How HOTorNOT Bootstrapped To Over $5 Million In Annual Profits – With James Hong

Posted on Jun 23, 2009 - 7:00 AM PST

This is a story of a company that was built in a living room and went on to become a cultural phenomenon.

I asked James Hong to come to Mixergy and teach how he and his co-founder, Jim Young, bootstrapped HOTorNOT and what they learned along the way.

The FULL program


Video excerpts


About James Hong

James Hong

James Hong co-founded HOTorNOT, which started as an online photo rating site where users uploaded pictures of themselves and the community voted on each picture. It grew into one of the largest online dating sites. He sold the company to a group of private investors in February 2008. Today, James is an angel investor and adviser to Alive Not Dead, Bit Torrent, Brondell, Crunchyroll, Frappr, Grouper / Crackle, GreenMango.co.in, Hook Mobile, Mochi Media, Odeo, Raptr, Simply Hired, Slide, and Social Concepts.

Text excerpt

The early years in a living room

For the first three or four years it was just my co-founder and I working out the living room, and then around year three or four we said‚ “Hey, let’s hire some people because what happens if I die? What happens if you die? We need redundancy.”

Frankly, we were tired of having to run the site 24/7 all the time, so we finally hired some people, and the site was running on autopilot for a long time.

A cash cow is built and milked

HOTorNOT started as a website where people could submit their pictures for other people to rate on a scale of one to ten. When we launched, it took off very quickly.

In those days it was really expensive to run a site, so we had to figure out a revenue model. The natural progression in our minds was, “Hey, if you think this person’s hot, maybe you want to date them.” So the next thing that we built was a system where people could meet each other, effectively a dating site — although we didn’t call it a dating site because we were hitting a much younger demographic that didn’t want to pay for dating, but they would pay to just meet people.

So, we started a dating site, and we basically turned that into a cash cow that we were running for about five years.

The founders learn from bars

The whole service basically worked like a bar. … So we thought ”Well, why don’t we mimick what actually happens in bars with the payment, as well?”  We basically said, “Hey, it should cost six dollars, because it was still low enough that we felt it could be an impulse buy,” and frankly, it was what we figured was the cost of two beers in a bar in the midwest.

Their revenue grows

HOTorNOT got up to doing about $7 million in revenue. And the highest run rate for profit was somewhere around $5.5 – $6 million.

They make their first million

At the point we made the million, I was confident that I was going to make beyond a million, because the run rate was up and to the right. What it really meant to me was that I reclaimed my life.

Think about this. As you get older your parents gradually police you less. College is probably the peak of when you have control over your life.

Then finally you’re old enough to get out to college and you get a job.  And you belong to someone again. You have to do what someone else tells you to do.

I had no inclanation to spend my money — I didn’t go out and buy a ferrari or anything like that right away. I just said, “This is the money that is going to buy me my freedom for the rest of my life.” That was a big moment because when I started HOTorNOT, I was $50,000 in debt from business school. I had just turned down a job to pay off that debt and i was kind of feeling that if it didn’t workout I’d have to go back and get a job and that would suck.

Competitors jump in quickly

We realized when we first started HOTorNOT is if we launched a site in about a week with about two days of coding, so could anyone else.  And they did.  I mean, there were hundreds of rip-offs.

The founders defend their business

We realized that most competitors would be in one of two classes.

They would either be companies that already had distribution, like an AOL or Yahoo — and obviously if they came in, that could hurt us a lot. Or they would be like us, people who had no distribution and were going to rely on the exact kind of growth methods as we would. And at the time, we primarily grew through word of mouth and press.

And so what I did, for the first six months I got as many articles as I could get written about HOTorNOT. Because I realized if a reporter wrote about us, they wouldn’t write the same story twice. They weren’t going to write about copycat number two if number one has already been written. So my goal was basically to lock out the press from any other potential competitor.

