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LookSmart
Looksmart is a financially troubled internet company, known for its internet directory developed by editors and Grub distributed web-crawling project.
Looksmart was founded by Australian husband and wife Evan Thornley and Tracey Ellery in 1995. They both served as senior executives of Looksmart, and both remain on the board of directors.
In recent years it has relied on the hard work of thousands of volunteers in building up the associated Zeal directory. Critics of Zeal argue that DMOZ is a more democratic version of a volunteer produced directory. Looksmart points to the role of certain extremists in determining the content of DMOZ, a phenomenon most say has affected Zeal also.
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High Valuation in Technology Boom
Looksmart initially aimed at replacing Yahoo! Then it presented as a women and family friendly version of Yahoo! It initially attracted Reader's Digest as an investor who later sold most of their interest back to Evan Thornley and his wife Tracey Ellery for a nominal amount as its losses mounted. Looksmart relied on the internet boom to raise venture capital from a mix of Australian and US investors prior to its IPO in 1999. Despite enormous losses, it briefly enjoyed a large market capitalization. Tens of millions of dollars were spent on activities later judged to be of little benefit, including multi-million dollar sponsorships of Sesame Street, the 2000 Olympics, several unsuccessful acquisitions including the purchase of late-night infomercial company Guthy-Renker's ecommerce division which were later written off.
Looksmart failed to create a consumer brand of any significance and then built its new strategy around licensing its search directory to then popular and successful portals such as Lycos and Infospace. Much of Looksmart's revenue stemmed from their primary client, Microsoft. In 2003, Microsoft announced its support would be withdrawn, resulting in a loss of as much as 90% of Looksmart's revenue. Looksmart says it's nearer 70%, although that fails to include the expected decrease in advertising revenue from those advertisers who are now going directly through MSN. In August 2004, Interim Chief Executive Damian Smith revealed that Looksmart had been "hooked" on Microsoft revenue during Evan Thornley and Jason Kellerman's period as Chief Executive.
Founders and Early Investors Cash Out Quickly
In years 1999 through to 2001, some of the founders such as Evan Thornley and Tracey Ellery and senior executives made tens of millions of dollars selling what most thought to be its overpriced stock even though the accumulated losses of the company approached one hundred and sixty million dollars. It is believed Thornley also quietly sold shares in Looksmart prior to the IPO in a private sale. Some critics say it was wrong for management to profit from the sale of free shares and options while the company was producing massive losses. Thornley frequently pointed to the value of Infospace, Inktomi in declaring Looksmart to be undervalued at $5 billion and even compared himself with billionaire Michael Dell in justifying his stock sales.
Internal divisions and Lawsuits
After Thornley's resignation as Chief Executive the founders Australians Evan Thornley and Tracey Ellery resisted a palace coup on the board from independent directors unhappy the husband and wife team intended to remain on the board. The three independent directors, Mariann Byerwalter, Robert Ryan and James Tananbaum resigned in protest at what they saw as inappropriate corporate governance when Thornley and Ellery used their casting votes to elect Thornley to the chair of the company. They were also concerned about class action lawsuits from Looksmart's once loyal customer base alleging consumer fraud and securities fraud lawsuits from Looksmart's shareholders against analysts who had advised the purchase of Looksmart stock which fell from $80 a share in 2000 to as low as $1 in 2002. Some of the lawsuits allege Looksmart underwriters paid secret commissions to prop up their share price after the IPO. The lawsuits do not detail the involvement of Looksmart managers in this illegal activity.
The consumer fraud class-action lawsuit, brought on behalf of customers who had paid a one-time fee to be listed in the directory and were switched to a pay-per-click model, was settled in September 2003. Claims were expected to reach up to $250,000 with Looksmart's legal bills topping $600,000.
In August 2004, a class action lawsuit was filed that alleged Looksmart conspired with gambling websites to promote the sites to California residents, where it is illegal to gamble on the internet. The lawsuit asked for a permanent injunction against the alleged wrongdoing and for "restitution for all illegal gambling proceeds" received by the defendants and/or the Internet gambling operations, including state taxes and fees.
