Interview w/ Patrick Spain, Chairman of Hoovers, Inc.

You’re welcome, glad to be here.

Well, we are an eleven-year-old company, and our original vision was that we wanted to make business information available to everyone – literally to millions of people. That may seem pass? today but in 1990, if you wanted to find information about a company, or an industry, or a company leader, it was very difficult to do. Companies such as Standard & Poor’s and Dun & Bradstreet had this information, but sold it generally for hundreds of thousands of dollars. They also sold it to a very small group of people, typically financial services companies and people at the elite levels of large corporations. So salespeople, marketing people, small and medium-sized business, students, job seekers, and individual investors really had limited access to information about companies, industries, and people.

Our goal, using mass distribution, was to change that – to make this information widely available to everyone. Our founder, Gary Hoover, who also started the BookStop bookstore chain, now part of Barnes and Noble, believed he could do that through books. He called me asking me to invest in this idea. I liked the idea but believed that electronic distribution was the future. I was particularly fascinated with a small emerging online service called Q-Link, which I thought was pretty interesting and ran at the then speedy rate of 300 baud. It had news and chat, and was oddly compelling. I had been using it for a number of years along with Prodigy and I thought that between the two, Q-Link was going to be the winner. So I mentioned to Gary that, if he wanted to provide this company info to millions of people, then an electronic delivery system was the way to go. Little Q-Link is now a slightly larger company called AOL Time Warner. So it turns out that after a few years Gary said, “you were right,” and we signed up AOL, CompuServe, AT&T, Microsoft, and everyone else who was creating a proprietary online service. That was working well between 1993 and 1995. Then in 1995 the Internet came along and we said “This Is It” — this is the way we are going to reach millions of people.

By 1990 we were seeing the democratization of information across all areas of expertise. For example medical information and information about computers had been demystified for people who were taking control of all aspects of their lives. But in 1990 no one had taken on business information. So we decided to do so. We believe that we were among the first enterprises to lead in democratizing the availability of business information to millions of people. And this was long before the Internet made this possible.

We do it the same way that a reasonably educated researcher would. Say you were a graduate student, an MBA student, or you were working at a company and your boss said, “Find out everything you can about the sale of soft drink products in Turkish Cyprus.” We go to the Web, we go to proprietary services (we subscribe to most of them), and we go to books and magazines because so much of the world’s information is still locked up in print and not yet digitalized. We do what anyone would do, if they had 20 to 30 hours to research a topic. We then synthesize and analyze this information for our users, and in about 2 minutes they have access to and can absorb the information that they need. We also keep this information updated on a minute-to-minute basis, so it’s like having constant research being done in the background for you. You know that if you looked at Motorola a week ago, and you look at it again, that any relevant changes that need to be made have been made.

Public companies provide annual reports to us; for private companies we have to do a lot more work on the telephone and in trade journals. And although historically private companies have been hesitant to provide information, lately we have seen a surge in private companies providing more and more information to have truth disseminated about them rather than rumor. Companies such as Cargill, which is the largest private company in the world, now publish quarterly financial results. That is the overall trend. They will tell you what their revenues are; they will tell you how many employees they have. They may not tell you their net income as Cargill does, but they are revealing a lot more.

Initially, it is very labor intensive. We have more than one hundred writers, editors, and researchers who do this for us. But very much like software, you have a large number of people who labor for a long time to create the base software package. Once that software is created, it has a very stable, predictable cost structure to maintain and upgrade it. These hundred people can maintain the nearly 20,000 companies that Hoover’s covers for a cost that doesn’t change on an annual basis, except for the change in the cost of living. So the more users we can attract to that information and sell subscriptions to, the better our gross margin. The profit on the last dollar sold is very high. One of the reasons that we have been unprofitable for a number of years is that we invested heavily in both our database and in acquiring new users. We will finally reap the benefits of this investment this quarter, as we reach EBITDA profitability. What has happened is that our revenue has caught up with our investments in technology, infrastructure and people.

We have also been very focused on the content within our database. That is the driver for our success. The Internet allows you to take whatever it is that you can add value to, in our case telling a company’s story or the story of an industry, and then you can arrange the data around that in ways that are extremely useful to people. You don’t have to own the data. We license financial data, quotes, and things like that. For example, with patents, IBM has a wonderful database and we license that information from them so that our subscribers have access to it. This capability is for both domestic and international patents, and then if users want even more detailed information they can then buy the complete patent wrapper through the IBM Web site. We also provide our news content in much the same way. So you see, it is quite scalable and convenient for our members at the same time. Overall, we have a core body of knowledge that we create, which is then complemented by data we receive from our partners.

