Internet pioneer on new web trends

Lloyd Ernst had an early start on the web, and has learnt how to achieve growth the hard way. He talks to AMANDA GOME about future web directions and what’s in the pipeline.

By Amanda Gome

Lloyd Ernst, 42, was one of the very early pioneers of the internet, and launched WebCentral in 1998. He ended up selling out of WebCentral, making a small fortune of about $8 million, and has now gone on to start up and play a very key development role in a number of other entrepreneurial businesses. He talks to Amanda Gome about the lessons learnt and the challenges ahead.

 To listen to the lunch with Lloyd Ernst, click here. To download this mp3 file and listen to it later, right-click this link and “Save target as…” to your computer (Macs; option-click).

Amanda Gome: You’ve been involved in building a number of internet businesses. What do you think have been some of the key lessons you’ve learnt?

Lloyd Ernst: One key message is not purely internet related, but it came from the early days of Microsoft. There were presentations where Bill Gates would stand up and talk about partner channels and reseller channels and those sort of things, and the word that came out was “leverage”.

And that’s something that we applied in the WebCentral business where we developed strong partner programs. In any business that I’ve been involved with, you can have say X amount of sales people, but you need the ability to create channels that can in turn leverage your sales people on to more customers.

So how do you go about developing a channel?

It really depends upon the product and building relationships. It’s about how do I make the partner look better to his customer – “how do I build my products that he can sell and he can use, that make him look better”.

So it’s really about understanding the customer’s customer?

Absolutely.

Can you give us an example?

Well in the case of WebCentral we developed a whole range of products.

We allowed our partners to rebadge everything. We didn’t have a problem with it, and that was a case of making the partner look good in front of their customer.

Then what sort of deals did you do?

That was the lesson from WebCentral; the ongoing recurring revenue streams. It’s also the beauty of some of the other businesses we’ve been involved with – you don’t have to go and make a whole lot of money from one particular customer. If you can build up enough customers and just have this recurring revenue stream that flows through automatically each month, it’s really a great product model.

How do you sell that?

The model needs to make sense for the customer, and for a lot of cases instead of going through and charging them X thousand dollars up-front for a product, you can say “here’s a pay-as-you-go solution”. For a lot of customers that works in quite well. It helps them budget for it. If they don’t like your service they can always change and move.

Do you do a deal for a year?

Absolutely. If people are willing to pay up front for a year, if you’re a government department and those sort of things, then definitely we take the money.

What other lessons have you learnt from building your businesses?

What you really need to do is figure out how you can consistently deliver great service, which is by making sure that your people are dealing with customers have their systems. When customers phone up and they talk to you, you’ve got to make sure that there is a consistent message being delivered through to each one of your customers every time they call.

What else do you do? How do you know what they want?

That’s just a matter of getting out and talking to the customers. I tend to have a policy to try to get out at least once a week and meet a customer and have a few drinks and talk a little bit about what’s important to their business, and that’s when you come back and make the products. And I guess in the business I’ve always been involved with, I’ve been kind of a key product guy. I’ve always liked to have the product teams reporting directly through to me, so if I need to change something I can get out there and say hey guys, this is the direction we need to move and let’s move.

So even though you were the product guy you’d go out and catch up with the customer?

Look, the CEO is number one sales person in every single business, and you’ve just got to be there. Otherwise you lock yourself away in the back room. You get these filters that pop up inside any organisational structure.

How much time do you spend working on the business? You’re meant to be working on the business not in it?

I like to get to work fairly early and at least have a good three or four hours before the staff arrive.

The WebCentral business was launched in 1998 and sold in about 2003 to some of your investors that had bought into the company. It grew incredibly fast and was a market leader at that time. Were you surprised at that?

One of the challenges is finding an answer to “why sell the business?” And I guess in that particular start-up phase all your assets are in one little pot. We didn’t have a whole pile of other businesses that we had interests in.

You have that entrepreneurial phase where this has been the first business that you’ve created that you’ve set up. And then if something catastrophic was to happen, if the government introduced legislation that made all the hosting move offshore, that’s something you’ve got to factor into the risk profile. Then you realise that all your assets are tied up in one particular business and so one of the reasons for [exiting] is that the three founders had all their assets tied up in it.

And was it too risky?

No it wasn’t risky. It was just one of the things where you want to have a resource that you can go out and invest in some other projects and some other businesses, and so WebCentral gave us the option, the ability to then go out and basically spend some time with some of that areas that we were wanting to get involved with.

