BOOK EXTRACT: How To Be Wrong – A crash course in startup success

We were watching Ferrit, Telecom’s online shopping mall, turn into a slow train wreck – all while they spent millions on billboards, TV ads and even banners on Trade Me (we were happy to take their money). We were keeping a closer eye on Zillion, the first credible local Trade Me competitor to get any traction. Our team was expanding rapidly, bringing unavoidable growing pains. The office was so full I was literally sharing a desk, with two old-style CRT monitors squeezed on a single desk. Which is all to say there was a lot going on. I hadn’t spoken with Sam one-on-one for several weeks.

I walked slowly beside him around the block. In his typical style, he didn’t beat around the bush. “I think we’re going to sell the company,” he said. The two of us were in a unique position – the only shareholders who were also employees – and I sensed he was relieved to have someone to share the thought with.

There had recently been some internal share transactions. I’d purchased a small number of additional shares myself. So it wasn’t news that some shareholders would be interested in a sale. But the numbers Sam mentioned that day did surprise me. On that first walk around the block, the offer was, from memory, to purchase 25% of Trade Me for $100 million. I remember thinking that we’d come a long way since 2000 when Sam had asked Independent Newspapers (which later became Fairfax NZ) to invest in Trade Me at a $1m valuation. They turned him down then. Or even 2004, when Telecom had offered to buy the company for $50m (at the same time as they were trying to screw us over access to all of their Xtra customers). Sam turned them down then, with some pleasure.

We walked and talked. I got the impression that Sam had decided $400m was a good valuation. But he was keen to see if there was anybody who would pay even more. He’d contacted eBay, who were interested but said the price was too high. He thought we could get more by selling to a media company. Sam asked Lance Wiggs, who was working on business intelligence and analytics at Trade Me, to do a detailed valuation.

Lance decided the business was worth $1 billion. That was a large round number but wasn’t an especially practical piece of analysis, because we assumed nobody would pay that much for it outright. However, over the course of the next few weeks and a few more laps around the block, the offers started getting closer.

Sam separately contracted a woman named Nina Gené, who had recently returned from working at an investment bank in New York. It’s hard to overstate the importance of having somebody to crunch those numbers. Her valuation was $750m.

On the third or fourth walk, Sam told me that he’d been approached by David Kirk, the former World Cup-winning All Blacks captain and CEO of the Australian public company Fairfax Media. They offered $700m cash plus a $50m earn-out based on future performance.

The price had nearly doubled in a pretty short period of time and it was a clean 100% exit rather than a partial share sale or float, which would have been a very different scenario. By then, Sam was talking about much more practical details of how the transaction would work. That was the first time I grasped that this really was going to happen.

I asked Sam who knew. He said that the board knew. And understandably he’d told Jessi, his sister and the first employee at Trade Me, ahead of me. Jon Macdonald [Trade Me’s head of technology and later CEO] was working on the details Fairfax required to complete their technical due diligence ahead of signing.

But Sam said we couldn’t tell [Trade Me chief operating officer] Michael “MOD” O’Donnell. At first that seemed cruel, but there was a method to his thinking. At that stage, MOD was fronting all media requests. And Sam needed him to be able to plausibly deny that a deal was being negotiated. As it turned out, that was important. There was a story published in the New Zealand Herald just before Christmas 2005. Somebody had spotted James Packer’s private jet in Auckland. Sam was also in Auckland that day and a journalist had connected dots. MOD could honestly say he didn’t know anything about it.

He wasn’t the only one. Almost nobody on the Fairfax NZ team knew the sale was happening until it was public. The due diligence was mostly done by their Sydney-based chief financial officer. We eventually looped MOD in during a memorable exec meeting held at Sam’s apartment. As I recall, there were two rounds of expletives, in quick succession – first as he realised he was the only one there who didn’t already know, and secondly as the size and impact of the deal for all of us (including him) sank in.

All in favour?

Sam told me there would be a shareholders’ meeting. He wanted to check in advance that I was supportive of the sale. The small group of shareholders gathered at the wood-panelled offices of our lawyers, Buddle Findlay, in the Wellington CBD.

