Curious George ponders groupon

June 8, 2010

For consumers, the deal is simple. Sign up for free, and get an email every day or so with a “groupon” – an offer for a deep discount on a local purchase, good only if some minimum number of people participate. Discounts cover a broad array of products and services, including restaurants, gyms, spas, supermarket shopping sprees, etc. Most customers are well-educated, single (49%) women (77%) under the age of 35 (68%).

For providers of goods and services, groupons generate significant one-time revenue, and the chance to attract potential repeat customers. As an example, a NYC day spa recently ran a groupon for hot stone massages. They reduced their retail price by 59%, from $120 to $49. In return, they sold 2,267 massages, generating over $110,000 in revenue (time to hire more masseuses!).

For groupon itself, the business model is highly attractive. They take a 50% cut of groupon purchases, and are supposedly on track to generate $350 million gross / $175 million net revenue in 2010. Better yet, groupon is highly viral. Since consumers only get their discount if others purchase, they eagerly spread the word via email, twitter, Facebook, etc. That’s enabled groupon to attract millions of customers with little to no marketing expenses.

How’s it working? Groupon launched late in 2008, sold a million groupons in their first year, and have sold three million to date. They reached break-even in just six months, and the business supposedly throws off $1 million per week in profits. Originally in Chicago, groupon has since rolled out to 40 cities. And investors have noticed. Groupon has raised over $130 million, most recently at a valuation in the range of $1.35 billion. 60+ other companies have copied the Groupon approach, including GroupSwoop, ScoopSt, SocialBuy, BuyWithMe, SwoopOff, MyDailyThread and LivingSocial. And at least two companies have created aggregators that scour the web for the best offers each day.

How much room is there for growth? It’s anybody’s guess, but the evolution of the email newsletter business may hold some clues. In that space, a few major players dominate big categories (e.g. Daily Candy for 20-something women, Thrillist for 20-something men) and a long tail of niche companies concentrate on particular market segments and product / service categories – with varying degrees of success.


Bo Peabody interview: Business models

May 19, 2010

Bo Peabody is co-founder and Managing General Partner of Village Ventures, an early-stage venture capital firm. Previously, Bo founded / co-founded a string of startups, including: Tripod (one of the first social networks, later acquired by Lycos), Waterfront Media, VoodooVox, FullTurn Media, and UplayMe. He’s also an owner of Mezze, Inc, which consists of three award-winning restaurants. Bo wrote a book for entrepreneurs called Lucky or Smart? published by Random House. He is a graduate of Williams College.

UpStart:  What advice do you have for entrepreneurs pitching investors about their business models?

Bo Peabody:  “Entrepreneurs have the counterintuitive task of having to think big and act small. For any business that is going to attract venture investors, a big vision is important. But that’s the easy part. The much harder job is figuring out how to distill that vision into an actionable plan that has clear, incremental levels of success. Entrepreneurship is like a video game…you need to know what the levels are and then reach each one before going on to the next.”

UpStart:  Are there particular business models that you prefer to invest in?

Bo Peabody: “At Village Ventures, we prefer to invest in business models that are tackling mature markets. We’d rather bet on our ability to back the right team that can knock off existing competition than bet on our ability to see around corners. For instance, this is why we invest in vertical publishers in the interactive media space, rather than social media companies.


May 19, 2010

Evaluating a new business idea? First, ask yourself the following questions:

1. Does the idea meet your personal criteria? Is it a fit with your goals, passions, and work environment preferences? Are you comfortable with the risks involved? Do you have the right skills and resources to make it successful?

2. Are market conditions favorable? Why is this the right time for your idea to work? How fast is the market growing? Is it big enough to support your revenue goals? For example, if the entire market only generates sales of $10 million, it’s probably unrealistic to think your company’s revenue will hit $5 million within five years.

3. Is there enough demand? Who are your target customers? Do they have important needs that are not being addressed? What evidence do you have that they will buy your products? (Note: “my friends like the idea” is not good enough).

