How I survived the growth trap

Last year, Fred Schebesta sold his online marketing business Freestyle Media for $1.3 million. He tells AMANDA GOME how he survived a period of unprofitable growth (and several stints in hospital) to build a highly successful company.

By Amanda Gome

Last year, Fred Schebesta sold his online marketing business Freestyle Media for $1.3 million. He tells how he survived a period of unprofitable growth (and several stints in hospital) to build a highly successful company.

Fred Schebesta, 27, was going to be an actuary, but was bad at statistics. Out of boredom he started building websites and databases before launching his own business Freestyle Media in 2003.

He recently sold his business for $1.3 million. But was it worth it? He tells Amanda Gome of the cost to his health, the lessons learnt turning around a troubled, unprofitable business, and how he found a buyer.

Fred is happy to answer your questions. Email feedback@smartcompany.com.au

Amanda Gome: You dropped out of university to set up a business building websites. Do you regret that?

Fred Schebesta: No. I was already working for myself. I built a website for a neighbour when I was 20, and then I got a finance company as a first client (they are still with us). By 2003, I was failing classes – I was too busy going to client meetings.

There was one key moment where I could have studied for an exam but learnt how to build data-driven web sites instead. After that there was no turning back.

You were very young. Did that bring any problems?

Yes. When I moved into an office I just got completely overwhelmed. I had exams, no money, I had to get clients and I had to pay rent. I had to check myself into hospital because I thought I had meningococcal. They had to put me in a room to calm me down.

What helped?

I found it very lonely and when I talked to other entrepreneurs it just made me more anxious because they had their own problems, and you feel competitive with them so it’s more petrol on the fire.

I began to go every week and have dinner with grandmother. She just listened and sometimes gave me advice. She was always interested in what I had to say. I also played computer games. Too many, but they were an escape.

So you were building websites. Did that business grow fast?

No, it didn’t do well. If I was starting again I would never be a web design company. You are signing yourself up to die. It’s a low barrier to entry and lots of web designers open up only to close down. You have really got to specialise.

I had already made a crucial decision in 2004. I wanted to change the direction of the business from building websites to online marketing.

I could see that was where the money was for us. Anyone could build websites, but a website build is a one-off. We started losing money on those big builds in 2004-05. The scope changes all the time as there are disputes over what is included in the original and what isn’t. That’s what kills most web developers. And I hated it. I found it so boring.

By 2004 we decided to change direction to online marketing. But that was very tough. By 2005 I had heaps of debt; $250,000. I didn’t have the revenue and had too many staff. I had to scale back and learn how to run a really profitable business.

It must have been tough.

There were tough parts. There were some people who didn’t continue with us. There were also good people we lost in those tough times.

But on reflecting back, when it’s hard, you think the business is going to fall over, but you learn that that is not what happens. What happens is that even in tough times, the business keeps going. It doesn’t just stop.

Look at big companies. They announce that they are going to get rid of 1000 people and so you would expect the company to come to a grounding halt. But it doesn’t. And in the long run it is probably better for the business.

Were you driving it too hard?

Yes. I was starting up too many new projects and I was spreading myself super thin. I would go over the top.

You know how weed killer works? It speeds the growth of the plant and it grows so fast that it explodes from inside. That’s what we were; we were killing ourselves.

Surely you had staff that reined you in. Didn’t your management team try and stop you?

Yes, but I would just tell them I would do it myself. I am relentlessly persistent. You almost can’t stop me.

Why is that?

I keep chasing opportunities. Since then I learnt to focus on one thing at a time. I now have a piece of paper on the wall which says in big writing: “Focus on one thing at a time.”

Now that’s what I do. If you start 20 things and finish none, you have done nothing. If you finish one thing it is productive.

How did you change the direction of the company?

I could see the trend towards driving traffic to websites and converting online customers into purchasers of products and services.

I had already decided to become the best online marketer in Australia. I started reading everyone’s stuff. I became a vacuum. And I began to write and blog and podcast.

That began to bring in work. The more authoritative I became, the more clients I got and the bigger the clients. Then I won the Young Direct Marketer of the Year by the Australian Direct Marketing Association. I started doing email marketing and building banner ads and landing pages for clients and going to current clients and saying you should do this. As we got them good rankings on Google and got them traffic, we got more work.