The final approval was a very quick and unanimous decision, without any real discussion or debate. I didn’t know it was happening in advance, but Richard Abbott, who had taken over as chair of the board of directors from Phil McCaw in recent years, proposed that there should be a premium paid to Sam as the controlling shareholder (he was the only one who owned over 25%) and recognising the deal was heavily dependent on him fronting it. Sam would be locked into running the company for the two years of the earn-out at least, and he was the one who had the relationship with David at Fairfax.

Even though I knew from our conversations that Sam was a very willing seller, that proposal was also supported by everybody in the room.

We also approved an employee bonus scheme for everybody in the Trade Me team, none of whom were shareholders. It was the right thing to do, given how much effort everybody had put in to help us get to that outcome.

Sam and Richard explained how important it was going to be to keep the bulk of the team in place to help us achieve the earn-out. The targets that had been agreed looked daunting on paper, but we were reasonably confident that we could achieve them. That confidence turned out to be well justified. We got a small portion of the $50m earn-out in the first year and the remainder in the second year.

Keep your head down

We were warned a deal of this size would put us all in the spotlight. I always laugh when Lotto winners say they want to continue their normal lives, then in the same breath talk about the expensive house or car they’re going to buy, which is anything but normal. Or, even more optimistically, when they say they want to remain anonymous. While I hadn’t won a lottery, I can relate, because that’s exactly how I felt.

It was difficult to go back to the office and concentrate on the minutiae of work. I wasted a lot of time stressing about how the sale would change the team dynamics. I’d spent a good chunk of the previous year on recruitment and hired a bunch of people I really rated and loved working with. The last thing I wanted to do was take the money and run.

In hindsight, I worried too much about what other people would think. A curious thing happened: the day after the sale, the Associated Press put out an article listing how much each Trade Me shareholder had received in the deal. That was picked up by a lot of different media outlets. But their maths was all wrong.

They didn’t have all the details they needed, including the top-up for Sam and the amounts that were set aside for the team. Even more absurdly, they missed me off the list entirely. The shareholder percentages in their table didn’t add to 100%. As a result, I was overlooked in most of the immediate coverage, which at the time was a huge relief.

The 2006 Rich List was published in July, just four months after the sale. Most of us were completely unknown to them, and it was revealing to see them struggle to place us. Nigel Stanford’s sister, Susan, herself a Trade Me employee at that point but also a trustee of a family trust that owned Nigel’s shares, ended up being incorrectly listed as one of New Zealand’s wealthiest women. Perhaps they assumed that she was Nigel’s wife? They are published with confidence but these kinds of media reports should always be read with a raised eyebrow and many grains of salt.

Tomorrow never knows

It was a bright Sunday morning early in March 2006 when we reconvened at the Buddle Findlay offices to sign the pile of paperwork and finalise the sale of the business. This time David and several other Fairfax employees were there in person. The deal had taken several intense weeks to finalise, and everybody was anxious to close it.

My dominant memory of that morning was the complications of arranging childcare. Our 18-month-old had been up all night vomiting. Because we had all been sworn to secrecy, we were in the awkward position of having to explain that to our babysitter. “We’ll tell you tomorrow,” we said. “You’ll understand then!”

After the giant piles of printed contracts were signed and formalities were completed, I walked home through crowds of people doing their weekend shopping. I had a strange feeling, knowing what was likely to lead the news the next day.

That night those of us with direct reports – Sam, Jessi, Jon, MOD and me – met at the Trade Me offices so we could call each of them in turn and share the news, including the detail of the bonus scheme that would result in generous cash payments for everybody.

Their reactions were all over the show. Some just wanted reassurance that nothing would change with their jobs or the team culture. Some were stoked – more than one mentioned that it would be enough to clear their student loan. My favourite was Brendon Skipper, whom MOD had recently hired from Stuff (then owned by Fairfax) to head up Trade Me Property. He was in the middle of a long notice period they had enforced before he could start with us. We had good news – “You can finally start on Monday” – and bad news – “You work for Fairfax again!”

Early the next morning I went to the InterContinental Hotel, where Sam and David held a short press conference to announce the sale. I stood at the back with MOD. I recall the shocked reaction from many of the business journalists present when the price was announced.

Bernard Hickey, who worked for Fairfax at the time, was sitting in the back row. He turned around to ask MOD to check that $750m wasn’t a typo, that the decimal point was in the right place. He wasn’t the only one who thought that Sam had somehow tricked David into adding an extra zero.

