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David Kreiger
(WG'07) |
Welcome Farhad. Thank you for being part of our first online Wharton Alumni Chat. Thank you also to current students and alumni who have logged on to participate in this online conversation. |
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As most of you know Farhad graduated from Wharton in 1996 and is the co-founder, of shopping comparison website Shopzilla (formerly BizRate.com). Last June Shopzilla was sold to E.W. Scripps Co for $560 million; Farhad remains with the company as Chairman and Chief Product Officer. |
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Though most of you are familiar with Shopzilla you might be less familiar with Farhad's fascinating and unique background. Farhad fled Iran during the revolution with his family when he was just nine years old. He lived in France, England and Northern California before he settled down in LA in 1984. |
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He went to UCLA undergrad, earning degrees in Math/Computer Science and Economics, before working for a couple of years at Andersen Consulting and coming to graduate school at Wharton where he earned his MBA in Entrepreneurial Management in 1996 with Shopzilla (then BizRate.com) as his graduating thesis. |
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In an interview with BusinessWeek when asked about his unkempt appearance and long hair, Farhad said, "I've met a lot of different kinds of people, and the ones I liked most were not afraid to be themselves." We hope to get a bit of that fearlessness today in our chat with him. |
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Thank you again Farhad for being with us. I will ask the first question and then open the floor to students and current alumni that have joined us today. |
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David Kreiger |
Farhad, many people consider starting their own business while they are at Wharton, but very few have been successful in actually doing it. What were the most important things that inspired you to start your own business and what were the most essential skills that helped you to be successful? |
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Farhad Mohit |
Full disclosure... I got David's 1st question yesterday and typed up a semi-coherent answer that I'm just going to paste in here... That way we have one reasonable answer before we get into full "chat" mode... |
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Important things for inspiration:1) I couldn't get a real job, nor did I want one after my Andersen Consulting experience with the Kafka-esque world of corporate America. In fact I didn't even interview my second year. 2) I am a 1st generation immigrant and believed all that "American Dream" stuff... (more on "helpful delusions" later). 3) I had no money and $100K of debt (that's inspiring when coupled with point 1 above, trust me). 4) I met the internet in 1994 when I first got to WG and saw it was going to change everything... All I had to do is figure out was little corner I was going to try and lay claim to... 5) Not a lot of money was needed to start an Internet company... (just technical knowledge and hard work -- btw: it's still that way... even more so since much of the infrastructure is built now). 6) It was not obvious what an internet entrepreneur should look like or how an internet |
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Essential Skills 1) Good at picking partners / people -- you're not going to be able to do everything. 2) Have Brains -- You're starting something new, and making a million decisions with limited information... if you are dumb things may not go so well. 2) Honesty -- means you should like the truth more than stroking your own ego -- facts will come and prove you wrong... can you handle it / embrace it / thrive on it? 3) Curiosity-- excited to roll up sleeves, get in there, work work work, and figure out how to add value in this medium... not just flaunt your MBA and boss people around. 4) Passionate / Driven -- not just in it for the 9-5 or the $$$ alone 5) Risk Tolerance -- first to jump out and just do it, then to stick with it when things go wrong... after all the odds assure you of failure, right? ;-) 6) Somewhat deluded or irrationally optimistic -- helps, when things look hopeless to all the rational people... 7) Lucky -- This can trump all of the above... and is a requirement for success.. |
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Koe Murphy
(WG'05) |
How prepared were you when approaching VCs (i.e., did you have a business plan, did you get committments from customers)? What about angels to raise money to build out the software? |
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Farhad Mohit |
You could say we were too prepared... having completed out business plan at Wharton it was an 80 page monster... (In general I'd say you want to have a 20 page plan and similar powerpoint, if you know what the hell you are doing... which we didn't) |
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As for angels... we raised a couple of friends and family rounds (<$200k) for the first 2 years... those were some LEAN years...  |
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One last thing... when approaching VCs, I'd suggest you schedule them like you did your interviews... don't go to your top prospect first... get a couple of "dry runs" because you will improve... |
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Bruce Brownstein
(W'80) |
How long will you stay with Scripps? Why stay that long? What will you do after? |
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Farhad Mohit |
We sold the company mainly to get rid of my investors (VCs) who'd grown a bit short-sighted 7 years in, they just wanted their money out... Shopzilla is far from a completed idea... we haven't even hit our stride yet imho... So, I'm staying for a while... no specific end date. |
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What will I do after? Very vague... but it will have something to do with finding myself a wife and raising a family (2 things that I sort of neglected in this "hunting and gathering" phase) |