And then you went to Extreme Lock and you moved on to start a business in China. In fact that kind of happened simultaneously, as these things do.

That’s part of being an entrepreneur, or a parallel entrepreneur I think. Because all this stuff’s happening at the same time, it doesn’t actually cascade one from the other.

Extreme Lock was a great technology business built out of 8 Mile Plains in the southern part of Brisbane, and these guys did some amazing technology that was utilised by leading companies around the world. Their technology was installed in something like 20 million PCs around the world – quite a stunning business. As the business grew I came on board to help corporatise some of the sales process, and during that particular process one of our large customers made an offer to buy the business and so I was then involved in that sale process.

And the China business is still going?

The business we have in China is called Sinocode, and that’s now being run by my wife. At WebCentral we’d always had several attempts to try to get a business operational in China and we investigated a number of different areas…

Many people have…

Absolutely. And we eventually came to the conclusion, after several attempts, that you’ve got to be there. So after Extreme Lock we’d started up a pilot up there, and so I moved. You actually need to be there, and so Sinocode does offshore software development and it’s about utilising the Chinese talent pool in development and technology areas.

What’s your revenue now?

It’s still very much a start up dot-com phase, and I think revenue will be around about $2 million or $3 million this year.

It’s been difficult?

It’s certainly taken a lot longer I think than expectations about how fast things can grow. You go there and get caught up very much in China, in that you see this amazing economy that’s just steaming along. So it’s taken us probably about twice as long as we thought to get to the milestones.

What have been the challenges in China?

We’ve probably done everything wrong at least once in regards to how you set up the businesses and employing staff – do you employ Chinese staff or do you employ ex-pats.

What do you do?

We started off with an ex-pat staff but we’ve changed to Chinese to run the business, and then we found Chinese staff that have had western experience to bring those people along.

The other key learning (because you never call these things mistakes) is you need to let the Chinese staff manage it in their Chinese ways. You can’t come along and try to take your management philosophy of how things are done. I see couriers turn up to the office delivering products and the office staff will then negotiate the delivery fee – and we’re talking $1 or $2 here, and they will spend 15 or 20 minutes negotiating with this poor delivery driver who has ridden a bike 10 kilometres.

Originally we would say “no no no, just pay the guy the money, let’s get on with the business” and that sort of stuff, but then the Chinese staff start to second guess you. They’re not comfortable with how you’re actually managing it. So the office staff run it the way a Chinese business would do it, and so that was kind of interesting. You tend to think “I know better or let’s get everything done and do it this way”. You’ve really got to sometimes take a step back and let them run it their way, otherwise you get tensions.

What else have you learnt in China?

Everything’s a negotiation, and that’s kind of fun for the first year or so. But after a while it really does grind you down, and that’s why you’ve got to let the Chinese do it.

The other really interesting thing is the concept of relationship. We had for instance a drycleaner who took one of my suits. One week later nothing came back. We phoned them up; “so where’s my suit”, and those sort of things. And the guy had obviously lost it. But there’s no apology.

Then we go through this enormous debate and argument about compensation, and he said no compensation. And then the staff would argue about half a day with this drycleaner, who had obviously lost the suit – and you know my suit is not exactly going to fit any Chinese guy, so I’ve no idea what’s happened there.

But then the strange thing is that next Monday the guy turns up – “oh where’s the dry cleaning for this week?” Like nothing had happened. “Mate, what’s going on here; don’t you realise our relationship is in tatters?” Now that’s a very simplistic example, but it applies to a whole range of businesses in China.

So the relationship continues even if there’s ups and downs?

Absolutely. I don’t know if it’s a game, but it’s certainly something that they just negotiate every element of the deal. The other interesting thing, not so much that we’ve experienced it but one of the things you notice about China, is just how quickly things change.

My wife and I went out for dinner one night, walked down this dirt road, went to this nice little restaurant. We came out three hours later and the dirt road had been paved and you go “where am I, is this the right place”.

But they also compete so aggressively. We tell them we’re very fortunate, in fact, most of the Sinocode business is into the UK, and so we don’t sell products or services directly to the Chinese market, because again they do tend to be very very aggressive. One day we were driving through the back streets in the middle of China, and you’ll be going down this little dirt road and you’ll see this little tiny shop set up selling Shell motor oil and next to it there’s another little shop selling Shell motor oil and there’ll be five of these little shops and they’re selling exactly the same product. They just compete the living daylights out of each other.