I find that I am running a very technology-driven company, despite my background. The turning moment in my life was when I flunked long division in 4th grade, and decided I was a word person and not a numbers person. I then began to focus on history. In high school and college I studied Greek and Latin. I stayed away from numbers, and whenever possible stayed away from biology, math, etc. At the University of Chicago I studied ancient Roman history and wrote my thesis on an obscure Roman emperor who reigned for just 18 months, but was very interesting because he was the second emperor after Constantine and tried to reconvert the Roman Empire back to Paganism from Christianity. This was not a popular thing, and he died in battle, perhaps killed by his own men.

Julian, he was popularly known as Julian the Apostate for obvious reasons.

I got out of college with no truly marketable skills, other than I really knew how to do research. I then began asking myself, “Where can a reasonably smart person with no marketable skills get a job?” And thought, “Ahhh, Washington, D.C.” I found a job working for a research company, doing social science research, and from there I began working for a consulting company. At the consulting firm, they weren’t sure that I had enough quantitative skills, so they assigned me to mapping the bankrupt railroad estates of Penn Central and the other railroads that became Conrail. I was sent down to the sub-basement and given one green marker and one red marker. The green marker was to map Penn Central and the red was for Erie Lackawana. They said, “Here are your pens; go map away.” And I said, “Well there’s a problem – I’m red/green color blind, and I can’t do this job.” So they sent me back upstairs and gave me a calculator. Turns out I was reasonably good at numbers and I did that for a while. I veered back again to words when I went to law school. Upon finishing law school I decided that I didn’t think I would like the practice of law as much as applying what I had learned in a business environment. I ended up going to work for a high-tech company, where I could use my legal skills to make the business more profitable and more successful. However, I found I wasn’t able to speak the language of a lot of the people there; it turns out they were all engineers. But in that job, I picked up some understanding of computer programming and finally got over my numbers phobia.

I have always been interested in research and information and in how technology allows you to find it, sort it, and deliver it. When Gary called me I thought it was an excellent opportunity to bring my interests in business, in doing research, and in applying technology to create a more efficient process for this. Since college, I have also been an entrepreneur – running a bus company, developing real estate, and trading commodities. I am interested in lots and lots of things and I believe that is what makes for a successful CEO and a successful employee. You have to have an interest in far-ranging topics, and want to learn about them. When people say, “I’m in Marketing,” or “I’m in Sales,” or “I’m in Finance,” it’s too limiting.

You’re right, his idea really appealed to me. He wanted to mass distribute business information. At the time I was doing mergers and acquisitions for a FORTUNE 500 company. I used Bloomberg terminals and Dow Jones terminals and in the process ran up $10,000 to $15,000 in access charges per month looking for information on companies we were looking into buying. So Gary mentioned that he wanted to provide this kind of information in books at a much lower cost. I told him that I thought the information needed to be much more up-to-date than books could provide. So after suggesting that we use a database to create, administer, and distribute information, he asked me to join the company. It turned out that it was extremely difficult to turn books into a mass distribution vehicle for information that changed frequently. It was also not a cost-effective distribution channel.

That’s an example of where a company failed to make a good transition from books to electronic distribution. Our problem was slightly different. Trade books, those sold in bookstores and which come out once a year, do not allow publishers to keep the information up-to-date enough for the people who need to use that information. The trade book distribution channel is abysmally inefficient, as, unlike virtually all other retail operations, books are returnable for a refund from the publisher in perpetuity.

In the area of business information, it is vital that the information be up-to-date. It’s not good enough to know last year’s CEO or financials.

Throughout my business career, I have noticed that the rate of change continues to accelerate. There have always been mergers and changes in staff, but the lives of companies and their leaders are much shorter these days.

It is the opportunity to take advantage of the democratization of information. Ten years ago I was talking with someone – who is a competitor of ours – about this industry and he told me that we were crazy because there were only about 300,000 customers in the entire world who care about what we do. He was right; at the time there were only 300,000 customers. If you look at most of the companies in the business of supplying information to businesses, their customer base is still in the hundreds or thousands, not the millions. But we saw the need to broaden the definition of the market from 300,000 to the expected 200 million knowledge workers in 2003 who will need, in order to perform their jobs, information about companies, industries, and the people who lead them

One of the challenges we all face is that we have been focused on delivering that information via the desktop. In Italy where we have opened a Web site, less that 10% of the people are connected to the Internet via a desktop, but almost 60% have mobile phones with Internet access. They are also extremely active on their mobile phones – text messaging, playing the lottery, etc., and this is a wonderful market to tap. So we have adapted our service to address the mobile businessperson as well.

