Start Up to Exit Case Study

By Angelika Burawska.

PhotoBox, an online service for printing, storing and sharing digital pictures, was founded in 2000 by two friends, Mark Chapman and Graham Hobson. Over the years, the company grew to be Europe’s leader in personalised product printing being present in 19 countries with over 31 million active members. Customers can choose from more than 600 personalised products ranging from photo books, calendars, smartphone cases and other accessories. In 2009, the company acquired Moonpig, UK’s leading online greeting cards retailer, and became the PhotoBox Group. Two years later, they introduced two new additions to their portfolio: Sticky9 and PaperShaker. Sticky9 is an online printing service that enables its customers to turn digital Instagram pictures into high-quality products. Mark Chapman, one of the fathers of this successful business talked about his journey in an interview with Start up Funding Club’s COO, Angelika Burawska.


What did you do before you and Graham Hobson founded Photobox in 2000?

We met when we were both working in the city as dealing room technologists. I was working at UBS and Graham at Barings. UBS hired him to do some derivatives trading technology work, so I ended up being Graham’s boss. We worked together at UBS until I moved to Merrill Lynch. Then I pulled him across to work there as well, so I wasn’t his boss once, but twice.


Funding the business was the very beginning. How did you do it? Did you bootstrap or did you get a loan? What were the first two years like?

We did an EIS round of about £500,000 on day one and it took us three days to close the deal. It was extraordinary. But you have to remember that it was 1999, it was an extraordinary time. There was an expectation and a vibe between the US and the UK – “startup fever”. It was a gold rush. At the time, the banks employed the smartest kids out of college, the Oxford graduates, and they were facing an exodus of people doing startups. It was kind of a phenomenon that people would quit every Monday morning because they were going to do a startup. They had seen LastMinute, Amazon, eBay and all of these massive successes. There were a hundred or a thousand wannabes behind those big plays coming through all the time and everybody wanted to be on board. So if you were a technologist, you could build a web server and if you came up with a dematerialised business to the extent that you didn’t need anything pesky like production or fulfilment, you could get a business up and running in moments. And there was capital looking for a home to back these plays.


So did you raise from your peers in the city?

We did, yes. And EIS was the key, because it was a very easy pitch. Typically, we were addressing people who would individually chip in £25,000 or £30,000 which, on a city salary with a bonus, wasn’t a great deal of money. They would be people we knew or people we had worked with or were still working with. For them it was a pretty efficient tax strategy and money that they could afford to lose. Not to say that they thought they were going to lose, but it was ridiculously easy.



So it looks like fundraising wasn’t the biggest challenge. So what was it, back then at the very beginning of the startup phase?

The biggest challenge was the same challenge everybody has. Unless you’re very lucky, it takes an age to build a viable business. Our first day trading, we made £1.42 and on the second day, it was probably £2.42. We kicked off the development work in December and we were live in April. We had one website, one printing machine, about three products and that was it. So the challenge was to build a business which would pay for technology, premises, printing assets and all the rest of the physicality of the business when your average basket was £5. Unlike ringtones or some other electronic product, we had physical products that needed to be paid for. We were kept up at night by questions like ‘How are we going to get customers?’ and ‘How are we going to close that gap?’. That didn’t go away for another three or four years.



So you raised a little bit of funding?

Yes, we went back to our existing investors and raised another £50,000. The first years of PhotoBox could be characterised as a slow, but successful proving of the business model. We dropped our ambitions in terms of time scales and growth about 18 months in and that was the last month we ever made a loss. Afterwards, we didn’t raise anything until the next big corporate event, when we merged with PhotoWays, a similar business based in France in 2005.


So what was the game-changing moment for PhotoBox? Was that the merger or was there something else that made it finally profit making business or a business that took off?

When we became a small business, we ratcheted down. As soon as be became series A, we had the backing to aim higher. But the actual transformative event was a court case in 2003. AOL broadband and Dixons took British Telecom to court, because British Telecom had a monopoly over the telecom infrastructure. They controlled how quickly high-speed internet was being rolled out and to whom. They were obliged by government law to allow that service to be repackaged and sold through third parties, but they were very slow and very negative towards those trying to retain and control the monopoly. So British Telecom was taken to court and lost. At that point, it became much easier for third parties to sell broadband. That was unbelievable at the time, so it became one of the fastest roll-out phases of the UK internet. Everybody bought it. Dixon’s and AOL were selling it for £20 a month and you’d get ten times the speed you got from dial-up overnight. That transformed our business, because suddenly, you could upload 50 pictures in 20 minutes as opposed to 2 hours.


So you noticed that sales changed at the same time when broadband came?

We did more than that. We actually made white label deals and partnership deals with many of the broadband providers. We were paying for customers through a pure revenue share model. We didn’t pay for customers unless we got an order, so we were in heaven. And of course, that supercharged our acquisition. Those deals ran with an explicit co-label. Everybody knew it was PhotoBox, so lots of people were introduced to the brand and subscribed direct. Best deals we have ever done. So about three years in, in 2003, everybody knew it was going to work. From 2003 to 2005, we got to series A on the back of really solid metrics. We merged with the French business, PhotoWays, and together we made a deal with Index Ventures and Highland Capital, who are both really great early-stage investors.


