Panos Bethanis Went $4.5 million in the Hole to Buy Back His Company

Should he have let it fail?

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Panos Bethanis closed the front door of his house in Boston's South End at 2 o'clock on a bitterly cold January morning in 2007. Eleven friends and colleagues, exhausted after a marathon meeting, had just filed out the door. Bethanis had invited his buddies over that evening to pitch them his strategy for buying an online directory business called DirectoryM. He had founded the company five years earlier but had sold a majority stake to a pair of venture capital firms in 2005. Now, with the company struggling, Bethanis saw an opportunity to get his company back.

For Bethanis, then 31, regaining control of DirectoryM was partly a matter of pride. Though he still had a 3 percent stake and a seat on the board, the investors had removed him from the CEO post, leaving him with no meaningful management role. In fact, he had started a new company, Interaction Media Group, or IMG, that offered a similar product. Now he wanted to combine the two companies, which he believed would speed IMG's growth but would cost a bucket of money and pose big risks.

To get back his company, Bethanis would need his old team to join him. Of the friends gathered at his house that night, all were current or former DirectoryM employees, including the company's co-founder, Jim Woodroffe. Bethanis wanted their knowledge and experience. He would need them to work long hours with no pay and to help finance the deal. "I needed these guys," says Bethanis. "Plus, they are my best friends."

Friends or not, the team was not yet convinced. How would they come up with the money to acquire DirectoryM? How would they pay its $6 million debt? Why take all that risk? Unlike in the old days, some had mortgages and families. "Why don't we just take what we've learned and build IMG ourselves?" asked Steve Burr, now DirectoryM's head of partner relations.

It was a question Bethanis was wrestling with himself. He knew taking on all that debt would be a major headache. But in the end, his gut told him the deal would work. Plus, he wanted to prove he had it in him to fix the company he had put so much of his heart and soul into building. "I didn't want to link my name to a company that failed," he says. "You know how people say it's not personal; it's business? I'm the opposite of that. To me, it's always personal."

DirectoryM is a sort of online yellow pages that shows up on some 200 media sites. It sells ads to local businesses and places them on sites like Newsweek.com, NYTimes.com, and Kiplinger.com. (Inc.com also offers DirectoryM listings.) In the business's early years, when the online ad market was slow, DirectoryM grew steadily if not spectacularly. Its sales reached about $3 million in 2004 (though it hadn't yet turned a profit), and the company employed 50 people.

By 2005, DirectoryM was successful enough to attract $11 million in funding from two venture capital firms, BV Capital in San Francisco and Matrix Partners in Boston. The VCs became majority shareholders and brought in a new CEO, who focused on building the company with a large ad sales staff. Revenue grew to $8 million in 2005, and the work force shot to 150, but costs were out of control -- losses peaked at $600,000 a month. DirectoryM was soon forced to lay people off. In late 2006, the VCs decided to cut their losses and sell. Matrix would not comment on the record for this story, and BV Capital representatives did not return calls or e-mails seeking comment.

In 2006, as DirectoryM struggled, Bethanis's new company, IMG, started showing promise. Instead of simply providing a list of local businesses on others' webpages, IMG combined its directory with stories on relevant topics. So alongside a list of, say, accountants in Pittsburgh would be stories on tax and accounting topics. By adding content related to subjects that Web users were likely to search for on Google (NASDAQ:GOOG) and other search engines, Bethanis reasoned, IMG would be more likely to attract neighborhood businesses. Best of all, the ad sales process would be automated. Businesses that wanted to buy an ad could do it all online. That meant Bethanis would be able to do away with the cost of an expensive sales staff. To speed growth, however, Bethanis needed publishers that would agree to share their content in exchange for a cut of ad revenue. DirectoryM already had those partnerships.

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