Startup Review

eCrush Case Study: Why timing the M&A market is tricky

written by Nisan Gabbay, posted on April 15th, 2007

Why profiled on Startup Review

The eCrush network is comprised of several major sites (ecrush.com, espinthebottle.com, and highschoolstyleboard.com) that offer flirting, matchmaking, quizzes, romantic content and social networking type features to teenagers (age 13-19). The sites receive over 1 million unique visitors per month, and rank as the 10th largest dating site in the US according to NetRatings. The company has been profitable since 2002, and generated $1.4M in profit in 2006. The eCrush network was acquired by Hearst Media in December 2006 for an undisclosed sum, rumored to be in the $8-12M range based on my sources.

Interviews conducted: Clark Benson, co-founder and seed investor of eCrush

Key success factors

Effectively transitioned user base from one service to another

The original eCRUSH site launched on Valentine’s Day, 1999 as an anonymous matching service. People with a crush on someone could use the eCRUSH service to anonymously discover whether their crush also had an interest in them. eCRUSH was the middleman, connecting the two parties anonymously via e-mail to see whether a crush was mutual. Over the lifetime of the service, eCRUSH has successfully matched over 900,000 people through 2.4 million registered users.

As an e-mail based service, eCRUSH had strong viral characteristics, peaking at over 3,000 registrations per day in 2000/2001. However, the site’s success led to the launch of over 30 copycat sites that replicated the eCRUSH functionality. Even more damaging was the use of the “crush” concept by spammers looking to collect e-mail addresses from unsuspecting consumers. eCRUSH became a victim of its own success, as spammers tarnished the reputation of the service with consumers.

In the face of these challenges, eCRUSH management recognized that they would need additional products to distance themselves from competing services and spammers. Over time, eCRUSH added additional content like quizzes, romance articles, rating games, astrology, etc. to keep its users engaged. eCRUSH launched a site called eSPIN (or eSPIN-the-Bottle) as a new type of flirting application for its teen user base.

eCRUSH would not have had a successful exit if not for the transition to the eSPIN product and subsequent user generated content strategy. The original service provided a nice user base and e-mail marketing database from which to launch the eSPIN service, and over time, the original eCRUSH service became a feeder service for eSPIN.

Established profitable lead generation model

eCRUSH found a clever way to monetize its traffic by offering users access to premium site features in exchange for filling out lead generation forms. eCRUSH management, led by Karen DeMars Pillsbury and Amy Gibby, were able to solve a problem inherent to most teen sites in the post-bubble era – a user base largely unwilling to pay for services and a cold banner advertising market. The solution was to hook users on the free service, and ask them to fill out surveys and co-registration forms to unlock premium feature sets. For example, if a user would like to know whether another user had read their message, they would need to fill out a 2-minute survey from a market research firm that eCRUSH had partnered with. During the downturn, market research surveys proved to be the most viable way to monetize teen site traffic. Although teens are unwilling to spend money, they do have time to spend. This lead generation model turned out to be both a blessing and a curse for eCRUSH, as it enabled the company to survive during the downturn and build a nice cash flow business, but ultimately did stunt its growth potential. More discussion on this topic in the “Food for Thought” section below.

Efficiently managed capital over company lifetime

As a previously successful entrepreneur with offline businesses, eCRUSH co-founder Clark Benson did not buy into the Internet bubble hype of the times. Mr. Benson resisted the temptation to raise a large amount of capital, opting instead to raise a total of $900,000 over two financing rounds in late 1999 and mid-2000 from angels. The focus was always to build a real business with actual profits. The company kept an extremely low burn rate from 1999 – 2001, and became consistently profitable in 2002. This capital efficiency enabled eCRUSH to wait until the Internet M&A market returned in full force in 2005/2006, as opposed to selling in a much less favorable climate.

Launch strategy and marketing

eCRUSH launched it’s anonymous e-mail based matching service in February 1999 and saw slow, but steady growth over the next six months. The service really began to take off once it got press coverage by some of the teen-focused print magazines. This PR coverage helped kicked the daily registrations to 500 per day, and enabled the viral attributes of the service to take hold. After 18 months, the site had 650,000 unique visitors and 12 million page views. The service peaked at about 3,000 registrations per day in 2000/2001. eCRUSH spent very little on advertising throughout its first 5 years, sometimes experimenting with online advertising and some ads in teen-focused print magazines.

As the effectiveness of the original service began to diminish somewhat, eSPIN was launched leveraging the site traffic and registered user list from the eCRUSH property. This effectively launched the user generated content site (eSPIN-the-Bottle) which today is the centerpiece of the eCRUSH network. With compelling user content and an established lead generation business model, eCRUSH began to advertise heavily (albeit with great emphasis on ROI), spurring its profit growth from 2004 to 2006.

Exit analysis

eCRUSH was acquired by Hearst Digital in December 2006 for an undisclosed sum. Hearst publishes a number of the leading teen girl magazines, like CosmoGirl, Seventeen, and Teen, thus there was a clear overlap between the user bases of both company’s sites. eCRUSH engaged investment bank Montgomery & Co. to aid the acquisition process, and was rumored to be shopping the company in the $12-15M range. In my interview with Clark Benson he mentioned they were happy with the sales price, but fell short of the target. Thus, I can only guesstimate that the price fell somewhere in the $8-12M range. Clark mentioned that at various points in time the company could have been sold for “noticeably less than half” what they eventually got, so they did well to weather the storm from 2001 to 2005. eCRUSH announced that they did $1.4M in profit in 2006, which would represent a ~7X EBITDA multiple at the middle of the acquisition range. Given that eCRUSH only raised $1M in funding, this represented a solid return for its investors – somewhere in the 3X range, according to Clark.