4. Is it working somewhere, somehow? It’s a good sign if other companies are pursuing similar ideas and experiencing success. That shows the idea can work, and provides an opportunity to learn by watching what other companies do. On the other hand, too much rivalry can tie up partners, drive down prices and make it tough for you to compete.

5. What’s the business model? Very, very few companies can get away with gaining a following first, and figuring out a business model afterwards. Leave that to whiz kids with venture capital backers. Instead, come up with ONE way to generate revenue that is clearly working elsewhere, and make sure your idea is a good fit with that revenue stream. For example, if you want to sell advertisers access to your website, understand how much traffic you’ll need, and whether your audience is one that brands want to reach – before you go through the trouble of aggregating that audience.

6. What will you need to execute? How much money do you need to build the business, and when? What kind of team will you need? Are there particular skills or relationships you’ll need to be successful?

7. What’s the payoff? If all goes well, how will you and any other shareholders (e.g. investors) benefit? Will you get paid along the way? Get a payout when you sell the company? While it’s tough to predict the future, you have at least one plausible end game in mind before you commit to an idea.


May 17, 2010

By some accounts, over 30 percent of adult Americans have unrealized dreams of starting their own companies. What’s holding these wannabe entrepreneurs back? Among other things, many of them just can’t find compelling ideas. Here are a few tips for discovering ideas that will get you off the fence and into the action:

1. Consider yourself. Before you look outward for ideas, look inward to determine what kinds of startups are a fit for you. Got limited access to capital? Look for ideas that are bootstrap friendly. Have credible experience in a particular industry? Find ideas in that field, and you’ll have a better chance of executing well, networking your way to industry contacts and customers, and convincing partners, employees, and investors that you’ve got the right stuff. Got skills in a functional area like sales or web design? Look for business concepts where those skills are critical, and you’ll be able to accomplish more with less help from outside. And whenever possible, look for ideas that are in-line with your long-term passions.

2. Solve a real problem. Some founders come up with ideas, and then try to figure out if customers want them. That’s extremely risky. Instead, find a problem customers are already paying to solve.

3. Copy something that works. If you are raising venture capital, or think you’ll only make money by selling your venture, ignore this. Otherwise, find an idea that’s already working, and copy it. Scour the Inc. Magazine 500 list. Keep your eyes peeled for businesses doing well in other markets. Let someone else go through the hassles, costs and uncertainty of proving whether customers are willing to pay for your product. Differentiate yourself with better service, or a better quality product.

4. Look right under your (employer’s) nose. Some of the best ideas come from employees who see something their clients want, but their bosses don’t want to pursue. Maybe the market is too small for their employers, or isn’t a strategic fit. A wily founder can feast on crumbs big companies leave behind.

5. Get started. Plan “A” rarely works, but it’s tough to spot Plan “B” from the sidelines. To solve the problem, get a simple product to market quickly. If you get a product in front of paying customers, watch and listen carefully, Plan “B” will often reach up and tap you on the shoulder.

5 things to look for in a startup idea, for bootstrappers

May 6, 2010

What types of ideas are best suited to bootstrapping? (We’ll get to “how to bootstrap” in a separate post). Here are a few things to look for:

1. Low startup costs. Look for ideas you can launch without writing big checks. For example, it tends to cost less to start a company that sells services than one that sells products. Want to sell a line of baby food? You’ll need to create product formulations that meet FDA standards, and design packaging that stands out on store shelves. Also, you may have to produce more than you want at first, to meet supplier minimums and be prepared for customer reorders. Want to start a consulting firm? You can probably get started with a simple website and business cards.

2. Low marketing costs. If possible, find companies that reach customers without the need for large marketing budgets. For example, one of my clients has a $3 million revenue business and has never spent a penny on marketing. She sells hospitality services that cost over $100,000 per year. The universe of potential clients is fairly small, so she networks her way in the door, gives a sales pitch in person, and (sometimes) walks away with a big fat contract.

