Thomas Heath
Thomas Heath
Columnist

Value Added: Sometimes success comes from running toward a crisis

Chicago mayor and President Obama’s former chief of staff Rahm Emanuel entered Washington lore for — among other things — his oft-repeated aphorism to “never let a serious crisis go to waste.”

Crisis was on the minds of David Wellisch, 41, and Michael Klein, 45, when they launched their start-up, Chevy Chase-based Latinum Network, in early 2009 — in the teeth of a financial crisis at that time.

You were reminded of those days just last week.

Instead of sitting out the Great Recession, which has stifled many entrepreneurs, Wellisch and Klein used the crisis as a selling point to potential clients: You need our product more than ever.

“It was scary,” said Klein, who walked away from a big job at the Corporate Executive Board (founded by Washington entrepreneur David Bradley) to start his own company. But he learned from Bradley that a great idea can be born in a bad economy. “David built his whole business around a better mousetrap.”

Latinum Network is the Wellisch/Klein mousetrap. It is on track to gross more than $5 million this year and, by my estimate, earn a 20 percent profit margin. It employs about 20 people. Wellisch and Klein own most of the firm. Angel investors own the rest.

Latinum helps big corporations tap into the growing Hispanic population in the United States. It has about 80 clients, including such big brands as Procter & Gamble, Unilever, Kraft Foods, DirecTV, Home Depot, Time Inc., PepsiCo, the NFL and the NBA.

The business model— known as a “network business” because it allows its members to learn from one another— is a page out of the Corporate Executive Board playbook: Charge yearly subscription fees in return for research on ways to improve your business.

Whereas CEB covers such subjects as how to improve your company’s human-resources department, Latinum sticks to the narrower mission of how to mine the Hispanic community.

Latinum charges subscribers between $50,000 and $125,000 a year.

I will get to the business lessons and the drama of starting a business in the severe recession in a minute, but first a little background on these two guys.

Wellisch is a native of Ecuador, where his immigrant parents preached education and his father ran a business distributing rope. He attended Brown University and Harvard Business School and cut his teeth on the Hispanic ecosystem as the founder and general manager of AOL Latino.

He made an important discovery at AOL. While 60 percent of non-Hispanic white Americans were using the Internet, only 40 percent of Hispanics were online. If he could boost the rate of Hispanics online to 60 percent, he could make a lot of money for AOL, which at the time was charging $24 a month for access to the Internet.

“It was huge,” Wellisch said. He had 700,000 new subscribers within a couple of years, earning AOL more than $100 million a year in subscriber fees.

“I was fascinated by this trend,” he said, referring to the growing U.S. Hispanic market, which comprises more than 50 million people, or more than 17 percent of the population. He said it is growing at three times the rate of the general population. “It was clear that when companies marketed to the Hispanic community right, it worked.”

He left AOL and in late 2008 met Klein through John Burke, a venture capitalist at True Ventures.

Klein went to Notre Dame and Stanford University’s Graduate School of Business. He worked in finance at Marriott and at Ernst and Young before joining the Corporate Executive Board. He ran the company’s human-resources practice, which earned more than $100 million in revenue. He left in 2007 after 11 years to do his own thing.

Klein’s first start-up — Kairos Networks — was modeled on CEB. It was targeted solely to hedge funds, with the goal of helping them run more efficiently.

Then the financial crisis hit the financial industry especially hard, and Klein closed the company before the year was out and wrote it off.

He and his partners split. Soon after, Burke introduced Wellisch and Klein, thinking their experience and smarts were complementary.

Wellisch had been thinking of taking the Hispanic model that worked at AOL and applying it to other businesses’ “pain points” — a popular term among entrepreneurs that refers to the vulnerabilities faced by businesses.

Wellisch and Klein saw the inability of companies to reach the Hispanic market as just such a pain point, so they put their hypothesis to work in early 2009. They sublet Bethesda office space for $700 a month from GeniusRocket, which pairs artists with brands that need creative approaches. Wellisch thought up the name Latinum because it combines Latin and platinum.

They then raised less than $1 million from some angel investors, which they used to hire a technology person and a researcher.

“We bootstrapped it,” said Wellisch, who knew from his private-equity days that they could keep control of the company if they didn’t take big investments. They didn’t take salaries for several months.

Rather than run from the downturn, they ran straight at it, telling companies about how they could use the pair’s expertise to crack the Hispanic code.

They pounded the phones, using their Rolodexes to call decision makers at big consumer companies, such as Nestle, Kraft and Clorox.

“We would talk to the smartest executives at these companies and go back seven and 10 times to the same person,” Klein said. The responses? “It’s not good enough. Too generic. I don’t get it. I don’t know what I will get out of this.”

The Latinum guys kept calling back, adding new features, sharpening their value proposition. One thing that worked was lowering the price for a first-year subscription.

The turning point came in July 2009, after the company was six months old. McDonald’s agreed to host a group of 15 companies at its offices outside Chicago. Officials from Nestle, Kraft, Hewlett-Packard and the National Basketball Association were in attendance.

Latinum signed up 15 clients.

The client list has since grown to about 80. Latinum recently helped a cereal company determine Hispanics’ cereal preferences and shopping behaviors. They helped an insurance company tap the uninsured Hispanic segment. And now they are working with a candy company to identify which chocolate bars Hispanics like to eat and then help them craft a message to reach the audience.

Things are going well enough that Latinum is planning to add six more employees by the end of this year. The co-founders are taking healthy salaries.

A crisis is a terrible thing to waste.

Follow me on Twitter at addedvalueth.

 
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