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Andrew: Hey everyone, my name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart, the place you come to listen to entrepreneurs tell you how they built their businesses. I first heard about the business that today’s guest co-founded when he decided to take on Google. In 2007, his startup created a product that helped you “search with Kevin,” (Kevin as in Kevin Federline). He has since pivoted, of course, since then, and adjusted the business a lot, and that’s what I want to find out about. I’m really eager to learn how he pivoted and how he got to where he is today, and you’re going to find out how great where he is today is in a moment. First, I should tell you that his name is Scott Dudelson. He is the co-founder of Swagbucks, a site that gives users virtual currency when they search the web, take surveys, or watch videos. The company is Bootstrap, right, Scott?
Scott: Yes, sir.
Andrew: And how much revenue did you guys do last year (2010)?
Scott: Last year, we did over $10 million.
Andrew: Over $10 million in revenue, completely bootstrapped. What kind of margins do you guys have?
Scott: A lot of our money is being shared back with the end-users, in the form of Swagbucks, so we don’t necessarily disclose what the exact margins are, but I can say that we do very well, and the end-users do very well.
Andrew: And you’re profitable?
Scott: We are profitable.
Andrew: You are profitable. Who co-founded the business with you?
Scott: It was our CEO, the gentleman who had the original concept. His name is Joseph Gerwitz [inaudible 3:20]. It was he and I for the first couple of years and then we brought on some of my best friends from childhood, Aranza Havi and Ron Lescham [inaudible 3:28], and the four of us together really brought together Swagbucks into the state it is currently.
Andrew: OK. You know what, let’s describe the product really simply in a way that even a 10-year old who might be very ambitious and listening to our program would understand, and then we’ll go back and we’ll get really into the guys of how the business evolved and we’ll understand it more completely. So, in a way that even a 10-year old would understand, what does Swagbucks do?
Scott: Swagbucks awards you with points for doing the actions that you take online everyday. So, if you search the web, if you purchase daily deals, if you shop through an iTunes or Foot Locker, if you take surveys, if you play casual games, all those different actions you could do with Swagbucks.com and earn points for doing it. Then you redeem those points for great products.
Andrew: Is it directly for great products, or do you guys still do sweepstakes.
Scott: We don’t do sweepstakes anymore, so now everything is point-based. You collect your points, you keep them in your Swagbucks bank account, and you can spend them at any time you like.
Andrew: OK, great. I’m going to ask you later on the question that I’m sure a lot of people are wondering, which is, “How do you guys compare to AllAdvantage and all those other companies that tried to do something similar in Web 1.0 and later on,” and I want to find out more about the business today, but let’s first find out how you got here, because a bootstrap company to do this well is really impressive. So, the original idea, what was it?
Scott: The original idea was to raise money for charities using the Internet search. I had previously been doing charity fund raising. Did a lot of benefit concerts where musicians put those deals together. And after doing that for many years I realized, the challenge and the amount of money that were raised were never proportional. It’s very challenging, never raised a lot of money. So I had been seeking our new ways to use the internet as a fund raising mechanism. And Yousef my partner had the concept of, let’s create private labeled search engines for organizations and we would do revenue shares based on the money that’s generated from supporters doing their searches. And I thought that was absolutely genius. Here I was spending month at a time putting together concerts, putting together events and my partner’s got this concept where we can sit back, do the selling of it, and allow organizations themselves generate money, and also help us create a sustainable business.
Andrew: OK. It does sound like a great idea. If you’re running an organization the people support your non-profit, want to support you in every way that’s easy for them and make sense. Why not use your search engine, especially since it’s powered by one of the majors instead of going directly to the major search engines, if that benefits the charity. In a moment I’ll ask you why that didn’t work. But first I’m wondering, you didn’t create the search engine yourself, how did you build this infrastructure that allowed all these to happen, what search engine did you use?
Scott: So at the time we were using a company called Valid Click. They provided the API for us to run the search engines. And the architecture was build by some geniuses that were local to us. They also build eHarmony platform and few other major sites, so they had a good idea of, once we told them what we wanted, they knew how to build it.
Andrew: Why didn’t you guys use Yahoo or Google?
Scott: So at the time we didn’t have, all we had was concepts. So at that time Valid Clicks was a great option, because at the time they can obtain the Yahoo feed. So it allowed us to back channel and get ourselves a search engine.
Andrew: I see. So they were getting you the Yahoo search engines, that’s what I thought. OK.
Scott: Yeah. We never want to be in the business of going out and create a search engine. We never want to go out and have a big ads sales team. Our goal was really to help distribute a product that already existed and use it to benefit organizations.
Andrew: OK. Valid Clicks providing these searches through Yahoo. What about the revenue where was that coming from?
Scott: So the revenues was all at that point was coming from search. So it would be a simple revenue share between search engine provider with us, and then we would do revenue share back with the organizations.
Andrew: The ads in there, were they Yahoo ads or Google ads, or something else?
Scott: At that time, I don’t remember who supplied the ads for Valid Click, but it’s whom ever they had.
Andrew: Got you.
Scott: So we never had an ads sales team, to market and sell these.
Andrew: Simple ways to get a business up and running, you use Valid Click, what’s the cost?
Scott: The cost to the organization or the cost to us?
Andrew: The cost for you guys getting the site up, getting the business to version one, to what ever is released.
Scott: I believe Yousef’s initial investment was from Angel’s, probably between 50 and 100.
Andrew: OK. I guess I call this business bootstrapped. To some people that’s bootstrapped. Did you get any more money than that?
Andrew: No. OK. So angel funded.
Scott: Whenever we need cash flow, we would occasion take loans from people that are related to the business or close to us some personally.
Andrew: How big were the loans, what was the over all amount?
Scott: It was, I don’t know the number off hand, but it wasn’t significant. It was a couple hundred thousand over the course of years.
Andrew: A couple hundred thousand.
Scott: Over years.
Andrew: Over the course, I see, so it was never, at one time what was the most you guys owed?
Scott: I think, it probably initially was 50 to 75.
Andrew: 50 to 75.
