Business Case Studies #5: The $12 Billion Email Giant (Classic)

What's up, everyone? This is Alex Lieberman, co-founder and executive chairman of Morning Brew. Welcome back to Founders Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. This week on Founders Journal, we're doing things a little differently. We are dropping a miniseries full of case studies that lay out a number of lessons you can learn from successful businesses. That means instead of just one episode Monday, Wednesday, and Friday, This week we're giving you 2, a new show that you won't want to miss, plus a classic episode you maybe haven't heard before. In today's classic episode, originally published on September 20th, 2021, I am talking about Mailchimp, the $12 billion email behemoth that sold to the parent company of QuickBooks, TurboTax, Credit Karma, and Mint. Let's hop into it. So as I just mentioned, Mailchimp was acquired and it was the largest private Bootstrap business acquisition ever in history. Mailchimp sold for $12 billion to Intuit, parent company of many businesses you know, like QuickBooks and Mint. And it's actually a really cool thing for me to read because Morning Brew wouldn't be possible without Mailchimp. Back in 2015, when my co-founder Austin Reef and myself were starting the company, one of the reasons we decided to start with email as our format versus an app or a website is because it was a cost-conscious way to get in front of consumers in a way they were already consuming content. And the first ever platform we used to send our emails was Mailchimp. I believe at the time we paid like $20 a month. It was one of our only costs as a business, and it's what gave us the opportunity to be entrepreneurs when we had no funding whatsoever. So that's our connection to Mailchimp. But let me give you the quick backstory before hopping into lessons that we all can learn from Mailchimp's ascent as a business. Mailchimp was founded in 2001 by Ben Chestnut, Dan Kurzius, and Mark Armstrong. I'm going to focus on Ben and Dan's backgrounds as Mark Armstrong is no longer part of the business. He actually was bought out in 2008. Ben Chestnut is the son of an Army codebreaker. That was his dad and an immigrant entrepreneur, which is his mom. And he learned about business and entrepreneurship through watching his mom operate a salon in the kitchen of his childhood home. On the other side, we have Dan Kurzius, who was born in Albuquerque, New Mexico. He worked at his family's bakery and deli until a big chain pushed them out of business when he was 12. Shortly after, his dad died of a heart attack and his family lost their primary income. And so now it was up to Dan to find ways to make money for the family, where he became a part-time DJ and a competitive skateboarder, and ultimately made his way to Atlanta. When he settled down in Atlanta with his wife and his few kids, he decided it was time to get a real job. Not that it's not a real job to be a DJ or skateboarder, but he wanted a more steady job. So around 2000, he applied for a gig at a Cox Media-backed music startup. Funny enough, Ben Chestnut had climbed the ladder at this very same music startup as a web developer. Ben ended up hiring Dan Kurzius as an engineer. And the funny part about this is Dan didn't even realize he was applying for an engineering position. He didn't know how to write a single line of code. And so after he got the job offer, he literally spent every night learning how to do the job that he had been accepted for. A few months later, the music startup that both of them worked at shut down, and Ben and Dan ended up using their severance checks to found Rocket Science Group, which was a web development agency that was building websites for big tech companies in the early 2000s. This leads us to the first lesson that we all can learn from Mailchimp's massive rise as the email giant that it is today. Very simply, you couldn't kill their business. Ben and Dan were absolutely relentless. They cared too much. They were self-proclaimed cockroaches of business where no matter what challenge was thrown in front of them, They just figured out a way to navigate it. So as I mentioned, they had this web development shop. They were focused on big tech companies. And if you know anything about big tech around the early 2000s, it wasn't too kind to them. We had the dot-com crash, which absolutely tanked their business because most of their clients were tech companies that were affected by the crash. So they were like, what are we going to do now? All of our clients are gone. Rocket Science Group ended up focusing on airlines after big tech companies. And unfortunately, as we all know, in 2001, 9/11 happened and that further tanked their business because they had shifted from big tech to airlines. And now obviously airlines were going through a ton of tumult with the terrorist attacks in 2001. After moving from big tech to airlines, Ben and Dan then moved to their client base being real estate