A \’real\’ case study on FUNDING : Cricinfo.com – \’We were burning through a million dollars a month\’

Source : http://www.espncricinfo.com/cricinfoat20/content/story/674579.html 

\’We were burning through a million dollars a month\’

In part two of his account of Cricinfo\’s first decade, Badri Seshadri looks at how the site changed hands during the years of the dotcom boom

The first £100,000
Peter Griffiths brought a very strong connection from the scoring and statistics side of things. He was at that time probably the Secretary of Cricket Scorers and Statisticians. Alex Balfour was doing all kinds of jobs, one of which was freelance journalism. He did a story on Cricinfo. That drew him into Cricinfo and he started working as a volunteer. He was always ready to write copy for any document we had to write or presentation we had to make. In addition to that, he was well connected in London with the financial side, because he was doing a lot of research work during the dotcom period.

One such company that was brought in by Alex was called Pangolin. It later renamed itself as sportal.com and then collapsed eventually. They were a company run by a bunch of sports executives who were in some television company or the other, into rights negotiations and broadcasting. It was primarily driven by soccer. They had the idea of putting together a pan-European mega sports network. They said they would give us £100,000.

It was our first proper funding in return for virtually nothing. Amazing deal. They said they would give us the money in return for us to write a business plan. If they liked the business plan they would invest in us at the agreed valuation. If they didn\’t like it or we didn\’t like the offer, we were to return the money, and if we didn\’t have the money to return – because obviously the moment you take £100,000, you start spending it – they would take advertising on our site, since they were building a sports network and they needed advertising and they knew we had a good audience base.

We said, fine. There was nothing to lose. Cash for advertising, and that as a last resort. So we took the money and started using it. Simon set up an office in a place called Hartham, and I went there quite often. Alex would come in for a day or two a week for small money, to do some work, and me going there, staying there for a month and coming back – that sort of thing.

But now we could employ more people in India. With that kind of money, if we even allocated a couple of thousand pounds we could hire people in India to do scorecards and other things. So that\’s how the Indian office was set up. Even before that, in \’98, when I started travelling to UK, we tracked Murari Venkatraman, who had been one of the admins before me. We got Murari in, and quite a few other employees. In hindsight we probably should not have hired most of those people, but we ended up hiring about 60-70 people, lots of them typing scorecards, which was the starting point, whereas in UK we had just one employee.

David Richards was still very active. He brought in a guy called Michael Watt, a New Zealander, who built CSI, which like TWI was into sports broadcasting. Both the New Zealand Cricket Board and Australian Cricket Board supported him and gave him television production contracts as well as television rights marketing contracts.

\”I will give you £3 million\”
David Richards got Simon to meet Michael Watt. Watt did not ask any questions. After a couple of meetings he said: You want money? I\’ll give you money. I will give you £3 million and you take it and build Cricinfo. This was over a handshake. Simon, myself, Balfour and Griffiths went, met him in his room, shook his hand, and he told his accountant to transfer three tranches of one million pounds.

 

Later they said they would have 25% stake in the company in return for the £3 million. It was an angel deal of a kind which was completely unheard of. So the money came first and the agreement came later, of less than half a page, which covered just three points: 25% equity, first-exit option for them, and if someone comes to invest they had the right to sell their equity first or not sell. They didn\’t even ask for a board seat or anything.

So this first funding came in August \’99. Simon and I tried writing business plans and we just couldn\’t do it because we didn\’t know what a business plan was. So we a got a document from Coopers & Lybrand which talked about how to write a business plan. We would go and sit in some pub and try to write. At times Alex would join us but mostly it would be me and Simon. We were always talking about the same thing: we will cover all international matches, we will have audio and video, the same things.

Michael Watt\’s people suggested that we get Pangolin out of the way. He knew everyone, so he simply called them and said, let these kids out, they will pay you off at no interest rate. So we paid the £100,000 out of the first £1 million that we got and cut the relationship off and we had Watt holding 25% of the company.

Around the time when the money came in, a whirlwind of activity started happening with us in terms of investments and we were simply not ready for it. We were clueless, really. Alex Balfour was probably the one who was the most clued-in because he was a business journalist. He knew about shares and valuations and how money was invested in companies, and we would meet in his house and we would talk about what to do.

Declan Murphy, who was Watt\’s investment manager, started looking around for investments. Probably he was looking to turn this £3 million into x million. So he started going to the market, saying, here is this company called Cricinfo and you can invest in it. And he started bringing in all sorts of deals.

It was just too much for us. There was a sudden flush of money – £100,000 comes from nowhere and then you have £3 million happening and you have not done anything.

All along there was some cricket coverage going on – the \’99 World Cup happened, which Alex managed completely. At that time he had a problem with the ECB, who were running an official website and didn\’t want to give us entry into the stadium.

But our coverage of the \’99 World Cup was a tremendous success. We could get more advertisement revenue in US or UK than the official website. Obviously the ECB would have been really pissed off about that. That was the last World Cup that was run by a cricket board before ICC took over the running and sponsorship and management of it.