Scott: The initial amounts.
Andrew: OK. Alright. Now you got some money. You putting it in the development of the site, you got a product. How do you find your initial users, the initial organizations that will get you the users I should say.
Scott: One of the reasons Yousef wants to put me on board was because I had relationships with organizations previously. And I had relationships with musicians, and we’ll get to that. So the initial pool that we would go with were the lahyme bit that I was to pick, and then from there was a straight business development task. Where everyday I would have a list of 200 charities, and I would cold call. And all day long I would find organizations that look like they had a nice web presence that looks like suitable for our program. Hit the ground running.
Andrew: How many phone calls would you make a day?
Scott: I made over 50 to 75…
Andrew: …make a day?
Scott: I made over 50 to 75 calls a day.
Andrew: 50 to 75 phone calls a day. Before we get to those people, the initial people who you knew, who you talked to about this product, what was their original feedback on the product?
Scott: The original feedback was not as positive as I had hoped. Organizations, in general, are very bureaucratic. A lot of them are very scared of change. So when I would approach them to do a benefit concert that was for them a no-brainer. They’re like, ‘Great. We love celebrities. We love musicians. We understand what a concert is all about.’ But when you take to them a concept that’s web-based and that’s, ‘Hey, do your searches and we’re going to pay you for that,’ at that time, and this was 2006, it was a little foreign. It was very foreign.
Andrew: Couldn’t you say, when you told them, and I’m imagining you did, you said, ‘Look. There are going to be ads within the search results just like there are on Google and Yahoo. I’m going to get a share of that and I’m going to split that share with you and your users are going to be happy that you’re getting that money.’ When you said that to them, what was it? Was it just general suspicion or…[SS]…?
Scott: There was always suspicion. I would say, ‘Look. You’re tapping into the revenue that Google and Yahoo, and they’re making $22 million a day.’ And that resonated with some people. They understand that, but I think there was suspicion. Organizations are very hesitant to get involved with new things. That was just the general vibe. We did, you know, to our credit, get organizations involved. There were some very progressive ones and they did use it relatively effectively, but we saw that it wasn’t sustainable for our business.
Andrew: One of the things that I found myself when I cold-called back in the beginning of my career, back when I was still in, I think it was high school or college, was you learn a lot about how to change your pitch, because if you try something, it doesn’t work, you get to adjust right away. You don’t wait till next week or next month to try a different approach or next sales call where you’re in another person’s office. You’re on the call within a minute, and so you get to keep iterating your presentation. Did you have that similar experience?
Andrew: So what are some of the things that you learned about presenting your business as you were explaining it dozens and dozens of times every day?
Scott: You know, a lot of the people that I was dealing with, a lot of the organizations, again, they are not very web-savvy so I learned very quickly. Your initial question to me was, ‘How can a ten year old understand what Swagbucks is?’ I would always approach in my initial pitch everything from a very high level, and I realized very quickly that I need to approach this like they’re a ten year old. These people are very sophisticated, very smart, but what I’m telling them is a whole other language. So I learned very quickly, simplify everything.
Andrew: Simply everything. So can you give me a description of what that initial presentation was like and what it was like after you finally learned to simplify it for someone who was busy on the phone and doesn’t get your industry very well?
Scott: Yes. The initial call was trying to tell them about the state of the industry and going into the background of all of it. I learned very quickly that people were just tuning me out. They were fading. They just didn’t care. So then I started, the initial pitch, once I got them on the phone, would be like, ‘Do you guys want to tap into the $20 million that Google or Yahoo or Ask make every single day? I found that starting with something like that just grabbed them. It led the natural curiosity of, ‘Of course I do. How does this work?’ And then going in from that as opposed to giving them the expansive overview.
Andrew: I see. So the overview would be in the future everyone might have their own search engines and we’re all going to be splitting because Google can’t get all the traffic out there by themselves or whatever it is, but it was just like a big vision of where the whole world is going.
Scott: Absolutely, and then also describing, you know, some of my background and saying, ‘Look. I used to do this. I know what it takes to put on a concert. I know what an event costs. I know what kind of net you make. How would you like to just make money while you’re doing your everyday business? And you don’t have to worry about, is that performer going to show up?’
Andrew: And that’s another thing, that the passive income appealed to non-profit. It did.
Andrew: Was that the main phrase that worked?
Scott: That and incremental. At that time I used the word ‘incremental.’
Scott: Generate revenues incrementally, but passive was absolutely one of the buzz words in these presentations.
Andrew: The other thing that, when I look at the industry, at the business as you first launched it, the other thing that stands out for me is it’s very spreadsheet-able. I can imagine the spreadsheet where you can figure out how much your revenues are, how your profits are, how it all ties in to the number of phone calls that you make, and the number of conversions that you make on those phone calls and the number of users that each one of those organizations have, and so on. It’s very organized. And I imagine that if you hit it enough times, that you would hit profitability. Did you…
Andrew: …Enough times that you would hit profitability, did you get to that or were the revenues so low that you couldn’t hit profitability, with that model?
Scott: So with that model we were never able to scale large enough to be able to hit profitability. We were able to generate revenue, because search is a scalable business. Somebody does a search, somebody clicks on a link, we get paid. So it’s just a matter of getting more users on board. But with the charity concept, we aggregated a good amount of charity, we probably had at our peak, over 120 different ones. But it was always a challenge to reach scale with that. And we realized we could continue adding more organizations, but if organizations were only adding a hundred users here, two hundred users there, you know, we would be profitable in 2018. And we needed, at a certain point, we had money invested, you know, we just needed to figure out a better way to do business.
Andrew: So earlier when I said I’ll come back to why this didn’t work, we now have a better understanding why it didn’t work. It didn’t work because each organization could only kick off a dozen new users at a time, and you were meanwhile making phone calls to bring organizations in, that cost revenue just doesn’t work itself out.
Scott: It was a big challenge. And at that point, again 2006 was a different era then it is right now. So it was new to people, and we did have competition. There were very large organizations that could potentially bring in lots of users. And really help scale it. But for various reasons, it’s early, economics didn’t work out. You know, we never landed any of those types of partnerships.