partners. They were completely understaffed at the time. They were getting burnt out. And honestly, Rocket Science Group was not looking too good. It was losing money. They didn't have enough people. But there was this interesting insight that the team had. Clients started asking Rocket Science for help with email marketing, and it started as a side project where it really wasn't a big part of their business. but it was something that a lot of clients had asked for. Ultimately, what happened was Ben Chestnut and Dan Kurzius took the code from an e-greeting card idea that they had just built for fun on the side, and they ended up using that to spin up a simple email app. It's 2005. The agency that they had built and started in the early 2000s was slowly failing after several pivots based on their customer base having to change. And the only reason they were able to push through it was because of this email side business. In 2006, Rocket Science Group wrapped up all of its consulting client work, and later that year, Ben and Dan went full time on Mailchimp as an email platform for small business. No matter what you threw at this pair of co-founders, somehow they found a way to push through. It's also just another really interesting learning that sometimes the best businesses Their products start as tools for themselves. This email app was an internal tool to help send emails for clients, and it became the core business of Mailchimp. This leads to lesson two in Mailchimp's story. One of the hardest challenges for entrepreneurs—I absolutely experienced this with Morning Brew—is how do you stay ambitious and how do you accelerate your company while remaining focused and not trying to do too many things at once? A lot of times, people believe that these two. Words focus and ambition are mutually exclusive, and Mailchimp is the poster child of marrying focus and ambition. In 2007, the company had 10,000 users and barely broke even, and then they made a single decision while focusing on the core of their business that would change everything. In 2009, Mailchimp introduced their forever free plan after 8 years of not having one. What did that mean? Basically, new customers could use Mailchimp for free, assuming they had below a certain number of emails they had to send every single month. That decision caused Mailchimp to go nuclear. The company increased its profits by 650% in that year. They went from 10,000 users to 85,000 users. And this is what put Mailchimp on the trajectory to become the company that it is today. In 2010, the company grew to 450,000 users. And just over $2 million of ARR or annual recurring revenue. In 2012, they reached 2 million users, and in 2014 they hit 5 million users and ended the year just under 8 million users. And what's the big lesson from all of this? During the entire time, that entire ascent, Mailchimp did only one thing extremely well. They made smart decisions to pour fuel on the fire of a great product that helped hundreds of thousands of small businesses send emails. Now, there was one other thing they did to pour fuel on the fire beyond just going to freemium, and that was they were an early mover in podcast advertising. Obviously, you're listening to a podcast right now. Podcasting as a medium has definitely matured over the last few years, but back in the 2010s, podcasting was an extremely nascent medium for content and it was an even more nascent channel for advertising. Well, Mailchimp was early on that train and they were the first advertiser with Serial. Serial is what I consider to be the creator of podcasting's renaissance over the last 5 years. And not only did the advertisement with Serial blow up because Serial was an absolute smashing success, probably the most successful podcast of all time, but also because of the copy that was read during Mailchimp's advertisement. This advertisement became notorious because the person who did the ad read mispronounced Mailchimp as Mailchimp. It ended up getting a ton of press on late-night TV shows, and Mailchimp ended up literally registering Mailchimp.com to redirect to Mailchimp.com. And so that's the second big lesson from Mailchimp's ascent as a business, is that they were relentlessly focused on email as a product before doing anything else. And making smart decisions to pour fuel on the fire of getting their email product into the hands of millions of small business owners. Now, time for lesson 3. This is less about Mailchimp's success as a business and more about one of the key challenges that any entrepreneur faces while building their business. With the announcement of the deal where Mailchimp sold to Intuit for $12 billion, there was a ton of chatter on social media about Mailchimp's payout and how employees were being compensated versus how the owners of the business, Ben Chestnut and Dan Kurzius, were being compensated. And so just to give you a quick summary, here's what happened. Ben Chestnut and Dan Kurzius each own 50% of Mailchimp. In 2008, Mark