Friday, Feb 23, 2007
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Investors shun profitable adult website operator

NO EASY EXIT STRATEGY FOR FOUNDER

By Constance Loizos
Mercury News

Sitting in his brightly lit, third-story corner office on leafy Sheridan Avenue in Palo Alto, Andrew Conru looks like a typical Silicon Valley entrepreneur. Wearing a blue button-down shirt, the racing bike he rides into work haphazardly propped up against a large window, the bespectacled, sandy-haired 38-year-old Stanford Ph.D. speaks in a measured manner about the companies he has started over the past 13 years, one of which reportedly generates hundreds of millions of dollars a year in revenues and is highly profitable.

So why aren't investors rushing to throw money at him? Because Conru runs one of the best-known but least discussed Web destinations, Adultfriendfinder.com, which dubs itself ``the world's largest sex and swingers community.''

Bawdy, yes, but also lucrative. Consider that Adultfriendfinder -- tops in revenue among the 40 sites run by Conru under the holding company Various Inc. -- claims 25 million active users, an undisclosed percentage of whom pay up to $50 a month for its services. The Web-measurement service Alexa ranks the site as the 58th most popular site on the Web.

In comparison, the social networking site Facebook, reportedly for sale for roughly $1 billion, has around 9.5 million registered users who pay nothing. Its Alexa rating: 56.

But most investors can't do anything about Various other than watch it expand. Many firms have ``sin clauses'' with their financial backers that outline the types of companies they are strongly discouraged from backing, such as adult entertainment outfits.

Even investors without such a policy feel constrained. ``There's too much at stake around our image,'' said one Sand Hill Road venture capitalist who asked not to be named. ``Adultfriendfinder is very profitable, (but) to invest in something like it would mean running the risk of alienating our investors.''

An IPO is an option, but other competitors have attempted to go public and failed. And the stocks of publicly held adult content companies get discounted heavily because so many investors, like mutual fund managers, can't buy the shares.

There also aren't many potential purchasers. Only a few adult-content companies are publicly held including New Frontier, Private Media Group and Playboy Enterprises and Conru says that his company is now worth more than they can afford.

Put another way, there's no easily ``exiting'' Various, in the parlance of the investment world. ``Although it's not illegal, adult content is akin to the drug trade in some ways,'' said James Hong, a friend of Conru and the co-founder of two start-ups, HotorNot.com, which rates users' looks, and SaveMyAss.com, a flower-ordering service. ``It's hugely profitable but (getting out) can be difficult.''

It's an unusual predicament for someone running one of the few dot-coms in Silicon Valley that is generating serious cash. Then again, he seems like an unusual person to run an adult Web site.

Born near Lake Michigan in northwest Indiana, Conru grew up on a farm and started his first company at 8, selling vegetables door to door. He thanks his parents, who were steelworkers, for his work ethic, saying he learned by watching them ``work the steel mills during the day, and farm at night.''

He threw himself into work soon after arriving at Stanford in 1991, where he received undergraduate degrees in economics and engineering and a doctorate in mechanical engineering. In between classes, he founded his first company, FocalLink, a banner advertising network that was later acquired. He also created the early online dating site WebPersonals, as well as Dine.com, a restaurant recommendation service.

Then came Friendfinder.com, launched in 1996. ``It was going to be a friend-networking site where people could find a golfing buddy or romantic interest, but people began to post risque photos. When that didn't stop, I decided to launch Adultfriendfinder.com.''

And a few other Web properties. Among the 25 dating sites now under the Various umbrella are Alt.com, JewishFriendFinder.com, FrenchFriendFinder.com, LesbianPersonals.com and SeniorFriendFinder.com. Alt.com is an adult-themed site with 3.8 million registered users; the others are regular, lightly visited, dating sites.

Conru, who is unmarried, says that he regularly uses Adultfriendfinder. ``I understand what goes on in our users' worlds by partaking in the process.''

Some go so far as to suggest that Conru is obsessed with the business, which now employs 300 people, including 100 programmers. According to one former employee of Various who asked not to be named, ``Andrew is a micromanager to the extreme.'' Added this person, ``(Conru) constantly undermines the technical staff by having them work at his whim on new features that he dreams up for the sites.''

Asked if the characterization was fair, Conru said, ``We release over 100 new features every two weeks. Most new hires are used to much longer release schedules and perhaps lower expectations. Frankly, some people are not a good fit.''

``People seem to think that the adult business is easy, low hanging fruit,'' Hong said. ``But Andrew has been able to create sustainable competitive advantages over his competitors. That's why he is so profitable.''

Exactly how profitable is a mystery. No one doubts the company is profitable, and Conru says the company has been making money since 1996, mostly through Adultfriendfinder.com and Alt.com. As for his personal wealth, Conru, who owns 90 percent of Various, says only that he is worth ``more than $100 million.'' (The other 10 percent of Various is owned by Lars Mapstead, whose start-up, Cams.com, was acquired by the company last year.)

Perhaps the bigger mystery is what comes next for Conru, who rarely talks with the press, dislikes VCs -- ``I'm rude to them,'' he said -- and yet seems stuck in his enviable rut, with few options for selling, even to buyout firms. (Conru says that he has met with several and that they, too, ``shy away from adult stuff.'')

Whatever comes next, one senses that Conru could use a respite from his unlikely empire. Looking out the window, he sighs. ``I do wonder, do I need another dollar? I've been doing this a long time.''


Contact Constance Loizos at cloizos@mercurynews.com or (408) 920-5920.