Launching businesses from ashes of failure

One of the great stories of Silicon Valley is how Josh Hannah and Jack Herrick bought eHow’s assets at a distressed price after the company went out of business, turned it around with a very low cost model and sold it to Demand Media two years later for a big profit. As Wikipedia notes:

eHow.com was founded in March 1999. The company raised close to $30 million... , hired 200 professional writers, and … employed a 25-person engineering team. By 2001, eHow had created thousands of articles. The professional writing, combined with a TV and radio advertising campaign, briefly made eHow one of the Internet’s top 10 news and information sites. Despite the popularity, eHow was not profitable and was forced to declare bankrupcy when funding ran out.

In 2001, IdeaExchange.com bought eHow out of bankruptcy with the hope of charging eHow’s readers to access how-to instructions. eHow remained unprofitable and in early 2004, IdeaExchange sold eHow to Jack Herrick and Josh Hannah.

Says Josh:

“When I told people what I was doing, they thought I was crazy. Conventional wisdom said content was dead, and there was no way to make money on it. We had a different view. In my experience, the foundation of a great business depends on having a different idea from conventional wisdom and pursuing it in spite of a skeptical market.” says Josh.

Josh and his partner restructured eHow by outsourcing content creation to the community and employing then-new advertising and search engine optimization techniques. In six weeks, they had earned enough from advertising to pay off the cost of the purchase. They increased revenue and traffic 30-fold before selling the company to Demand Media in 2006 for a 400X return.

The NY Times has an interesting article in this Sunday’s magazine which notes that much the same may be happening with Linen’s and Things:

In this instance, control of the Linens ’n Things brand, meaning its trademarks and the like, and its Web site, were acquired for a reported $1 million by a joint venture between Gordon Brothers Brands and Hilco Consumer Capital, divisions of firms with long histories in the bankruptcy business. This entity helped run the Linens ’n Things liquidation, spending four or five months immersed in its unwinding operations in the process. “We learned a lot about the brand and the consumer,” Carlyle Coutinho, vice president of Hilco Consumer Capital, says. “We knew we’d have a very strong e-mail list and a very strong customer base that was very loyal.”Time will tell how loyal shoppers turn out to be to what the Gordon Brothers-Hilco crew concocted: a Web-only version of Linens ’n Things. But a database of five million e-mail addresses isn’t a bad thing for a “new” business to have at its disposal, and certainly not something an online retailer starting from scratch would be likely to have. Nor would a start-up have a nationally recognized name the day it opened…

The proposition of this distinctly Great Recession model is snapping up a valuable asset on the cheap and using the low-labor tools of Web commerce — outsourcing, electronic ordering, etc. — to simulate a version of the original business.The new version of lnt.com that celebrated its “grand reopening” a few months ago may not strike the typical shopper as anything radical. The interesting stuff is in what’s behind the site, or maybe even what isn’t. For instance, the actual operation of lnt.com has been jobbed out to a third party: a San Diego firm called TorreyCommerce that bills itself as “a leading provider of outsourced e-commerce to the home-furnishings industry.”…

Linens ’n Things itself now has few direct employees, or even a full-time chief executive. And while the comeback announcement included a mention of plans to “reinvigorate” the brand, the marketing efforts so far revolve around Internet search ads and promotions sent to the e-mail list.

As companies both big and small go out of business during this great recession, I wonder which of them may yet be reborn by smart, thrifty, scrappy entrepreneurs who know how to keep costs low and, more importantly, variable. Anyone leveraging someone else’s invested capital out of a bankruptcy like this – please email me!

(For more from Jeremy, visit his blog)
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