With regard to the larger competitors, we realized those were all public companies. At the time, HOTorNOT was considered really edgy. It’s not as edgy now, but back then, it was almost like “Woah, is this porn?” and we realized none of those guys was going to follow us, because it was too edgy for them.

Must marketing helps spread the word

[Andrew's note: thank you live viewers for asking about this.]

If you posted a picture of your friend, of course you were going to send it out to everyone you knew because that’s the joke. If no one sees it, it’s not funny. You’re giving your buddy a hard time, by posting it on there, and making sure that everyone sees it.

If you posted your own picture, well you were going to get your friends to vote for you.

(The dirty little secret is that those votes wouldn’t count. The only way to get to your picture was through a link that identified your picture. We actually didn’t count those votes because it would invalidate the system.)

The founders get tired and step back

We brought in employees in year four. It was primarily because we were tired of running HOTorNOT. For the first four years, it was just the two of us, which makes for a very profitable model, but it also means we were thinking about HOTorNOT all the time. If a server went down, we had to deal with it. If anything happened, it’s all on us, and frankly, it got a little tiring.

Leaner competitors step in

We finally hired some people, and the site was running on auto pilot for a long time.

Then all the social networks came in and started really having an impact. Our business definitely went from growing organically to still growing but starting to flatten out. We could see where the curve was going, where things were headed.

I think we always realized that if you take a product and just leave it the same, over time it will deteriorate, it will get stale. We always wondered what we would have to do at that point.

[Costs also changed.] When we started, bandwith cost a thousand dollars per megabit per second. It was expensive, and servers were expensive as well. But in 2006, managed hosts were available and they were a lot cheaper.  Bandwidth was orders of magnitude cheaper, two orders of magnitude cheaper.  What it meant is that these same services we had to charge for to keep the services alive, other people could start and run for free.

The founders jump back in and get rid of the site’s fees

We said, “Okay, let’s go in and let’s make the site free.”

Scammers attack their site

[Originally, one of the reasons] we created the double match system [and charged] because it kept the scammers at bay to some degree. It cost them money to try and reach [our users]…. One of the big problems when we went free was all these Nigerian and Russian spammers coming in to the system flooding the system and it was probably more than we could handle at a time so we rolled back [and charged again].

They start charging users again

It probably went back to 80% [of what it was before we went free], but it was still rising, so I think it did recover.

The founders sell their business

We’re adrenalin junkies and we have no attention span, we just want to work on whatever is cool at the time or whatever we can make cool….Jim and I both didn’t have our heart in really continuing to work on HOTorNOT.

Full program includes

- How HOTorNOT negotiated away some of their biggest expenses using techniques you could (and should) use right now.

- How a bad economy could help your company grow. (It helped HOTorNOT.)

- The most effective way to increase conversions and get more users to pay. (It’s not what you’d expect.)

- The step James ADDED to his order process that increased sales. (It’s still an under-utilized technique)

Suggested comments

- MOST IMPORTANT: If you heard the full interview (not just read the excerpt above), do you think I exposed enough new stories and ideas to include in the Mixergy book?

- What did I miss in this interview?

- I transcribed this interview using Mechanical Turk. Do you see any crazy spelling mistakes?

[Thank you Nils Johnson for introducing me to James.]

  • http://super-trainer.com/ Kaiser

    Simple idea – big money – perfect example of bootstrapping and what's possible at it's finest –

    Again Andrew, you pulled a million little but extremely valuable pieces of info out during this interview, and thanks to James for being so giving.

    This is the best free marketing content on the web, hands down.

  • http://krmmalik.com/ Khuram Malik

    Its videos like these that continue to give me hope. Those years of “self doubt” as you say. Am thankful for Mixergy because these videos continually inspire me and fire me to drive on.

  • daniellicht

    about 50 min in you talk about your problem with spamers and what not and your model. What about a model where you get 4 mutual matches a week for free and more then that you have to pay $6 that way you get money and you cut down on spammers by limiting the point of them spamming and almost redirecting them to your competition.

