Reorg rocks PlanetOut

Culminating two months of infighting, PlanetOut is reorganizing. On the outs are a major financial backer and the company's chief executive officer.

Tom Rielly, who founded the company a year ago, is back on the board after being kicked off two months ago and is replacing outgoing president and CEO Jon Huggett. Rielly and PlanetOut are buying out Sequoia Capital, a venture capital firm, which had pumped $2.7 million into PlanetOut.

That makes Rielly the majority stake holder in PlanetOut, the online gay community that launched on the Web and America Online with great fanfare only five months ago.

AOL has a minority stake in the company and the remainder is owned by employees and some angel investors with Silicon Valley companies, Rielly said.

PlanetOut's troubles are a cautionary tale for other online services. The company found itself unable to please their investors and serve a grassroots community. For now, at least, the grassroots is winning out.

Rielly characterized the reorganization as positive, saying PlanetOut is now free to pursue its vision of becoming the premier online service for the gay community. Detractors, however, worry that PlanetOut's vision is too small, catering primarily to gays and lesbians living in large metropolitan areas such as San Francisco.

There also will be staff cuts, with at least two employees leaving. Harry Taylor, vice president of sales, criticized for his efforts to attract "mainstream" advertising by toning down the site, also left. But Karen Wickre, who Huggett fired two months ago, will be returning as editor of PlanetOut Press, a new division that will publish books related to the Web site.

Rielly characterized the internal problems plaguing PlanetOut as a combination of a clash of personalities and differing philosophies.

By definition, Sequoia was looking for a fast return on its investment. But a content company trying to build an online gay community needs time and the trust of the community to do so, Rielly said. Sequoia "realized that the content business doesn't necessarily fit into the venture capital model," he said.

In other words, PlanetOut wasn't bringing home the bacon fast enough. "Although they were willing to take a gamble, they were not willing to change their business expectations quite to the extent that the market requires," Wickre said.

Rielly said PlanetOut and Sequoia mutually decided to part ways. Sequoia did lose some money in the deal, but Rielly would not say how much. Sequoia partner Mike Moritz, who will be stepping off the board of directors, declined to comment.

PlanetOut, Rielly added, has been bringing in advertising dollars with companies including American Airlines, Virgin Records, and Amazon.com. But, he said, the service is no longer relying exclusively on ad revenues. It also is trying to generate sales from transacting online commerce, licensing content to gay and lesbian newspapers, and hosting gay and lesbian Web sites.

Rielly added that PlanetOut has enough money in the bank to last three years.

Most people who log on PlanetOut have had no indication that trouble was brewing. In fact, the number of visitors to the site have continued to increase, Rielly said.

But Netizens paying attention would have noticed at least one small difference that speaks volumes about the feuding factions and their differing philosophies.

Two months ago the service, lead by Huggett, dropped PlanetOut's tag line, "a worldwide online community for gay, lesbian, bi[sexual], and trans[sexual] people," saying the inclusion of bisexual and transgender communities would alienate potential mainstream investors and advertisers offended by PlanetOut's more radically queer sensibilities.

Huggett said he had his eye on the international gay and lesbian community and "not just a small group in San Francisco," he said. PlanetOut, he added, "is getting smaller."

But Rielly said the tag line reflected PlanetOut's desire to serve the entire gay community in all its diversity. "We need to serve all aspects of our community, and we're not just for a certain segment."

Last week, the tag line was put back on the service. "Everyone here is just in the greatest spirits right now," Rielly said. "We've gotten more work done in the past two weeks than we had in the previous four months. And we're very, very happy. We're sort of rocking and rolling right now."