$750m was (and is!) a staggering amount to pay for any business. But the real news that day was just how profitable Trade Me was. The price paid was a multiple of the earnings and reflected the high-growth trajectory we were on. It was no secret that we were growing quickly. But this was the first time that detail of the revenue behind that growth was reported.

To attract the interest of an investor or acquirer for any venture, the two basic motivating emotions to tap into are fear and greed. We need to have new and (often more importantly) growing revenue, or we need to be threatening existing revenue elsewhere. Trade Me had both. We had decimated the revenue media companies previously earned from classifieds.

We joked that we were just working our way backwards through the sections of the newspaper – we’d done Classifieds, Motors and Property and were poised to launch Jobs then Travel at the time of the sale. And we had great margins. A large portion of every dollar we earned was profit. In the year before the sale, we made $26m. In 2007, we nearly doubled that to $45.5m. The following year we hit $70.1m.

After the press conference, David came back to the office to meet the rest of the Trade Me team. He removed his suit jacket and tie, so he didn’t seem completely out of place. Compared to the thousands of employees in the other parts of his corporate empire. I imagine it must have seemed like a small and young team. Within a few years, the revenue that Trade Me contributed to the Fairfax group would become an important part of their business.

Mojito island

In 1998 (or “the late 1900s”, as my kids call it), long before starting my own company had entered my mind, I got some excellent career advice from a former manager. Unlike many of the other people on our team, he had worked at a few different places beforehand, rather than coming up through the ranks at the firm. Perhaps that gave him a better perspective. It was obvious to him that I wasn’t enjoying the work I was doing. I’d started to think out loud about quitting.

He took me aside and said: “I’m not going to try to convince you to stay, but don’t quit because you’re frustrated, leave because you’re excited about what you’re going to do next.”

Thankfully, I took that advice and stayed on the project. I spent the next six months thinking about what I wanted to do instead. The decisions I made during that time have shaped the rest of my life. I’ve subsequently given similar advice to several founders trying to decide if they should sell their company. Often the question of an exit has come up only because they have lost their enthusiasm and they are feeling exhausted.

More than once I’ve said: “Don’t sell the company because you’re tired. Sell because you’re excited about what you can do with the proceeds – at least more excited about that than what you’re currently doing with the team and product you have.”

Did we make the right decision to sell? Was $750m enough? It created so many opportunities for myself and others, I never stopped to think about that question at the time. I had the same feeling when Vend and Timely were acquired in quick succession in 2021. In all three cases, half the uninformed reckons I heard were “You sold too soon!” and the other half were “How is it possibly worth that much?”

Kiwi business people are sometimes criticised for a lack of ambition – selling out once they have enough to buy a bach, a boat and a BMW. That’s misguided. Of course, we should all aim higher than that but I don’t think this means aspiring to own a private jet or superyacht instead.

After one of the shareholder meetings during the sale process, some people were speculating about the impacts of this kind of lump-sum wealth. Rod Drury joined the Trade Me board in November 2005, a few months before the sale. AfterMail, the business he co-founded prior to Xero, had recently been acquired for US$14.7m. I recall Phil asking him: “How do you spend that kind of money without everybody thinking you’re a rich prick?” Rod’s reply was perfect, if not especially helpful: “I’ve always bought expensive toys even before I could afford them, so people probably already thought that!”

As long as we measure ourselves based on how many expensive things we own, we’re never going to be satisfied. There is always another level above – a more expensive car, a bigger house, a longer race. As soon as we achieve that, we quickly normalise it and start to take it for granted. There is nothing so amazing that we can’t get used to it. Then we start to compare ourselves to people who are slightly ahead of us. Our appetite is always slightly bigger than our stomach.

With the benefit of hindsight, two things made the difference for me following the Trade Me sale: I had a young family, and it was grounding to have to go home every night and be a parent. Plus, I was able to continue working at Trade Me for about a year after the sale so I had the opportunity to tidy up a lot of loose ends. By early 2007, most of those had been dealt with. The interregnum was over. The next opportunity was about to slap me in the face.

I didn’t realise it at the time, but I had a lot of unfinished business.