Management, Organizations, and Strategy
The entrepreneur Rodrigo Azevedo (35) is not a journalist. Nevertheless, he decided to found Comunique-se, the largest online journalism community in Brazil. Educated as a systems analyst and a natural entrepreneur, and after observing the routine problems encountered by journalists when he worked at FSB, he came up with the idea of offering certain services to journalists in 1997, using a nascent technology at the time, the Internet. The first services created by Rodrigo included the online press conference and the online press room. New services were included, until the idea occurred in 2001 to launch the Comunique-se Portal in order to consolidate and commercialize some of his solutions.
In addition to the support from FSB, Rodrigo also received support from the venture capital fund, InVent, which injected a total of R$ 5 million into the business. Comunique-se became part of the company’s set of investments in Internet-based companies, such as Elefante and Central de Desejos, for total investment of R$ 50 million and the subsequent liquidation of these investments within a period of 5 years.
Comunique-se quickly created the entire journalism community, with more than 600,000 Internet users, of which 70,000 were journalists from around the world and the rest were divided among students, freelancers, communication agencies and companies. With the Comunique-se Awards, which recognized the exceptional professionals of the year, the portal gained its stature as the main meeting area for Brazil’s media industry.
In 2002, at the time of the second injection of investment, FSB decided to exit the business, with InVent becoming the only investor, while Rodrigo held 1% of the business. In 2003, the business recorded strong growth, with revenue going from R$ 400,000 in the first year to R$ 1.9 million in the third year.
In view of this performance, which was the best of all companies in InVent’s portfolio, it was difficult to understand why InVent needed to shut down the business in 2004. However, as determined in the bylaws of the fund, the investments had a predetermined period for their realization. The term of the fund expired before achieving break even. Moreover, because of the bursting of the Internet bubble and the crash in the tech-heavy Nasdaq index in 2000, the R$ 50 million fund ended up contracting to R$ 7 million by the end of the investment term. Investors did not want to continue the enterprise, and InVent had few arguments to justify continuing with only one company in its portfolio.
After encountering difficulties in selling the business, since it was a very specific niche segment, the fund resolved to close the company’s operations. Given this prospect for a business that still had enormous potential for growth, Rodrigo was faced with the dilemma of buying the company or getting out. If he decided to buy, where would he get the money and how would he manage the business alone? The decision would have to be taken before the business (still a start up, with 5 years of existence) was terminated.
Over three months, mobilizing employees and two friends, Rodrigo raised R$ 600,000. He made an initial offer of R$ 100,000 with margin for reaching a maximum of R$ 200,000. Rodrigo knew he held bargaining power, since it is very expensive to fire people; contracts with clients have durations of five years, which would be the time required to close the company.
But the process was not that simple. Rodrigo and his partners had missed the opportunity. The fund had found a competitor to enter the dispute. This was the last thing he wanted to happen. For a while, Rodrigo and his partners thought it might be a bluff.
After various rounds of negotiations, he ended up acquiring control of the company for R$ 500,000. Although this was much more than he had planned to pay, it was still a great deal, given the value of the company (at least R$ 6 million). However, there was only R$ 100,000 left to restructure the company and make it profitable.
On the other hand, without spending a cent out of his own pocket, Rodrigo had increased his share from 1% to 25% and had gained sufficient power to make the major decisions to come out on top. After a very difficult period, Comunique-se recovered and became the only company in the world to provide high-quality corporate communications solutions online, was elected Top of Mind in the journalistic community and was selected in 2006 an Endeavor company by Instituto Endeavor.
The objective of this case is to illustrate the dilemma faced by various entrepreneurs during the early days of the Internet, which was accompanied by the boom in venture capital flows at the end of the 1990s. Topics that could be explored by the case include:
This case can be applied to courses on entrepreneurship, economics and finance. The proposal is to discuss with students the decision-making process between the buyer and the seller of a company and the way in which venture capital funds and angel investors operated following the lessons learned from the Internet bubble, as well as the conflicts of interest arising from this relationship.
The case helps students understand that a successful company is not always capable of maintaining an investor. It also shows the painful decision to exit an investment, even though it may be an attractive business with high potential. The case presents some of the elements considered by investors when deciding to exit an investment. The difficulties faced when selling a high-potential business positioned in a specific niche are also portrayed, reflecting the typical dilemmas companies face when deciding to expand or turn a profit.