Digital Railroad Insider Sheds Light on What Went Wrong

Posted on 10/31/2008 by Julia Dudnik Stern | Printable Version | Comments (1)

An insider from the now-defunct Digital Railroad contacted Selling Stock to say that a number of media outlets have misreported what has transpired at the company and to offer a different viewpoint. Another former company executive made an offer to confirm the information, which was provided on the condition of anonymity.

First and foremost, Digital Railroad ex-staffers wanted to stress that the company never intended to provide such a short site-takedown notice. The source also offered an explanation for the abruptness of last week’s events and discussed the long-term strategic, management and financial issues that contributed to making the company’s runway precariously short.

From ideology to business model

Evan Nisselson had a business idea that inspired thousands of photographers, earning him the reputation of a visionary and a roster of loyal customers for Digital Railroad. What Nisselson did not have, according to the insider, were the skillset and experience needed to run a 60-person company capitalized at a total of $22 million.

Nisselson’s online résumé lists an arts baccalaureate from the University of Vermont and additional coursework at prestigious art institutions of New York and Florence. He got his professional start as photographer and then photo editor, most notably at SABA Press Photo, remaining in editorial or producer positions until 2002, when his then-employer Eyetide Media promoted him to a business development position. In this role, Nisselson collaborated on securing funding, hired senior management, was responsible for 2002 revenues of $400,000 and deals with companies such as Microsoft, AOL, Warner Bros., HBO,, Getty Images and Time Inc. After a brief 2003 gig as an imaging consultant to Telecom Italia, Nisselson founded Digital Railroad.

He later brought in Charles Mauzy—who had worked at Microsoft, EyeWire, Corbis and AllStock—and longtime Microsoft executive Maris Berzins to help run the business. However, the source said this did not delegate management responsibility or bring transparency; all decisions, including hiring, were either made by Nisselson or required his buy-in. The founder also kept financial information closely guarded, until he distanced himself from day-to-day operations and became chairman of the board in late 2007. Mauzy and Berinz were then promoted to respective positions of CEO and president.

The big reveal

The source said that a year ago was the first time that company management got access to the books, discovering that Digital Railroad was burning an unsustainably high monthly figure of over $1 million. The early-2007 round of financing brought in $10 million, which “should have lasted well into 2009,” said the source, “but it was apparent a year ago that the issue of funds would arise much sooner.”

In addition to the expectedly high infrastructure costs of a technology-driven business, the company was overspending in many areas.

By late 2007, it employed 60 people, including managers whose backgrounds mandated top-level compensation—or were overpaid, as some pundits had put it.

Another problem, said the source, was trying to do too much, too soon. In addition to the original archives product, Digital Railroad directed a lot of resources at developing the Marketplace, which launched early that year.

Strategic issues that contributed to overspending included pursuing big-name clients—and their industry cache—as archive customers. Digital Railroad became known for throwing extravagant parties, which the source said were much too expensive for a startup. And although firms like VII, Redux and other photography mainstays became customers, they had no interest in Marketplace and thus contributed little to company revenues. However, the company continued courting them.

Attempted recovery

January 2008 layoffs were the first—and “extraordinarily difficult,” according to the source—act of the new management team, which resolved that the company needed to dramatically cut costs in order to survive. The reduction of staff to 27 people cut Digital Railroad’s monthly spending to $400,000. The company began actively looking for money that would take it into its next phase.

Though there were some challenges, the company did not think this quest futile. It was heavily capitalized, and much of its previous financials were, in the source’s words, “aspirational figures.” While this made it substantially less attractive to traditional venture capitalists, existing investors said they would come in for another round, if Digital Railroad secured a leader.

By then, the Marketplace had grown. Industry observers noted that that obscure foreign-magazine customers began to be replaced with high-profile mainstream titles on the Marketplace blog. The source said Digital Railroad would have closed out 2008 with $2.5 million in total revenues, half of it from the Marketplace. It was on track to pay out $1 million in photographer royalties.

