What Stays in Vegas

by Adam Tanner

  He searched for ideas, and sought out successful businesspeople for advice. Later that year he went to an Internet conference in San Francisco. After a dinner speech by Niklas Zennström, one of the founders of Skype, Matthew queued behind others in the audience to approach him for a quick word of private insight.

  “How do you guys come up with these huge disruptive ideas?”

  “Just look for things that have yet to be totally digitized, because as things become digital everything changes.”

  In May the following year, along with thousands of others, Matthew traveled to Omaha, Nebraska, for the annual meeting of Warren Buffett’s company, Berkshire Hathaway. (He did not own the premium A class shares then trading at $93,000, but a few of the company’s cheaper class B shares, which were going for about $3,000 each.) He rose at 4 a.m. on the big day anxious to ask a question of the finance guru and his right-hand man, Charlie Munger. On a rainy and windy spring morning, he stopped at a twenty-four-hour Walmart store en route to the convention center to buy an umbrella. As the foul weather tested his patience, he waited in line for hours for the convention center to open. Finally, the doors swung apart and the early birds put down their names to question the Sage of Omaha.

  Later that day, with a record crowd of twenty-seven thousand shareholders attending, the predawn maneuvers paid off. Matthew stepped up to the microphone. His voice trembled as the many thousands in the audience focused on his question. An echo bounced off the back of the hall a second or two later as he spoke, throwing off his concentration.

  “I’m twenty-three, I have some resources, I sold a small e-book business, and I’m looking to start a new company. If you were in my shoes, what types of fields would you look into or what types of criteria would you use?”

  Buffett started by recommending that Matthew read everything that he could: “You need to fill your mind with various competing thoughts and decide which make sense. Then you have to jump in the water—take a small amount of money and do it.” Buffett, famous for his folksy manner, continued with a salty analogy that made the crowd laugh: “Investing on paper is like reading a romance novel versus doing something else.”1

  Munger followed up: “Of course, the place to look when you’re young is the inefficient markets.”

  Buffett then finished up the thought: “You should do well in games with few other players.”

  The wise men had spoken. Matthew set his goal: he needed to build a technology-driven business in a large inefficient market. If he did not know exactly what kind of business that might be, he had already settled on where he wanted to be: Silicon Valley, the center of the tech universe, and close to Facebook. In fact, just a week before making the pilgrimage to Omaha, he had signed a lease for an office on the third floor of 101 University Avenue in Palo Alto, immediately north of Stanford University. He wrote out a security deposit of $20,149.50 and agreed to pay more than $10,000 a month for 2,100 square feet of office space. He did not have contacts in Silicon Valley and hoped proximity would help make magic happen. He set the orbit of his life around that office and rented an apartment just four blocks away.

  Matthew eventually set his sights on public records and directories. He realized it had the potential to be big, but saw a highly fragmented and inefficient sector. He thought he could improve on what was out there, but found that he had to do far more than just identify an opportunity. He had to build a business from nothing. “It was tough, it was really tough, because the data industry isn’t the easiest to understand as an outsider,” he says.

  His brother, Brian, still in college, pitched in from afar and traveled to Palo Alto during his breaks. He studied the search results made public by Google and Yahoo and noticed many people looking up telephone numbers. Yet those searches typically did not lead to helpful results. From that insight, the brothers set up reversephonedetective.com.

  Having settled on an idea, the brothers needed to get unpublished cell phone numbers. Brian researched companies that aggregated phone numbers and hesitantly called. Surely, he thought, he would have to hop through a lot of hoops to obtain such intimate information. He explained his idea to one company.

  “We’re building a website where people can do self-service caller ID.”

  “Oh, yeah, we can do that. You can give us the number and we can provide you with the results.”

  “Seriously, you can do that?”

  Brian was surprised that a college kid could get the information so easily. A new business was born. The brothers set up the site in December 2006. The site listed many reasons to reverse search phone numbers, such as finding the source of prank calls, hunting down suspicious numbers on a boyfriend’s or girlfriend’s phone, looking up a number on a phone bill, or checking out missed calls. They charged $14.95 for the number’s owner and address. “Get INSTANT ACCESS to owner information, address history, carrier, connection status, and location details for any phone number,” the site advertised. “Your search is 100% legal and strictly confidential.”

  By the time Matthew signed the expensive office lease in Palo Alto, the site was bringing in tens of thousands of dollars in sales a month. Yet very little profit resulted because of the high cost of assembling and marketing the phone numbers. Matthew paid the data provider just $2 per number searched.2 Yet the main cost came from luring customers via Google ads, the promotional copy that appears in small boxes alongside search results when people look up words and phrases. Companies pay only when Internet users click on the ads, which might cost 10 or 20 cents for a person’s name. The ads appear not only on Google.com but on other websites with their own search boxes, such as The LA Times and Wired, which host Google ads in exchange for a share of the revenue.