Our primary goal is to provide both valuable free and subscription business information for our large audience of businesspeople. Our users tend to be extremely well educated, wealthy, and in higher income brackets. These characteristics make our audience highly attractive to our advertisers.

Nine months ago we had two types of threats; one being the Internet companies such as Work.com, Office.com, and Business.com. They were giving away business information for free and trying to support it exclusively with advertising and e-commerce. Work.com is out of business; Office.com is in bankruptcy; and I don’t know what Business.com is up to. We no longer view them as a threat, because it is clear that a pure advertising model is very difficult, and probably impossible, to sustain. The traditional players such as LEXIS-NEXIS, Factiva, and OneSource continue to sell to a few hundred or a few thousand customers for a lot of money. These folks are having a hard time democratizing their information and democratizing their pricing. If they begin reducing their prices, they then directly cut into their current revenue, while trying to grow broader-based businesses. It is not that they’re unaware of these issues or are not trying to change them; it is that there is no easy solution to this issue. Just as ever more powerful PCs and workstations destroyed the mini-computer market, Hoover’s is destroying the market for high-priced information.

So we find ourselves at a wonderful place in the middle, between these free entities with no viable business model and the high-priced subscription companies with an increasingly obsolete business model.

I am always worried that our competition will be able to surmount their structural problems. A number of our competitors are extremely talented, and I never count them out. We are always on our toes.

We see an evolution in the way that people get business information. The way that the Web distributes information is that it requires the businessperson to come to the information. Increasingly, we see customers wanting highly tailored information sent to them. My own vision of the future is a step beyond this. Applications and information will become one. Outlook, Word, etc., will be the primary interface with information.

I would have moved a little bit faster in the mid 1990s and a little slower in the late 1990′s.

The most obvious way is that our stock is down, which is never good for employees or investors. One of the blessings and curses of our situation is that we were able to go public before we had any right to do so based on traditional standards. That meant we were able to acquire $50 million in capital that we otherwise wouldn’t have been able to get.

The curse, of course, was that we have been grouped with the dot.coms, many of which never had a viable business model. The blessing is that we do have that money and we built our business with it, much more rapidly than we would have otherwise. So we are at a huge advantage to where we would have been, if we had not had access to the money.

Both of these and too much money chasing too many ideas. It was a typical boom-and-bust cycle; they have occurred before and they will occur again. I will say that the boom was based upon a combination of technology and a world-view that has fundamentally changed the way that people behave.

The Internet is the single biggest technologically driven change since the introduction of commercial broadcast television in 1949. It has truly and deeply changed the way we communicate with each other. It has also changed how we do research. But it has not changed two key areas: education and entertainment.

Rapid change occurred when the new “thing” was not competing with an established way of doing things. No one really wrote letters anymore, so we adopted e-mail quickly. Only students still went to libraries to do research, which opened up the Web as a fundamental research tool. It was not changing existing behavior. It was creating a new one.

The problem with education and entertainment is that there is a huge established way of doing both of these. So to use the Internet in these areas requires people to change behavior. This is much harder than getting people to adopt new behavior.

All the nay saying and cynicism that now abounds about the Internet is totally wrong-headed. The Internet is real, and is the single most important change in our lives in two generations.

You have to have a very good idea and execute on it correctly. It just takes a lot of hard work and little good luck.

You also have to keep your eye on the ball. We haven’t been totally surprised by the way things have developed. We hoarded our cash; we still have $30 million. We saw the advertising downturn coming and adjusted our business to accommodate it. We saw it six months before Yahoo!, who apparently didn’t see it coming or wasn’t prepared to admit that it was coming. If you have been around a while you know everything is cyclical. Some folks just thought everything would stay high-flying indefinitely.

In business, you need to be able to see six to 18 months out, but also be able to see 20 years out. I am good at the former. Gary is good at the latter. That is why we made a good team when we were starting the business.

Get as much experience learning every aspect of business: finance, marketing, technology, etc.

A Liberal Arts education.

English and history majors are my favorite majors, not because English and history prepare you for the job, but they do prepare you to be extremely flexible and capable concerning writing and research. Generally, I prefer openness to doing new and challenging things. I don’t care if they are right out of college or have 20 years of experience.

Gary is taking a little bit of a breather from being an entrepreneur and is sharing his experiences with others by giving speeches and writing.