  • http://Scale.cc Vincent Chan

    Great Interview! Learned so much from it, especially from the user-selected content part. James sounds like a great guy and is deserved for all his success.

    Just to let you know, I am a super fans of Charlie Munger, too. If anyone here want to know more about here, go buy the book “Poor Charlie's Almanack” on PoorCharlieSalmanack.com. That is the only place that you can purchase that book which is highly recommended by Warren Buffet and me :) Believe me, the content of that book is unreal. It combines all the best speeches and articles by Charlie Munger himself. After reading it, you will feel as excited as reading the book “Influence”.

  • mike

    Just some alternative viewpoints in my comment:

    Hot or Not makes a great story of bootstrapping to “millions” which is incredible considering the economic challenges facing those early startups. But, over the years the founders had a lot of time and flexibility to innovate– a hard earned environment they created for themselves by not taking in large amounts of outside capital.

    Based on their history it looks to me like they missed out on that opportunity. They chose to milk the cash cow rather than expand on the social aspects of the site as friendster, myspace, etc moved into the market. You say that managing the site became tiresome, but what about decisions you made or inadvertently made when it came to evolving the business into more of a communications platform? Did you see the potential for that opportunity or was the site always to be a sort of one-off destination for ranking people's looks?

  • rass1

    Glad to hear that my (non-diagnosed) bi-polarity is completely normal!
    Thanks James – and thanks to you Andrew!!

  • http://chri.sto.ph/ Christoph

    Just read the entry text and it's a very interesting read.

    One tip I'd like to offer is to reduce the salesy text for the full program preview, it really stands out and makes the content look cheap. Lines like “it's not what you'd expect”, “techniques you could (and should) use right now”, hinting at “secret methods” to increase traffic, etc is just so widely used online for throwaway content that it has become a signal for it. If I'm reading the preview for the full program, I'm clearly interested already from the main text, no need to sell me more. Just something to be careful with. I'm posting this feedback since you asked for it in the suggested comments, not to vent. So hope this helps.

  • Shaun Sinclair

    Ok, i've watched quite a few interviews here. Start to finish on each one. Now… Mike Michalowicz talked about that 'dip' you get when things become hard, challenging or what ever. Guess what i do when i get that dip??…I watch a Mixergy.com Interview. Keep them coming Andrew, Mixergy Rocks!

  • http://www.sellingtools.com/ Nancy Shawver

    Just watched the James Hong interview. As a struggling entrepreneur who sometimes wonders – am I doing the right thing – James reminded me that the right thing is simply to be passionate about what you do and enjoy it for the process.

    I'll be back to watch some of the other interviews (Seth Godin is one of my favorites)
    Nancy

  • http://www.3e-lab.com roberto

    Great interview.

    This article from Mark Cuban hits on the same points of keeping a lean & mean lifestyle.
    http://blogmaverick.com/2009/06/09/success-moti

  • http://how2livelife.blogspot.com/ NewWorldOrder

    Andrew, this was one of your best interviews on Mixergy. The combination of you asking the right questions and pushing for answers mixed with James Hong's openness made for a killer show.

    And thanks for bringing up the often ignored (but hella important) emotional aspect of entrepreneurship. It was a revelation I had about a year ago (http://how2livelife.blogspot.com/2008/03/what-t…).

  • tp

    Thanks James! Solid interview Andrew.

  • http://www.blackysky.com/blog blackysky

    I love this interview. James Hong was an open book. Simply love it… I love the last part with your books selection. Influence is a must read and must have….

  • zerocarboncomputing

    Hey Andrew – GREAT interview. Thank you James as well. Love the generous spirit and grounded style. Keep up the great work.

  • http://www.dennisgorelik.com dennisgorelik

    Great interview.
    The only thing I miss in it — more detailed description of spam issue. James could share what they tried to do to fight spam and what he would do now with more experience and better anti-spam technologies.
    Spam is a very serious issue that strongly affects lots of internet businesses.

