Have you ever wondered how a would be entrepreneur starts with a simple idea and proceeds to turn it into a multi-million dollar business?
What does it take?
Venture capital veteran Michael Rodrigues teaches us:
– How to leverage an international brand to raise capital
– How to save a startup from extinction
Learn the steps Michael took to launch Time Out magazine in Sydney and Melbourne.
Check out Time Out Magazines Sydney website at http://www.au.timeout.com/
Transcript and video below.
Daniel: Hi, I’m Daniel from AR Cash Flow and today I’m interviewing Michael Rodrigues from Time Out magazine here in Sydney. Michael, thanks for joining us.
Daniel: You started Time Out magazine in Sydney and now Melbourne. I really want to get your story, so let’s go back to the beginning. Tell me about Time Out magazine, exactly how you got into it.
Michael: I was working as a lawyer in Dubai. I met a guy publishing Time Out there under license from London. Time Out’s been around for about 40 years now and it was a massive title in Dubai. No one had published it in Australia. I was from Sydney. We got together and said, “Let’s go and see if we can convince the owners to give us the license rights for Australia and New Zealand,” which they happily did.
Daniel: What did you do to convince them?
Michael: I told them I had lots of Middle Eastern backing and that they should trust me.
Time Out’s like a unique brand. The guy who started it still owned it at the time we approached him and sort of made a judgment on our ability to respect the brand more than necessarily the hardcore commercials behind it, which is interesting for a business proposition. The business is the brand, isn’t it? If you screw the brand, you screw the business. It’s quite insightful in a way. There were challenges in, obviously, raising funding and bringing investors into the business to launch it in Australia, which primarily related to all the [inaudible 1:58] in the market in the media in Australia. The market in media is largely held between the three large publishers, which makes independent publishing a real challenge. It took about a year to build a business plan, actually find some funding, and then present to Time Out to get the rights. We managed to square it away in the end.
Daniel: Tell me a little bit about the venture capital side. Is that what you initially got?
Michael: I was a first-time fundraiser and it was classic friends, fools, and families initially for seed capital. We were starting with nothing. We didn’t have the franchise rights. We didn’t have a team. We needed a way of trying to bring it all together. What we did have were a few families and friends, quite usual for a small business to start that way and so we had some of that capital. Then we used that to sort of, I guess, seed the investment.
Daniel: Seed the investment means register the company?
Michael: Register the company, cover the cost of two or three people for six months while you build the business case. We were both living in Dubai, so we moved back to Australia. Engage lawyers to negotiate franchise rights, that sort of stuff. We always knew that we’d need to bring in a large body of funding, either from our own business perspective and just common sense not trying to do things on a shoestring and also from the perspective of the head licensee demanding to see serious backing, which led us to the path of venture capital.
I guess the challenges in the market are that you’re after a few million dollars, which is more than one person wants to give you but way less than a lot of other people can be bothered dealing with you for. I don’t know. I speak to quite a few founders and they all have the same sorts of stories when it comes to this because unless you can find an angel investor, which I think is good in theory but I don’t actually know too many companies in this market that have started off angel investment, you are sort of left in venture capital land.
Daniel: Why is it so difficult to get funding at that size business?
Michael: I suppose it comes down to the margin and what’s in it for the funder. Buying a company for $50 million that’s up and running and that can grow is probably a better investment for them than stuffing around for six months with a small scale investment. Either way, the due diligence is that same, the structuring can be the same. Probably as you get into the smaller end of the market, the deal structuring gets more complicated. It sort of leaves you with venture capital, left us with venture capital as the main route to funding the enterprise.
Daniel: What did you end up with the structure like?
Michael: I guess for us it was a particularly unique situation. The original idea was to fund the investment through an IPO and the VC was going to launch a fund, of which Time Out would’ve been one of the assets of that fund. That was all going. We would’ve been structured on venture capital terms.
Daniel: What’s a ticket with venture capital terms?
Michael: Pretty aggressive.
Daniel: When you say aggressive, from your point or from. . .
