This interview is with Dean McEvoy, cofounder and CEO of Spreets.com.au. Spreets is a group buying company in Australia that sold to Yahoo!7 back in January for around $40 million! What’s most incredible is that Spreets had been in operation less than a year before it was sold.
The interview covers: Deans background and how that led him to starting Spreets, sales and marketing particularly in the early days when they were just starting up, the dynamics of the merchants and consumers in the group buying model, making assumptions, testing and iterating quickly, as well as capital raising and more on their $40 million dollar exit to Yahoo!7
The full interview, (in audio) can be downloaded here: Entrepreneur Interview – Dean McEvoy - Spreets
The full interview on video is here:
If you prefer text, here’s the Summary Notes:
Dean’s Background:
Deans previous experience with Booking Angel and as a bar owner gave him entrepreneurial experience, how to run a company, how to pitch to investors etc but more importantly it gave him a deep understanding of the problems that the Spreets business model solves.
The Problem Spreets Solves:
Local merchants have for years struggled with the efficiency of the basic advertising available to them and didn’t really get a clear return on investment.
This was the first model that really gave local merchants a way to acquire new customers and on the flip side it gives the consumers variety, a cool fun thing to do that they would have thought of themselves, and a good incentive to go out and get the offering.
He’d felt the pain firsthand from Booking Angel and as a Bar owner so can relate strongly to the problem that Spreets now addresses.
The difference between Spreets and Booking Angel is that there’s real benefits and incentives for the end user. He was able to do this a little bit with Booking Angel when he combined it with deals on Eatability and such, but the benefit is much more clear with Spreets.
On the merchant side the value is much greater too. They’ve been able to deliver $300,000 of revenue to a merchant in one day with Spreets!
The Group Buying Model:
Early on they learnt that what makes the group buying model grow quickly is when a deal goes viral. In order to do this the deal quality needs to be great. For a person to share it with their friends on Facebook it says something about them as a person, and only great quality deals get shared. He noticed that his friends wouldn’t share a deal that was only ok, it needed to be great. So the quality of the deal drives viral spread.
On the other side of the equation, in order to close a great quality deal, you need to guarantee to the merchants that you’ll be bring them good quality customers. Not bargain hunters and low value customers, the merchants want good customers that will go to the merchant and spend more money.
So there is a viral mechanism: If you can get good users, you can close good deals, and then get more good users. So from the beginning they basically started seeding the database with only good quality users. Anytime they did a partnership deal or focused on how they’d get more users they made sure that they were quality users. (For eg. Brands Exclusive was a partner and they have consumers that buy high value products.)
Assumptions, Testing and Iteration:
The reality is in any startup environment and particularly a fast moving one, you really can’t plan too accurately too far in advance. When they started at the beginning of 2010, they thought they’d be making $500,000 a month in December 2010, they ended up making nearly $4,000,000 in the month of December.
Assumptions are constantly changing, iteration is everything they live by. Having the right feedback loops in place, quick feedback loops, that allow them to try lots of things really quickly and find out if they are working or not working.
SEM – they started with 600,000 keywords in Adwords and refined them down to the ones that work. The person/company that can do these iterations the quickest is what wins in this space.
No one really knows until you put it out there and try it. They initially thought restaurant deals would be their big sellers, but it turned out to be beauty. They basically learnt very early on to test every assumption and be willing to throw them all out and start again.
In the early days it was a lot of trusting your intuition, and seeking out personal feedback from people.
He tells a story of entrepreneurs in silicon valley who used to pay $20 to someone off the street, get them to use their product and them just ask them: “what are you doing”, “how does it work”, “how do you feel” etc – sometimes google analytics isn’t enough, you have to constantly get real feedback from people.
He calls it his “mum test” – he gets his mum to go signup and when she can’t do it he goes “hmmm we need to fix that”.
Marketing and Selling in the early days:
On the merchant side he was out their selling to customers before the site got built. He is of the opinion to go sell it before you built it. You don’t need everything perfect and done before you sell it because you get real feedback. It makes you think about the business model right from the start.
He was probably pretty bad at it for the first 20 or so calls, but then eventually learnt how to sell it.