  • mitch

    excellent interview

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  • http://ukuleleunderground.com/ Ryan

    “Deciding to become an entrepreneur is like signing up to be bi-polar” I am so glad I am not the only one who feels like this sometimes. Awesome interview. Thank you James and Andrew for doing this one.

  • Leo

    Great interview Andrew!

    …Towards the end the interview cut off. I unable to fast forward interview to see the books you were going to show at the end. What are they?

  • Pingback: HOTorNOT interview with James Hong – The Quick & (very) Dirty Transcript — Mixergy.com

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  • http://brainyflix.com/ Jack

    One of your best yet! Andrew you are doing a great service to entrepreneurs and dreamers everywhere with this website. Please keep it up.

  • AZ Start-Up

    As Khuram said, THANK YOU Andrew and Mixergy for continuing to inspire us and giving us the hope and energy to keep going.

    On another note, Andrew, is it possible to put these interviews/information on pdf by any chance. I really like, how you highlight the transition from “rages to riches” as it were, but its tough to save these, without picking up the sidebars and other content. Just a suggestion. Would love to have their stories on a pdf to save. Thank you for letting us input.

  • http://darkspikes.com/ Kevin

    This was an awesome interview. James really opened up, I loved how he asked you to repeat the question just to be sure he was giving you as much as he could. I can't believe a few minutes on youtube lead to 2 hours here, I'm glad it happened though as it was truly insightful.

    I think one of the other things which made hotornot so successful was that it became a source of validation for the users. It encourages approval seeking behaviour which makes it easy to draw users back. People who are hot want more votes because the more votes the more accurate right? People who are not want more votes to bring up averages. Then in order to satiate this desire, they would have to rate other people to get rated themselves. Brilliant.

  • http://mixergy.com AndrewWarner

    This comment makes me think that should go back to posting my videos
    on YouTube. Glad you found my work. Thanks for adding your voice here.

    Andrew Warner
    (sent from my mobile)

  • sam

    Hot or Not was popular because of its concept and its name.

    Thats why it was defensible, because the url was amazing.

  • http://techshots.net Jaremy

    Incredible interview. Absolutely inspirational. I love the quote that an entrepreneur almost has to be bipolar in order to deal with the euphoric highs and depressing lows. Though my work as an entrepreneur has been limited to one small, part-time business, I believe that I have felt many of the same things that James Hong did in his quest at HOTorNOT.

    It was also very refreshing to hear someone point out that it truly is about happiness, not the money. If it was entirely about the money, you could spend years working at a large corporation and earning stock options. Entrepreneurship is about doing what makes you happy, and it should always be a cost-benefit analysis of how much an extra few hundred thousand, (million, or billion) dollars is worth in exchange for your happiness. Glad to hear James echoing those sentiments.

    I look forward to hearing more from some of the companies he invests and advises, and am excited to see some of your future interviews :-)

  • http://www.domains99.com/ Mark

    Great interview! It is inspiring to hear. Really appreciate James sharing, and Andrew for interviewing!

  • http://www.DrugCritics.com/ Paul DiGi

    Best interview I've seen on this site. This interview made me realize that this website is a great thing and will continue to grow.

  • Alex_Pavlovitch

    Andrew, thanks for creating this great website. This interview in particular was very insightful and inspirational. James sounds like a fantastic, down to earth and very knowledgeable guy. Never expected a founder of HotOrNot to read Tversky and Kahneman in his spare time. Wish you poked James (and others) a bit more on how they gained initial critical mass of people getting to their website. Seems like most founders are quite cryptic on this subject. 2 million page views in two weeks? How exactly? Anyway, great resource for anyone trying to launch a startup. Thank you.

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  • http://www.newviewit.com Website Design

    There's some great insights there…. nice interview!

    Would be nice to hear more about their roll out marketing strategy…

  • http://www.newviewit.com Website Design

    There's some great insights there…. nice interview!

    Would be nice to hear more about their roll out marketing strategy…

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