Michael: Yeah, as a founder you’re like obsessed with holding equity in a company that you either conceived or created. Venture capitalists play the numbers game and they know that, I don’t know what the current numbers are, but it’s like 1 in 30 are going to succeed. In order to get return on investment across 30 investments where 29 are going to fail, the one that succeeds, they need to have a high equity stake in. That’s me telling it from the perspective of a founder. The investment return that they look for is quite high in comparison to other funding structures.
Daniel: Compared to bank debt?
Michael: Yeah. For example, I’ve lost track actually of what the VCs look for. The return on investment is like, I guess, 20 or 30 times.
Daniel: Wow. Really? Twenty or 30 times?
Michael: I think so.
Daniel: How does it work? What are the processes in raising the venture capital?
Michael: I’ve done a lot of debt finance work and coming at it from a debt perspective’s not a bad way because banks take very conservative positions. If you can structure something for debt, then you’ve probably got a bankable project. That’s things like shareholder’s agreements, not giving away security, all that type of thing. We had to make sure we had a bankable exercise, which was making sure we had the franchise right, there was condition precedent, an executive team in place that could deliver on the project, ideally some initial advertising conversations as the main revenue stream. Then it’s about building a financial model that demonstrates the returns that the VCs are after, which if they’re after an aggressive return, you need to be able to show aggressive growth.
Daniel: With the advertisers, you had a brand and a strategy but how did you attract those initial advertisers? You’re pre-selling your product?
Michael: Trying to, which is almost impossible because advertisers buy audience. Time Out is a 40-year-old brand, had a lot of goodwill associated with it and meant that you could get meetings quite easily and expressions of interest coming on the first few issues. We were relatively successful at that.
The challenge was that we launched the business roughly at the same time as the subprime mortgage market fell. It took a while for the economic consequences of that to flow on into the Australian market, but when they did, they started biting into corporate dollars. Marketing is typically discretionary spending, so that’s one of the first things to get the chop. We lost a few long-term advertising contracts, which put quite a bit of pressure on the business model.
Daniel: How did you deal with that?
Michael: It was quite a challenge, I guess. The reality was that the revenue model wasn’t being supported and our cost base was too high. We had to change the business model. Initially, we launched the magazine as a weekly publication. I should add that our business involves both digital and print publishing. The magazine’s the flagship product, but we have a fast-growing website and email newsletter audience that are the other two parts of our audience. I guess we launched the pre-product initially on a weekly frequency. Paper and ink cost a lot of money, as does distribution. Obviously, at that rate of publication, we also had a large editorial team.
We had to make some pretty hard decisions within 12 months of launch, simply because we were burning through the cash that we had raised. You can’t do that for too long before you come to a point where you can’t function anymore. For us, that meant basically rejigging the model. Where we ended up was a magazine on a monthly frequency, which cut the print cost quite substantially, four times a month down to one. Then, I guess, we essentially replaced that weekly frequency magazine with a weekly email newsletter blast, which sounds wonderful in hindsight but that’s probably the way we should have come about it in the first place.
Daniel: Do you think a lot of old school flat print magazines are going to go or have gone that way? They’re going digital?
Michael: I think there are some real challenges in the print business. There are, I don’t think, too many publishers in the world that have print products that could really argue with that. Definitely in this market, print publishers have diversified. I think the Australian market’s probably unique in the sense that there’s a lot of the advertising dollars that are flowing into the pockets of three or four large players in the market who’ve had a heavy dependency on the print medium. Because of lack of choice for the advertiser in the market, those print models have probably been sustained longer than they would otherwise have been in a competitive market.
I guess we’re a young business and we started off with a print product and we have challenges navigating the print versus digital debate. I guess organizations of a lot longer standing with much more established print businesses and larger operating bases, it’s a big challenge. I think that when you’re a small business, you’ve got to make a virtue of being small so you need to be quick and nimble. That’s what we’ve tried to do.
Daniel: When you changed the business model with the restructuring of the globe, if you’d like, was it easy for you to change because you’re a smaller business? How quickly did you change?