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Amanda Lonsdale
(WG'06) |
How did you market the site initially? At what point did retailers start coming to you |
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Farhad Mohit |
Originially we were BizRate (rating online businesses)... So, I was pounding the pavement (personally) getting sites to agree to serve our survey invitation on their receipt pages so their customers could rate them... |
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this was not an easy sell at first... because the company is like BizWho? GET OUT... |
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but, it's a prisoners dilemma kinda thing... as CDnow got into it, so did Music Boulevard and CD Universe and so on, since they couldn't sit on the sidelines and watch their competitors improve... |
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but it wasn't 'til we rolled out our shopping search (price comparison) capability in 99 and started sending stores real leads that the vendors started to come to us... |
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now, we have a run rate of about $3Bn in gross merchandise sales and we're on most serious merchants' radars. |
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Sandra Chaisson
(WG'92) |
What were the biggest obstacles to growing the business from a fledging start-up? |
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Farhad Mohit |
Our business was a bit ahead of it's time (1996 wasn't the perfect time to launch a shopping search engine) and it took us a while (putting it mildly) to hit our stride with our business model (selling customer satisfaction research wasn't that lucrative)... |
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So, one of the biggest early obstacles was just not running out of money... (especially before our first VC round in 1998)... Even then though, and even after 2 more rounds of VC funing that took us to $77MM in raised capital... because we were in the rah-rah Internet boom phase... we were very undisciplined...so even with that much money we almost went belly up... (down to $2MM before we went into the black) |
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BTW: Last round we raised was $52MM in March of 2000... right before the collapse... (a roudn that I was fighting against, given all the hot air that had been propped up my butt)... So: if you want a LUCK intervention moment... that is one. |
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Michael Meiser
(WG'99) |
How do you feel about giving up control to VC's or some big investor your company? Some people make a big issue about this but at the end don't Vc's have the upper hand anyway (especially if you need more cash?) |
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Farhad Mohit |
I have very strong feelings and lessons on this front... |
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Control is perhaps the most important issue in a start-up... |
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keep in mind the following: 1) many things are moving, many decisions need to be made... you are living this everyday as management. 2) VCs are managing a portfolio... many have never been operators... they don't have time or inclination to get into the details and really understand everything. |
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So... inevitably, at some point or other, your opinions will diverge and whoever has control wins... |
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Here are some personal examples from SZLA (our ticker symbol that never came to pass...  ) |
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I had 7 board members... 3 founding manager... our hired gun CEO and his best friend... 2 VCs... |
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So technically management was totally in control... |
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That's why our VCs for instance, couldn't ask for their money back (i.e. vote to liquidate) after their ill-fated March 2000 investment of $52MM at $700MM pre-money... |
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this would have happened in a heartbeat. |
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Anyhow... still, even with a 5 to 2 dominance... over time, as our VCs timehorizon (7 years) started to appproach and they become very short-sighted... they started pressuring our CEO who caved and suddenly we had a 4 to 3 situation making selling the only option... Note: We sold at $560 in June... we would have been well over $1Bn had we held on 'til after x-mas... and control was what caused our sale early... in the end, CONTROL is KEY! trust me on this one... our silly vcs lost themselves money (and us too... but they don't care, because it's a portfolio thing and SZLA is their most successful investment ever... blah!) |
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Neel Chauhan
(WG'05) |
When you started ShopZilla, did you have a back-up plan in mind? If you had not been successful would you have tried a second venture? |
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Farhad Mohit |
I'm going to go shorter so I can answer more questions |
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(I'm can keep going until 10:15PST or til all questions are answered... whichever comes sooner... ) |
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back-up plan: NO. I had nothing. No other job (hadn't even interviewed). This turned out to be very key actually... because it made me HAVE TO make this successful... |
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backup plans are dangerous... because several times things were so bleak that any back-up would have been a rational path to take. |
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Sergei Zaiats
(WG'07) |
What activities did you undertake to prepare for entrepreneurship while at WG? Which classes/activities would you recommend? Which skillset to build? |
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Farhad Mohit |