Trust v profit motive
Our user base was going up tremendously and money was also coming in, but we didn\’t have any idea or plan or strategy. And Simon wanted complete control. Say, for example, if we wanted to sell the company in \’99, someone would have come and bought it for any amount of money. But Simon had the idea that the whole thing started as a voluntary venture, so we could only consider ourselves as trustees. Simon was never in it for the money and that is where the clash started, because on one end you have Michael Watt and his money – though he also appeared to be a very nice guy, but his manager, Declan Murphy, was about money.

So Murphy said, let\’s do a deal and get investors. Simon said, no, it\’s a trust. And we had exasperated meetings of five of us, including Declan. He was very angry, thought we were a complete bunch of idiots sitting there with no understanding about what the dotcom market was all about. We had agreed to give 25% shares to Watt but only two shares had been issued at that point, and both were taken by Simon. So on paper 100% was with Simon. He said he was a trustee for a bunch of volunteers. How do you structure these things?

 

 

 

Simon came up with a formula. The idea was something that he had discussed with me, where he looked at all the people who had volunteered for Cricinfo, and we went through all the names and came up with 70-75 names. So 75 people own the company before anyone else came in. How do you give them shares? So then a measure was how many scorecards were typed up by which guy. Then there were other people like Vishal, who had created scoring software, and KS Rao. Using and applying all sorts of measures he created a formula where premium equity was given to himself and me, because we were the first two people who quit our careers to jump into this. After this entire formula was created, it was sort of like 25% for Simon King, 15% for me, and then it starts tapering down all the way. And a further 25% to Watt. This was presented to a few people and it was agreed and accepted generally.

When we started getting money, Simon and I took a trip to the US to meet with sportsline.com, which was then called CBS Sportsline and was a pioneer among multi-sports media companies. They were keen but uninterested in any sort of cash deal. They wanted to acquire Cricinfo and roll it into CBS Sportsline, to make it CBS Cricinfo. The deal was that CBS would invest, but more in terms of advertising space in return for nearly 30% equity.

When we went there it was quite amazing for us because they had their own internet radio station that they were running for basketball and football matches. These were things that we had always wanted to do, and we saw that they could do it with just two guys sitting in a room, providing live audio commentary. They had wonderful server set-ups, while we were hopeless. They were the ones who actually told us about the importance of editorial. They had so many journalists. We were thinking only about cricket scorecards and statistics, and journalism was somehow not as important to us.

So CBS Sportsline were interested in acquiring us for stock but Simon was not. Other deals were proposed and all of them consisted of people taking a majority stake and buying the company completely. Simon was dead against that. He believed control is important and that he had a great vision for Cricinfo, so he said he could not give a majority stake to anyone. This resulted in a loss of several deals, and Declan Murphy was absolutely raging at this point.

So we all gave up and I came back to India, where I started getting a lot of phone calls about deals. Word had spread that Cricinfo was interested in investment. CBS sent one of their top executives here. They were trying to build a company called sports.com, which was supposed to be an exact replica of Sportsline for the UK. They were direct competitors of Pangolin. Both were still interested in us.

 

India was opening up at that time to internet ventures. We were approached by Bank of America\’s investment banking division in Hong Kong. They said they would represent us, do a business plan for us, which was wonderful, as we had been trying nearly a year to write one and had not gotten anywhere.

Prakash Parthasarathy from Bank of America, primarily working with me and with some inputs from Simon, put together an information memorandum. Then he circulated it to various potential investors, and the best deal from Simon\’s point of view came from Sify, Satyam Infoway, mainly because it gave us the best valuation, $150 million, and it didn\’t ask for much in terms of stake.

Sify gets on board
The first thing was to come to an agreement with Murphy on how much he wanted out of the whole thing. He drove a hard bargain.

If you take 25% of $150 million, it comes to what, $37.5 million dollars? It was split as 20 and 17.5. So $20 million to be paid off to Michael Watt and a further $17.5 million invested in Cricinfo.

I don\’t remember exactly how the structuring was done. They first acquired the £3 million, or $5 million, worth of stake for consideration and further invested money. Additional shares were issued to the founders at no particular cost. So at the end of it, it was 25% to Sify, 75% to these 70 people.

Michael Watt walked away with $20 million. But this is where the problem comes – it was not dollars, it was ADRs – American Depository Receipts of Satyam Infoway, which was a listed company in the US. Basically they issue ADRs, which take a certain time for registration and then you have to offload them into the market and then you will get the current price of the stock. If the stock price falls you have a problem, but if it goes up, you have an upset too.

Declan Murphy and Co, they liquidated fairly quickly. But at our end we didn\’t do a good job of it. After the ADRs were issued to us, when Sify announced the deal, the stock price actually went up. Which meant that the 17.5 we got was worth probably 18.5, 19.5, 20 – it went up by 10-15%.

Peter Griffiths decided to keep everything in ADRs, which in hindsight was a big mistake because we could simply have converted them into cash and then put it in safe investments of some kind. He was liquidating only what he wanted to use each month. Within two months the whole market collapsed.

