Dispatch From the Field – Davis Smith

Davis Smith is a recent Wharton grad. His latest entrepreneurial venture in Brazil is really cool, so I thought I’d share it here.  It’s a write-up that first appeared in the alumni newsletter that I put out every month. I think you’ll enjoy it.

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After six incredible years as an entrepreneur, I decided it was time to roll the dice with Wharton/Lauder admissions. I was fortunate enough to be admitted, but when starting the program in May, I didn’t know what exactly I should do post-MBA. It became clear to me after a couple months that there was only one path for me … that of a trailblazing entrepreneur. My business partner (and cousin) was simultaneously completing his MBA at HBS and we decided to forget recruiting and committed to each other that we’d start another business while in school. We spent the first year in business school brainstorming business ideas on a shared Google spreadsheet. Eight months and 60 ideas later, we met in Silicon Valley. We had applied to a couple incubator programs at VC’s, but had been rejected, so we created our own incubator of two.

We literally worked out of a Silicon Valley garage and methodically narrowed our ideas list from 60 to four. We spent the rest of the summer analyzing, vetting and testing those four ideas. Ultimately we decided on an idea that was Lauder at its very roots, an idea born out of a discussion with a Brazilian classmate.

My cousin and I came out of the summer with a firm decision to focus on the e-commerce baby vertical in Brazil. In September I made my first trip to Brazil, not speaking Portuguese, but confident in ability to navigate a new country, language and business challenge. I began making regular trips to Brazil on weekends, leaving Thursday afternoons after class and returning Tuesday mornings, just in time to make my first class of the week.

Being a student entrepreneur at Wharton provided some distinct advantages. I negotiated our term sheet/valuation while taking Wessel’s venture capital finance class and brokered a deal on a web property while taking Diamond’s negotiations class. Let me tell you the story of both:

With nothing more than a PowerPoint, we walked out of our first VC pitch with an offer to invest $1 million at a $2 million pre-money valuation. We high-fived each other, but knew that we had something even more valuable on our hands. We still didn’t have a domain name and we felt strongly that a great web property would add rocket fuel to this business. We believed in the value of generic domains, as we had previously built and sold a generic domain e-commerce business. After researching dozens of names, we found that the domain Baby.com.br (Brazilian domains end in .com.br) would likely be for sale, as the site was little more than a couple landing pages. We contacted the owner and discovered that he had purchased the domain in 1999 along with 70 other domains. He had yet to sell any of them … when I heard this, I knew he was either not interested in selling, or he was irrational. Turns out it was the latter.

After a month of almost daily discussions, I convinced him to give us a price range that he’d be willing to sell at. He said “somewhere between $500k and $1M.” Based on our calculations, we estimated the value of the domain between $300k and $500k, so we felt we were within the right price range. He made it clear he had received many offers already and would not accept any offer outside of that range. We came back with an offer to pay $500k, but with the condition that he allow us pay over a five year period. If we ever missed a payment, the domain was his and he could keep all previous payments. I told him we needed a decision by the end of the day or that we would purchase another domain. He came back a couple hours later with an email, “I accept your offer to pay $500k for the domain over five years. Upon completion of the five years, in order to complete the purchase, I will need a $1M payment or 10% of revenues of the business for the next 10 years.”

Clearly, something had gone wrong. In my negotiations class I had learned that it is impossible to reason with people in a negotiation, that it is all about understanding the goals of the other party and keeping control of your emotions. I asked him if we could delay negotiations for the weekend. I needed some time to collect myself. On Monday I proceeded to ask him why his counter offer was so far out of range from his previous suggested pricing. His answer? “Risk”. He saw the five years of payments as a major risk and felt he needed to be compensated for it. I then clarified, “So if we gave you $500k today for the domain, you would sell it.” He answered in the affirmative. I knew what I had to do. I asked him to allow us to pay a $5,000 non-refundable deposit and then give us 90 days to pay the balance payment. With a bit of negotiating, he agreed.

We had 90 days to convince investors that we had the gun powder to create an e-commerce empire in Brazil. Armed with this new domain, we suddenly saw a flood of interest in the business. Our once $2 million dollar pre-money valuation skyrocketed and we ended up raising $4.5 million over two successive rounds with a post-money valuation in the double digit millions.

We launched Baby.com.br less than a month ago, and have already seen some great success. We’ve had nearly a million pageviews and hundreds of thousands of unique visitors to the site. We are days away from announcing a major celebrity endorsement that should catapult us into the lead as the largest online baby retailer in Brazil.

Many people questioned me why an entrepreneur would possibly need an MBA. Because of the influence of my peers, professors and alum, I am here in Brazil, building what I hope will be a billion dollar business.

~~~Davis Smith

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