StubHub: Anatomy of a game-changing idea

@FortuneMagazine July 23, 2012: 12:23 PM ET
Jeff Fluhr was looking for businesses that were

Jeff Fluhr was looking for businesses that were "ripe for change." Scalpers were just the ticket to start StubHub.

FORTUNE -- Making money through technology is Jeff Fluhr's stock-in-trade. Fluhr, 38, was the co-founder of San Francisco's StubHub.com, an online ticket marketplace where fans buy and sell from each other. Fluhr sold it to eBay in 2007 for $310 million. Now he's trying for an encore with the launch of Spreecast.com, a social video platform designed to bring the intimacy of face-to-face conversations online. Here's his story:

My father [Zachary] was an electrical engineer for AT&T (T, Fortune 500) and my mother [Laura] worked at a women's designer-consignment shop in Manhattan owned by her dad [Michael Kosof]. She later took over the store. When my dad retired, he started a commercial real estate security business, so there's entrepreneurship in my family blood.

After I graduated from the University of Pennsylvania in 1996, my first job was at the Blackstone Group (BX), a large financial services firm in New York. I decided that going into investment banking would be a great way to learn how to evaluate companies. Blackstone dealt with old-school manufacturing businesses, which were good for leveraged buyouts, but it wasn't interesting to me. I was an analyst and learned a lot, but decided to look for something that was more in the technology world.

In the late 1990s the Internet was coming into its own. Netscape, Yahoo (YHOO, Fortune 500), and eBay (EBAY, Fortune 500) started, and I decided to move to San Francisco to work for Thomas Weisel Partners, a private equity firm that worked with tech companies. After a while, with my interest in business and technology, I decided to start a company of my own. I thought going to business school would be a great way to pivot, network with people, and have time to develop a business plan for a startup. So in 1999 I enrolled in Stanford's graduate school of business.

I wasn't sure what I wanted to do, but I met Eric Baker, another student who'd also worked at financial institutions. We talked about our mutual interest in starting a company and different ideas about industries that were ripe for change. Eric's dad was a season ticket holder for the Lakers, and my dad for the Yankees. We talked about the large quantity of tickets for sporting events, theater events, and concerts that weren't used, and the fragmented market of ticket brokers who resold those tickets.

It was a stigmatized business, with the perception that you'd get scammed if you bought a ticket from a scalper. But we thought there might be an opportunity for buying and selling tickets online. I wrote the idea up as a business plan for Stanford's business plan competition, and we were chosen as one of the six finalists. But we pulled out because we decided to start the company and didn't want competition before we got going.

We started networking, talked to executives in the music and sports industries, and found investors. By August 2000 we had raised $600,000 of seed capital for StubHub. It would be an eBay for tickets. Sellers would set the price, more or less than a ticket's face value, depending on market demand. We'd take a percentage on every transaction -- 10% from the buyer and 15% from the seller. That first $600,000 was enough to get us to our beta product, get into the market, and learn and test different features. The seed money came from family and friends, but the next level was more difficult.

We had incorporated in March 2000, and right after that the dotcom bubble burst. As we went to raise our second round of funding, a lot of people said no. So we had to meet with more than 50 angel investors, venture capital firms, and others.

Eric stayed at Stanford to get his degree, but I left to become CEO and run the company. When he graduated in 2001, he joined as president. We had about 20 to 30 employees our second year, 60 people the next. By the time we sold to eBay in 2007, there were 350 to 400 employees.

In 2004, Eric and I had a difference in vision. He wanted to focus on partnerships with leagues, using their brands to build our brand. I felt we should concentrate on building our own brand, so both of us decided to part ways. He kept his share as co-founder and left the company. We got to cash flow positive in 2005, and revenue was about $50 million. We became a hot company growing rapidly, but there were still challenges.

Ten or 15 states had laws that restricted the amount you could charge to resell a ticket, either citing a fixed dollar amount over face value or a cap on the percentage over face value. We got letters from a few state attorneys general implying that we might not be in compliance. We argued that we weren't the sellers of the tickets, the users were. No attorney general ever filed a claim against the company. We actually hired some lobbyists and were successful in changing the laws in states like New York, Florida, and Pennsylvania.

Another challenge was Ticketmaster, which didn't like us or our business model. They said we were infringing on their contracts with venues or performing artists by reselling tickets. They never took legal action during my time but sent letters of complaint.

The one significant lawsuit we faced was with the New England Patriots, which filed suit when we were in discussions to sell to eBay in 2006. They said we were inducing their season ticket holders to violate their agreement with the team. We sold before the suit was decided, and eBay settled with them.

In 2006 the company was profitable, with $100 million in revenue. When eBay approached us, I had gotten to the point where I wanted to move on to the next thing. I had gotten married in 2005 while StubHub was rising, and my wife was pregnant. So we sold StubHub for $310 million in 2007 and closed the transaction two weeks before my first son was born. I took time off to travel with my family, and we went around the world. I played a lot of golf and tennis, started doing angel investing, and just enjoyed myself. I'm invested in 40 different companies now. Some are doing well, and some not. I stopped doing angel investing in 2010 and started Spreecast.com.

Over the last 10 years I noticed that with Facebook (FB) and Twitter and smartphones, people are spending a lot of time to stay connected. But there's something missing with the way we're communicating now with all this text-based, asynchronous communication. I wanted to bring back face-to-face interaction to the conversation, so I started Spreecast.

Spreecast is a social video platform where you can talk in a public forum about the same topics people are talking about on Facebook -- whether it's the passing of Dick Clark or fashion -- only it's in real time using a webcam and web browser.

In 2011 we raised $4 million start-up capital from people who invested in StubHub. That figure includes my own investment. The public beta launched in November 2011, and we're starting to see celebrities, politicians, journalists, and others who have a public persona experimenting with us to engage with their fans and followers. There's been nice growth, month over month.

I enjoy the intellectual challenge of building something from nothing and navigating through the challenges of starting a company. I think entrepreneurs look at opportunities and seize them. They don't just talk about them.

My advice

Challenge the status quo. If you're disrupting the way businesses do things, you'll be told that's not how it works. But listen to your instincts. Spreecast wants to create a throwback to thousands of years before the Internet, when people had face-to-face interactions. Without face-to-face conversations, people are missing out on learning social skills.

Create a team that will mesh well. The mistakes I made in hiring at StubHub have helped inform my decisions this time around. I'll be treading more carefully in bringing in senior people and look for different qualities. I'll focus less on experience and skill set and be more interested in personality, raw intelligence, and drive to make the person a better fit with the existing team.

Encourage your team to speak freely. When you're leading a company, if you work with people you trust, letting them speak their mind allows you to get good ideas on the table, even if they conflict with yours.

This story is from the July 23, 2012 issue of Fortune.

More stories of how they got started:

Panera's Ron Shaich

Levenger's Steve and Lori Leveen

John Paul Mitchell's John Paul DeJoria

Build-a-Bear's Maxine Clark To top of page

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.