I was an entrepreneurial management major.. that was good. BizRate was my "P" fetching plan for Venture Initiation 811 (if I remember the title correctly) |
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There was a couple of legal / tax classes that were very useful for the mechanics of setting up a corp. |
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the general language of business (you know biz-speech) was useful... so I didn't sound like the bum that I look like... |
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And, most importantly... not really going to class (every passes at WG anyway) and spending time on the idea itself, was something that you won't have once you're out of school... |
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also: my partner... very useful. and professor reibstein (other founder)... all found at wharton while socializing... |
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Samer Hakoura
(WG'05) |
When you were starting out, in those meetings when people were says "bizwho .. get out" how did you persuade sites to use you? And now that you are where you are, what are the sort of directions you want to take the company? |
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Farhad Mohit |
Pesuasuasion is an art... but in prisoners dillema type situations, you have "gravity" on your side... So, you basically pitch that Consumer Feedback is inevitable... those who get into it sooner will have an edge... then when one falls, you say... look EVERYONE'S doing it... |
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As for future of SZLA: We think we have a shot at being the entire information layer of retail. We're unconflicted by inventory issues and have some great techonology in the works... We'll leave fulfillment / returns handling to the stores... but there is no reason online that all the information needed for selecting what to buy and where to buy it won't be on one site... We hope to be that site. |
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Matthew Zieniewicz
(EMTM,'06) |
What proved to be the biggest cost driver during those early years prior to 2000? Marketing? Direct advertising? IT development? |
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Farhad Mohit |
Prior to 2000: people. Post 2000 and the advent of pay-for-performance marketing (i.e. GoTo / Overture and Adsense)... marketing. |
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Michael Luxenberg
(WG'91) |
When you are over your head with work as a 1 man shop, trying to fund organically, and don't have the cash flow to hire--would you just build slowly, go for larger outside funding to scale up or leverage outsource resources |
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Farhad Mohit |
I think that the smarter people bootstrap to profitability (of course that is not always possible)... in our space... the PriceGrabber guys are the smart ones in my opinon. They just took some friends and family money. Therefore, they had control and sold in december of this year (not like us and our silly VCs)... so... they had a ton of equity and they chose their timing perfectly... |
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Just to rub it into myself: PG sold for $485MM on 2005 revs of $60MM from $40MM in 2005 (50%) growth... We sold in June (less than 6 months earlier) for $560MM on 2005 revs that turned out to be $155MM from $67MM in 2004 (130% growth!)... |
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Bootstrap if possible!!! (and retain control!!!!) |
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Philip Benson
(WG'05) |
How did you know when it was time to start executing on your exit strategy? What were the factors that led you to start shopping the company around? |
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Farhad Mohit |
This is a tough question... |
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Usually it's when the risks start becoming larger than the rewards that you start thinking liquidity (and of course you have to be at a point to have the option) |
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in our case: I needed to promote our business MVP to become President of the company and reward him with a good slug of stock. Our VCs (short sighted) didn't see the need for long-term compensation and resisted. Our President & CEO, was reluctant to give up his President title (blah!) and hence we had a terrible situation that escalated... The only option, so that we don't lose John (our studly WG '98 current president) was to sell the co and give our VC and friends the "golden boot"... |
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that said.. I should say we were very luck for Scripps... because they've been an ideal partner thus far... (and I ain't just saying that... that's why our whole management team, actually most everyone is still on board... minus our CEO of course.. ;P) |
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Huy Ton
(WG'04) |
was the business model transformation from cust satisfaction to comparison shopping a difficult leap? were there other things you were considering doing? |
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Farhad Mohit |
It was not that difficult... and a general version of it was in the plan... but the pay-for-performance model that we went to (i.e. sorting by who pays most) rather than who is "highest rated" was a tough thing to swallow... |
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John (our current president) made the case that my model -- highest rating -- which he'd dubbed as "pay me please", wasn't great and that PfP would work much better just as it was with GoTo... I thought we'd lose all credibility. (he was right.) |
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had to say that parenthetically...  |
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Koe Murphy
(WG'05) |
How did you value your company to VCs when there was, perhaps, no proven product/service? I.e., how much of the company were you initially going to give up relative to the amount of $ you were expecting to raise? |
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Farhad Mohit |