Andrew: OK. At what point do you decide we need to adjust? How did you find the next step, once you realized this doesn’t work?
Scott: So even when Joseph came to me with this concept, of charities and search, his ideas was also, how can we incorporate celebrities. And get brands involved, because a lot of charities have celebrity endorsers or people that promote them. And that was a world that I had played in, so as we were getting this charity project off the ground, Joseph is like, you know I think now is the right opportunity to maybe tweak the model, just a bit, and instead of doing search engines for charities, let’s do search engines that are branded celebrities, branded musicians, where we would raise money for their favorite charities. Or, in some cases, if the brand didn’t want to raise money for charity, help them generate some more money for their website. Because at that time, Bens, I mean the music industry in general was in complete shambles. And they were looking for new opportunities to make money off their brand and for their website.
Andrew: I see. Each non profit may have a small audience, but if you can get a big celebrity who has a huge audience of very passionate people, they use the product over and over, the celebrity eggs them on maybe and it integrates with the celebrity’s overall web presence.
Andrew: Who’s the first celebrity that you reached out to?
Scott: Well, first we reach out to, well I’m not going to say names, because some of them didn’t do it. But I work a lot of very major artists, and approached them with the concept and it took a while for somebody to get on board. It’s always a chicken and egg thing. Especially, in the entertainment industry. No one wants to be first. Nobody wants to be first, they’re scared of that. But the first artist that came on board was Wynonna Judd. So the first branded search engine product was search with Wynonna. And that was late 2006. And then shortly after that it was search with Meatloaf. Meatloaf had Bat Out of Hell 3 coming out, and we did a killer promo around that.
Andrew: I see. And the people who said no, they said no, we don’t want to go first. And I understand, there’s a risk involved in something like this. You want to see the reaction to the product before you attach your name to it. Beyond that, what else was it that they were saying no to?
Scott: So, I think everybody loved the concepts. By the time I was pitching the music people, I had the sell down. I knew what the value was, I knew to open with, you know, “Hey guys do you want to tap into this tremendous revenue pool.” And again at that time the music industry in shambles, people loved that concept.
Andrew: And you knew that because you were going in day in, day out, dozens of times a day pitching it, tweaking it, adjusting, feedback and so on.
Scott: Yeah, I knew what was going to get the reaction. And I knew that, just like the charities were always interested in finding ways to make new money, the bands were as well. So in concept everybody loved it, they loved it. Even more so than the charities. They thought this was revolutionary. Again, it was always, “Get somebody on board. Once you do that, contact us and so we can see what it looks like and we can see how we could get this thing rolling with our brand.”
Andrew: That makes sense. I see that.
The other thing that I’m wondering is this. I can’t pick up the phone and get Wynonna Judd to take my phone call, or get Meatloaf to accept my business proposition. I or someone in my audience would have to partner with someone like you, who has experience.
Practically speaking, how do you do it? You don’t just hang out with these guys at your house every Friday night, right? What’s the mechanics? Just take me in a little bit.
Scott: The entertainment business, no secret, it’s all relationship-driven. For me it was very easy because I live in Los Angeles; I’m around the entertainment scene all the time. It was many, many years of meeting people and developing these relationships.
You’re absolutely right. If I didn’t have these relationships, there’s no way that Wynonna’s manager… And I don’t deal with the artists directly. Make that clear. I’m not hanging with Wynonna or Meatloaf. I call the management company. If I didn’t know them already, it would be very, very difficult for them to take our call.
Andrew: I should give a little bit of your background. I’ve got your LinkedIn profile here in my notes. You were CEO of Music for Charity Productions from 2003 to 2006. You were a contributing writer for various magazines from 2002 until today. I didn’t realize you were still a writer. You’ve got something called Dudelson Concert Photography. I saw your photos on Flickr. You take photos of artists, and the photos have appeared in Los Angeles Times, AOL’s Spinner, LA Weekly, Classic Rock Magazine, and many other places — more than I can read here.
All that — I guess that gives you contact with the managers of these artists. They’re in your phone book, and when it’s time for you to take this product out, you reach out to maybe one of them who you’re friendly with. You say, “Hey, this is what I’m working on. Do you think your artist would be interested?” You essentially do the whole cold-calling thing in a different world.
Scott: Absolutely. And I would always try to use my circle of friends, my circle of contacts, to try to reach me out to other people. If a particular manager said, “You know what? This is cool, but this doesn’t work for me,” I’d say, “That’s cool. I understand this isn’t for everybody, but perhaps there’s another client on your roster or another manager you work with that might be interested. Or maybe you have another manager friend that might be interested in this.” People were very, very open to it.
Again, at that time, managers were scrambling to find ways to make money for their bands. They weren’t selling records as much anymore; touring revenues were down. So this was appealing.
Andrew: Why is Kevin Federline the one that I kept seeing over and over in my research and the one that I heard about long before I ever did this interview with you?
Scott: Federline you probably heard about because it got a lot of attention. It was at the point when Federline had just broken up with Britney Spears; he had just put out his album. At that time he was the news on TMZ every day. When writers [??] window of Kevin Federline has a search engine, for various reasons that resonated as, for some, a comedy bit, for some as, “Wow, this is a really interesting play in the web.” Not because Federline’s doing it but because this is interesting. It got a lot of attention.
And you know what? It worked out to be great for us. Sure, a lot of people made fun of it. I think it was even on David Letterman, and he made fun of it. But we got a lot of business out of it. A lot of people called us because of it.
Andrew: They wanted search engines for their artists.
Scott: Yeah. They said, “Wow, this is innovative. How does this work?” Or, “Why is he doing this? What does he get out of it?” When we would explain the process, they thought, “This is genius.”
Andrew: In my research, I saw Kevin Federline. I saw Dice Clay; I saw Kiss, Snoop Dog, Kanye West. Again, more people than I can list here. I imagined that you were creating these pages and saying they were inspired by these guys, or like fan pages. But you’re telling me that you had relationships with all these people who I just mentioned?