  Through continuous experimentation, Brian figured out how to generate a Google ad for thousands of different numbers by using just a fragment of a ten-digit phone number, such as the area code and first three digits. This insight was important because at the time Google limited the total number of keywords an advertiser could use. Also Brian had to enter the numbers manually. Even with music or a movie playing in the background in his dorm room, such rote data entry proved mind numbing. In the end, fragments of 75,000 to 100,000 numbers generated ads for millions of phone numbers, a technique rare at that time. “Who owns 303 703 1436?” the reversephonedetective.com ad might read. “Find out who owns 303 703 1436 with this Reverse Phone Lookup.”

  Brian tried different combinations to see what would work best. How about numbers in a row without spaces? What happens if you add dashes in the phone numbers? He experimented with variation after variation. Testing key words that people might enter into Google allowed the company to shave fractions of pennies off the ad costs. Such tiny amounts added up to real money when placing thousands of ads.

  The ads lured many people to reversephonedetective.com. Yet almost everyone wanted the information for free. The Monahans typically paid 10 cents per AdWords click, but only one out of a hundred people would actually pay for a lookup, thus adding a cost of $10 per new customer. On top of that, they paid another $1.50 to process the credit card charge and $1 for customer service. By the time they were done, the service left them with about 50 cents’ profit for a first-time customer. Repeat visitors would obviously prove much more lucrative.

  Valentine’s Day Goes Sour

  Brian dropped out of Harvard after his sophomore year. Like Facebook founder Mark Zuckerberg, who had left before finishing college three years earlier, Brian felt ready to take on the world. He abandoned a full scholarship, swapping his elite college dorm room for a couch in his older brother’s apartment in Palo Alto, California.

  Business developed slowly in the early years. The brothers lived off the $1 million Matthew had earned from his first venture. They spent much of their money on rent—principally the centrally located office and their nearby apartment—and software development. For more than three years they did not even own a car. They focused on work. They also created several other sites. On
e gave information about classmates. It failed. A website that helped consumers gather telephone numbers and file complaints against telemarketers (callercomplaints.com) did not succeed either.

  On most days they ventured no further than a triangle between their office across from Stanford University, their apartment four blocks away, and a Whole Foods supermarket. On occasion they made it as far as a few local restaurants. The brothers dedicated all their energy to making the business succeed. They embraced the mantra “Burn the Boats,” a reference to Spanish explorer Hernán Cortés, who destroyed his ships upon landing in Mexico in 1519 to ensure that his men could not retreat from conquering the Aztecs.

  By early 2008, a year after starting the site and half a year after Brian quit school, they were making $300,000 to $500,000 a month in sales. That amount left roughly $50,000 in profit, which they reinvested. Leaving Harvard looked like a smart decision.

  Few things could draw away the brothers’ attention from work, but Brian planned a rare break to fly to Boston for Valentine’s Day, which fell on a Thursday, because he hoped to continue his relationship with his college sweetheart. His girlfriend had recently returned from a semester in Paris, and Brian wanted to rekindle the romance. On the big day, the couple strolled across Harvard Yard. He felt happy to spend time with her, but that winter’s day, with temperatures just above freezing, did not provide an especially romantic setting. Rain fell from gray skies; the tall bare elm and oak trees provided little cover.

  A message on his cell phone interrupted their walk. Matthew had bad news. Intelius, a leading competitor, had just slashed its caller ID lookup prices dramatically. Not 10 or 20 percent less, or a few dollars less. A full three times cheaper than reversephonedetective.com. Brian called back at once. “Dude, Intelius just dropped their prices to $5. We are looking at the conversion rate, everything is plummeting,” the older brother blurted out, referring to how many of the visitors to their site actually paid to look up a phone number.

  Alarm bells sounded in Brian’s mind. Just a few weeks ago, Intelius had unveiled plans to take the company public. By cutting prices so dramatically, the firm could put the brothers out of business. Both realized all their sacrifices stood a hair’s breadth from miserable failure. Not only had they turned down many thousands of dollars’ worth of scholarships, but they also had spent far more trying to build their company, burning through much of Matthew’s savings along the way. On the regular job market, they were just two dropouts with enough college credits between them for one diploma.

  Brian, overcome with guilt that he had left Silicon Valley in the middle of a workweek, put his date on hold. He rushed in from the rain to Lamont Library to get online. He read everything he could about what had just happened. He plotted with Matthew on what they should do next. The people-search war was under way, a fight that would last for years. Brian’s relationship with his girlfriend proceeded on a terminal path.

  As the Monahans expanded their business, they faced many competitors, but none more ambitious than Intelius. Founded in January 2003, the company initially played up patriotic themes sweeping the country after the 2001 World Trade Center attacks and the 2003 Iraq War. A photo composite on the company’s home page in those early months showed fused images of the Statue of Liberty, the US Capitol, and an American flag. The site quoted founder Naveen Jain as saying, “The next war will not be won based on who has the most powerful weapons, but by those who have integrated intelligent information.” The Bellevue, Washington–based company became a dominant online vendor of public records. It advertised itself as the “world’s largest and most accurate public records source.” Revenue soared from $18.1 million in 2004, a year after it started business, to $122.9 million in 2008. Even more remarkable for an Internet startup, it reported a profit throughout that time.3 To gain market share, the company advertised heavily. Eventually one million people were visiting the site every day.4 Coming up with the core product—personal data on adult Americans—came relatively cheaply. Gaining attention proved more costly: advertising represented more than half of total expenditures for Intelius between 2004 and 2008.5

  In January 2008—the same month two private equity firms purchased Caesars in a leveraged buyout—Intelius filed paperwork for an initial public offering. With investors looking over its financial numbers carefully, the company hoped to boost sales and subscribers. In 2007, it had started allowing people to search for private cell phone numbers (the Monahans and others would only allow people to look up numbers received via incoming caller ID, but not names). Outraged citizens and some important voices in Washington complained. Intelius withdrew the service. Weeks after announcing its plans to go public, Intelius lowered the cost of its reverse phone lookups to $4.99—or 99 cents as part of a monthly subscription.