Armstrong, the other co-founder, was bought out of the business. $300 million was given to employees as bonuses for the deal, and $200 million worth of restricted stock units was being issued buy into it to Mailchimp employees. So $500 million total in what I would call employee retention bonuses was part of the deal. Beyond that, $11.7 billion was paid out in stock and cash evenly to the 2 owners of the business, making Ben Chestnut and Dan Kurzius multibillionaires, each worth approximately $5 billion. Any time you have an outcome this big, And any time you have an outcome where there are a few billionaires versus hundreds of millionaires, people absolutely feel a certain type of way. So on one side of the debate, you have the people that are really frickin pissed about this. They think it's selfish and unfair that 2 co-founders own the entire business and are about to be multibillionaires without any employees having skin in the game after having created value, this much value over the last 20 years. And some people would argue it's a huge loss for Atlanta because Atlanta is not known as one of the top-tier tech hubs. This is where Mailchimp was founded and is still headquartered. And people would argue that if this deal was more equally distributed across employees, it would lead to more businesses being founded by ex-Mailchimp employees in Atlanta and also ex-employees or current employees just willing to angel invest in the Atlanta ecosystem. And so this is what we have in one camp is people who just say a few people got too rich and not enough people got rich enough. But then there are other people that don't understand why people are pissed. One reason is because Mailchimp has participated in this concept of profit sharing for years. So if you go to Mailchimp's website, they talk about this idea of up to 19% of employees' annual salaries being put into their 401 each year, and hundreds of millions of dollars have been contributed through this profit sharing program over the last several decades. And the other major point here is Mailchimp is not a venture-backed business. And what does that mean? Well, typically when you raise venture capital money, you are going to be expected to raise more venture capital money. And as you raise more and more money, there is opportunity for owners and employees of the business to sell some of their shares. That's called secondary, to sell some of their shares and cash out. But the issue is, is as a bootstrap business, you oftentimes don't know if you will sell or if you want to sell in the future. I know that was the case for Morning Brew in the early days of the business. Austin and I had no interest in selling, and we oftentimes talked about this concept of Morning Brew being a lifestyle business that we'd be involved in for the rest of our careers. And let's just say if Mailchimp was planning to be a lifestyle business, one that Ben and Dan— it literally would be their first and last startup. Employees would actually be really pissed if they were issued stock or stock options by the business if the company had no interest in selling. And so basically employees would be holding on to stock for 30-plus years with no way to turn it into cash. So where do I stand on this issue of how employees were compensated? I want to give you my thoughts, but first, a quick break. Let's hop back into it. So I think it's impossible to be super convicted here without having the context on how Ben and Dan thought about their business for most of Mailchimp's existence. If they thought about it as a lifestyle business that had a low probability of selling, then I think it makes total sense that they didn't issue restricted stock units or stock options to employees because employees would have never been able to actually turn that into cash. But if, on the other hand, they thought there was a good chance of selling and they decided not to give out stock because they didn't think they had to, given Atlanta has a less competitive talent market and that's not what's required to hire employees, Well, that's a different story. My guess is it's somewhere in the middle. And ultimately, I don't think we can penalize the founders without knowing the answer to that question. But I do think that giving out post-acquisition bonuses is absolutely the right thing you do. You need to thank your employees for creating billions of dollars of value for you personally, but also for the business over the last 2 decades. We can have a whole different conversation about if the bonuses that Mailchimp decided to pay out was done in the right way. So, for example, these bonuses are being paid mostly over 3 to 4 years to incentivize employees to stay. One could argue that you should just pay employees upfront for the work they did rather than bonuses for keeping them. But that should be a totally different Founders Journal episode on how to compensate employees correctly. So that's the, the whole conversation about were Mailchimp