Michael: Yeah. I can only imagine it was easier for us to do. We had to make people redundant, unfortunately. It wasn’t 600 people. It was six people, as an example, which is just simply an easier process. I think it probably took about six months to push through the changes. We changed the frequency of the magazine quite quickly. In order to then to build an email newsletter database, that took time. Cast my memory back, but we probably didn’t get to a mature model of a business until probably the last two years maybe, maybe one to two years.
Daniel: It took you. . .
Michael: It took about three years, probably, yeah.
Daniel: Three years to get the model right.
Michael: Probably to get, yeah, the basis of the model right. That didn’t actually necessarily translate into… That was the operating model. The revenue model has come along probably in the last two years, if that makes sense. From an advertising perspective, advertisers aren’t going to put money into an audience that isn’t there. Even once you’ve got the audience, it takes time to convince the advertiser that, yeah, we’ve got the audience and that’s. . .
Daniel: Is that because they want to see that that audience translates to dollars in their bottom line?
Michael: I think so. That’s probably a good summary and just the way that corporates make their decisions. It just takes time to have a budget approved and then a marketing strategy developed and then to be the right choice of media and then for that marketing campaign to actually proceed, while there may be other economic conditions at play. To say this is a subsidiary of a U.S. company and the U.S. market’s in the pan, they may cut an advertising spin down here and you lose the business.
Daniel: I’ll ask you a question about you’ve got the print magazine people have to pay for. To get access to the online magazine, the online version of it, people don’t have to pay for that.
Michael: No. There are different models at play probably. I guess the print audience versus digital audience, they’re not interchangeable. They’re not one for one. Someone who’s involved in a print product, probably most people would agree, has a high depth of engagement than a casual visitor to a website.
Daniel: That makes sense.
Michael: For us, what we’re getting with the cover price is, in addition to some revenue to support the business model, you’re also getting a quality of audience, you’re getting a story or billing from the advertiser that the audience that’s reading us in print is an audience worth having. For an advertiser, that level of engagement through the print medium still has value.
Website advertising or digital advertising is a different business. The numbers are that much larger. We have a larger number of people on the website, but the length of time they spend there is lower. If you’re looking for a restaurant review, you Google restaurant, read it, done. You’re off. You may come back later in the month when you need another recommendation. A print subscriber to the magazine’s going to pick up that product on a coffee table.
Michael: Yeah, absolutely.
Daniel: What are the things that you’ve learned about venture capital? Not the stuff you read in the magazine, but from someone who’s done it.
Michael: Yeah. I guess our corporate history’s seen the involvement of venture capital from day one. We haven’t talked about it but 2007, we launched 2009. We’d basically gone through our initial funds and we needed more funding. It was at that point that we brought in another partner, another publisher who took a majority stake in the business. I guess we have the legacy of a venture capital funding, but that probably isn’t our current state today although there are shareholders who’ve invested on a venture capital basis. I guess there are no vendettas out, but they haven’t, as yet, seen the likes of the return that they initially invested in.
Daniel: At the time, if they invested in 30 deals, they only one of them is going to go on.
Michael: I think that’s the response and the advantages. We’re not actually one of the deals that hasn’t worked. We’re a deal that hasn’t gone the way originally it was intended.
Daniel: It does work, but they haven’t gotten the 20 or 30 fold.
Michael: That’s right. Yeah. I think, happily, we’re in a position where that type of high exit value is potentially going to be realized. We’re back into that sort of ballpark because of the rapid growth of the brand, rapid growth of the audience. There is a bit of a lag between audience growth and revenue growth, but the revenue growth is starting to occur and that should lead to high enterprise value and an exit at some point.
In terms of our business, as I said, it’s probably got a venture capital legacy. Some of the learnings have been quite interesting. I guess as a young founder, you’re very ambitious and you believe you can take on the world and you’ll succeed.
Daniel: Bulletproof or something like that.
