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Created out of an apartment in the East Village of New York City in 1995, Razorfish, Inc. is a leading internet consulting company that in its brief history has expanded into a global concern through an aggressive pattern of acquisitions and mergers. A separate entity, Razorfish Studios, was created to develop new media products--such as Web sites, screensavers, and Internet games&mdash well as old media products such as books, films, and music. The start-up went public in 1999, quickly becoming a darling of investors. The company's stock actually soared to such incredible heights that Razorfish was once valued at more than $4 billion, before a market correction and other concerns about the company in 2000 sent the stock plummeting. Despite such setbacks, in the beginning of the new millennium, Razorfish was one of the few internet companies that could actually boast that it had turned a profit.
A 1994 Chance Encounter Leads to Razorfish
Razorfish founders Jeffrey Dachis and Craig Kanarick were childhood friends in Minneapolis. Kanarick studied computer science at the University of Pennsylvania and earned a Masters degree in visual studies from the Massachusetts Institute of Technology, but Dachis took a less obvious path to becoming a new media mogul. He studied dance and dramatic literature at SUNY Purchase in New York, and then earned a Masters degree from the college of education at New York University. His background in business was limited to his childhood, when he reportedly broke up packs of Bubble Yum to sell the individual pieces to classmates at a profit, as well as later scalping tickets to University of Minnesota football games. Dachis dabbled as an actor, disc jockey, and model. He then ventured into 'guerrilla-marketing' when he founded In Your Face, an events firm.
In his late-twenties, Dachis was freelancing at a record company in 1994 when he ran into Kanarick on a Manhattan street corner. Kanarick showed him the Mosaic Web browser, the first viable graphic interface to the internet. Before Mosaic, the only way users could navigate the internet was through a text-only environment using arcane programming language. The possibilities of combining pictures, text, and sound excited Dachis. 'After that,' he was quoted as saying, 'it was sort of a zealot-like focus. The revolution was about to happen, and we were not going to miss it.'
Dachis and Kanarick mapped out their plan for a business on a napkin while sitting in the kitchen of Dachis's East Village apartment. Their concept, according to Dachis, 'was a mixture of some technology, some business modeling, some one-on-one direct marketing communications, and some branding and visual identity.' Supposedly the two partners coined the company's name by randomly selecting words from a dictionary, as well as other forms of brainstorming. Dachis went to the bank with a list of ten possible names and only decided on Razorfish when he opened the company's checking account.
Working out of Dachis's apartment, Razorfish began to do freelance Web design work, although on occasion Dachis had to wait tables to pay the bills. It was when Razorfish created Blue Dot--an online art gallery, which Dachis said was done 'for our souls' rather than direct commercial gain--that the company really began to take off. Using a beta version of Macromedia's Shockwave software, the site utilized visual effects that were a radical departure from what the Web had been offering. Razorfish attracted the attention of Omnicom Group. The New York advertising organization bought a stake in the start-up, allowing the company to set up shop in a SoHo loft. Dachis served as CEO for Razorfish, and Kanarick as chief scientist.
The company's first major project was a $20,000 assignment to create a virtual garden for the New York Botanical Society, commissioned by Time-Warner's Pathfinder business unit. From the beginning, Razorfish went beyond providing mere graphic design. The site was in essence an experimental e-business that allowed Time-Life to sell its list of gardening books.
After generating sales of $300,000 in 1995, Razorfish took in $1.2 million in 1996 and earned a profit of $300,000, a feat that precious few internet start-ups could claim. The company also brought attention to the creative work being done in the fast growing 'Silicon Alley' section of Manhattan. Razorfish quickly outpaced Agency.com, the leading internet advertising agency at the time. Its list of powerful clients included CBS, IBM, America Online, Charles Schwab & Co., and Sony. After posting sales of $3.6 million in 1997, Razorfish was poised for even more rapid growth.
