Reinventing HOTorNOT

_James generously adapted this from his “original blog post_”:

For the first six years of its life, my startup, “HOTorNOT”:, had pretty much been steady along the same course: A picture rating site with a not-so-serious dating application built on top that generated healthy amounts of cash for me and my cofounder, “Jim”: For the first 3.5 years, Jim and I worked about 10 hours a week, and the company earned millions of dollars per year. *Then 2 things changed,* and we realized we had to change with them:

*I. Startup economics steadiy improved* following the dotcom bust, making it harder to keep good people.

*II. The Online Advertising Market improved,* making free competitors a reality.

Jim and I learned some *important lessons* by addressing these two changes in our competitive landscape. I wrote a more “detailed post”: on our growing pains, but these are the highlights:

*1. LESSON ONE: Don’t expect smart, young people to do anything that you wouldn’t do yourself.*

*By late 2006,* all of our employees wanted to leave to go do their own things. They recognized that the costs of doing a startup had gotten so low, it made less sense for them to stay at HOTorNOT than start their own startup. This was our own doing.. after all, we hired them BECAUSE we thought they were smart and entrepreneurial. Most were also young with nothing to lose, because we recruit out of Berkeley. Jim and I had to admit, if we were 22 years old, we wouldn’t stick around running someone else’s cash cow for no equity, either — even if we earned salaries 2-3x the normal wage. They may have felt stiffled, too: Jim and I weren’t exactly model “risk-takers” then, being overly concerned with conserving cash. We either had to let the employees go or give them equity.

*a) We created a stock option plan for our employees.* Giving the team a large cut of equity has aligned their interests with ours and we’ve seen it breathe an incredible amount of new energy into them… as it should. *They are now working for _themselves_ and not for us*, and we think that is a better situation for everyone.

*b) We began encouraging innovation again,* rather than squelching it in fear of change hurting the flagship cash cow. Changes are now made to the site that I don’t always agree with, and in some cases I don’t even know about. As long as the team is measuring and testing the effectiveness of everything, that’s ok.

*II. LESSON TWO: Cash flow can be an enemy of innovation.* (Just ask Microsoft!)

When we launched HOTorNOT we developed a subscription service on top of our dating service, and that quickly became very profitable. Nurtuting our cash flow was like a drug addiction — *we became focused less on innovating and more focused on making sure our next dividend check was coming.* (To hell with longer term trends!) But then came online advertising. If they can do something for free versus the same thing for charge, which do you think s/he is going to pick? So free social networking sites like Myspace, Facebook, and to pop up, threatening subscription sites, like ours.

*HOTorNOT’s traffic started to drop around 2004.* It’s not that these services made our site worthless to users, it’s just that consumers suddenly had alternatives. HOTorNOT’s profitability was still extremely strong thanks to a large loyal base of paying users, but *we saw the writing on the wall.*

*a) We made HOTorNOT free.* If Subscriptions were our past and Advertising and Digital Goods were our future, we had to take the plunge at some point. The tendancy of successful companies might be to “work up to” this kind of change, but it was too important: _We went cold turkey._

This had broader implications than you think.

*First,* we now had less to lose by being aggressive. Countless right moves were killed in the past because we were worried about what it would do to our bottom line). *Second*, it meant we could let users create their own content on the site. User-generated content powers the web. But when you run a dating site, one of the things you have to do is screen ALL content to make sure nobody is hiding their contact info in their profile somewhere. Screening content on a UGC site doesn’t scale, but under an advertising-based model, letting users upload more data doesn’t threaten the business model, it helps it.

The changes we made at HOtorNOT may sound small and incremental in theory, but in practice they are not small at all. *HOTorNOT is a completely different company* than it was just 6 months ago:

*HotorNOT used to be a cash cow* where the employees didn’t hold any equity, and where innovation generally took a backseat to income preservation. It was so miserable to work here, even the founders left.

*Today, we have an exciting culture of risk-takers.* New-motivated employees with equity work harder and take initiative. They build new features for HOTorNOT users with some guidance, but low supervision. They feel a larger sense of ownership and pride in their work, and most important — they have more fun.

*Traffic has doubled* in the past 3 months. We’re doing about 20 million pageviews per day now.

*HOTorNOT is spawning innovation on the side.* Our employees have built 2 major Facebook apps:* Moods, which has almost 2 million users in only 3 weeks, and Pets, which has 200,000 very active users. Both of these products may be spun-off as separate companies in the future.

We are now pointing HOTorNOT in a strange new direction that some have called crazy, others have called brilliant. I’ll following-up on this in a future post, but in the meantime, if you are a coder and want to work somewhere that doesn’t suck, check out our “job postings”: We are also looking for a business hire to help run things, as well as an ad sales person.