The story spread. "In one two-week period, FreeLoader was in U.S. News & World Report, Newsweek, Investor's Business Daily, and InformationWeek," recalls Bennett Kleinberg, who orchestrated FreeLoader's publicity assault. "No one else was feeding the market so aggressively. What we did there defined how other campaigns we do now take place." Charles Lax, general partner in SoftBank Technology Ventures, one of the venture firms that put money into FreeLoader, recalls, "It was positioned as a savvy, happening company in a hot space." During the company's life span, publications ranging from Rolling Stone to the Wall Street Journal wrote about it. "Public relations makes more of a difference than anything else," asserts Andy Sernovitz, president of the Association for Interactive Media, a trade association based in Washington, D.C. "The ones with better press are getting big bucks, acquired, or venture-capital backing. It bears no relationship to the quality of the product or the quality of the team."
Entrepreneurs like Paul and Pincus are often the only experts available to the press. Few can contradict them. "No one knows about the new technology except the people who created it," Sernovitz says. "It's a really twisted business," comments Seth Ferguson, managing director and head of the technology mergers-and-acquisitions group of BancAmerica Robertson Stephens in San Francisco, the investment bank that represented FreeLoader in its sale. "The new-media business happened so fast that there were no experts. The consultant you hire from McKinsey & Co. learned about the Internet the same day you did."
The buzz paid off big. "It was amazing how they quickly set up a company, said they were the leader, and they were," says Fred Wilson, a venture capitalist in New York City, whose previous firm, Euclid Partners, invested $250,000 in FreeLoader in November 1995. "There was very, very good marketing and public-relations activity." So good, in fact, that Wilson agreed to kick in another $1 million in February and help get SoftBank's venture-capital arm, a major investor in Internet start-ups, to pony up $1.6 million in March.
Begin with the end in mind
The road to freeloader's acquisition began in February 1996--just a few months after its founding --when the company employed a consultant to introduce it to potential marketing and distribution partners. In mid-April, with the help of then-consultant Julie Chapman, Pincus met with Yosi Amram, the founder of Individual Inc., then a $24-million news-retrieval service (which recently merged with Desktop Data Inc. to become NewsEdge Corp.). Over dinner with Amram, Pincus says, he quickly realized that the CEO fancied FreeLoader as more than just a strategic partner. Amram informally offered $25 million to buy the company that night. Viewing it as his ticket to greater cyberspace, Amram recalls that "FreeLoader had a unique technology and brand that I thought could get us into the market much faster than developing things internally would."
If the sudden offer raised Pincus's pulse, he hid it well. Double that number, he coolly shot back, and we'll talk. "Mark's a very persuasive and impressive guy," comments Chapman. "He knew that the opportunity was there to come up with an idea and essentially flip it very quickly." If that was indeed FreeLoader's intention--both Pincus and Paul contend that their goal was to build a company, not to sell it quickly--the strategy worked. Over the next couple of weeks, Pincus and Paul estimate that they heard from Amram five or six more times. Still, they refused any kind of deal. Negotiations with BancAmerica Robertson Stephens to underwrite a private placement boosted the boys' bargaining power. During a meeting with Yahoo! Inc. to discuss a proposed marketing partnership, as Pincus and Paul recount it, they just happened to mention their offer from Individual. According to them, Tim Koogle, president and CEO of the Internet navigational service based in Santa Clara, Calif., also expressed interest. "We said, 'We have a firm offer, so your offer has to be $45 million or better," recalls Pincus. "He said he might be interested." (Through a spokesperson, Koogle says he doesn't recall discussing numbers and adds that Yahoo! gets approached by lots of companies.)
While mulling over their prospects--real or imagined--with Yahoo!, Pincus and Paul used the opportunity to notch up the stakes again. Pincus took the liberty of telling Individual they had another potential acquirer waiting in the wings--a bit of a stretch considering Koogle's sketchy recollection of the meeting. But Amram bit, offering $38 million for FreeLoader, partly in cash. He also promised to keep FreeLoader's company name and to invest millions in advertising and building a serious subscriber base.
Amram describes the negotiations with FreeLoader as "kind of a mad rush," more a bidding war than anything else. "FreeLoader was talking to us about an acquisition. Yahoo! found out about it and made them a counteroffer that was significantly higher. And two other companies offered investments to keep them independent." Bob Lentz, Individual's chief financial officer at the time, has a similar recollection: "We knew there were other offers on the table and others coming in. The whole Internet market was wild. FreeLoader was clearly the leader. They had very good brand recognition. They were a cool, young company. Its owners had goatees. They had to be wild and with a name like FreeLoader...they met all the Internet specs. I think we thought it was good for our business. We were willing to do a deal."
What made FreeLoader worth so much? According to AndrÉ de Baubigny, who worked on FreeLoader's prospective private placement and is now heading up Morgan Stanley's Internet practice, it was a combination of good timing, entrepreneurial chutzpah, and Individual's panicked state. "I think FreeLoader could have raised money, but it would have been at a different number. It was Individual's desperation that got them to $38 million. Push technology was very hot, and Individual needed an answer. Here were two guys with good technology and very good brand awareness. The secret to all of this is they built a big name in a new space very early and cashed out before anyone had figured out the space."