Michael: Yeah. I guess bulletproof is probably not how I’d describe myself but I’ve managed to survive. At least that’s something. The learnings, I’d say, are that… You speak to founders who have been through a VC process, they have that sort of smirk on their face because everyone’s taken one. It isn’t all bad. One of the things that they did very well was to make two young 30 year olds ask some hard questions and face some realities, which I know other businesses haven’t had that because you have that self belief. You can sort of put your head in the sand and think, “If I work harder, I can make this work.” Sometimes you just need to take a step back and go, “No. We need to cut and change.” That’s was probably a positive, if I can put it that way.
In my experience, VCs, bankers are very good at looking at numbers. That’s a real benefit. There’s a difference between numbers and business, in my mind. There’s more to business than just the numbers. There are things like rapport and being able to get deals done and there’s passion. In the whole process, I had a number of conversations with some gray-haired men who have been in publishing for a long time around this country. Publishers require passion and belief. That doesn’t always resonate with someone who’s just looking at numbers because you can’t put a value on that. That’s what will make a business work.
I guess it’s a hard concept to convey. Even if the numbers add up on paper, without that other element the business won’t work, which is kind of our case in point. The numbers, theoretically, added up on paper. What was missing? A few other things that aren’t being capable of being reduced to numbers always.
Daniel: What are the things to look out for in venture capital, if you’d like, bad things?
Michael: Yeah. I guess if I were to do it again is probably a way of coming at the question. I’d say there’s little point in being obsessed with equity day one, I think, your equity position day one, because it’s all theoretical. If you don’t have a successful business, you’re equity’s worth zero. People said that to me at the time and I kind of heard what they had to say, but didn’t really take heed of that advice. As a result, you get very emotionally invested in a process where actually that energy should be spent on making sure the business is right. It’s always a negotiation, I feel. If the business is doing well, you can always go back to the table and have another discussion.
Daniel: That’s actually a really good point. Don’t focus on your equity slice. Focus on making the business successful in maturity and then the equity will come down the track, if you’d like, as a result of your success.
Daniel: That makes sense. How do you go about choosing good business partners?
Michael: I think in our particular case, and I skated over it earlier, we had a real challenge. The subprime mortgage market had fallen. At the time, we hadn’t actually concluded the franchise deal. We had an option and we were getting towards sign-off, but we weren’t quite there. We had to, I guess, find funding. I’m not going to say from wherever we could get it, but there was a “seize the moment” aspect to that situation, which influenced the decision-making process.
We had a couple of discussions in the market, which was great because that helped with pricing. You can sort of trade one against the other. I guess going back to that point and saying, “How did we make our decisions?” all things being equal, it probably wasn’t the best way to do it, if that makes sense, because you’ve got necessity as opposed to choice. Businesses need money to run.
Having said that, you want to have people who understand the space. I think this is going back to some of the issues about a set of numbers not necessarily being, which is often how bankers will look at something, the whole story. Digital media is a very complicated area. Things change very quickly. New technologies mean new consumption habits. New consumption habits means death of old revenue streams and it can move very quickly. We tried to find funders who would look at media or had media experience. As I say, it’s a very dynamic space.
I guess one thing is that each market is different. Looking at, say, a New York version of Time Out, their revenue model is different to ours as it’s different to London because it’s a function of competitive set in the market. We have three or four main publishers. That’s unique to the Australian market. It meant that the rate at which advertisers would ultimately trickle into Time Out was slower than it would be in another market like Dubai, where there was no large competition.
Going back to your question about choice of partners, I guess you’ve got to try and find people who probably mirror your own set of beliefs in a way, like know the space but have some passion as well.
Daniel: People within the industry who know media very well and know the local market?
Michael: I think that’s probably right, yeah. I think that’s probably right. Any type of digital business like ours is always going to be a bit speculative, I think.
Daniel: Can I take a sec and talk about… The other thing is the passion. Is that you want them to have that passion for that business because you’re willing to see it through the bad times?
Michael: I think that’s right. Yeah. There’s a story, which it’s one of those things when people sit down and we have these types of discussions I tell them because I think it sums up exactly this point about an investment theory and actually making a successful business.
