Rotten Tomatoes Founder: How His Startup Survived the Last Market Crash — Because It’s About to Happen Again

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Our generation’s entrepreneurs could really use some wisdom right about now. A financial crisis might be looming and young entrepreneurs today were probably in middle school when the last one hit — we grasshoppers clearly haven’t learned.

That’s why we have masters like Patrick Lee. Patrick Lee is the co-founder for the movie review site Rotten Tomatoes; he was also a Silicon Valley entrepreneur during the dotcom market crash of 2000 and remembers it very clearly — most importantly, he survived.

Like most successful entrepreneurs today, Patrick began in college. He attended UC Berkeley first as an electrical engineering major, then computer science, then business before finally landed on cognitive science by his second year. However, Patrick wouldn’t finish his degree for literally another decade.

Interestingly, when it comes to similarities, college during Patrick’s day wasn’t very different to the declining value of college degrees today. Like many entrepreneurs, Patrick asserted he’s never used his college degree.

“I think for me, college is also just more to learn to be on your own and from an entrepreneurial standpoint, what I tell people is it’s the single best place to find a co-founder. You look at tons of these big companies like Facebook, Google, Yahoo and PayPal, and it’s usually buddies from school.”

It was with friends he met in school that he began his life as an entrepreneur.

“The first company I did with some friends was actually this company called Human Ingenuity, and we were just selling computer systems and components. We would just literally take the orders and drive down to San Jose, buy the parts and then come back.”

Like most young entrepreneurs and their first startups, the company failed, but in their first attempt they lived through the first rule of entrepreneurship — just do it.

“It wasn’t good business, it didn’t go anywhere. I think we were just impatient; we just felt like school is so slow and we wanted to just get out.”

Patrick soon found himself balancing classes while running his various businesses, like his web design firm Design Reactor. By 1998, he was focused on growing his next company, Rotten Tomatoes, and pushed school to the side as he dedicated himself to business. After he sold Rotten Tomatoes in 2004, Patrick finally finished his degree and went off to Asia to travel and explore business opportunities, only recently having come back to the U.S. for business.

We had the pleasure of meeting up with Patrick during his visit to Los Angeles, where we discussed what he thinks about Silicon Valley’s culture now, the stock market crash of 2000, what his company had to do to survive and the crucial lessons he learned during hard times.

The Culture

Having been in the Bay Area during the internet boom, going abroad for nearly a decade, and then coming back to find Silicon Valley completely transformed, Patrick has a unique perspective on how Silicon Valley has changed since the earliest days of Google and before Steve Jobs introduced the first iPod.

“My observation is the Bay Area, it’s like Hollywood now. You know in Hollywood how they say every waiter is trying to be an actor or director or they have a script in their back pocket? That’s the Bay Area now, except with startups.”

HBO’s “Silicon Valley” did well to highlight the trend. Entrepreneurship and tech has become a bandwagon — one that not everyone should be jumping on.

“Some of these people probably should stay and do what they should have normally done. I feel people now are much much more focused on the numbers. They’re always talking about term sheets and valuations and stock options and they’re just too focused on the money.”

Even though he is completely right, Patrick admittedly sounds like an old man with his next point.

“It’s like they want to be Zuckerberg because they want be a billionaire, not because they want to make something like a Facebook. And at least in our old days, I feel like people were focused more on making a product, like making something cool.”

And when it’s not about the thirst for startup money, young entrepreneurs are quick to play the “it’s about who you know” card.

“ I see a lot of people who come to me and they’re like, ‘Hey, can you introduce me to VCs or angels or whatever,’ and they’re at maybe a prototype stage or an idea stage. And I’m like, ‘No, just go out and do it and show if you can actually develop a product that gets any kind of traction or traffic or revenue.’ Then, it’s going be much easier for you to go and raise money, because a lot of these guys, if they went out and tried to pitch a VC, they’re way too early and they would get ‘nos’ from 99.9 percent of those people.”

Not only would it make someone like Patrick look bad if he referred an amateur entrepreneur with an undeveloped product and no revenue to a VC, but what happened to actually working to grow your own company? This is inherently one of the greatest problems Gen-Y entrepreneurs face. Though it’s for the best, our generation is about to get a harsh wake-up call.

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The Crash

The turn of the century saw the explosion of the internet industry. Stock prices soared, there was high market confidence that many companies would turn huge profits, venture capital was widely available, and money was being thrown left and right at companies without investors’ due diligence in their viability. Sound familiar?

These are the same conditions the startup and tech industry find themselves in right now. Recently, Silicon Valley’s top investors are alarmed at the new startup bubble that could be about to burst. Venture Capitalist Marc Andreessen, along with several others, have been issuing warnings, especially for the multi-million dollar startups in their portfolios — many bet they will become successful, but some have yet to turn a profit and still suck up millions in funds every month.

Patrick recounted what happened during his generation’s bubble — where many companies died off, Rotten Tomatoes was able to weather the storm, but not without great sacrifices.