employees and owners compensated? And I think it's a really tough question to answer, but it is one that is brought up in every business, both from an employee and owner's point of view. Now, the 4th and final lesson in the Mailchimp story is the acquisition. Does this acquisition make sense? Did it make sense for Intuit to pay up $12 billion for Mailchimp? And does it make sense for Mailchimp to sell itself after 20 years of operating independently? Well, first, what is the vision that both of these companies had? What Intuit said is they want to build an end-to-end customer growth platform for small and mid-market businesses, allowing them to get their businesses online, market their business, manage their customer relationships, benefit from insights and analytics, get paid, get access to capital, pay employees, etc. That's what Intuit said. So basically to become the full-stack provider for small businesses. What Ben Chestnut, Mailchimp CEO, said is by joining forces with Intuit, we will take our offerings to the next level, leveraging Intuit's AI-driven expert platform to deliver even better products and services to small businesses. I think this acquisition makes sense. I definitely think it makes sense from Intuit's perspective. There are 2 reasons for that. One is I kind of think of it as an opportunistic buy. If Intuit believes that Mailchimp is on the way up, its growth is continuing to accelerate, which it appears that it is. It looks like it's going to do $1 billion in revenue this year. And if Intuit just wants to buy the company's stock in the same way you want to add a company stock to your portfolio as a retail investor. It's simply an opportunistic buy that Intuit is doing. But then there's a second reason, and this is the more strategic reason. This is an accretive buy for Intuit. Intuit sees this opportunity to own the full suite of products that small business owners need to be able to operate and grow their business. And so the best analogy for thinking about this Intuit acquisition is Them buying Mailchimp is to SMBs what Salesforce buying Slack and other companies is for enterprise. Basically, Salesforce has been trying to buy the full stack for enterprises to be able to grow and accelerate, and Intuit with QuickBooks, Credit Karma, Mint, TurboTax, and now Mailchimp is building the full stack solution for small businesses to be able to operate and grow. And so what does that actually mean to be accretive? Well, I'll give you one example. Cross-selling. Now with millions of Mailchimp customers, so paid customers who are small business owners, now Intuit has the ability to target any of those millions of customers to sign up for any of the other brands under the Intuit portfolio. So say Intuit says, hey, every company needs to manage its finances and hey, we own QuickBooks. Let's send a dedicated email to all of our Mailchimp customers once a year to convert our Mailchimp customers to QuickBooks. That is something that is possible that wasn't possible before the acquisition happened. So those are the 4 lessons that we can learn from the Mailchimp story. First, it was impossible to kill these relentless founders. They did everything to navigate all the challenges that were thrown their way from the dot-com crash to 9/11 to simply their consulting business not working and pivoting to an internal tool that became their core business. They never lost focus while continuing to be ambitious. And we can learn lessons as founders and employees based on the way that employees were compensated based on the deal. And if an acquisition like this actually made sense. What an amazing story this is. Mailchimp is an absolute monster. It sends 1 billion emails every weekday. It did $800 million in revenue last year and is on track to cross $1 billion in revenue this year with 13 million users, 800,000 of which are paid. This is just an amazing story for a bootstrap business, typically a type of business that wouldn't be covered in mainstream news. And for us as business builders and professionals, We can learn so much through Ben Chestnut and Dan Kurzius's story. As always, I hope you enjoyed listening to Founders Journal. I've mentioned it the last few episodes, but this show is on absolute fire. We are going to nearly double this month after nearly doubling last month. And the number one way that we can keep this momentum going for the show is through reviews. Reviews are the number one way to get the algorithms of Apple and Spotify spinning. I think we're currently at 694 reviews. So if you get a second, please leave a review on Apple Podcasts for Founders Journal. My goal is to get us to 750 reviews over the next week, and if we do, I know we're going to grow the show even more. And finally, if you enjoyed the episode, please share with a friend that you think would love to use Founders Journal as a tool for thinking better in order to build better. As always, thank you Thank you so much for listening, and I'll catch you next episode.