One of the guys I was talking about earlier, very senior, very eminent. It was a confidential conversation, so I can’t say who it was. He saw the product and he said, “Look, this is a great product and I could see how it would work in the Australian market. I’ve been in publishing a long time and right at this particular moment, I can’t come in and get involved. I’ll tell you something about publishing. I produced a really high-quality product for a number of years and it lost money year on year, a million dollars a year, say. After six years, I had to close it. I still believe in that product.” Then he said, “Then I started another product where it was motorcycle with a sexy girl on the cover. Six months later, I sold that for millions. That’s publishing. You can have all the science in the world, but you also need something else.”
Daniel: Is there like an X factor to it?
Michael: I think so. In consumer publishing, definitely there is an X factor. I’ve only really worked in… This is my first business, but you can see that X factor in other people that are around you. I don’t want to start clichés, but people like Branson have an X factor. They’ve got the ability to see something and make it happen and make deals happen when perhaps those deals might not make sense.
Daniel: Yeah, that’s definitely true of Richard Branson.
Daniel: Now the business is traveling well. You’ve got a rapidly growing audience for the business. What are the things that you think you need to focus on going forward?
Michael: Yeah. I think we’re like somewhere about 30 people and now in more than one city. I guess a real focus for us now is getting our business systems working well and efficiently. Being in one city to date from a management perspective has been good in the sense that you can always walk down the corridor and speak to somebody. Moving into multiple markets that are different, you need stronger business systems to support that growth and to make sure that both on the reader experience side and on the advertiser side, they have the same level of experience that they’ve grown accustomed to. I think we’re also sort of focused on our advertisers and making sure that they still get the same level of service that they’ve been accustomed to in one market. Delivered across two is the challenge.
Daniel: Is that a consistent experience, a consistent message to your customers?
Michael: Yeah. It’s consistent message and service delivery. I guess I look at what we do on the commercial team of Time Out as a marketing service for advertisers, really. We want to understand what they’re trying to achieve and help them achieve it on the basis that if we are the right media, great. If we’re not, hopefully they can achieve that elsewhere in the market.
We try to remain as outcome focused as we can and that means trying to own that objective from “we want to do business with you” right through to “we’ve done it for you and it’s gotten results.” Simply because, and it’s quite self-interested, happy advertiser means growing advertiser means they’re coming back next year. That’s the basis of most good businesses.
Daniel: Would you say now that you’ve pretty much got the whole business model right, it’s a matter of just tweaking it and improving it?
Michael: Yeah, I think we know what we need to do. We’re not quite there at the moment, but we will get there very quickly. The challenge is the space is changing and will forever keep changing.
Daniel: The goalpost keeps moving.
Michael: The goalpost will keep moving. It’s a challenge for marketers, as much as it is for publishers. Someone who’s got a product to take to market needs to make the call at some point about how the audience is going to be reached. The campaign may not launch in six months’ time. I don’t know. Apple launched a new iPad. There are a million and one things that could happen. Trying to make a call on the right investment decisions into new technologies, new markets, is part of the challenge.
Daniel: That probably gets hard as you grow as well.
Michael: I think so. Yeah, that’s right. What we need to try and do is to remain nimble, even though we grow. I don’t know how we’re going to do that.
Daniel: One question about the market, your market, what’s the future of digital media from here or media, if you’d like? Get out the crystal ball.
Michael: Yeah, I’ll get out the crystal ball. I wish I knew. There are quite a few views on this that people talk about all the time. One consistent theory or belief is that the future of media is about brands and we believe that, which is why five years ago myself and my business partners said, “If we’re going to start a media company in Australia, there’s no point in doing it unless we’ve got a brand. It’s too competitive, too many players. A brand is how we’ll be able to do this successfully.”
For us, what is the business fundamental? The business fundamental is engagement with the brand, actually. Our readers, whether they’re in print or digital or wherever they are, are engaging with the brand and they trust that brand. Then the issue of how you reach your audience is one that you need to keep revisiting. Maybe print today, video tomorrow, email newsletter the next day, iPhone app the next. As long as you can keep that brand integrity and continue to reach the audience, move with the times, theoretically, you should have a good business model.
Daniel: Michael Rodrigues, thank you very much for talking to me, sharing your story.
Michael: Pleasure, Dan.