Scott: Yeah. These were direct deals with the management companies or with the companies that provide the website — official fan club companies.
Andrew: All these guys were partnering up with you. They have huge audiences. The incentive for them is that they get a share of your revenue. The incentive for the user, as I remember it, was they got entered into a contest. Right?
Andrew: They weren’t getting money; they were getting entered into a contest. Of course, they got the love for the fan. That didn’t work out, because you pivoted away from it. Help me understand why that didn’t work.
Scott: The first, probably, two dozen sites we launched were all with this instant-win sweepstakes model. We saw, initially, a lot of people coming in to try the sites, but we weren’t seeing the adoption and the stickiness that we had hoped for. We quickly realized it was because people were coming and they weren’t guaranteed to win anything. They’d win a sweepstakes entry, and that sweepstakes entry, if they didn’t win a grand prize, was basically worthless.
So we looked at what successful loyalty programs have in common. It quickly came to us — and that’s points. We decided, you know what, let’s keep what we’re doing with these branded search portals, but let’s change to a points system where you earn points for your searches, and you can redeem those points for your Maroon 5 merchandise or your Kevin Federline merchandise. That was the pivot that ultimately opened up the whole virtual currency landscape for us.
Andrew: I know that there have been some adjustments since then because I’ve done some research — I saw some kids on YouTube even complaining about the older version that we haven’t even talked about yet. What I want to know is the head game at this point.
You’ve now done so much more than many people in the audience will ever do. You got top celebrities, as we mentioned here, not just to take your phone call but to partner with you and to put their name on your product. Most people would kill for that. Most people would kill to be a few steps behind — to have a product that charities are working with. To have a product that’s up and running is very impressive for most people.
I mean, this is a lot of steps going forward that you’ve achieved and still no success. The head game in here — how do you keep yourself going? What’s going on in your head, in fact, as all these failures are happening?
Scott: When we started the branded search site, we started to achieve a little of the scale that we had hoped for, and the revenues. Wynonna would promote, or Maroon 5 would promote, and we’d bring in users. I wouldn’t call that the success that we have now.
I guess at that time, it was, “There’s always someone bigger.” Wynonna Judd does X for us, but if we could get WWE — World Wrestling Entertainment — that’s going to be what…
Andrew: So you’re getting some profits. It’s not a huge hit, but it’s not failure after failure the way I described it. I was wrong. It’s a little more progress, which makes you say, “If we go another step forward, we’ll have even more progress.” It’s not huge, it’s not worthy of what we’ve put into in and what we want out of our lives, but it’s progress.
Scott: Right, and we looked at it as an aggregation play. We’ve got these 12 sites, and these 12 sites are generating us this amount of money. It was fairly easy for us to project. Okay, great. If we get a hundred sites, if we get a thousand sites, this is where we can be. That guided us, and we said, “Okay, this partner is a C-list celebrity, or a B-list celebrity.” Let’s take it up a notch. Now we’re only going to hit the A list, or we’re going to hit the sports teams. We’re going to open up this platform to whomever. It doesn’t have to be just musicians. We just thought about other ways to scale it beyond musicians.
Andrew: Here’s what I was alluding to earlier. I saw people go on YouTube from years ago saying, “I haven’t earned any money from SwagBucks,” the company name you guys evolved into. They said, “Look, I’ve been on it for months, and all I’ve got is two bucks.”
So you went from sweepstakes to giving people a little bit of the action, giving them some money per action that they were taking, splitting your revenues, and that didn’t work. Why did you decide to take that action instead of going from sweepstakes to points that led to something else? Why give money?
Scott: At that time, it was actually particularly good for us because we weren’t necessarily giving out money. We were giving out products that the bands would provide us. So if Maroon 5 was our partner, they would give us an inventory of t-shirts or an inventory of posters. When we were giving the points and we were sharing back the money, there was always that margin built in because we never paid for the products.
Andrew: So the user’s benefit was accumulating enough points that they could get a Maroon 5 t-shirt.
Scott: Right. They might have paid $20 for it if they had bought it on Maroon 5’s website, but they used it on Search at Maroon 5, so they got it for free.
Andrew: Cool. Then you evolved from there, right? What was the next thing that you were giving users?
Scott: The next evolution — we continued with that path. We aggregated more sites; we ended up doing very well in terms of brands. What we realized was that we need to control our own destiny. The inherent problem, particularly with the sports teams and with musicians, it’s all a cycle. Maroon 5 goes on tour. They’ve got their album. They promote, then they go into hibernation for two years. A football team has their season. They go into hibernation for eight months. There was never this consistent flow of promotion. On top of that, it was never Maroon 5’s business to promote, search for Maroon 5. Their business was to sell records, to sell merchandise, to sell concert tickets. As we started aggregating, we realized, ‘Oh my God, our business is dependent on these third parties.’ If they stop promoting us, then our business suffers, because the money we’re making them is pennies compared to the money they’re making on their tour. We decided we’re going to create our own central destination called Swagbucks.com, and instead of users earning Maroon 5 merchandise, they can earn Amazon gift cards. We did get feedback from people who emailed Customer Service saying, ‘Look, I love Maroon 5, but I’ve got this new album. I’ve got this t-shirt. I would use this site. I love the concept, but I’m not going to spend my time doing it if I’m just going to get stuff I already have.’
Scott: We incorporated some of that feedback and said, ‘Why not, you know, we’re trustworthy. Let’s make the most trustworthy reward site on the web and we’ll call it Swagbucks.com,’ because Swagsbucks was the currency we were giving out anyway.
Andrew: So the original product was called Protegé and it used to be a search with Kevin.Protege.com and so on.
Andrew: I think KISS used their own domain so that was an option, too. You also, by the way, along the way said, ‘If people aren’t going to remember to come back to our site, we’re going to give them a toolbar so they don’t have to remember to come back to our site.’ That seemed brilliant to me. How did that work?
