A Start-Up Story

Favemail began as a unique marketing idea — the kind of never-before-seen concept that made venture capitalists salivate.

Here was the pitch: consumers would send their friends emails that contained a banner ad, which they had selected. In short, they were helping to promote products with which they felt an affinity. It was supposed to be sort of like an online bumper sticker, or the equivalent of wearing a Nike hat. For doing this, users were rewarded with “points” that they could exchange for cash, or other online currency products like Flooz.

It arrived on the Internet business scene last year when investors were still willing to take huge risks in hopes of a grand-slam payoff. Spending on online marketing was booming and there was no end in sight. But somewhere along the way, things changed, dramatically.

This week, Favemail announced it had changed its name to its original moniker — Expression Engines, brought in new leadership and embarked on a new direction.

The fate of Favemail illustrates what’s occurring with a host of start-up companies, in a stock market environment that’s putting the squeeze on marketing budgets. It’s also a cautionary tale of the twists and turns that all start-ups face as they struggle to “find themselves” and find a market — a process that requires strong leadership and turn-on-a-dime flexibility.

Back in 1999, David Kent, a West Bloomfield, Mich.-based ear nose and throat doctor, came up with a concept that combined the ubiquity of email, the creativity of home page building, the viral marketing techniques pioneered by Hotmail, the popular affiliate marketing model, and the loyalty rewards model used by MyPoints.com. He was the brains behind the idea for Respond.com, which had already received $55 million in venture capital funding, so when he came up with ideas, people listened.

The idea was powerful enough to convince New York’s Flatiron Partners, a well-respected venture capital outfit, to back it with $2.5 million and incubate it in-house — an unusual practice for the firm. Around the same time, similar companies popped up across the country. Epidemic Marketing emerged in Colorado, and SuperSig debuted in California. As entrepreneurs are so fond of saying, this “validated the model,” by proving that, if other people had this idea and were getting funding, it must be a good one.

At the time, Michele Slack, senior analyst for Jupiter Communications‘ online advertising group, said, “I think the reason these companies are coming to market is that everybody is trying to find a way to systematically harness the power of viral marketing.”

But there were signs of trouble with the consumer model. It failed to gain traction for the most basic of reasons. “I don’t think that the vast majority of Americans want to make money off their friends,” said Slack, “or will feel good about their friends making money off of them.”

Almost right out of the gate, SuperSig began to take more of a business-to-business approach, deploying its solution on sites that were already destinations. A Britney Spears Web site, for example, would let you add a “Sig” that featured pictures of the singer. SuperSig would be compensated by, in this case, Britney Spears’ record company. Then, it began developing a corporate product. In this scenario, corporations would pay SuperSig to install its graphic email “stationery” on a company-wide basis, which would help them build their brand with every email that went out. So far, SuperSig has managed to stick with that model, and stay afloat on only $1.7 million.

Epidemic Marketing wasn’t so lucky. “The consumer proposition,” Kelly Wanser, chief executive officer of the company, said back in April, “was trickier than we expected.”

By then, Wanser had raised $2.5 million for the company in its first round, was seeking $12 to $15 million in a second round, and shifting the company to a business-to-business model. The funding apparently never came; Epidemic.com has now folded.

Since the April market “correction,” getting that kind of dough has been tough for ventures. The chilly funding conditions have hurt marketing start-up companies like Favemail and Epidemic Marketing in two ways.

First, it’s hard to convince investors to sink more money into a company that has yet to prove its revenue model or build a brand. And it’s certainly not cheap to build a brand. Epidemic was, after all, one of the companies that spent around $2 million for a splashy Super Bowl spot. Second, potential advertisers may be likely to shy away from an unproven method, when more tested options exist.

Favemail, meanwhile, was floundering. Rumors circulated that the CEO brought in to incubate the company, PJ Stafford, was ousted at the behest of investors participating in the second, $8 million, round of financing. The search for a new chief executive dragged on for four months and new user numbers weren’t growing as fast as the company hoped; marketing the site came started to look like a very expensive proposition.

This week, Favemail, which has now returned to its original, more flexible, name — Expression Engines, announced a new leader and embarked on a new direction.

Fred Wilson, managing partner at investor Flatiron Partners, said the backers were looking for leadership with a vision of what the company is going to be.

The man chosen to take the helm, Al DiGuido, a former executive vice president at Ziff-Davis, certainly has a different vision for the company than the one originally conceived. With twelve employees shed along with the old business model, the company is transforming itself into a one-stop-shop email marketing company, providing everything from strategic consulting, to banner building, to email distribution services and data analysis.

“They were in need of a re-thinking of how to position this technology and how to bring it to market,” said DiGuido. “The endgame here is that we want to be more than a tools provider.”

But there’s no shortage of competition in that space — everyone from Digital Impact to Bigfoot Interactive to YesMail.com (and there are many others) — is trying to capture email marketing dollars. But that doesn’t worry DiGuido, who said he’ll be tapping the high-tech business contacts he gained at Ziff-Davis, and working to convert them into Expression Engines customers.

“I’m familiar with the challenges that companies face in taking their businesses online,” said DiGuido. “The market is so gigantic that we’re just beginning to scratch the surface.”

So, too, is the nascent company only beginning to scratch the surface as it begins again in the marketing business, trying to salvage the technology from the company’s first iteration and use it as the foundation of its new plan.

Still, it avoided Epidemic Marketing’s fate, by being willing to dramatically change direction.

“It doesn’t come without bumps and bruises,” said DiGuido. “In the Internet space, if you don’t make the changes, if you don’t look up, you’ll be a dead company.”