3. Proven demand. Forget “if we build it, they will come”. Instead, make sure you can sell it before you build it. There are a few ways to do that. The best way is to get customers to commit to making purchases in advance. Alternatively, you can work closely with one large customer when developing your product or service, so you can build their needs into your design. Can’t do that? Copy something that’s already selling.

4. Simple operations. Pursue ideas that don’t require large teams, wide varieties of products, or other factors that make operations difficult. Instead, find businesses where you sell one type of product or service to one type of customer, at least at the start.

5. Quick break-even. Seek opportunities that will let you get a product or service to market quickly, get cash flowing in the door, and reach profitability within a few months. Beware of ideas that require critical mass, before you can start generating revenue, like advertising supported websites or marketplaces. Also, watch out for startup ideas that entail long, unpredictable development cycles, or high levels of overhead.

Size matters: How to estimate your total addressable market.

May 5, 2010

Market size is important, because it provides a general idea of just how big an opportunity you’ve got. If you are going after a market where customers currently spend $10 million per year, it’s probably unrealistic to think that you’ll generate $5 million in revenue anytime soon – that would require a 50% market share, which is more than Coca-Cola has, and they’ve dominated their market for more than 50 years.

Still, sit through enough pitches, and you are bound to hear something like the following:  “This is a $1.5 billion market. It’s huge! If we capture just one percent, we’ll have a $15 million business!!!” Trouble is, the $1.5 billion market size is pretty much irrelevant because it includes lots of segments that have nothing to do with their business. Also, one percent is arbitrary—that could be a little or a lot, depending on the competitive dynamics.

When sizing up a market, focus on the part you can sell to—the total addressable market. That’s the amount of revenue your company could generate if you got 100 percent of your potential customers.

For example, let’s say you are starting a cosmetics business, selling high end products (“prestige” in industry parlance) through U.S. specialty stores like Saks, Sephora and Neiman Marcus. Total annual sales of cosmetics may be more than $40 billion on a global basis, but that’s not your opportunity. You won’t be selling lipsticks at Wal Mart, for example. Instead, you’ll compete in the U.S. market for “prestige” cosmetics, which is closer to $3 billion in revenue.

It may seem like bigger is better, but overstating the market opportunity is bad for everyone. It can mislead founders and shareholders, who will be disappointed when sales are lower than expected. It can also reflect poorly on founders, especially when pitching to investors who know better.

3 reasons to make your startup the this of that

April 14, 2010

Some business ideas are truly revolutionary – radical departures from anything done previously. When revolutionary ideas lead to successful companies, founders and investors reap bountiful rewards. In 1999, two venture capital firms invested $25 million in a young, innovative startup with an odd name: Google. Their stake in Google is worth about $50 billion now.

But starting a company based on a revolutionary idea isn’t for everyone. It’s extremely risky because there are so many unknowns. Will customers buy the product (or service)? Will they pay enough for you to make a profit? How much will it cost to market and sell the product?

Many entrepreneurs prefer to pursue evolutionary ideas. They find concepts others have implemented successfully, and modify them. These founders strive to create the “this of that”. Here’s why:

1. Lower risk. Method revolutionized the household cleaning product market. They developed sleek designs and eco-friendly formulations, and outmaneuvered huge rivals like P&G and Clorox. They also opened the door for other startups, by establishing a proven model for success. Following that model is less risky than creating a new one and hoping it will work.

2. Instruction manual. A friend of mine is building “the Method of oral care products”. Whereas founders with revolutionary ideas have to start from scratch, my friend can look at the history of Method, and learn from their successes and missteps. He’ll have a head start when figuring out how to price, manufacture, distribute and market his products, for example.

3. Easier to pitch. Founders of startups have to persuade other parties that they have a winning idea, including customers, investors, partners, suppliers and employees. A “we’re going to be the this of that” pitch makes it easier for those parties to grasp and believe in the merits of your idea.

Got a “this of that” idea? Post it here for some free feedback. Don’t worry about copycats – success is about 95% execution.