Scott: It’s exactly what you stated. It’s a branded toolbar where you have, we’ll take Kevin Federline for the example. On that toolbar you could have, at that time there was no Twitter but now there is. You could have Kevin’s Twitter feed. At that time MySpace was big so you could have his MySpace RSS posts right on the toolbar. So if you are a fan of the brand, you could have basically their online universe right in front of you at all times and you could have this quick mechanism to search right through the branded site. The toolbar is actually something we have launched with the charity products, so when we had decided we’re doing the search products, we knew all along that toolbar was going to be a component of it.
Andrew: I’m listening to you describe it and I can’t imagine a person that I’m that big a fan of that I would install it on my browser, but I know that there are people who are that passionate and if you get them to install the product, they are going to use it over and over, I imagine.
Andrew: Why didn’t that become such a big hit that that took the company forward at that time?
Scott: The toolbar was great for us, and everything we did incrementally grew our business, but the fundamental problem was, like I said before, it was never these brands primary purpose to promote us.
Andrew: I see.
Scott: We can never sustain on a long-term basis the growth that we had and the users we had, because there would be attrition and when you weren’t bringing new users into it, the attrition will ultimately just kill you.
Scott: So we realized we need to control our own destiny and we took a gamble and we said, ‘Great. We’re going to put our resources.’ We were still focusing on the partner sites. We dedicated more and more resources to Swagbucks.com as our business.
Andrew: I can imagine Gene Simmons is not sitting at a board room somewhere, sitting at his house saying, ‘How can I grow my Swagbucks website and get people to use it more?’ It might be good revenue for him, but it’s not going to be nearly as good as, I don’t know what, a KISS casket or whatever else his band’s going to come out with.
Scott: Well, or you put it into perspective, you know. I’m making these numbers up so, Gene Simmons, don’t quote me on this or get mad at me. Let’s say KISS makes a million dollars per show. They get paid a million dollars to do, you know, 65 minutes worth of work. If we pay them $100,000 over a year for doing nothing, they like that, but they’re like, ‘I’m going to do 45 shows and I’m going to make $45 million for 45 hours worth of work,’ and rightfully so. That’s their business. And a lot of these band’s business. And so that’s where they focus. If they’re going to post on MySpace bulletin, that’s how MySpace is big. You know, they would probably want to focus more, ‘Buy tickets to our Cleveland, Ohio Show, which isn’t sold out,’ as opposed to use Search With [??].
Andrew: I get the need to control your own destiny. But the beauty of the model is, and you had it up until now in the story was, others were bringing you end users. When you were thinking of adjusting, how did you imagine. Before we get into the reality of what happened, how did you imagine you were going to accumulate all the users that you needed?
Scott: Well, at first we really thought it would be an ad play, that we’d go out and we’d market the hell out of the site, and we’d buy users, we’d bring it in, we’d find ways. But it turned out that, initially, this isn’t the case anymore, but users would come from our partner sites. They’d be like, ‘I don’t want a maroon-5 t-shirt.’ They’d be like, ‘cuz we had a centralized pay as you see on all sites, they’d check Swagbucks, they stop, ‘Wow, I can win an Amazon gift card. I’m gonna do this. I’m gonna use Swagbucks.’ And our initial base of users was all organic from those sites, not a lot. But that organic, we never ended up doing these ad spends. To this day, we still don’t spend really any money on advertising, or marketing. It just kinda grew from there.
Andrew: So, I see. Is it every single person who registered on all these sites that were partnering up with you?
Scott: No, it was at that time a very small group.
Andrew: And can you tell me again who that small group was? How did you know who you could contact directly and bring into Swagbucks, and who was off limits because they belonged to the artist?
Scott: So, we didn’t contact anybody. What we did is we had a network, and one of the values we always brought to our brand partners was, look, if you’re a B-level artist, you want to benefit from A-level artists’ traffic on our site. So we created a centralized location to create a network effect, where people could say, OK. I don’t want to search with this artist anymore. I want to now try this artist. And then we’d have a lot of cross-over. And one of them that we had, which is the first spot on our list, was Swagbucks.com. All our users knew that Swagbucks was the currency that they were earning through the partner site. So a small percentage of them decided we’ll check out what Swagbucks is. And the prize offering on that was pretty sweet. It was Amazon gift cards, and Barnes & Noble gift cards, and cool merchandise.
Andrew: So, it’s not just a first item on the list but it’s also the item that gives me real world products that even my friends who have no passion for any of these artists would be interested in?
Andrew: OK. There’s one other thing that we haven’t talked about. We keep talking about search as the main product. I imagine at some point you realized search isn’t where the real money is. That’s a nickel and dime at a time business, but surveys are going to bring in even more money, because people are filling them out and we’re getting bucks, instead of pennies. Am I understanding that right?
Scott: Yeah. To be fair, search is a great business. And it is pennies, but it’s all about scale. If you can get a million people generating your pennies, you’ve got a very nice business. And that was always kind of our, even with the charities, that was our play, let’s aggregate a lot. But in terms of the next evolution to adding new verticals, surveys, special offers, that surprisingly didn’t come until, you know, late 2008, when we realized . . . ‘cuz we were doing well at that time. Swagbucks had taken on a life of its own, we were getting those pennies from lots of users. But we realized, more important than the money we were generating, we couldn’t give out enough points to our users to really encourage them to come back every day and make this their long-term, I say long-term search engine. So we realized the only way that this could be sustainable is for us to increase the way and amount of Swagbucks we could give out. And we couldn’t do that with search, because like you said, we were tied to pennies. And there were so many pennies we could give out for pennies generated. And that’s when we started to look into what other opportunities were out there. And survey was a natural one, offers is another one.
Andrew: Search, Survey and what else?
Scott: And special offers.
Andrew: What’s special offer?
Scott: So, think about when you play any of your Zynga games on Facebook, or any of your social games. If you’re buying your in-game currency, a lot of times you may be buying a Netflix subscription, or maybe downloading an application. So it’s that same concept.
Andrew: Ringtones is one time, too.
Scott: Right. Right. So we do those types of things where you could get a great discount on a Netflix subscription and we’ll give you 800 Swagbucks for doing that.
