In December 1999, Hotbar.com launched the first version of its product on the market. The company's software enabled customers to alter the appearance of their browser. The product, called a skin, included a clickable button on the toolbar designed for sale to advertisers. You could get away with a business model like that in December 1999.
Four months later, Hotbar.com cofounder and CEO Oren Dobronsky set out to raise money armed with two million users and a huge amount of hype. “I got orders from Kleiner Perkins Caufield and Byers, Benchmark Capital, Draper Fisher Jurvetson – all the world’s biggest venture capital funds,” he says. “They were all satisfied with our product. We were offered several investment from quite a few groups. The Nasdaq crashed when I was on the plane going back to Israel. By June, they were asking, ‘What revenue have you got?’ They all withdrew their term sheets. We were left with nothing.”
”Globes”: What does that do to a company?
Hotbar.com cofounder and president Gabriella Karni: ”It made us rework our profit model from the ground up. The second version of the product that came out after a few months already included several buttons for advertisers. We inserted a dynamic advertising bar in the third version, in which the advertising buttons were adapted to the site’s content." Dobronsky says that, as of now, Hotbar has 80,000 advertisers.
Is there any competition?
Dobronsky: ”There’s no direct competition, but that makes no real difference, because we’re competing with anyone trying to get Internet advertising money. What we have to offer is our users. We have three million active users out of 20 million registered, to whom we display 7.9 billion Internet pages of advertising content.”
That may be the reason why Dobronsky (30) is getting the Tel Aviv University Prize for the Young Entrepreneur for 2002 this week. Hotbar.com is one of the strongest dot.com companies right now, certainly in the Israeli market. The bare figures are in its favor – with a team of 40 employees, it reached the operational breakeven point in the fourth quarter of 2001.
Captain Internet
In general, you could say that evolution made Internet companies extinct. That’s what makes it so surprising to find one that has survived. Hotbar.com’s $15 million financing round at a company value of $50 million, after money, from investors like Deutsche Bank, Unterberg Tobin, Eurofund, and Tamar Ventures raised quite a few eyebrows. Dobronsky says, “First we were trendy. Later, when we raised money, we had to fight the opposite trend. The situation is that Internet investors are subject to ridicule. People have to explain exactly how and why they invest in a company like this.”
Today, with quite a few millions of dollars in the bank and having broken even, Dobronsky sounds calm when he talks about his most recent financing round, but 18 months ago, he was far less calm. “It’s not just a matter of a presentations and term sheets. I met dozens of investors who were simply unwilling to invest; they wanted impossibly precise answers. I had to remind them this was still venture capital. We didn't have an easy time even with those who eventually decided to invest, although they looked at the model and understood what we were talking about. We met 25 times with Unterberg Tobin before getting money from them. I really had to work on them to get the investment committee’s approval. We reached a point at which the connection was so institutionalized that when the money actually came, it seemed like a mere technical detail.”
Eurofund VP Moshe Price, one of Hotbar.com’s investors, says that even in the company’s first financing round, completed in October 1999, it wasn’t easy to decide to invest. “We asked ourselves why we should invest in them, rather than 20 other Internet companies we were looking at the same week.” Karni breaks in to say that this could be another reason why Dobronsky is getting the prize. “They eventually invested in us because they believed in our management. They regarded Dobronsky as an experienced captain, who could steer the ship in stormy seas.”
The return of viral marketing
Now it can be said: the economy feasibility of Hotbar.com’s model has been proven. Eurofund president Aharon Beth-Halachmi says the company has successfully demonstrated the user’s positive economic value. Now that more users mean more revenue and profit, Hotbar.com is making a renewed effort to enlarge its user base.
Anyone who thinks that Hotbar.com buys Superbowl advertising time is missing the point, however. That’s not how the company broke even; it did so by saving money in every possible way. Even now, the company offices in Israel are located in a private apartment on Tel Aviv's HaYarkon Street. If you want to visit Dobronsky, you have to climb three flights of stairs. There’s no elevator.
Hotbar.com now knows how much they get from every user. They also know that 78% of those using its application heard about through viral marketing – the enchanting marketing notion that good news travels from one mailbox to another, or through various chat rooms. The company accordingly put out a second product that includes a toolbar for surfers’ e-mailboxes.
The new application enables users to add graphic features to their e-mail messages at a higher quality than that of standard mailbox programs. This means that the e-mail can be tailored to the user, including backgrounds, fonts, business card, etc. At the bottom of every e-mail message sent is an invitation to visit the Hotbar.com site and download this application, as well as download the traditional skin application. The aim is to increase the number of users. Why? In order to achieve more revenue and profit.
See you in first grade
Dobronsky and Karni have had good fortune all along the line. If they had gotten an investment from one of the prominent concerns that offered them money in 2000, they would have shut down a long time ago. Had their investors not believed in them, Hotbar.com wouldn’t have survived its first year. Without shekel depreciation, they wouldn’t have so much money in the bank. The ability to fire when necessary, cut salaries (10% in 2001), and create a profit model have kept this Israeli Internet company going.
So that’s it – you’re successful entrepreneurs now? Give me a break.
Dobronsky: ”Oh yes, we’ve passed first grade. We’re just beginners. We were lucky; we probably would have failed in many other cases. Sometimes we changed direction suddenly because of our gut feeling, with any real reason. In short, we’re now on our feet. Now we have to build a strong, profitable company and create value for the investors.”
Karni continues the seafaring metaphor: “The goal is to stabilize the ship, and we did it. We have a lot of money, but we’re not touching it. From here on, the sky’s the limit, but we’ve got a long way to go. Have we succeeded? We came through a stormy sea and reached a desert island. That’s all very well, but just staying alive isn’t enough. Now we want to reach the mainland.”
Published by Globes [online] - www.globes.co.il - on June 6, 2002