1998: Razorfish Goes National, then Global
In the late 1990s, Razorfish was at a crossroads: to keep pace with demand for its services, the company either had to hire new talent or acquire it. Razorfish chose the latter course, and was systematic in its approach to expansion. First, it solidified its position in New York City by merging with Avalanche Systems. Avalanche could also boast brand name clients--Cosmopolitan, Warner Music Group, and Carnegie Hall, among others--but it was an independent shop that was finding it increasingly more difficult to survive in an environment in which its competitors were partly owned by larger conglomerates. With great expectations, in September 1997 Avalanche had moved into larger offices, and had then overspent its budget on several projects which forced it to lay off staffers. Other disenchanted employees soon left the troubled company, and Avalanche began to field offers from potential suitors. Razorfish made the highest offer, instantly gaining a reputation as a player to watch. The move more than doubled the size of Razorfish's staff, to approximately 150, and increased its revenue by 400 percent.
In May 1998, Razorfish gained a presence in the Silicon Valley market by acquiring the San Francisco-based Plastic, an interactive ad agency. Via the newly named 'Razorfish San Francisco' office, clients Joe Boxer, Computer City, and Microsoft were added to the fold. Later that month, Razorfish staked a claim overseas by acquiring London-based CHBi, another interactive agency whose clients included British Aerospace and Virgin Cola. While allowing the company to better service its multinational clients, the move also provided Razorfish with a gateway to the rest of Europe.
Two months later, Razorfish continued its rapid growth by tapping into the entertainment and media clients of Los Angeles by purchasing Tag Media and its ten full-time staff members--and by renaming it 'Razorfish Los Angeles.' Tag had gained notice by creating a parallel web show of FOX's 'The Visitor.' Tag CEO and president Richard D. Titus had been approached by other agencies, but went with Razorfish because he believed Dachis shared his vision of parallel media on the Web. Clearly, Razorfish was positioning itself for a future role that would transcend the confines of a graphics company or interactive advertising agency. Tag also brought with it more traditional business. Its roster of clients included NASA, Intel, and Metropolis Entertainment--the producer of such major films as Independence Day and Godzilla.
The following month, Razorfish made its biggest acquisition with the addition of Spray, a Stockholm-based interactive agency with offices throughout Scandinavia as well as in Germany. The move made Razorfish a truly global business, with more than half of its 350 employees located in Europe. Razorfish and Spray had already enjoyed a working relationship throughout the brief history of both companies, having conducted an exchange program in which every six months two employees traded places. Aside from adding more prominent clients, such as Ericsson and Nokia, the acquisition of Spray also made sense for Razorfish on a financial level. Europe already boasted the highest internet usage in the world, and the potential for future business on the continent was tremendous. Furthermore, with the national monetary systems of Europe poised to complete a transition to the euro currency by 2000, the exchange rate for the dollar was considered advantageous for U.S. buyers. It was also expected that the adoption of the euro would stabilize markets.
Razorfish goes Public in 1999
In April 1999 Razorfish made an initial public offering of its stock. After completing what was described as a seventy-one stop IPO road show, Razorfish raised $48 million at $16 a share. Trading on the NASDAQ Stock Market, Razorfish stock exceeded a price of $80 within seven months, a period during which many internet start-ups achieved values completely out of keeping with their earnings. Sales in 1998 for Razorfish were $13.8 million, but the company showed no profit after its spree of acquisitions. Sales then ballooned to $170 million in 1999, but the company posted a loss of $14.5 million as it continued to expand at an incredible pace and solidify its reputation as a cutting edge company.
Razorfish Studios began to produce traditional media products in 1999 when it published a book of photographs by Danny Clinch, featuring famous musicians, titled Discovery Inn. Razorfish also delved into music by releasing an album, Ticklah's Polydemic, which could be purchased over the Web as a CD, vinyl LP, or mp3 file, or in traditional stores as a CD or LP.
