Deal of a lifetime

How a New Zealand internet entrepreneur took on a global giant — and won. By EMILY ROSS

Summary: At just 30 years of age, Kiwi web entrepreneur Sam Morgan has already made the deal of a lifetime. In March 2006, he sold the online website Trade Me for $617 million to Fairfax Media. Morgan took on the global giant eBay on his home turf — and won. Here’s how it was done.

While eBay remains the world’s dominant online auction site, this is not the case in New Zealand. An estimated 60% of all website visits in the country are to Sam Morgan’s creation, Trade Me.

Typically Trade Me will have 600,000 items for sale compared with eBay New Zealand’s 14,000 items. Based in Wellington, Trade Me is New Zealand’s most popular shopping website, with more than a quarter of the country’s 4.1 million population registered with the site. With 48 employees, it has diversified into car, property, dating classifieds and map services.

As a child, Morgan had been dragged around Wellington’s garage sales and auction rooms by his mother, so from an early age he had a sense of people’s passion (and addiction) to bargains and the community spirit among traders.

He combined this understanding of trading with his theory that the web is a place to hang out and do stuff. “A lot of people don’t get it yet, that [the internet] is a community,” says Morgan. What Morgan did was create an online space where New Zealanders wanted to hang out, grab a bargain and connect with other Kiwis.

Morgan launched the site in March 1999. He bought a server on his credit card and connected it to the internet in his father’s office. “It was nothing special,” says Morgan, “just a PC connected the internet running a web server and a simple database.”

Start up costs were an estimated $A12,000. While Morgan was developing the Trade Me site, he kept his day job as a technology consultant at professional services firm Deloitte. He worked nights and weekends on Trade Me from home.

When Trade Me first went live, there were no fees for buyers or sellers. Morgan wanted to build subscriber numbers first. He started with 20 subscribers, all friends and family.

“On day one, you don’t have anything for sale and you don’t have anyone — you’ve got no buyers and no sellers,” says Morgan. “So you’ve got this really long organic growth path and you have to get up and that’s really the main barrier to entry in this space.”

Morgan deliberately avoided advertising. “I think our brand is defined by our community,” he says. However Morgan was known for his letterbox drops, office emails and driving around Wellington in a bright green Holden with Trade Me written on the sides, hoping to raise awareness of the site.

It took five months to build a subscriber base of 1000.

According to Morgan, the best way to boost subscriber numbers is to focus on the website. “Make it kick ass, and people will tell their friends. Everything else costs more money than you get in return for a business like Trade Me where the customers are, individually, worth very little.”

Rewriting the business plan

There was a major flaw in the early business model of Trade Me. Morgan had predicted that internet advertising would be an important revenue stream for the site. (He was about six years too early for that to happen.)

Without decent revenue, the business was looking precarious. Morgan had to change the fee structure, first introducing fees for priority listings, bold headlines and images. Soon after, in September 2000, a success fee was introduced with fees ranging from 1.9% to 5.9% depending on the item and the sale price.

Morgan found the cash the business needed by selling 50% of the business to a local venture capital group AMR & Associates (now known as Movac). He secured funding when the site had only 1500 subscribers.

Movac, which included former colleagues at Deloitte, paid $NZ75,000 for the shareholding (which would be worth $NZ350 million in less than six years). The cash allowed Morgan to leave Deloitte, find an office and concentrate on Trade Me.

Trade Me only had two main rounds of funding, from the same set of investors. “We weren’t raising much money and never really put together a big business plan to raise funding,” he says.

“It was more a case of ‘shit, we have got no more money. Shall we put some more in?’,” says Morgan. “I would take no salary, investors would put in a bit more money and we worked off a valuation made up on a whiteboard quite quickly.”

Two-and-a-half years after the site launched, Trade Me became profitable. The site went from 6000 auctions a month in March 2000, to 250,000 a month in 2003. New Zealanders were hooked. Revenue figures followed the same pattern, with four successive years of annual revenue growth of more than 1000%.

Expansion plans

Trade Me branched out, creating spin-off businesses including a dating service FindSomeone, a site to track down friends called OldFriends, a site to handle Trade Me transactions called SafeTrader, and online map service, smaps.

All these sites are easily accessed through Trade Me. Morgan also introduced property services on to the site in 2005. Within a year it could boast listings for one third of all property for sale in New Zealand.

In the same year, international buyers and sellers were banned from Trade Me to cut down on risky transactions – a huge drawcard for locals afraid of being ripped off online. Only Australians with a New Zealand bank account are exempt from the new rule. The next market for Trade Me is Trade Me Jobs.

Morgan will stay at the helm until 2008 as part of the Fairfax deal. He intends to concentrate on strategy, pricing, senior management coaching, recruitment, key site metrics and user interface design.

He has also begun investing in technology businesses in New Zealand. The Fairfax Media deal made Morgan and a group of a dozen early investors, including his parents, sister Jessi and long-time business partner Nigel Stanford, multi-millionaires. His share of the deal was $200 million.

While Kiwis were astonished at the sale price, the New Zealand Herald rightly points out that the sale price is 15.6 times its projected earnings in 2007. On a good day, Google is valued at 75 times its earnings.