Looksmart - as a result of a 2000 investment from BT they later wrote off - had significant cash reserves although many analysts question Looksmart's ability to survive the loss of their only significant client. The BT joint venture used tax havens - such as Barbados - in order to minimize taxes on the hoped for profit from a listing of the company. The use of tax havens is interesting given the founder Evan Thornley's stated interest in left-wing politics, evidenced by his purchase of loss-making, left-wing publisher Pluto Press Australia.
Some Looksmart critics say the company is run on very conservative lines demonstrated by the company's declaration in each of its annual reports that none of its employees are members of a labor union and that each employee was forced to sign individual fixed-term contracts (rather than collectively bargain as is preferred by labor unions). The employment of family members and friends of the Australian founders raised concerns of nepotism and favoritism. Geoff Ellery, the brother of founder Tracey Ellery was accused of harassment by a number of Looksmart staff members which was widely reported in the Australian press.
Effects of the Loss of Microsoft's Support
Looksmart is regarded by most financial markets observers as likely to be acquired at near cash value or to collapse following the loss of Microsoft's support. Some shareholders questioned how former Chief Executive Evan Thornley had allowed it to become so dependent on one client. They challenge the legitimacy of Evan Thornley giving lectures on successful business practices in Australia while Looksmart continues to ail from strategic errors made by him.
In an attempt to curtail expenses, the company has recently sold its Australian business to Australian telecommunications giant Telstra for a token sum and is closing all offshore operations. Its Chief Executive Jason Kellerman resigned, replaced by Evan Thornley's friend Australian Damian Smith.
With Looksmart challenged by rapidly declining revenue, lawsuits, layoffs, increased competition and staff morale issues, the Australian based and highly paid Chairman Evan Thornley agreed to resign in June 2004 and was replaced by Teresa Dial, a former CEO of Wells Fargo.
Greg Santora, a non-executive director and former Intuit CFO, resigned from Looksmart's board in August 2004. The company said he was resigning due to work commitments although observers noted he remained a non-executive director of two other publicly traded technology companies and had only resigned from Looksmart's board.
Damian Smith, Looksmart's interim CEO, complained in an interview in August 2004 with MetrixMedia that he had had to rebuild the company. In the same interview, he said that Looksmart had been "hooked" on Microsoft's revenue stream which was 70% of its total revenue, had failed to keep costs down and that Google was a better search product than Looksmart. Smith explained that Looksmart will operate as a bottom-feeder, offering a lower-price service to those who couldn't afford Google and Yahoo! According to Smith, maintaining a low-price discount service requires even more dramatic cost-cutting from Looksmart's expensive and labor intensive business model.
Smith says that turning Looksmart around is "easy to say, hard to do."
External links
- Detailed Account of Cairns' controversial involvements in Down To Earth movement (http://www.angelfire.com/pq/edgecentral/threephaseone.html)
- Looksmart's site, one-time top portal now discount listings wholesaler (http://search.looksmart.com)
- Consumer Fraud Lawsuit from Looksmart customers (http://aboutus.looksmart.com/about.jhtml?dir=profile&page=notice)
- Looksmart penalized by Federal Trade Commission for deceptive advertising (http://news.findlaw.com/hdocs/docs/looksmart/looksmartftcord.pdf)
- Reasons Why Microsoft’s MSN Dumped Looksmart’s Search Results - Non-Official Explanation (http://chinese-school.netfirms.com/computer-article-Looksmart.html)
Alexa Traffic Popularity Ranking Reveals Looksmart's collapse to 2100th site in the world
- Looksmart Interim CEO Damian Smith Interview (http://ext.viomail.com/metrixmedia/?h=200773&r=10B4C5E1-8316-458A-BFA2-E287EBEF3CDA&s=480%20)
- Looksmart not Looking Smart (http://www.smh.com.au/articles/2004/01/21/1074360833933.html?from=storyrhs)
- Collapsed Looksmart share price (http://finance.yahoo.com/q/bc?s=LOOK&t=5y&l=off&z=m&q=l&c=)