at a very early age, and she could see all of his symptoms coming back. She told us, in no short order: “I’m sorry but I’m not going to let him do this.”
We were floored. We were dead. We had put our reputations on the line with 53 agents/brokers and burned bridges with many others. I can’t really explain the feeling that came over me that night, but I can tell you that I hope I never feel it again. Anyway, the next morning, after confirming the news, we had to make our own difficult phone calls. It was time to pull back the curtain and admit that we had no clue about what we were doing. We were junior varsity level players and it was time to come clean and own up to our inadequacies. The first, dreadful call we decided to make was to our top advertiser, the “30 Under 30″ guy. He sat quiet on the other end of the phone while Cam and I did our best to explain why we could not move forward. After a long, akward silence, the first words he said were “…it sounds like you need a broker and some money. What if I can bring that to the table?” Cam and I looked at eachother, eyes wide open, and one of us said “…it would be game on.” 45 days later he had sold his brokerage, moved his family to the Twin Cities, and joined our company as a minority shareholder and COO. We were back.
Lesson #2: A deal isn’t done until it’s done.
Lesson #3: Good things are sometimes born of disasters.
The Trough of Sorrow
2006-2009 was full of ups and downs. Almost immediately after launching our new model we entered acquisition talks with 3 large companies. The one company we were most interested in working with took the talks very far, but after several meetings with their C-level execs, lawyers and IT teams, the deal fell apart. Our new model started out great and was a moderate success, but as the housing market collapsed, our referral fee revenue began to dry up. Markets that were closing 20 referred deals per year in 2006 turned into 1 or 2 closed deals by 2009. Less revenue meant that we did not have the resources to audit our affiliates and the whole thing was spiraling in the wrong direction. To make matters worse, it didn’t take long for Cam and I to realize that we had some major personality conflicts with our new COO. After 12 months on the team, we all agreed it would be best if he moved on. The terms of our buy/sell agreement required him to remain the broker of record for 2 years while we bought our shares back. This gave my business partner Cam time to get a real estate license and eventually his brokers license. It also allowed our former COO to earn 3x on his investment (not great, but not bad).
Note: While things did not go as planned, our COO was able to parlay his experience at LakePlace.com into a Director of Franchise Sales position at a big, national real estate company (he also became a contestant on “The Apprentice”), and we were able to keep our business alive as a licensed real estate brokerage. All in all, we have no hard feelings and I look back on it as a win-win. I think he feels the same.
A New Beginning (The Second Pivot)
By late 2009, after reclaiming 100% ownership of our company, it was becoming obvious to Cam and I that our referral brokerage model was probably not going to be the driver of success that we had hoped for. We had spent more than 6 years searching for a successful model that we could (attempt to) scale and during this time companies like Zillow, Trulia and Redfin had soared (Facebook & LinkedIn launched at about the same time as LakePlace.com) while we were spinning our wheels. After 30+ years as bff’s and more than a decade as business partners, the stress of long hours and shrinking incomes was coming to a head and Cam & I were starting to resent one another…and then we got the phone call that would change everything.
At the beginning of 2009 I helped one of our affilates setup a blog and over the course of the year, I gave him a little SEO advice that helped his blog rise to the top of the SERPs. He worked for a large brokerage that was in the largest lakeshore market in Minnesota (probably the largest lakeshore market in the country). When sh*t hit the fan at his company, he called us right away and asked if we ever thought about openening our own real estate office. It’s kind of funny because even though we had been working directly with realtors and brokers, day in and day out for 6 years, the thought of opening up our own real estate office was never really on the table. Like I mentioned above, our goal was to build a scalable product…”products scale, services don’t…blah, blah, blah.” After a lengthy conversation, Cam and I got excited and agreed to setup a “secret” meeting at a remote lake home with a dozen realtors from our affiliate’s brokerage. At the end of our presentation, all 12 agents at the table committed to joining LakePlace.com if we committed to opening an office. In April of 2010 LakePlace.com-Crosslake (Brainerd Lakes) opened it’s doors.
Lesson #4: Helping people can provide unexpected returns on investment.
