Instead, it almost killed their business.
Greg Watkins stood at the bar at a New York City nightclub, watching a fashion show unfold onstage and trying not to think about all the drinks his guests were charging to his credit card. He was paying for three rappers, two of whom each ordered an entire bottle of Hennessy cognac. Pretty soon the tab exceeded $600--and that was the least of his worries.
It was late August 2006, and Watkins's New York City-based company, the hip-hop news website AllHipHop.com, had spent a year planning this festival. Watkins and Chuck Creekmur, his co-founder and childhood pal, hoped the event, AllHipHop Week, would catapult their brand into the big time. Instead, it had turned into a cash-flow nightmare. A few days before the week began, their accountant had broken bad news: The company was plunging deeply into the red. Receivables were overdue, costs had spun out of control, and the cost of the event, projected at around $150,000, had inflated to twice that amount.
AllHipHop.com was attracting five million visitors a month and was on track to hit about $2 million in revenue in 2006. That was four times what it had earned the previous year but not enough to absorb an extra $150,000 in unexpected expenses. Watkins mingled with the crowd and tried to put on a good face. To outsiders, the company appeared to be pulling off a spectacular event, with big-name rappers performing and thousands of fans attending concerts and art shows throughout the week. But Watkins worried that AllHipHop.com was on the verge of collapse.
Watkins and Creekmur had begun with more of an artistic vision than a business plan. They grew up together in Newark, Delaware, and shared a love for rap music. Watkins bought the domain AllHipHop.com, in 1997, to promote Oblique Recordings, the small record label he operated. Creekmur, a freelance journalist, was trying to break into music magazines and planning to launch his own online publication. In 1998, the friends decided to join forces and start AllHipHop.com, which bills itself as "the world's most dangerous site." They updated it daily, and it became a source of inside news about artists and the industry. At first, they paid scant attention to advertising and concentrated on the site's content. "If we hadn't built it, there would have been nothing to sell," says Watkins.
By 2003, the business was making enough money for Watkins to quit his job and go to work for AllHipHop.com full time. Creekmur followed the next year. Traffic kept growing, even as overall hip-hop sales declined and other rap-oriented sites went belly-up. By 2006, AllHipHop.com was attracting more visitors than sites like Vibe.com and BET.com, according to the Web-trafficking service Alexa.com. And that success was fueling bigger ambitions. Watkins and Creekmur wanted their company to become a worldwide brand. They dreamed about hosting hip-hop concerts and other events worldwide, selling CDs and other products through the website, and perhaps even launching their own record label.
In 2002, the company sponsored its first event, a barbecue that attracted about a hundred people to a park in Queens. Over the next few years, as the brand expanded, the informal barbecue morphed into a weeklong series of events Creekmur and Watkins called AllHipHop Week. It was a lot of fun, but the events still attracted only a few hundred people and provided no real financial boost. In 2006, the pair decided to try something more ambitious. They would stage events around New York: an art exhibit, a showcase at which record company executives could check out new talent, a fashion show, and a roundtable discussion with rappers and activists at B.B. King, a nightclub in Times Square. Then they would cap it off with the musical equivalent of a fireworks extravaganza--a final concert featuring rappers Busta Rhymes, Lloyd Banks, Clipse, and Remy Ma at the Hammerstein Ballroom. Watkins figured the event would cost about $150,000--10 times the event's budget the previous year.
The figure turned out to be optimistic. Watkins and Creekmur had outsourced much of the work to an event planner, a concert promoter, and caterers, giving them few budget parameters. The fashion show alone cost $25,000. The company had to pay to remodel the club, build a runway, buy insurance, hire models, and order invitations. And of course, AllHipHop.com had to cater to VIP guests. The artists agreed to perform for free, but Creekmur and Watkins soon found that they didn't come cheaply. These stars had to be flown to New York, shuttled around town, lodged in hotels, wined and dined. The bills added up quickly, and the partners paid them with a smile. "It was like we had to keep up a façade," Watkins says. "We didn't want the stress to show."
To make matters worse, several advertisers on the site were late paying their bills, to the tune of about $500,000. AllHipHop.com had never had a formal process for chasing delinquent accounts. "If someone was late with a payment, we didn't worry about it," says Creekmur. "We got the money when we got the money." But they weren't getting the money--and they needed it now.
Then there was the biggest line item of all--the $90,000 grand finale concert at the Hammerstein Ballroom. The event wasn't well publicized, and only a few hundred tickets had been sold. Watkins wanted to cut their losses and cancel it. "It's not worth it," he told his friend. But Creekmur was determined to press ahead with the original plan. Canceling the concert would have been a major embarrassment, undermining their goal of building the brand's visibility. "Let's put on the best event possible and think about money later," Creekmur argued.