Andrew: So, 2008 is the year that you just mentioned that that happened. You guys generated three million in revenue in 2008. Three million.
Scott: That was actually all search. 2008 was all search.
Andrew: All search?
Andrew: Unreal. 2009, six million. 2010, ten million. 2011, expected 20 million.
Andrew: Huge jumps. I’ve got these numbers partially from our conversations before the interview started but also from Venture Beat where it was published publicly for everyone to see. Why are you being so open with your data? Especially something so critical?
Scott: So, it’s difficult for us to get, for better or for worse, a lot of attention. We’re not up in Northern California. We’re not in Silicon Valley. We’re out here in Torrance doing what we do. And at some point…
Andrew: You guys are in Torrance, southern California?
Scott: Yeah. You know it?
Andrew: Yeah yeah.
Scott: You see, I used to live in Santa Monica.
Andrew: Love it. I love it. Not too far. So, we want to start getting the story out. We wanted to let people, you know, that it would be good for us to let people know what we’re doing down here. It’s a little company, bootstrapped, nobody knows who there are, but we got big numbers. And you know by doing this, we’ve actually, it’s been a blessing for us. We’ve had companies contact us that we’d never heard of before that are great, that are perfect fits for us. They hadn’t heard of us before these articles and they saw the kind of sales we could bring to them.
Scott: For example, what’s a partnership that happened as a result of being this open.
Andrew: That’s a good question. So, I have to ask my, it’s probably in the office space.
Scott: I see. So, you’re getting offers and opportunities to bring offers to users that you didn’t get before. Let me ask you about this. And then I want to come back and find out how you grew your users even further. I am fascinated by how you kept growing and growing. Confidentially, a lot of my interviewees when I’ve asked them why do you want to do the interview, I asked you the same thing. I said, “What can I help you get out of the interview?” Confidentially, a lot of them have said, Man 1, we want, oh I forget the way that they phrase it but basically they are looking to sell. Basically, they are saying look, we want to position ourselves either within the next year to do it or we want to put ourselves in the minds of people who could down the road do it. Are you guys, by going out to Venture Beat, here to Mixer G, and maybe a few other places, are you guys now in the mindset of thinking of selling the business?
Andrew: No. I mean, our goal is to build the most sustainable, best business as we possibly can. By virtue of going out and doing press, people are going to ask these questions. Eventually they ask money questions so we give them what we can but the goal is not. Even from the start, you know, I know a lot of internet entrepreneurs who have gone in starting a business and say, in 12 months I’m going to have my exit. When we started, there was never that thought. There was in 12 months, I hope we have a sustainable business that we have employees working with us and that we could help them support their families, support my family and to this day that is still our goal. You know, build a sustainable business. We want to do what’s best for the shareholders. We’re not close to anything but we keep our heads down and try move forward and just build out as best we can.
Scott: All right, I’ll go back to the narrative that we, where we left it off. More users. Tell me how you got the initial users that link and the incentive for people to use Swagbucks. How did you grow beyond those initial users?
Andrew: So, what we started to do is, like every company, we put together a Facebook page and we started allowing people to commune on our Facebook page. And then we discovered that a small group of users that we had were addicted to Swagbucks. It’s kind of like a drug. They are like, I need more Swagbucks. I need more Swagbucks. So we had an interesting concept of let’s create treasure code hunts.
Scott: Sorry, we lost the connection for a moment. You were saying let’s create treasure hunts.
Andrew: Treasure codes. So it’s going to give out free Swagbucks. We’ll create strings of text. We’ll give out to users and that should, in part, satiate some of their desire to find more ways to earn Swagbucks. We built out that system. We started giving it to them on Facebook and it turned out to be huge. People would clamor to our Facebook. Our small group of users would clamor to our Facebook page every single day, sometimes multiple times a day, asking where’s the next Swag code? Where’s the next Swag code? Where’s the next Swag code? And we start giving out more of these. and that just brought core of people to our page. And that sort of bring their friends to our page. From there we launched a referral system, where if you get people to sign up for Swagbucks, under your referral link, You get people referral links, their own member ids, you’ll earn every Swag buck up to a thousand. So if I invite you to the site and you won a thousand Swagbucks, I’m going to get you matching Swagbucks. So the combination of these two things really help spur a lot of our viral growth.
Andrew: I didn’t know about the first, which was more powerful, was giving out free Swagbucks everyday on Facebook, or was it doing that referral program where people got Swagbucks for every person they referral?
Scott: I think the first thing probably was the referral program. I think now our best legion system is probably the Swag code system. People love it. They know, OK, I’m going to win certain amount doing search, doing surveys, they know that if they engage Swagbucks, we’re going to get 3 Swagbucks everyday. And that’s simply maybe go to Facebook page, maybe go to the search page.
Andrew: That seems like a good retention strategy. I’m not following how that help bringing their friends.
Scott: It is a good retention strategy. But it got a lot of people who maybe having trouble convincing friends initially to get on board, saying look you don’t have to spend your entire day search, you don’t spend your entire day doing this. You’re on Facebook anyway, just like you’re searching anyway, go to Facebook page and you can get some free Swagbucks for doing that.
Andrew: I see.
Scott: That helped grow a lot of our member base.
Andrew: I see.
Scott: We knew a lot of people love our system.
Andrew: So now, it’s get Swagbucks for searching, for filling out survey, etc. And for being on Facebook and that connected it.
Scott: Or it can be Facebook, it can be Twitter, or it can even be on our site. We hide Swag codes. We can turn them into a game basically. A game of finding the concept of it. And you can earn them, it might be in Amazon gift card, prize description, might be strings attached, says enter this code for 10 Swagbucks.
Andrew: I see that’s clever. So I’m looking at just the description of the product and boom, I suddenly discover that I’ve gotten free points for looking at it. That incentivizes people to also look at your promotion.
Andrew: I think it’s October, 2010. You guys launched something called the Gift App. Am I right about the date? What is the Gift App?