Dean’s not traditionally a sales person, he knows how to sell: Listen to people, get feedback and try to solve their problems. This is what an entrepreneur should do, listen to people, get feedback and solve problems. So to Dean any entrepreneur who says they aren’t a salesperson is a bit of a worry.
So getting the merchants on board is about lots of phone calls, refining the pitch and improving as you hear new objections.
On the other side getting the database of consumers. It started off with a database of friends and family. And then it was Adwords buying premium keywords, using cross promotions with Booking Angel. They were focusing on quality from the beginning, they weren’t going out trying to get huge numbers.
Adwords was the key part of their marketing. To get a quality customer database it wouldn’t be about adwords terms like “restaurant deals” they’d use category keywords. They’d use category keywords like “massage” for example, so someone searching for that would be willing to pay full price and they’d be a quality customer.
They started with restaurants because Dean knew a lot about this from his experience with Booking Angel. Later they found out that beauty was a hot category.
Raising Capital:
He raised a small amount of money with Booking Angel but raising money was really hard. He didn’t really know how to run a startup then and you make lots of mistakes. No investor wants to pay for you to learn and make mistakes. He also didn’t know how to build a business that people wanted to invest in.
To do that you need to create momentum. It’s really about having everything happen all at the one time. Having 5 different trains collide just at the right time to make it all happen.
It’s about team, the business, understanding the problem, getting some real traction that you can demonstrate. And it is about creating this momentum that investors have to get on board otherwise they are going to miss out. It’s kind of like dating, you have to be the coolest, most illusive person but you don’t want to be desperate chatting up everyone in the room. You want to be the cool person that is focused on what they are doing, has got direction and with that comes attraction. People want to be part of that, people want to get on board, people want to invest.
You don’t have to talk to a lot of investors. Focus on your business. Try to get enough money from friends and family so you’ve got your “fuck you” money, money so you don’t need it, so you’re not desperate for it. People can smell desperation and they don’t want to be part of it.
You have to be able to say “I’m going in this direction, I’ve got this momentum, I’ve built up these customers, here’s the solution, I’ve got a team together that wants to do it, and the ingredients are there, I’m heading in this direction, if you want to be part of it you can make some money too, otherwise someone else will. That is the certainty you have to sell.”
Australian investors are very risk adverse. You have to prove a lot more to get an Australian investor interested. They want to see finished product, team, customers, traction. In America they just want to know that you are smart, you know the problem, it’s a big problem and you’ve got a good team. But Australian investors risk aversion is also to do with the limited exit options here in Australia. If you are in the internet space, there’s not many more options than getting bought by a media company. But increasingly US investors are getting involved here which is creating competitive tension.
Exiting to Yahoo!7:
To get bought, they definitely created competitive tension. But they hired an advisor to go out and get the best price for them.
The analogy the advisors used on Dean was: if you’re selling a house you’d use a real estate agent, if you’re selling a business it’s worth a lot more so you want someone to look after all that for you.
You also don’t want the sales process to distract you from the business. One of the tricks that buyers do is that they get you sucked in to the sales process so you’re not focused on the business, they’ll take 2 or 3 months to do due diligence which will see the revenue decline and then they’ll start negotiating on price.
Key points on exiting:
- Focus on your business and continue to create value
- Hire a professional corporate advisor to handle the sale
- Create competitive tension
- Get the right fit, you want the business sold to someone who shares your vision
Spotting trends before they become trends:
- Get close to the problem
- Understand a problem better than anyone else. And look at a big problem. For eg. One of the big problems around at the moment is around micropayments, how do you securely and safely make a small payment online/mobile.
- If you know the problem better than anyone else, know the issues around it, more than likely you’ll be in a position to come up with a solution before anyone else does.
- So being close to a problem and being close to a big problem is the best method. If someone spots the solution before you do, if you know the problem really well, you can actually iterate faster or as fast as what they are.
And this is exactly what happened with Dean and Spreets (and his previous experience with Booking Angel). He knew what the problem was, knew how to solve it, knew how to pitch it, and knew what people to pull together.
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