The Decision Watkins and Creekmur gave away hundreds of tickets to make sure all 2,500 seats in the venue were filled--and they were. At one point during a performance by Busta Rhymes, Watkins looked over the crowd. He turned to his partner:
"Man, how are we going to get through this?"
"Just enjoy the moment, brother," Creekmur replied. "That's all I can say. Just enjoy the moment."
But Watkins knew the next few months wouldn't be enjoyable at all. How would they survive the cash-flow crunch? And how could they make sure it never happened again?
A week after the concert, Watkins and Creekmur regrouped in the Manhattan offices of their accountants. They spent hours poring over spreadsheets and dissecting the business. Bottom line: The business was healthy and would survive, but the next few months would be painful.
Both founders had run up tens of thousands of dollars in personal credit card debt. Creekmur's credit rating suffered because of the additional debt, and he called his mother to warn her that he might need to ask for a loan. "We paid those people we had to pay," Creekmur says. "If someone could wait a month or a few days, that's exactly what we did. Without those people who were gracious enough to work with us, we would have had a serious, serious problem." Luckily, their accountants, lawyers, and Web-hosting provider all agreed to wait, since AllHipHop.com had always paid its bills on time in the past.
The near crackup had exposed the fault lines in the partners' business practices. Their company had outgrown its old ways; it was time to grow up. One of the first goals was to get cash flow under control--a crucial step for a business that spent tens of thousands of dollars just to host and maintain its website. Creekmur and Watkins instituted a formal process for going after delinquent accounts. Their accounting firm would more closely track receivables--and staff members would start shaking the trees when bills were overdue.
The business had expanded so quickly that the founders failed to realize how much potential was being wasted. The site generates 140 million webpage impressions per month, and most of those pages weren't being filled with revenue-generating ads. AllHipHop.com hired two full-time salespeople to boost ad revenue. Creekmur and Watkins signed a deal with a bulk advertiser that committed to filling 80 percent of the site's ad space, thereby guaranteeing millions in revenue per year. They started targeting advertising to the specific tastes of each viewer. They also launched an e-store selling CDs, DVDs, jewelry, electronics, and games, and signed partnerships with Amazon.com, iTunes, and Thumbplay to sell music and ring tones.
After about six months, the company was back to paying its bills on time. Meanwhile, the entire operation went through a makeover as Creekmur and Watkins sought to raise its global stature. They spent more than $100,000 to relaunch the website. They added more video interviews, audio streams, and content that expanded beyond music into lifestyle, such as sports, health, gaming, and fashion. They had resisted outside funding in order to retain control over their business; in 2007, they opened themselves up to the idea of investors and began talks with venture capitalists who might help them expand further. In 2007, Watkins says, revenue exceeded $4 million, and the site was recently dubbed "the CNN of hip-hop" by Essence magazine.
In retrospect, both partners are glad they decided to leverage themselves to the point of breaking. "We took two steps back and five steps forward," says Creekmur. "No question we did the right thing. It really raised the profile of the company. It put us in a league that no hip-hop website had ever been in."
For the 2007 AllHipHop Week, they planned more carefully and gave contractors firm budgets. They signed a sponsorship deal with American Airlines, which saved them tens of thousands of dollars in travel expenses. And they pulled off the event for $200,000--$100,000 less than in 2006. The week had an appropriate theme: rebirth.
Watkins and Creekmur should think about forming partnerships to expand their brand instead of doing it all themselves. They could branch into clothing and other merchandise by licensing the AllHipHop brand to Russell Simmons, for example; he already knows the market and has a network of manufacturers and distributors. Margins would be lower, but volume would be higher. If they donate money to a nonprofit in exchange for some publicity, it would boost the brand at a fraction of traditional advertising costs.
The Wharton School
University of Pennsylvania
This is the same story that I've seen many times: entrepreneurs with no plans, no budgets, and no discipline. Watkins and Creekmur should develop a board with three to five advisers who meet regularly to review and approve the company's plans. They should spend money only when they can quantify a return on the investment. Finally, they each should take a course or two annually at a local business school to learn the quantitative aspects of business. Passion and energy are not enough; the fundamentals must be practiced and applied.
Kellogg School of Management
My main suggestion is to take a long, hard look at the value of the live events. The Web has dramatically altered the calculus of marketing dollars. How many new viewers would $200,000 have bought them if they had used it for search engine marketing, instead of spending it on the latest event? It seems clear that AllHipHop was growing very rapidly without the events. Going forward, I would encourage them to refocus on what has worked so well for them in the past--high quality editorial combined with merchandising.