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Venture Capitalists and the Silver Bullet

Posted on May 20, 2009 by Tim

Some business models are more difficult than others.  Many times, difficult business models are a direct result of businesses attempting to solve hard problems that need solved.  Enter eCommerce...

Ecommerce is Difficult

Ecommerce is difficult.  Extraordinarily difficult.  Drop ship eCommerce is even more difficult, magnitudes more.  Scaling a drop ship eCommerce model is, for all intents and purposes, all but impossible.  If it wasn't for the talented people we've surrounded ourselves with at the Gordian Project, we certainly wouldn't have been able to win at it.

The incredibly daunting task of managing a multitude of vendors while creating lasting relationships that encourage strong performance, competing in various independent verticals, housing a massive product selection and an accuracy of the product data, efficiently managing the returns of these products, designing complex algorithms and logic, maintaining quality and future-safety in an industry where the primary requirement is immediate results, developing a custom platform, stitching that platform to numerous third party systems, meshing with a plethora of partners, traversing dozens of advertising and marketing channels in order to develop the right mix of paid and free marketing that drives revenue, managing thousands and thousands of affiliates while controlling spend and analyzing and understanding consumer trends, catering to every beck and call of marketplaces, leveraging tools available to meet the increasing expectations of customers, while managing and balancing the needs of the company with the wants and expectations of team, in one of, if not the, most competitive spaces in the world, is seemingly insurmountable.

Now, try doing that profitably.

Now, try doing that profitably, while bootstrapping.

Now, try doing that profitably, while bootstrapping, while growing.

Oh, and do all that scalably.

What’s that?  You're up for the task?  Oh, hold on.  Just a minute.  Let me get some popcorn and some friends, this is gonna be hilarious ...

Online Advertising is Difficult Too

Since eCommerce is so freakin' tough, it's refreshing to notice other industries that are difficult as well.  Online advertising isn't as difficult as eCommerce, but its pretty close.

Last year, journalism lost an icon with the passing away of NBC commentator Tim Russert, the longest serving host of "Meet The Press," the longest running television program in history.  Russert's fervor for politics, understanding of politicians and the media, aggressive yet elegant interview style, knowledge of the landscape, and hard working attitude revolutionized both news and politics.

Of course Matt Drudge headlined with the story, and, as a fan of politics and taken aback by the loss of Tim Russert, I followed Drudge's link to washingtonpost.com's article headlined "NBC's Tim Russert Dies at 58".  A glance at the article I landed on made me sick, if only for an instant.

This is what I saw ...

Qantas Ad conflicts with story regarding Tim Russert's sudden death


Although I knew that I would be landing on an article about Tim Russert and his passing away, I wasn't prepared for what I was about to see.  Once I landed, I saw immediately that Drudge had sent me to the Washington Post and quickly read the headline "NBC's Tim Russert Dies at 58".  Then, scanning the article I saw what looked to be an image of a man, lying dormant, eyes closed, head on a pillow, white long sleeved gown, thin cotton blanket, in a hospital bed.  My heart sunk.  For a fraction of a second, no, a fraction of a fraction of a second, a terrible thought crossed my mind.  "Did the Washington Post actually publish a postmortem image of Tim Russert alongside an article addressing his death?"  "Impossible!" I thought as my eyes quickly scanned over to the image.  Shortly, I learned that it wasn't an image associated with the article, but an ad for the airline Qantas showing off their "sleeper beds".

My first thought was one of sympathy for Russert's family.  Then, my second thought was something along the lines of "What kinds of idiots are running advertising at the Washington Post?  Who on earth would allow this ad to be tied to this article?"  My next thought was something along the lines of "What kind of negative reaction might Qantas receive?”  Then, fuming for Tim Russert and his family, I wondered how upset I would be had I seen a similar article about a family member, paired up with a similar ad.

After taking a minute to pause and catch my breath, I realized that ... automated, scalable, relevant online advertising, is, well, difficult.