Here is how our funding went: |
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1996 - 1998 : $200K friends and family |
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June 1998 Series A : $4.5MM at 7.5MM premoney (i.e. $12MM post) |
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July 1999 Series B: $20MM at $100MM pre. |
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things are heating up... we have like a $1MM in revenues at this point.. but the internet is on fire... |
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March 2000 Series C : $52MM at 700MM pre. |
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Are you kidding me? I was actually resisting this... afterall we had like $2MM in revs and 4 banks drafting our S1 telling us that we're a multi-billion $ (seriously) IPO! |
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How did we manage those valuations? I think it's a combination of irrational exuberance and delusional self-belief, coupled with the ability to abstract it all into a game... |
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In other words... and John (mr rational) and I always argue about this... valuations are NOT rational. They need some rational basis (i.e. mySimon sold for $700MM in Jan 2000.. although they were arguably much bigger and more advanced than us)... But, I argued that we have the "ratings network" plus a price comparison service... so we're the better long term play... if they bet now, they could get us at the same price... (you know, silly stuff like that.) |
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Jean-Francois Orsini
(WG'72,Ph.D.'84) |
Bonjour! Do you have other great ideas for web-based businesses or do you think many of the major opportunities have already been staked out...ebay, google, amazon.shopzilla .. |
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Farhad Mohit |
I have a bunch of other ideas... do you have a great team? |
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the internet is still young and if you know your way around (i.e. I've stubbed my toe on every stumbling block)... there are a million things to still do there. |
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Sergei Zaiats
(WG'07) |
How did you go about building your brand? |
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Farhad Mohit |
on the internet you don't "build a brand"... you build a product that people love and a brand is created out of it... |
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arguably, our brand still has a way to go... since, I truly think our product is still of limited value to most... (Google has built a nice brand.) |
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this is actually something that we're actively discussing with scripps right now... they are much more a "traditional brand building co"... |
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that's not how it works on the internet... build a great product and the brand will follow. |
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Sergei Zaiats
(WG'07) |
Any advice on allocating start-up equity among co-founders? |
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Farhad Mohit |
yes... don't waste too much time on it.... (of course, it's a negotiation so try to take as much are possible for yourself... but ultimately, at the founding stage, you got nothing... so you're arguing about how much of nothing you have... go make something so big instead that any piece is valuable.) |
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even the first 100 employees of google probably ended up with more $$$ than I did, and I really did a hell of a negotiation with my co-founders... |
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One thing though... don't give any founder shares if they're going to leave (I narrowly avoided that with a 3rd bizrate "founder" who left after summer 1996... also: try not to have a "deadlock" situation 50:50 if possible... |
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Michael Mallari
(W'06) |
What are the tangibles and intangibles that gave you confidence when there are a lot of uncertainties? |
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Farhad Mohit |
I honestly didn't have any other options to pursue... that is a tangible "confidence" booster. |
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Also: while at wharton I wrote this advice column (Ask Farhad) for the wayward MBAs and I'd talked a lot of smack about how I wasn't even interviewing... That put me in the awkward position of having to eat my words if I actually failed... |
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fear of failure is a good thing. |
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my ego is relatively large and that compounds the fear of failure thing |
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and, I'm naturally an optimist... so I always believe that things will work out... |
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(a positive attitude, even irrationally so, is useful when the going gets tough) |
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Mike Judge
(W'68) |
You have said that "control is key." Are you saying to avoid VCs if at all possible? Or is their a way to access money w/o giving up control? |
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Farhad Mohit |
I can't say avoid them categorically... I do have the names of some you should avoid though. |
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that said... just keep in mind that VCs are in it for their Limited Partners and not for you... they don't "enjoy building businesses" or "helping entreps grow" or blah blah blah |
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they are simple ROI generating vehicles and will always act in their firms best interest. PERIOD. the rest is just hot air. |
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that doesn't mean that their interest isn't somewhat aligned with yours... it is... but when it isn't, expect the obvious... |
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Sergei Zaiats
