In 2006, IAC paid $26 million for CollegeHumor. In January 2020, they gave it away. More than a dozen potential buyers had a look and walked, and the only person willing to take it on was Sam Reich, who was already running the place. He paid nothing for it, and IAC kept a minority stake.

Six years on, the same business — renamed Dropout — has passed a million subscribers and is growing at around 31% a year. It employs roughly forty people. There are no public shareholders and no private equity sitting behind it, and it's been profitable for a while now.

Nothing about the property changed at the moment it changed hands. Same shows, same audience, same back catalogue, same costs. What changed was who was holding the scoreboard.

IAC wasn't being stupid, by the way. For a company of that size, a subscription service with somewhere between 75,000 and 100,000 subscribers isn't a business — it's a rounding error with a payroll attached. It couldn't move IAC's numbers in any direction that mattered, so it registered as a loss whatever it actually earned. Reich was looking at the same asset and asking whether it could support forty people and grow, which it plainly could.

The market for unwanted things

Larger organisations judge everything they own against their own cost of capital, so anything that can't clear that bar gets starved or sold off for being too small rather than for losing money. Picture a regional service contract sitting inside a national firm. It's profitable. It's well run. The client renews it every year and has no intention of going anywhere. It still gets handed off, because it needs a manager's attention every month and it's never going to grow into a line anyone puts in a board pack.

For you, those numbers look completely different. A book of business that's an embarrassment on a plc balance sheet might be two years of comfortable growth on yours. The price you'd pay reflects the seller's appetite more than it reflects the asset, and their appetite is much larger than yours.

Now, I want to be careful here, because there's an obvious way to get this wrong. The scoreboard story is a very comfortable thing for a buyer to believe. Every cheap business comes with a reason it's cheap, and “they're just too big to appreciate it” is the flattering version of that reason. Sometimes it's true. Often enough it isn't, and the thing really is broken — the contract's about to be retendered, the customers are leaving, the numbers only work because someone senior has been quietly subsidising it. Telling those two situations apart is most of the job, and I don't think the Dropout story helps you do it at all. What the story is good for is noticing that the mismatch exists in the first place.

The moves only make sense once you've stopped competing

What Reich did after the handover is where it gets instructive, because almost every decision looks wrong if you assume the goal is to become Netflix.

Dropout signs its performers on non-exclusive terms. In television, that's close to heresy — the whole point of a talent deal is usually to stop your people appearing anywhere else. So performers go off, shoot other shows, and come back. Reich pays for auditions and shares profits with staff. He describes the approach as being pro-talent and pro-human, which sounds like something you'd put on a careers page until you notice it also removes the need to cancel shows just to release people from contracts.

The company doesn't chase down password sharing either. It's actively relaxed about it, at the same time as the large streamers were building whole engineering teams to stamp it out.

Both of those become available once you've given up the ambition of being someone's only subscription. Some businesses only get healthy when we stop trying to make them venture-shaped, and this is what that looks like from the inside. If you're trying to be the thing that replaces television, every shared password is stolen revenue. If you're trying to be the thing people are happy to pay for alongside everything else, a shared password is somebody trying you out for free.

The non-exclusivity part is the bit I'd be most careful about copying. It works when your people are performers with portable reputations and the product is partly their presence. If your position rests on a process or a client relationship instead, letting your best people work for your rivals is just a worse idea.

I've written before about rising above what you actually sell when you're planning long-term, and this is the near-term version of the same idea. You can't sensibly choose tactics until you're clear about the size and shape of the business you're trying to build.

Applying it

Write down your own scoreboard, in numbers. How much profit does this business need to produce, for how many people, at what rate of growth, for you to call it a success? Most owners have never done this explicitly. What happens instead is that they default to borrowed measures — industry benchmarks, whatever the market leader is doing, whatever a founder on LinkedIn says is table stakes. Once you've got your own figures written down, go and look at what's being discarded near you. Ask suppliers what they're winding down, and larger competitors what they're stepping back from. Some of what you find will be bad business that deserves to be thrown out. Some of it won't be, and you'll only tell the difference by asking questions the seller would rather you didn't.

Where are the fixed costs, and what happens to them on day one? Who actually holds the customer relationships, and are those people coming with it? Does the thing work at your size — a contract that needed a full-time account manager inside a national firm may need half a day a week inside yours, or it may need the same full-time manager and slowly ruin you. Reich could answer all of this before he signed, because he'd been running the business for years. You won't have that, which is the whole reason to ask.

Then take a look at your own defensive habits. Every business inherits practices designed for a company of a different size — exclusivity clauses, protective pricing. Go through them one at a time and ask whether each one is defending the position you're in or the one you once hoped to reach. Differentiating rather than imitating your competitors usually starts here.

Where the comparison breaks down

I don't want to oversell any of this. Reich had two advantages most buyers won't. He already ran the business, so he knew exactly what he was getting. And the handover involved laying off more than a hundred people — the company that survived was a good deal smaller than the one that was sold, which isn't a small footnote.

And I'm not sure how much weight one company can really carry here. It's entirely possible Dropout worked because Reich is unusually good at this and the scoreboard business is just a tidy story I find satisfying, in which case none of the above is worth much.

But it costs you nothing to ask. The next time something comes across your desk at a price that looks too good, ask whose scoreboard produced that number, and whether you'd have arrived at it yourself.