Why does this acquisition make sense for Hearst Magazines Digital? More broadly, why are traditional media companies buying user generated content sites at multiples that many people consider to be excessive? To understand the math behind such acquisitions requires exposing some little known facts about how online branded advertising is sold. Hearst Digital has well established teen brands (Seventeen, Teen, CosmoGirl) that I’m guessing typically don’t have a problem selling out their ad inventory at reasonably high ad rates – in the $10-12 CPM range. This is because they have an established sales force with deep relationships to ad agencies and brand advertisers. Hearst can leverage these relationships to include ad inventory from eCRUSH into larger ad deals that go across its network. Hearst can reasonably sell eCRUSH ad inventory in the $3-10 CPM range (the value of page views on sites with social networking is determined loosely by click-thru rates and placement, and there is a big difference from some types of pages to others – i.e. pages deep in a user profile are much less valuable than “jumping off” pages). This brings up the concept of what I’ll call “drag along”. Say an advertiser wants primary ad inventory on the home page. At the same time, there might be five other advertisers who want this same ad spot. As a result, the publisher will require the advertiser to buy ad inventory on its sister sites to get the ad inventory that they really want. Hence, sites like eCRUSH might get “dragged along” into the deal at high CPMs just to secure an ad spot on the home page of Seventeen for example. Another example of “drag along” is when an advertiser might have a large (for example $500K) ad campaign to fill. They might spend $200K on Yahoo, $100K on MySpace, $100K on Alloy, and $100K on Hearst. Part of that $100K will go towards eCRUSH ad inventory on the recommendation of the Hearst salesperson, inflating the CPM rate that eCRUSH could command on a standalone basis. The advertiser is typically happy because they get more unique eyeballs at reasonable CPMs, while still ensuring that they get their prime branded placement.

eCRUSH, as a start-up and standalone brand, had been using mainly 3rd party ad networks to fill their inventory, with typical CPMs in the range of $0.50. To increase that CPM they’d have to build a small sales force that would have difficulty competing with the larger sales forces of more established sites anyway. Even if eCRUSH could build a competent sales force, eCRUSH still couldn’t put together the type of package deals that a large advertiser is looking for. Hearst, selling that very same eCRUSH ad inventory can get minimally $3 CPMs. Hence, the eCRUSH property is 6X more valuable as a part of Hearst than it is as a standalone company. This does not include more strategic factors like cross promotion opportunities, technology, management expertise, etc. With an understanding of this math, it is easy to see how with proper execution Hearst can make a good ROI on its purchase of eCRUSH.

Food for thought

While eCRUSH was a solid win for its founders and investors, it missed the opportunity to become a home run exit for a few reasons, including some conscious decisions made by the executive team. For one, the eCRUSH management team was very concerned with building a safe online environment for teens. As such, the site only allows communication and flirting between members through pre-drafted phrases and responses. eSPIN screens all photos before they are uploaded to the site too. This is a much more controlled environment than the teen social networking sites that launched well after eSPIN. Second, and perhaps more importantly, eCRUSH was focused on building profit growth rather than maximizing site traffic. Its lead generation business model clearly stunted viral growth by placing obstacles between the user and actions that the users’ wished to take, reducing user engagement. In 2004, eSPIN had 800,000 monthly US unique visitors, and as of this writing has over 1M UVs. That represents solid, but not spectacular growth. Had they removed some of these restrictions, it is likely that the site could have grown to 3-4M UVs or greater.

The eCRUSH management team faced some tough decisions in the 2004 timeframe. The online ad market for branded advertising was starting to come around, yet they had a profitable lead generation model in place. They could have removed some of the eSPIN site restrictions to increase traffic growth, but at the expense of profits. It was unclear in 2004/2005 that the Internet M&A market would be driven by traffic metrics. Having lived through the first bubble, the eCRUSH management decided to stay the course of growing profits rather than traffic, and did achieve that goal. It was difficult to predict in 2004 that user traffic growth would be valued more highly than profits.

The irony is, if eCRUSH had played for massive site growth in 2000-2002, they would have likely become another dotbomb. Had they done so in 2004/05, they would have likely increased their exit valuation tremendously. The point being that it is nearly impossible to time the M&A market. The best advice Clark had for entrepreneurs is to understand what your objectives are for the business. Building a slower growth profitable business is a much safer way to ensure that you can hit a double, but at the same time decreasing the likelihood of a home run.

Reference articles and additional reading

“Baby, I’ve Got E-Crush on You”, Alternet, September/October 2000 Issue
Article has a good summary of the origins of the site.

“eCrush, eSPIN-the-Bottle Acquired”, Mashable, January 2007
Short overview of current product offering.

Hearst Corp official press release on eCrush acquisition

“Hearst Corp. buys Chicago’s eCrush”, Chicago Business News, Analysis and Articles, January 2007
Source for $1.4M in profit in 2006.

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