(WG'07) |
What would you do differently if you had to start a new venture again? |
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Farhad Mohit |
good question... |
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I will answer for an internet company... |
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I can say that every single exec that we brought from the outside was bascially an error. Marketing executives especially because the internet is killing their whole "off line" branding world... as I discussed earlier... |
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I would hire young, smart curious people who are good with uncertainty and making decisions... and let 'em loose... Nobody knows what this medium is about and "offline" experience is more of a hinderance than a leg-up... |
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All our best people grew up with the company... and my naive "bring in an adult" to fix the situation attitude was just dumb. |
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Second: I would be more generous with stock earlier with our top flight people... I was a bit of a "negotiate to the death" type... and in the end, that wasn't very smart. |
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when I did want to get 'em stock, the adults / board weren't eager and it caused problems... |
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again.. this is about getting the best people and motivating them to make the biggest pie possible... not about keeping an extra .5% of a small pie for yourself. |
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third: I would stay much more engaged with my board and sit on committees that I thought were a stupid waste of time (most importantly the Compensation Committee)... I was so excited that my VCs were eager to take these committees on for me... |
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these committees matter... in the end, because they are part of CONTROL |
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which matters a great deal. |
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I could go on forever on this one it seems... so, I'll stop there to give another question a chance. |
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Megan Mitchell |
How are you able to maintain your individuality (as an entrepreneur and as a company) now that you are a part of a significantly larger corporation? What sacrafices have you been forced to make? |
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Farhad Mohit |
this is THE reason we chose scripps... |
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initially we thought they'd be the stalking horse... and a big-name internet company who was pursuing us was the natural acquirer... But, as we got into it... Scripps really knew very little about the space and therefore was truly "betting" on us... while the other company thought they knew exactly how to run out silly little division and that we'd just better take the money and shut the hell up... |
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that wasn't a very useful tack to pursue with us and so we let 'em destroy our competition... ) |
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by buying them. |
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So.. so far with scripps... outside of Sarbanes Oxley (sp)... which is a pain all public cos have to go through... we've been pretty much business as usual. |
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I love the Scripps people... truly good guys from the midwest... (it can happen ) |
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Mark Midle
(WG'04) |
How is the company's strategy different now under Scripps' ownership than it was an an independent company? |
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Farhad Mohit |
We can take a longer term view... not as worried about cash on hand, EBITDA etc... since we're not trying to "look prettiest" today in case we need to sell... |
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this is quite important for our business, which we think still has a major inflection point (i.e. a point were we actaully could see accelerated growth) down the line, IF we do everything right... |
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Eric Lemons
(WG'84) |
When did you pay back your initial friends and family investors? Were they shareholders or just making a "bank loan"? Did they make a substantial return or just recover their investment? |
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Farhad Mohit |
we had some loans that were paid back upon our Series A... and some investments (who are very happy right now. ) |
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Alan Cantor
(WG'73) |
Who is your barber? |
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Farhad Mohit |
OK... I can tell we're getting to the core questions now... (Unfortuantely I can't give out trade secrets...) |
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OK... I gotta run now... |
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thanks everyone for the wonderful questions. |
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much  , Farhad. |
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David Kreiger |
Well, we have run out of time. Thank you very much Farhad for volunteering to be part of our first alumni chat! Thank you everyone for logging in and asking some great questions. |
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Also, we just found out that it is Farhad's birthday today. So happy birthday Farhad. We are really glad that you chose to spend part of your birthday chatting with us! |
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We will be posting the transcript for this chat on the WEP home page. Please also look for more upcoming alumni chats. I hope everyone enjoyed themselves and have a great rest of your day. |
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Farhad Mohit |
I should have also wished everyone best of luck with their ideas! |
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Good luck all! |