  The dramatic price reduction hit the Monahan brothers hard. The original $1 million in the bank had dwindled to $200,000; they started losing money every month. They ran fewer ads and hoped to weather the crisis. They outsourced some of their programming to a small team in Kiev, Ukraine. Five months later they were also hit by the unexpected death of their father, who collapsed at age fifty-seven while exercising on an elliptical training machine. Not long after that Matthew looked at what remained in his bank account. “Where did all the money go?” he wondered.

  Still embracing their “Burn the Boats” philosophy, the brothers pressed on. Eventually, Intelius and some of the other data brokers experienced setbacks. The media and government authorities began looking into reports that some firms unfairly roped people into expensive subscription plans without their knowing consent. Some companies also suffered black eyes by exaggerating the quality of their information. The Federal Trade Commission and other authorities stepped up scrutiny. In 2010, Intelius agreed to pay a $1.3 million settlement after the Washington State attorney general alleged the firm had acted unscrupulously by enrolling one-time users as subscribers without their consent.6 The company did not admit any wrongdoing as part of the settlement.7 “The only reason we get these things is that we were the biggest. We are the biggest,” said company founder Naveen Jain.8 “Our customers love us as is evident from our A+ BBB rating,” he added, referring to the Better Business Bureau, a nonprofit, nongovernmental group that monitors consumer complaints.9 In 2009, Jain won vindication in an earlier legal tussle. In May 2003 a federal district court had issued a summary judgment that Jain had purchased stock in his previous company, InfoSpace, within six months of selling the shares, a so-called short swing that was not allowed because he had been an officer of the company.10 He appealed the ruling, and in 2009 the US Court of Appeals for the Ninth Circuit dismissed the case.11 But in 2010, a second Intelius cofounder was jailed for perjury related to having sex with strip club dancers.12

  Other data brokers got into hot water as well. The same year that the Monahans started reversephonedetective.com, several Stanford graduates set up Spokeo. Business picked up considerably after 2010, when the site started adding data from more than ninety social networking sites.13 But in 2012 Spokeo agreed to pay an $800,000 FTC fine for advertising its services as a way to check out potential job hires, a violation of the Fair Credit Reporting Act.14 “We wanted to put this behind us,” said Emanuel Pleitez, Spokeo’s chief strategy officer. “Any company goes through their own internal calculations of how much legal fees and things they cannot do for X amount of time, where they lose productivity and they lose the ability to create new products, and you make an assessment on whether you settle or not.”

  Other people-search sites faced lawsuits over their marketing. A 2011 class-action lawsuit charged that MyLife.com, which advertises that it will tell “who’s searching for you,” was sending out emails suggesting people were looking for users even when nobody had expressed any interest. To gain access to the site and learn how many people are looking for them, users provide their name, age, and ZIP code. To test how MyLife.com works, I randomly picked a name, age, and city to see what would come up. The
site said that more than twenty people were searching for my imaginary person—James Parker, a nineteen-year-old with a New York City ZIP code. More than fifteen of them were female. Perhaps there is a lucky guy in the city called James Parker with a lot of lady friends. The lawsuit quoted one web developer who had tested the site: “I went to the site and put in a fake name like sfsf sdgfsdgf and a real age and ZIP code, and guess what?! 7 people were searching for sfsf sdgfsdgf !”15 The lawsuit also charged that the company hacks into users’ email address books and invites their contacts to join MyLife.com. That feature is given in the fine print of a user’s privacy policy: “Contacts who are not registered. Members will receive an email invitation from us on your behalf inviting them to join. We may follow up such invitations with a limited number of reminder emails to some contacts if they do not respond.” Jeff Tinsley, the company founder and CEO, said the case was settled out of court in 2012: “There was absolutely no merit to the case, and the claims are outright false.”16

  Such tactics, even if spelled out in the fine print, rubbed a lot of people the wrong way.

  Many people-search businesses did not always seem on the up-and-up, and their reputations suffered. Rivals continued to struggle in the following years. In 2012, a former CEO of LocatePlus Holdings Corporation, which sells personal data to professional groups such as law enforcement, pled guilty to conspiracy to commit securities fraud and was imprisoned through 2017.17 In a related case, in 2013 a US district court sentenced another company official who had served as chief financial officer and chief executive officer to five years in prison for securities fraud that included an effort to inflate revenues.18 He is also set for release in 2017.