Scott: So Gift App is a virtue gifting application, on the Facebook platform right now. It will be else where. But virtue currency in the world we’re in, we’re so interested being on the for front of this virtue revolution. And virtue gift to us are amazing. Because for a brand you are selling something that cost very little, and you can sell it over and over again. So we decided we’re going to create a virtue gifting platform for Facebook called the Gift App, and we’ll hook up with brands to create virtue gifts for them and we’ll just create our own virtue gift to catalog. So Andrew if it was your birthday, I would send you a fully dynamic, animated virtue birthday cake to your Facebook wall. Or maybe I’ll send an Archie, we have a deal with Archie comics, so maybe I’ll send you an Archie comic virtue gift from Archie to wishing you a happy birthday.
Andrew: And this is a user sending a gift to another user?
Andrew: I see, yes.
Scott: Exactly. And it’s developed a lot of traction since we launched this. Based on number of sends and usage, we’re probably in the top 3 biggest gifting applications on the Facebook.
Andrew: How do you guys monetize that? You advertise Archie comics page as advertiser, what else?
Scott: So Facebook credits is the way Facebook is going to monetize their platform and that’s how we’re going to monetize. So you buy your virtue gift for 10 Facebook credits each. Facebook is worth 10 cents. We get our share from Facebook, we do revenue share back with the brands. Admittedly the Facebook platform is early in it’s infancy, credits is in it’s infancy. So right now the big play is monetization, but the real play is the branding, like an organization like Archie comics, they want to make money off of it, but they also recognize that, hey if we can get Archie send to two million people Facebook walls, in stream there is tremendous value in that as well.
Andrew: What percent of the 10 million you guys generated last year came from that product the Gift App?
Scott: It’s negligible.
Andrew: That’s negligible. So why do it? Also as I looked through it, I was trying to figure out how you are connecting it to Swagbucks, and I couldn’t figure that out.
Scott: That’s a great question. So there’s couple of reasons why we do it. One of the way it connects to Swagbucks is, if go on the application, you’ll see Carolina Panther, NFL virtue gifts, you’ll see Kiss virtue gifts, Star Trooper virtue gifts. All those are partners with Swagbucks. And the purpose of those aren’t to sell them, they all free gifts. But is to promote search with Kiss, or search with Roddenberry. So when you send a USS Enterprise to your friends Facebook wall, it also has a call to action that says win some free products on search with Roddenberry.com.
So from that perspective it helps us, and it’s good. But from another perspective, it’s good to be early adopters into spaces you truly believe in. So while there is not a lot of revenue in this right now. There’s a lot of usage in it, and there’s a play for revenue in the future. And we have an opportunity to build mind share. When we think of virtue gifts we want them to think of the Gift App. And to this point we have added so many great high levels brands that we’re really starting to do that.
Andrew: I said earlier that AllAdvantage famously in their first version, first hour of the internet, try this business model. And any time anyone even get close to this model that you guys are in, everyone bring up AllAdvantage. Tell me why, AllAdvantage and other businesses that paying money to users for doing things they are already doing online, like search and browsing. Why they didn’t work, but you and others in your space are working? It seems obvious now at the end of this conversation, but I think it’s important to put that point on it.
Scott: To be fair, I’m not too familiar with AllAdvantage. And that’s probably good that I’m not too familiar with it. Because we’ve build a business that might have separated itself from in spite of that.
What we do fairly well, is we create a unified user experience. when you access Swagbucks to do your search, surveys and what ever, you’re doing it within the Swagbucks universe. I think that wins a lot of trust to the concepts. We’re not, there’s a lot of companies that still exist, that if you want to play a casual game and win points, you’re going to get send to the casual game website. If you want to do survey, you’re getting send to the third party survey site. Everything we do is within our frame.
The other thing I believe is reason why we are successful. because we care. We deliver on the promises we offer, our customer service is top notch. There’s few people that had bad experiences with Swagbucks, and there is probably fewer people that say Swagbucks ripped me off.
Andrew: I was looking for that actually. I got to be honest with you. I said I’m coming into this conversation, i got to look for all the people that hate them, and look at them.
This wasn’t what I expected. There are some people that said I didn’t earn enough points, some people said I couldn’t get more points for doing this or doing that, but there was no one, unfortunately for me, I was looking for a shocking question. Actually I wasn’t, I was looking to understand your business. But I wanted to uncover. But there wasn’t anyone who said these guys ripped me off. These guys got me to think I was getting points, it was to lead to something, I never got it. I couldn’t find that, which didn’t mean it doesn’t exist, but it means that it’s a above board business as far as I can see.
Scott: Absolutely. And part of the reason is that, one our growth is so slow and so at this point it’s successful it’s because we took everything slow. When we were given out points for search it was all attached to revenue. So we would never give out more than we made. So there was always a backing for everything, you got your points, there is really money there to back those points. Where as I can see this potential could happen, I know companies that have done this they raise 20, 30, 40 million dollars for points and prize concepts, but when they do that, very often they give out more points than money they have coming in, so that some points in the future they are at deficits, they got a billion points out, but they only got $100,000 in the bank. You screwed when that happens. We always balance it out to where, we made X, we’re going to give out X minus Y dollars. So there is always margin in between everything.
Andrew: Always keep it profitable. Has the business been profitable since 2008?
Scott: The business has been profitable. Yeah, it’s been profitable. Yes, it’s been profitable. Cash, it’s been profitable since, but as we grew, you know, there are cash flow issues. You get paid later and I hire new people. At this point we are cash flow positive and profitable. At that time we were profitable, but we were also at times taking loans that we paid back once we got the money from our providers.
Andrew: This is a business that’s been around since 2007. I can see many people giving up with less time in in their business.
Scott: We also had the initial concept late 2005. I came on board early 2006.
Andrew: Oh, really? So the business didn’t launch 2007, but you were still working on…[SS]…
Scott: Protegé Charity launched in mid-2006.
Andrew: That was the original name?
Scott: Yes. It was Protegé Charity Search and Raise. Then Search and Win Sweepstakes launched in early 2007. Swagbucks, the currency, on the partner sites launched mid- to late-2007. Swagbucks.com launched February 2008.