The deal happened around the end of April 2000. By May we had the ADRs in hand. June-July the stock went up a little bit and started coming down. With the stock coming down you want to wait for it to go up, so you just compound the problem. At one point you had $5 million cash, then you have $17 million in notional cash. It just went berserk.

We started sponsoring the women\’s World Cup, County Championship – those were chunks. We were also hiring people, building offices.

Adding value but no revenue
Basically these sponsorships were Simon\’s way of giving money to cricket. They were handouts. If you are a cut-throat fellow, what mileage will you get from sponsoring the Women\’s World Cup?

We had by then built a burn rate of a million dollars a month, with revenues not even one tenth of that. I would blame, one, us, but equally Bank of America. We were asking: what do we do with the money? Build value, we were told. Spend the money, build value, because the next deal we are going to do will be on a $250 million-plus valuation. So income was not even considered. We were literally hiring snake-oil salesmen, who came and said, I will raise the revenue from $1 million a month to $2 million a month. And we were hiring them at £75-85,000 a year.

 

 

I wouldn\’t say we spent a lot of money on editorial, but we spent on equipment, and we were hiring producers. We were sending a lot of equipment to the Women\’s World Cup to do video and beam the matches on the net. Today it just looks ridiculous. Flying people from England to New Zealand itself is a huge cost – all flying business class, and Simon would fly first class. So how to spend money is very easy.

I was basically handling operations. Simon said that my job was to go and meet all the cricket boards at the top level. I was hiring people in UK and India and sending money to the Indian subsidiary to spend.

We had built a team in Australia and were covering cricket matches at first-class level everywhere. We were adding lots of value but zero revenue. The only revenue-making places were Britain and India, with Australia contributing a little bit. Then we did a deal with Nine MSN in Australia. It was a tripartite deal: Nine MSN, us and the Australian cricket board.

Then this craziness about doing the official websites of the boards started happening, but slowly that wore off because it was not generating too much money. The boards were not making much out of it either. They saw that everything was template-ish, looking the same.

This was a time when we were going through difficulties on every possible front. The engineering was weak, the Mike-Jeff boxes were not sufficient. Their thinking was to add more boxes and to build software solutions, when what we actually needed was good, robust hardware solutions. You had a lot of journalists but they were from very disparate backgrounds, and to really pull them together to do good work wasn\’t happening. All through, the one thing that could not fail was the scoring, and that was also the one that generated money. That went on, but you could see the lack of professionalism everywhere.

By the end of 2000, it was clear to us that things were not going right. Bank of America came and said, sorry, we may not be able to get you any more deals.

In too deep
The money came in in 2000 and we were going broke in 2000! We forced Pete to sell all the ADRs. We lost money, but still it raised a few million dollars for us. Maybe we lost about five or six million dollars, but still we had millions. Our burn rate was huge, but more than that, mentally we were not clear where we were going. There was no business plan. It was only an information memorandum, saying our page views will increase like this, our revenues will increase like this. That\’s not a business plan.

By the end of 2000, I was in UK, and I decided that I would go to India and start driving revenue rather than focusing on operations. Operations were sort of stabilised. We were simply stuck for money. The realisation that money is more important than everything else happened at that time. I was to look after the generation of income in India, and Alex Balfour was to do the same in UK. We did increase it but it was nowhere near the kind of money we were already spending, so it was very clear that we had to cut cost.

In 2001, we had about 25 people in UK, on production, html, technology, everything. In Australia there were only four or five because Nine MSN was providing technology and other things there, so we needed very few people. In New Zealand the same chap, Adrian Motherway, was responsible for both operations and revenue. South Africa and Zimbabwe we had Keith Lane handling. Indian operations, I was primarily handling revenue and I had hired Ramesh Kumar to build up a team

Companies were just getting smashed everywhere. At least in India we were generating more revenue than what we were spending. But a lot of costs are hidden – the servers were paid for by the UK operation, which is a crucial payment.

That is when we went to Sify, saying we are just clueless. But their operation was also exactly like this, which I didn\’t know at the time. They were raising money and spending money like crazy, which their CFO told me about after he quit Sify. Cricinfo was just one of the hundred or so investments or acquisitions they had. It was taking their stock price up but they also had burn.

They started loaning money to us. They were not interested in investing money in shares, but they created a loan-note arrangement. They had a stake in the company and they still had cash. They were raising cash through all kinds of jugglery, which I came to know of much later.

Exit King
Simon was forced out. We were reaching a stage where we were running out of cash fast, so we had to act. After all this investment, Sify was 25, Simon 15, and mine was 10 or nine point-something, and then others dropped down all the way.

In some sense we were somewhat unfair to Simon, but Simon in that scenario couldn\’t give any leadership either. He could have simply taken the decision of sacking as many people as possible, slimming down the operations, working till it\’s cash break-even, but he was in no position to do that because he didn\’t have the experience, and we didn\’t have the experience either.