What a very hard problem to solve.  The ability for an automated system to understand the content and context of an article, to understand what an image in an advertisement is portraying, to understand that the image might be interpreted as something different, and then to understand that associating the article with that "something different" may be quite inappropriate so as to negatively affect the advertiser, disserve the goals of the advertisement, put the publisher in poor light, and offend the visitor.  This is the perfect storm of terrible online advertising.

Wow.  What a very, very difficult problem to solve.  And to do so scalably... magnitudes harder.  If you tossed any reasonable human at this example, say an employee in Qantas' marketing department, they would have immediately exclaimed "No, no, no!  We're not sticking this ad here, are you insane?!?!?!"  However, tossing humans at problems like this is very much the opposite of scalable.

Great Rewards

When you see that others, like Google, are trying to solve very difficult problems, and are doing so with great, but not perfect, success, you're reminded that the ability to develop solutions to the most challenging of problems reaps great rewards, even if you make some errors along the way.  Solving easy problems is easy.  However, solving easy problems can be duplicated overnight by copycats with a few dollars who inevitably saturate the market and dilute the incentives.  Solving difficult problems takes a lot more.  It takes amalgamation and brilliance, which I'll address in a minute.  And it can't be duplicated over night.

Now, don't get me wrong, online advertising isn't as tough as eCommerce, but it is tough indeed.  Google, you're in good company.  If you need any help, don't hesitate to call.

Turning the Head of Venture Capitalists Toward Difficult Business Models

Given the difficulty of the problems that the Gordian Project continues to solve, more and more frequently these days, Venture Capitalists will come across information regarding our success and are interested in chatting.  Sure, what the heck, its good experience and good fun!

I love it when my partner and I are on the phone with a VC.  Once we plow through the formalities, the bios, and the story, we quickly get into some meat: the model, the talent, the success, the future, the market, the opportunity, the growth, the scalability, the financials, the pace, the target, the exit, etc...  In essence, the "how much money am I (VC) going to make and how fast".  Great.  No problem.  That's a softball.  "Lots, because reasons, reasons, reasons ...”

Then, invariably, the question arises: "So what makes you different from everyone else?  What I mean by that is, why can't [insert random, unsophisticated, fly-by-night operation who wants to make a quick buck] I buy [insert cookie cutter, off the shelf, ecommerce software] and reproduce what you've built tomorrow?"

When this question first arose, I was like, "Is he delusional?"  Then, after my brain mouth filter kicked in, I was like, "That's a fair and decent question."  The VC cares about investing in a company where VC #2 isn't going to jump in tomorrow and chip away at all his "Benjamin’s".  So we would answer with great examples of areas where we are very different from everyone else out there trying (or soon to be trying) to win at eCommerce.  A high level example might be "proprietary technology".  But then a VC, who isn't well versed in eCommerce specifically (let alone a drop ship model), would get all wrapped up in the details of those examples.  "But what about this, but what about that ...”  Then, since those questions are also typically "fair and decent" and have some merit, we have to spend a bunch of time helping them understand why that example really does set us apart, and why they should care about that example.  They always come around, but understandably want more.  "Well, what else sets you apart?"  So, another super example comes out, and round and round we go.  Ten or twenty minutes later, we've discussed, at no deeper than surface level, maybe two out of infinity examples of why we're great at eCommerce and why so many others aren't.  Great, only infinity more minutes to go.

After a couple of those instances, my partner and I sat back and thought about the question and, more specifically, the forum.  You, VC, want me, entrepreneur, to tell you all of the arenas where my company is different from the countless other losing players, or players-to-be, out there and how we successfully solved one of the most difficult business models on earth, in ten minutes, on the phone, when you barely understand eCommerce???

Um, that just might be harder than drop ship eCommerce or online advertising, combined.