Andrew: Pivot, pivot, pivot, pivot, profit.
Scott: We believed it in and thankfully, we did.
Andrew: I’ve got a couple of questions that I wrote before the interview started and one of my viewers sent some in. Your competitor’s home page. It’s empty, nothing. Actually, I might as well bring up their name. No, I won’t because I want you to feel open about explaining what’s going on here. It’s empty except a big image and a button that says, ‘Join Now.’ Usually, when I see that, it tells me that the action isn’t happening on the home page. People aren’t coming to the home page to sign up. Where are they coming in from if not the home page? Where are they coming from and where are they being sent to, the users?
Scott: It’s less now than it was before, but most of our growth comes from referrals. If you have your referral link, you post it on a blog. You click on that link, you are going to be sent right to the registration page. The registration page is different from our home page. A surprising number of people come from registration versus the home page, but he home page does serve as a registration path as well.
Andrew: I see. It does or does not?
Scott: It does.
Andrew: It does for you.
Scott: There are two ways for people to access to register. Most of it comes from our referrals.
Andrew: I see. Let’s see, actually, all my questions were asked.
Scott: I’m curious. Who is the competitor?
Andrew: Lockers, I guess it’s called Lockers.com?
Scott: Lockers, yes.
Andrew: He’s a guy who raised money and/or coming in to compete with you.
Scott: Yes, there’s a competition-type element in there, but there’s divergent elements to it as well. What we specialize in, and what we’re great at is points and ways to monetize users to give them points. What Lockers is great at, I think, is providing great concept. They provide very good ways for users to engage. They’ve got [??] save, they’ve got good videos, but from our perspective, the way I look at them, they’re not a points company. They haven’t figured that element out yet. Maybe they will, maybe they won’t, but I commend them for what they’ve done and they should commend us for what we’ve done.
Andrew: Devon Stokes in my audience asked these questions when he saw that you were coming up. He said, first, he noticed that you didn’t raise money. Was there a time when you were starting out when you weren’t sure how to scale this any more, or when you needed money, I guess, to grow the business, when you were thinking of raising money?
Scott: Yes. Early on, maybe mid-2006, once we started proving some of the concepts, we put together a formal plan. We actually did bring it out to a [Asian] group and we made a presentation. It didn’t go very well. We were young and I don’t think most people probably believed in what we were doing. After that we realized, you know what? Screw it. We believe in ourselves. We know what we’re doing. It’s a scalable-type business where, if we bring in users we’re going to make money. Let’s give it a go on our own. There was that short period where we did think, you know, let’s do it. Let’s go raise some money and we did one presentation to the [Asian] group.
Andrew: So how did you overcome it? You needed money to grow. How did you overcome the lack of money and grow to spite it?
Scott: We’re fortunate in some senses in that Yosef, our CEO, is also very young guy. He’s also very, very smart and very successful guy, so he had a previous business which he had started, unrelated to the internet, so he had some capital that was able to float it, and you know people within our community were also, because they were friends with Yosef, they believed in Yosef, they were interested in providing some of this cash flow for us.
Andrew: And these were the loans that you were talking about?
Scott: These are the loans. But initially it was all Yosef. Yosef said I believe in this, I’m gonna dedicate this money to it, and credit to him.
Andrew: Devin’s other question actually I think we already answered, he asked if you’re free to share this, how much money did Yosef put into the business to bootstrap the company, and you said roughly $100,000 to begin with and then loans throughout from his friends.
Scott: And those were just cash for cash flow.
Andrew: Cash flow loans. Alright. Let me go over some of the notes that I have here if you don’t mind. I want to know from you what you’ve learned, but here are some of things that stuck out for me. The first is you had a feedback machine in that cold calling period where you just kept talking to people and understanding what wasn’t working about the way you explained your business. Second thing you did was you partnered with people who were audience magnets, you did that with the non-profits. They weren’t as big of magnets as I would have expected and you expected, but they had some. And of course you moved on to celebrities who had bigger audiences before building your own. Third thing is I keep coming back to points, points, points. That’s what your business is based on right, and so you figured out that if you incentivize people through points they’re going to take action including reading a description for an Amazon gift card. You told me earlier that you want to keep users on your site, that that’s one of the reasons why you guys succeed where others fail. Instead of sending people over to fill out a survey on another site you keep them within the community on your site. And finally, I wrote down, and I know that there is much more than this, PR leads the business development. I keep asking people why do you do interviews with me. Why do want to talk about your business instead of spending this hour and a half doing your business, and it leads to business development.
Scott: Absolutely. And if anyone here is watching and wants to do business with us, reach out.
Andrew: I’m sure they will.
Scott: We believe in what we do, and we’re all solid, good individuals. The one thing I hated, I’ll bring this up, we’re not doing cold calls or cold e-mails. It’s always frustrating when a person is not gonna call back or just get ignored. What I learned from that experience is I’m not gonna be like that. I may not wanna work with everybody, there might not be opportunities, but everybody deserves the benefit of a response or something to explore, so I say that with if you’ve got a great idea, and you think there is a synergy.
Andrew: Be careful my friend be careful. Guys, be careful. I’ll say, in addition to that, one of the reason that I know why you’ve done this interview, is to help other entrepreneurs, help others who are building their business right now learn from your experience, and I’ve gotta thank you, because you really could have come in here and been opaque, you could have talked in generalities, but instead you told a really good useful story with lots of details, lots of openness, and this is the kind of interview that I like to do, and I know that this is the kind of interview that my audience gets lots of value from. So I’ll say this guys, regardless of the [??] opportunities or anything else that you might want out of this interview, I hope that what you’ll do is just send Scott a thank you note, or if you see him at a conference somewhere, just say hey Scott, I saw you on Mixergy I heard your interview, you don’t even have to bring up Mixergy, this isn’t a selfish thing for me, it’s a selfish thing for you to do for yourself, and it would be a nice gesture for Scott, say thank you the way that I’m that I’m saying to you Scott, thanks for doing this interview.
Scott: Thank you Andrew, I appreciate it.
Andrew: Well thank you all for watching. Bye.