So how’s switching from a product to a service going so far? In 2009 we received two (2) referral fee checks from our affiliate in 1/53 markets. In 2010 (April-Dec), after opening our own office, our agents closed 53 transactions from company generated leads in that market. When we ran the numbers across all of our affiliate markets, the path forward was obvious…so we started executing. Here’s the timeline:
2003 – LakePlace.com launches as classified ads website
2006 – LakePlace.com pivots into a referral brokerage
2010 – LakePlace.com opens first real estate office in Crosslake, MN (LakePlace.com-Crosslake)
2011 – LakePlace.com acquires ReMax Woodland Realty (now LakePlace.com-Birchwood)
2011 – LakePlace.com-Crosslake merges with Century 21 Gold Shores (now LakePlace.com-Crosslake)
2012 – LakePlace.com opens Wayzata, MN office (LakePlace.com-Metro)
2012 – LakePlace.com opens new headquarters in Bloomington, MN
2012 – LakePlace.com merges with ReMax Northwoods Realty (now LakePlace.com-Siren)
2012 – LakePlace.com acquires ReMax North Country (now LakePlace.com-Hackensack)
2012 – LakePlace.com opens Detroit Lakes, MN office (LakePlace.com-Detroit Lakes)
2013 – LakePlace.com opens Alexandria, MN office (LakePlace.com-Alexandria)
2013 – Loads of new bullet points coming (“knock on wood”)
Our sales & revenue doubled in 2010, 2011 & 2012 but we still have a long, long way to go…and even though our business isn’t quite the technology product we envisioned when we started, Cam and I are happy again and loving what we do. Every day presents a new challenge and we get to attack it from an angle that most companies in our industry can’t see. We may not be “changing the world,” but we feel like we are pioneering a new way to build a successful real estate company, and that in and of itself has been very satisfying.
Lesson #5: Hard work and perseverance pays off.
I’m not going to pretend I’m some sort of startup guru with magic advice that will change your life – there are already tons of people out here doing that, and plenty of them have built things that make our company look like a lemonade stand. I will, however, share some things (read: anecdotes) that have worked for me.
1. Never quit. I don’t mean be irresponsible…I mean if you are working on something that you truly, wholeheartedly believe in, but it’s taking longer than you anticipated to get traction, don’t stop. It takes time and it’s probably going to be a lot harder & more painful than you thought it would be, but don’t quit.
2. There are riches in niches. Niches are almost always the best/easiest place to start if you’re a bootstrapper.
3. Sales cure (almost) everything. Money isn’t the most important thing in the world, but it’s what we use to keep score…and it keeps the lights on. More money = less pressure…so always be selling
4. Know your customer. Your customer is the person who gives you money in exchange for your product or service. It’s easier than you might think to get confused about this one.
5. Listen to your users. Don’t add/remove features on every whim, but if you ask and then listen very closely, you’ll find nuggets of gold.
6. Everything scales. If you build a successful business model (product, service, whatever), it’s scalable. It might not be easy, but it can be scaled. Don’t believe me? Ask the founders of Walmart, Home Depot, McDonald’s, H&R Block, Re/Max or Fantastic Sams.
7. Always think big. Cameron and I operate with a short-term, mid-term and long-term plan. The long term plan is our “take over the world” plan. Our 3-plan approach helps to keep us focused on our day-to-day operations but also keeps us alert and looking for opportunities that may help us reach our ultimate goal.
8. No Excuses. Can’t raise money? Figure something else out. Don’t have connections? Neither do we. Cam and I started out on our entrepreneurial journey with $600/ea on credit cards (no savings) and did $1M in revenue our first year…because we needed to. I’ve applied to Y-Combinator twice and talked to local investors a few times. Everyone said “no.” We said “fuck ‘em, we’re doing it anyway.”
9. Pick a fight. Don’t do this publicly, but always have an enemy – at least one person and/or company who’s ass you are trying to kick. Don’t stop until you have their head on a stick…and then pick a bigger enemy.
10. It’s really, really hard. Cam and I have gone several months working insane hours without a pay check or health insurance (multiple times). Entrepreneurship is definitely not for everyone, but if you’re like me, you can’t imagine doing anything else. Ever.
*One last note: This post focuses on me and my co-founder Cameron, but our company is 50 +/- people strong and growing. None of our success would be remotely possible without the heavy lifting of our team – especially the first 12 agents that took a chance on us. Cam and I steer the ship but our agents, brokers and employees (and frank) do all the hard rowing.
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