So now, we get to the point where PhotoBox has enough muscles to acquire other businesses. PhotoBox bought Moonpig and the number I found was £120 million. Was it PhotoBox’s strategy to acquire or was it because investors were expecting it?

Well, first I should say that we hired a CEO when we made the deal with Index and Highlands in 2005. We hired Stan Laurent, who had already done an IPO and who was very familiar with the European consumer business. He had worked in Spain, Germany, France and the UK and because we had the ambition of becoming a Pan-European business, it was a no-brainer, really. It was probably one of the best decisions the firm made, and we enjoyed working together from first to last.  In terms of strategics, part of that European buildout process was to acquire, yes. We looked a lot at potential businesses all over Europe and we bought a couple of databases and failed businesses. But the big deal that got us noticed was Moonpig. Even though we had known Moonpig for years, we never expected it to be our first big deal, to be honest. Graham and I knew Nick Jenkins [CEO of Moonpig] and we had talked about the combination over a few beers a few times. But we didn’t get it done until 2009. The thing about the Moonpig business, and Nick won’t mind me saying, is that is was very profitable and therefore very expensive. So it would have been completely beyond the reach of PhotoBox without backing. The good thing about Moonpig however was that because it was so profitable, we could do it partially on debt. We didn’t need to do it all on equity.


Was there a mistake that you think the company made but could have been avoided?

The one thing you will always hear me say is that we were utterly naive during the first 3 or 4 years on customer acquisition. We thought that if we just offered a good service, the web would provide a viral way of bringing customers to us. Even though it worked enough for us to think it was working, it really didn’t. We didn’t look at customer acquisition as an actual strategy for four years, maybe because we weren’t serial entrepreneurs, or we hadn’t gone to business school. We weren’t digital marketers – we just kind of winged it. But if we had taken just a moment to invest in customer acquisition in the early days of PhotoBox, the business would have been bigger in 2005 when we did the series A. And therefore, we’d have been valued higher. When we merged the businesses together, it was about 50-50, which was nice. The French business was growing faster, but less profitable and we were going slower but more profitable. When I look at startups now, I always look really hard at their customer acquisition models and their sophistication in terms of how they think they are going to get customers.



Was exiting the business in your mind from the beginning or did that idea come later?

Graham and I always thought that PhotoBox was something we weren’t going to hand over to our children, but we were in no hurry to sell. We had a lot of fun and we were working with people we really liked working with. We had in our mind that we needed to exit at some point. I think we were always confounded by the fact that it just wouldn’t grow as fast as it needed to grow to get the most optimal price. After all, you need a very profitable business which is growing fast to have a successful exit. We would grow with 25% to 30%, which is not bad for a physical business. But we were turning over €300 million or €400 million at the time, which was not enough to really pile in with the great exits. So it was nearly there, but we never got to the deal that everybody wanted to get until, eventually, we did of course.


How did the exit process look like? Did you make the decision to look for potential buyers yourself or did they approach you? And how long did it take?

Because of the seasonal nature of the PhotoBox business, there was a window that you could consider an exit after we got our Christmas numbers in and before we got too close to Christmas to make it too risky to make a deal. We had three or four months to get a deal before we would be into the next Christmas cycle with new uncertainty. We had been considering it for two or three years. It was almost entirely done through intermediaries, like banks, which were introduced by our venture capital partners and investors. They would prepare the data room and the prospects and all the required data that potential buyers want to consider a purchase. They also did the screening process, found the really interesting guys and they dealt with the capital markets people to figure out whether you got an IPO prospect and what that might bring. We were typically using the A-list banks and they would deal a fairly confidential process of looking at trade sale, recap via private equity or IPO. And we kind of considered the prospects of doing that until there was enough traction on the market with a 100% recap. It was just a question of getting to the level where everyone was satisfied with the deal.


So all shareholders were on board?

Yes, they were. There were three levels of shareholders. The founders and management, the Series A round,  and the series B round, who came in with Moonpig. The founders were really happy to get out, the series A-investors were happy, because they entered at a pretty low level.  The series B investors were always looking for a higher number, but it was alright for them. And then of course, you’ve got the other side, the buyers. They want to buy as low as possible, because they want to get a multiple for the next phase in business. It’s just a matter of closing the gap, which Electra and Exponent did for us.


In your opinion, what are the biggest mistakes that entrepreneurs make in business and in front of investors?

The biggest mistake I see time and time again, is that people overpromise. I saw yet another one today. They’re three years into their business and did £90,000 worth revenue last year. They are planning £235,000 worth of revenue this year and £23 million next. Even if you’ve got a solution to turn lead into gold, this is just not going to happen. I think that entrepreneurs feel like they have to produce those kinds of metrics in order for investors to invest. But I can’t figure out whether it’s their fault or the investor’s. I’d rather see a rational plan over time than somebody promising me massive riches tomorrow, which I just don’t believe. But at the other extreme, if investors think that being five years in the businesses and only being at £2 million sales dictates a ridiculously low valuation, then entrepreneurs get disincentivised to raise and talk to investors. But making unsustainable promises which are doomed to disappoint, will only lead to bad relationships with investors.


The last question then: If you could give one piece of advice to budding entrepreneurs, what would it be?

Patience. Very few founders get rich in five or ten years. So I would tell them to be patient and to do something they enjoy, because they’re likely to be doing it for a long time.