That was how we won Virgin as a client. They found a white paper I had written on how to choose an online marketing agency.

The guys had to learn different things while I did the selling. I also promoted James Ward from accounts manager to running operations, and he is now CEO. He was very focused on profit and keeping things on target.

In 2005 we did $250,000 revenue, then $1.5 million then $2.2 million in 2006-07. We are now on track to do $3 million. We decided we wouldn’t take on projects that immediately were not going to make a profit.

What was the one major thing you did right?

Everyone says it, but I surrounded myself with good people. I always hired people who are much better than me. And I kept experimenting to get the model right until I finally did. We not only did online marketing but integrated online strategy with web site development, SEM, SEO, online advertising and marketing.

(Clients included Sanitarium, Laser Sight, Rabobank, PMI Mortgage Insurance, Goodman Fielder, Computer Associates and The University of Newcastle.)

Weren’t you up against large established players?

Yes. But online marketing is becoming more specialist. And businesses are moving from big ad agencies to specialists who can do specialist work. The online space is so noisy now. It comes back to really understanding what the customer wants.

Take laser surgery. They had been running online banners for six months before I had the insight. People wanted to know if they were suitable for it or not. We changed the message with a call to action – send in your details and we’ll tell you if you’re suitable. That is still running three years later.

It’s not hard to find out what the customer wants, out it in a headline and put a damn obvious call to action button next to it. But you see companies going in the wrong direction. Take MYOB. They are setting themselves up as a content provider, to provide information on small business. But they don’t have the credibility to do that.

So do you hit people online with a direct offer as opposed to building the brand?

You need to do both; you need to build brand because it improves the conversion rates. You have to do awareness campaigns to keep your business top of mind. But you also have to get businesses to engage and buy now.

What’s new in conversion rates?

New in Australia is split testing. You can change your entire home page to look different for different users. Also the debate over usability versus conversion is growing. I believe usability is a subset of conversion.

Predictions?

Here is an aggressive prediction – Twitter is going down. It is too much narcissism in the market. People will get sick of it.

Has it been worthwhile financially to you to run the business? You could have made a lot as an online marketer in a big firm.

Well, I sold for a million. I also took a salary, but I have recently changed it to be serious ($130,000).

Did you always want to sell the business?

Yes. We were geared towards selling from the beginning.

How did you do that?

We always thought about creating systems and processes. We experimented on how to create scale, so we made sure there was not one person who was irreplaceable. That was our key focus from the beginning.

So while I took the rubbish out, I always had it in the back of my mind to get to a certain spot where I didn’t run the business day-to-day and someone else runs it.

How did you sell the business?

We shopped around. We looked at all the major listed companies and my mates who were selling businesses spoke to most of the big agencies who recommended people we could speak to. So we would call them up and say we were looking for partners.

At the time everyone was snapping up companies, so we put together a presentation and went out and presented it.

We got a different feel from every different company. Every one of the companies used different formulas to value the business. Some wanted complete ownership, others a part of the business. Some wouldn’t fit with cultures, but in others we could feel a connection.

We had a few conversations where we said we liked each other, then it all went quiet and suddenly it all happened in six weeks.

We were not clear at the start of the process how much we wanted to sell, but then we decided to sell all of it. Lots of groups by then had formed big groups in our industry and they command the relationships in the marketplace.

So you were bought by Q Ltd?

Yes. In June 2007, and I have a three-year earn-out clause, so I’m still involved until that runs out.

And you were bought for how much?

$1.3 million.

Did you receive all of that?

Most of it. I had a debt of $150,000 to pay off and I had a partner Fred Restuccia who bought a quarter of the company for $10,000 in 2003.

Many entrepreneurs think about whether they should give equity to employees or partners. Do you regret selling for so little back then?

Look at it this way. More people will buy assets from me because they will do well.

What’s that been like having a new owner?

It has helped us with more structured reporting and to grow it. I also learnt about what investors look for. I can now look at anyone’s business and see the value. They look for active databases, recurring revenue streams, systems that make money, no debt or big liabilities and no big overheads.

Have there been problems?

They have different ways of doing business. We had to become more disciplined so there were slight conflicts over little things.

So has it all been worth it?

It feels like it has. I could have got a job at 20 and worked for five years, and after paying tax, where would I be?

Read Fred’s SmartCompany blogs here