In March of 2000, the dotcom bubble burst and the stock market crashed. Many companies failed completely, stocks in others fell by fatal percentages, and roughly $5 trillion in the market value of companies was lost. Amazon’s stock fell from $107 a share to $7. Rotten Tomatoes, at the time only a year old, saw the industry collapse all around them.

“We had identified like over a hundred competitors that were in entertainment, video reviews, etcetera, and it went down to less than 10 within a year or two — everyone went out of business.”

This signaled the beginning of the startup “Hunger Games” as young companies of the dotcom industry struggled to survive.

“You were bootstrapping — I was sleeping under my desk for six months. And when we did it, I think a lot of it was just trying to do something with friends and doing something we thought was cool.”

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The Struggle

Patrick elaborated for us the struggles of managing a business in a down market. Even though Rotten Tomatoes was venture capital-backed, he quickly realized changes would have to made quickly — not surprisingly, these changes mirror exactly what Marc Andreessen has been warning VC-funded startups to do recently.

“We raised a million from angels, but when the market crashed and we have twenty-something people, we just knew there was no way we were going to survive, so we had to cut down to fourteen, then eleven, then finally to seven.”

Downsizing staff is one measure startups that experienced “funded growth” have to take. For the workers they had to let go, Patrick and his co-founders let them go “in a nice way” and even allocated equity to them before they left.

“We told them like, ‘Hey, go find a job first,’ and we essentially employed people until they got a job so no one had a gap. But then even when we were seven, we still weren’t breaking even, we were still actually burning money, so everyone had to take a pay cut.”

Cutting costs at every corner is inevitable to survive. Everyone took a 30 percent pay cut — 100 percent in Patrick’s and another founder’s cases. Patrick then looked at his expenses; his high monthly rent was weighing him down so he got rid of his apartment and moved into the office.

“I moved everything because we had so much space. I just took three cubicles and hid my clothes and stuff in the drawers and just had a foldable bed …  at night you just roll it out and go to sleep.”

 

“Even if  the security people came through and they looked in and sometimes you’re there, you just go, ‘Oh I’m pulling an all-nighter or whatever.’ It’s like you work late and you get in the office really early — no one can tell.”

While Andreessen would advise entrepreneurs to avoid the expensive company office, in Patrick’s case their huge office really came in handy until Rotten Tomatoes could get back up on it’s feet.

“We just had steady growth and every month or every quarter you look at it you’d be like, ‘Okay, traffic’s bigger, our revenue is bigger.’ After all the cutting, we eventually got to a point where we were breaking even, we can just keep growing, growing and growing.  And when the site or their company is constantly kind of growing, it fixes everything else.”

 

“We sold it in 2004. This was  when things were getting better but Google had not gone public yet so the market was recovering, but not like as huge as it is now.”

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The Lessons

“I would say one thing I realized was I used to say that you can never fail until you give up. So as long as you keep at it, eventually, hopefully, you will succeed.”

Tons of entrepreneurs hear the kind of advice that tells them to blindly follow their passion, to keep working hard and that eventually they will make it. However, Patrick realized that blind faith and hard work alone don’t always cut it after a few failed ventures in Asia. Sometimes it’s just not meant to be.

‘“It’s like in poker. It’s skill and luck. It’s not just one or the other. Some people have a great company, they think it’s all skill, but no, a lot of it is luck.”

 

“I think that’s the biggest thing I realized — it’s both. If you’re an entrepreneur and things are going bad even though you’re working really hard, sometimes it’s not your fault. I mean, sometimes it’s just wrong timing.”

Patrick gave us the advice that you can’t always predict what’s going to be big, but getting creative, trying a lot of different ideas, and trial and error are the best, and only, ways to go. If you are going to work hard, you have to at least work smart too and hopefully you get lucky on the way.

We then asked Patrick what he thought the most important factor in managing a company in an unforgiving market was. His answer was simple:

“So generally you see people tell you about [company] culture and all that. That’s important. I mean, definitely have a good culture, have good benefits, etc., but at the end of the day, the most important thing is to just grow. If you’re growing, it would solve everything.  If you grow too fast sometimes you end up suing each other like SnapChat or Facebook or whatever weird things, but that’s a rare case I think.”

Focusing on growth cures all: morale, profits, industry stability and company culture.

Lastly, we asked Patrick what his plans are now that he’s back in the U.S. Just like in the good old days, he’s partnered with some friends for a startup they think is “cool.”

“So we’re doing one now, it’s called Hobo Labs, and we thought it was a funny name because when we were travelling, both of us weren’t working and he would always say that we were kind of like hobos and stuff.”

 

“We raised some money from some VCs and angels and we’re trying to make mobile games where people are actively playing with their friends and trying to get their friends to play more.”

Sometimes the old ways are best and doing something that you genuinely love with people you like to work with can be the simple key to success.

Photography by Melly Lee

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