Generally regarded as a Web graphics and advertising agency, Razorfish now rejected the limitations of such a definition. According to Dachis, 'The agency of the future isn't an agency. The agency model doesn't provide the strategic benefit that it should and could.' Razorfish preferred to view its primary business as helping a client to establish a brand in an increasingly digital world, either in traditional or new media. To bolster that position, Razorfish continued to acquire properties in 1999. It purchased Santa Monica-based broadcast design firm Fuel and its commercial production arm Tonga, bringing to Razorfish traditional production and broadcast design capabilities. It also bought I-Cube--a Cambridge, Massachusetts company&mdashø provide back-end Web expertise, the technical support that drives a Web business, which is invisible to the consumer on the front end. Rather than merely designing a client's Web site, Razorfish could now offer what Dachis called 'end-to-end solutions.'
The company also opened a laboratory in Helsinki to research and develop wireless applications. Wireless, already with deep penetration in Europe, promised the potential of huge growth in the United States. All of these strategic acquisitions positioned Razorfish to promote a client's brand across platforms, whether that be over the broadcast medium of television, print, on the internet via broadband, or through wireless devices such as cell phones, palm pilots, or future laptop computers.
Razorfish also positioned itself to provide content that could be delivered across these platforms. No possibility for future applications was dismissed. For example, Razorfish worked with CIEOS, a New Jersey consulting firm, to develop a flat-panel display screen that could be held on the lap of dental patients, to allow them to watch pay-per-view movies or surf the Web while having work done on their teeth. The dentist would also be able to show the progress of the work on a similar screen.
In addition to its vision of a digital future, Razorfish was also gaining a reputation in other areas. Like many other internet companies, it embraced a non-traditional work culture that critics called cult-like and others called fun. Instead of traditional business cards that measure 3.5 inches across by 2 inches down, Razorfish turned to cards that measured 1.5 inches across by 3.5 inches down. Employees were encouraged to bring their dogs to work. The company shut down operations for a weekend so that 1,200 employees could fly to Las Vegas for a three-day party it called a FishFry. The company spent another three days whitewater rafting in Oregon.
Razorfish also gained a reputation as arrogant. It was reported to turn away half of the customers that approached the company because of a 'wrong fit.' At a time when labor was hard to find, Razorfish rejected 80 percent of its job applicants for similar reasons. Clients were also showing some concerns about the company. Joe Boxer discontinued its e-commerce business, after executives complained that Razorfish had failed to meet deadlines.
Investors' euphoria over internet companies in general began to wane in 2000. Many, like Razorfish, were so inflated in value that analysts were not surprised when on April 14, 2000, the NASDAQ lost 355 points. Although Razorfish stock began a steady decline, the company continued its aggressive pattern of growth. In the first half of 2000, Razorfish opened offices in Melbourne, Australia and Milan, Italy, as well as expanding its Mobile Solutions units to all of its European offices to take advantage of the expanding mobile Internet business. In August 2000, Razorfish acquired the German e-business company Medialab. In September the company opened an office in Chicago, despite the level of competition heavily entrenched in the market.
Throughout much of 2000, rumors swirled around president Michael Pehl, who had joined the company after selling I-Cube to Razorfish. The Wall Street Journal reported that former Razorfish employees suggested that Pehl did not mesh with other top managers. What was certain, however, was that in February he had begun to sell off shares of Razorfish stock. When he announced in August that he was leaving the company to spend more time with his family, he had cashed in $6 million worth of stock. Shares immediately dropped 6 percent, and investors expressed concerns about the company's stability.
The price of Razorfish stock continued to slide as autumn arrived. When in early October the company announced that it expected lower than projected third-quarter earnings because of a seasonal impact in Europe and a strong dollar, the stock plunged another 40 percent, dipping below $5 a share. Razorfish, however, was still much better off than most internet companies. The steep decline in the NASDAQ forced many start-ups to cut staff or to simply cease operations altogether. Razorfish was now worth only a fraction of the $4 billion it had been worth only months earlier, but it remained a global company with many assets ready to take advantage of a rapidly changing media landscape. Considering that the company was only six years removed from its origins in an un-air-conditioned East Village apartment, Razorfish remained a huge success story.
Principal Subsidiaries: Razorfish San Francisco; Razorfish Los Angeles; Spray Media Agency; Razorfish Studios
Principal Competitors: Agency.com; IXL Enterprises; MarchFIRST
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