The discussion echoed some of the reasoning expressed by PhotoShelter as it shuttered its own stock collection; however, the source said Digital Railroad anticipated many of such problems. Still, “Marketplace was strategically questionable,” according to the insider, who thought the stock-licensing product was late to market by over a year. In addition, it was first expected to become the cornerstone of the business, “but it was going to take more.”

So Digital Railroad began diversifying. Prints emerged as potentially the highest revenue source: with fulfillment by Kodak, it was a low-cost, high-demand product. The company was also working on ways to reach out to the general consumers and niche audiences, such as decorators: “As long as we kept the service’s value to photographers, the content would be there to support [these new business lines].”

In 4-5 years, management expected Digital Railroad to generate above $80 million in annual revenues. While this did not necessarily excite traditional investors, the company was also exploring other avenues, such as strategic partnerships—otherwise known as a new owner. The source discussed two potential deals with complementary photo-industry companies and said that by September, Digital Railroad though it had a deal that would make both management and photographers very happy. The two companies were discussing moving into due diligence.

The last chapter

The rest of the story is predictable. The economy melted. The buyer pulled out. Existing investors panicked. The company was out of money and out of luck.

Its board voted to dissolve itself on Oct. 15, when half of the staff—including president Maris Berzins and vice president of marketing and sales Mark Ippolito—were let go. Chief operating officer Charles Mauzy was retained by the investors to consult during the transition.

Digital Railroad brought in Diablo Management, tasking it with finding a buyer. “There was still a possibility of bringing back staff,” said the source. Nisselson recently told the National Association of Press Photographers that he had tried to make arrangements; there were also allusions of a potential merger with PhotoShelter, including its CEO Allen Myrabayashi acknowledging such a possibility.

While in discussions with Diablo, the source said company executives stressed that, in case of a worst-case scenario, it was imperative to provide photographers with at least a two-week notice to make other arrangements: “There was a miscommunication.”

The source added that Digital Railroad encouraged its investors and the liquidation firm not to pull he plug on the Web site until the last possible minute: “That was where the value of the company was: In its photographer and Marketplace customers.”

The already dire situation was exacerbated when the lender that provided Digital Railroad’s hardware loan, which the source says is typical for such infrastructure-dependent businesses, foreclosed on the loan.

Two weeks since the company announced the latest cost-cutting effort, the Digital Railroad Web site is offline, apparently forever (PhotoShelter warns of a final deactivation on Friday, Oct. 31). All of Digital Railroad employees have gone, though a few are still assisting in the process on their own time or a limited-time commitment to investors, as is the case of the former CEO.

What will be done about unpaid royalties and prepaid membership fees is unclear. The Stock Artists Alliance has announced it is spearheading this inquiry.

PhotoShelter and LiveBooks have offered discounts for Digital Railroad customers, the former along with technical migration tools.

So what was it that caused Digital Railroad’s failure—the micro-management by its founder, strategic mistakes, over-borrowing, overspending, macro market forces, bad timing or some combination of such factors?

According to the source, the company was positioned to meet a market need with both of its products: “There is certainly an unmet need. Getty and other large agencies [only] have between 40% and 50% of the market, and photographers need a litany of things, from storage, pricing and licensing assistance to an online delivery platform.” But in the end: “We were doing well, we just did not cross the really big hump we needed to make everyone feel comfortable.”

Copyright © 2008 Julia Dudnik Stern. The above article may not be copied, reproduced, excerpted or distributed in any manner without written permission from the author. All requests should be submitted to Selling Stock at 10319 Westlake Drive, Suite 162, Bethesda, MD 20817, phone 301-461-7627, e-mail: wvz@fpcubgbf.pbz


  • Fred Voetsch Posted Nov 3, 2008
    Very informative, thanks.

    As someone who started up a stock photography agency and managed to survive (barely) I really appreciate hearing the details.

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