Amalgamation

The reason that we are different is that we have successfully amalgamated the brilliant execution of a million on-the-verge-of impossible problems in an arena so very hard that even the most well funded and sophisticated players barely stand a chance at success.  The VC wants us to spend a morsel of our hour long conversation, and try to tell him why we're different.  Well, I could tell you that "amalgamation" thing.  Does that help?  Otherwise, it's impossible.  The VCs question can only be answered by getting in the trenches.  The VC would have to successfully apply for a job at the Gordian Project and work here for, I don't know, six months?  In that time they won't answer their question entirely (remember the whole infinity thing), but they'll know we were telling the truth about the "amalgamation" stuff.  However, that whole "brilliant" thing might work against the VC in the job application process, which means he may never get close to his answer. ;-)

Venture Capitalists Searching for the Silver Bullet

In recent conversations with VCs, we've fielded their question with the "amalgamation" answer and invited them to come spend some time with us, to get their hands dirty with us, to experience the amalgamation and brilliance.  It's so funny.  Venture Capitalists and the Silver Bullet

They know it’s true, and an incredible answer, and that it makes our company so much more valuable than the silver bullet they were hoping for, and that it’s so much better than anything else we could have said in the very few minutes they afforded us, and that if they took us up on our offer they would clearly see opportunity or see its absence.  However, when we give that answer, they just seem to squirm.  They pause, "But, um, ok, hmmm, so, I see, yeah, well, right ..." then they pause again. It's like they know it is true, and wants it to be true, but wish that there was some teeny, tiny, little morsel that we could cite that was the difference.  Sorry VC, teeny, tiny, little morsels that can be described in ten minutes can be duplicated overnight.  Not amalgamation though.  Not brilliance.  They've got their Checklist-O-Good-Company-To-Invest-In, and halfway down the list is "Silver Bullet".  They know they should check it off, but their pencil just fights them.  Screw triple digit growth.  Screw profitability.  Screw negligible debt.  Screw scalability.  Screw talent.  Screw success.  Screw solving the most difficult business problems on earth.  I want TEENY-TINY-LITTLE-MORSEL-O-SILVER-BULLET that can be described in ten minutes but can't be duplicated overnight!!!

Ok, ok, ok, Mister VC... I know you want to hear how we have no idea how big the market is, and that you have to find five other VC's to tag along in order to aggregate $100,000,000.00 to keep us afloat for another year, and that we have no idea how to monetize our product or service, and that we don't have a solid business model, and that we're not even sure what the product is going to look like at go live, as long as we have a clever domain name and our idea is SEXY.

How's that strategy working for ya?

Yeah, Yeah ... Reality

The reality is that it's hard to sell a difficult business to VC's, in an hour, on the phone.  For the most part, VC's aren't stupid, but this issue is a challenge to the smooth flow of a potential transaction.  And, of course, certain VCs, such as those dedicated to retail, may be better than those dedicated to Green.  Moreover, part of the challenge is that VCs can't get their hands dirty with everyone they end up on the phone with who swears they've got amalgamation and brilliance.

This is an exciting and difficult challenge.

If our best answer is "amalgamation" and "brilliance" and they can't afford to see if we're right or not, in their eyes, then how do you get through that impasse?  Maybe it boils down to financial performance as the key factor when they decide who to get dirty (due diligence) with and who not to?  If a company is brilliant, and has solved a very difficult problem, and simply needs money to scale, a VC should see it in the financials, right.  However, what if a company needs money to scale, in order to reach those financial targets that demonstrate brilliance ...?  Yep, we're back to getting in the trenches...

I wonder how many VCs have punched themselves in the face over and over and over again reminiscing about a chat that ended without a silver bullet...

VC: "So guys, in ten minutes or less, what is the one thing, the one morsel that makes Google different from everyone else?"

Larry Page and Sergey Brin: "The reason that we are different is that we have successfully amalgamated the brilliant execution of a million on-the-verge-of impossible problems in an arena so very hard that even the most well funded and sophisticated players barely stand a chance at success."

VC (unsatisfied and confused look on his face): "But, um, ok, hmmm, so, I see, yeah, well, right ..."

Larry Page and Sergey Brin: "Why don't you stick around with us for a few weeks, and hang out in the trenches with us?  You'll see soon enough."

VC (tone of Bill Lumbergh from Office Space): "Yeah ... We're gonna have to get back to you on that."

VCs would be well advised to tread cautiously. Heaven forbid we be tempted to just make up a pretend morsel that will satisfy the thirst for the silver bullet, skip the trenches, and end up with a bunch of rich VCs...



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