Watever you do, someone will set up a shop doing exactly the same. It’s such an aggressive environment if you’re trying to do business with the Chinese, so our business is really about an arbitrage of the technology and the development skills there.

In China you also compete against the best international companies.

Absolutely, and you’ve just got to look at people like Wal-Mart and all these companies that are setting up, and KFC rolling out their different franchise businesses into China. They’re all aggressively trying to get out there and make it all work, but you know, I don’t think they’re quite used to how aggressively the Chinese will compete with each other.

And the other thing: China is not necessarily a level playing field for western companies when you move there. As a western company, as a wholly owned foreign enterprise, you have quite a lot of commitments with regards to what you need to pay your staff in terms of taxes and you tend to find that some of the locals probably don’t meet all their legal obligations. And the Chinese Government is definitely trying to crack down on that, but it’s just the nature of the size of the beast.

And you’re absolutely making sure that your accountants are paying all of the right taxes for baby tax, health tax, income tax – all that stuff. It’s quite a highly taxed society. Whereas I’m sure some of the other Chinese companies there sort of work a little bit below the radar. Now that will change eventually, but at the moment you have to realise that.

So you’re going to stick to it?

Absolutely. But again it’s one where the model changes as we sort of evolve the particular business. We’re sort of profitable and cashflow positive at the moment, which we’re very happy about, but we see a lot of future in China with regards to where they’re going. They’re trying to build this internal consumption engine. Now at the moment everything obviously is driven through exports and you can go to ports like Tianjin and see 10,000 containers a day leave the port. What the Chinese are trying to do is build this middle class, so it’s an exciting time certainly to be in China and see that level of growth.

Are you also looking at it for other opportunities? Or do you just want to be in China to see what else is going on?

Again it’s one of those areas where, when you talk to the Chinese, they’re doing half a dozen things. We have a whole pile of Chinese friends, and they’ll have three or four different businesses and in some cases they’ll be involved in steel mills and another one will be involved in steak houses – and you name it, the guys are just all over the place. It’s quite amazing.

However our focus really just been on the one business, building the model and continuing to evolve it, and the other thing is that if it isn’t working you’ve just got to cut what you’re doing and say “we’re going to change strategy”. Where in Australia it’s like “I’ll tweak it this way, I’ll tweak it that way”, this is a little bit more about changing direction and those sort of things.

That was also hard to pick up there, but the people are fairly resilient so when we changed models and the way in which we do development, and all the process and the technologies around it, staff that had to stop what they were doing, and learn new systems, train on new products, were surprisingly flexible in that area.

Your wife’s running that business now and you’re back in Australia doing what?

I’ve been helping out with the business again in which we invested in the early stages, which is a business out of Brisbane called PIPE Networks. This is run by two amazing entrepreneurs who were going to start it from scratch and have grown the business very very rapidly. And so I’ve been helping the business with some of our domestic products. One announced recently is to lay a 6900km cable from Australia to Guam, to bring more internet access into the country.

Have you got equity in this business?

Yes. I’m one of the founding shareholders, with a little less than 1%.

What do you see as online broadband trends for 2008?

The big things online are really going to be people refining their businesses. I mean everyone’s gone through and got a website and using email and those sort of things, but it’s providing that next level of plug-ins to your website or your businesses so people can interact with you – whether that’s being able to check on orders online or whatever.

People want to do what the airlines do. They want to go there and book their tickets online, and create the whole process without necessarily needing to deal with someone on the phone. I think we’ll see, in a business sense, people exposing more of their business online. And on the social networking side of things.

Again just crazy growth is appearing in this area. We just continue to be surprised by how kids are using the net and how it’s all sort of fitting together.

Who could possibly imagine that you could have these simple systems like Facebook and all that sort of stuff just getting millions and millions of people behind them.

So I think business is understanding how they can tack that element of social networking into their own services: there’s some very interesting challenges in that area.

How can business do that exactly?

It’s one of those “how long is a bit of string” questions. It depends on the business, but if you deal with this younger generation you’ve really got to start thinking about how to tap into this. How do I appeal to these people that want to go through and expose a whole pile of information about themselves.

In some cases they want to do it anonymously and they want to slander you and libel you and those sorts of things in one breath, and the next breath they want to write these great testimonials to how great the service was.