A VC’s take on the Season 5 premier of Sharktank

http://lsvp.com/2013/09/21/a-vcs-take-on-the-season-5-premier-of-sharktank/

by jeremyliew • 13 years ago

56 35 13 years ago

Interesting. I've seen a few seasons of this and the international versions, and found it odd how different valuation works compared to with valley VCs.

drwl• 13 years ago

Yes I agree. I think the main contributing factor is that it's on television.

Axsuul• 13 years ago

Shark Tank also takes 2% stake regardless if they get funded or not.

billybob255• 13 years ago

Not really, it was 5% equity or 2% royalty and according to a Forbes article[1] ABC hadn't asked the two people interviewed for any money. The article also said their source claimed ABC wouldn't be asking for either in upcoming seasons.

[1]http://www.forbes.com/sites/jjcolao/2013/06/13/is-shark-tank...

gfodor6• 13 years ago

I built a postcard sending product called babygrams over the last few months:

http://babygra.ms

After 5-10 iterations over 6 months, 500 or so paying customers, almost 100 4+ star reviews, and a decent amount of data, I concluded the business model doesn't work. Citing vanity metrics like number of downloads and even revenue (as was done here) is a nice way to obscure this fact.

The catch is that to get people to send postcards you need to give them one for free otherwise nobody converts. (This makes sense since they otherwise don't know what they're buying.) You also need to let them pay in bulk for credits or else it is a completely lost cause. The problem is for every person who ultimately becomes a customer, you have too many people who send a free one and forget about you, which costs you real money. The margin on your paid customers needs to make up this sunk cost, which leaves little room for real profit.

The numbers just don't work, and no amount of additional product tweaks or marketing pushes really seem that they can move the proper needle (free-to-paid customer conversion rate) enough (to me) for the model to make sense. It took a lot of work to get to the point to validate this so it's not surprising there are a lot of dead in the water apps in this space that get no traction at all. Essentially you have a low profit-per-sale product that has a fixed customer acquisition cost, and the margins are so tiny that you're threading a needle. Unlike other apps, where the customer acquisition cost can in theory drop to zero.

So I'm not surprised to see that Postcards on the Run is bleeding cash. I looked at their app in the beginning and I can't even imagine how they're getting any orders since the app is so poorly designed. Asking for more money for marketing purposes is hilarious since that will just likely scale up the rate at which they are losing money. I also would not be surprised if Postagram is bleeding tons of cash also. Their app is spectacularly designed but it's an unprofitable model. They have a high volume app for which they are almost certainly losing money on most of those users. ("We lose money on every sale, but we'll make it up on volume.") I'm also fairly certain all of these companies are using the same printing company, so I have a sense what their margins are and I had the same. (There's also not much flexibility there since US postal service costs are known entities.)

I could be wrong though and they may have cracked it somehow. I know they have tried partnering with advertisers to subsidize the free cards (which could work, in theory) but I can't imagine an advertiser paying the amount needed per card to offset things properly. The fact they actually recently did this tells me they realize the free cards are killing them, otherwise why plaster ads all over their product (the design and quality of which they obviously put a lot of care into.) They also give away 5 free cards which to me is absolute madness since I failed to make things work even when giving away a single free card.

Obviously sinking 5-10k of your own money into an experiment like this for 6 months seems much more attractive to me than burning through a few million VC dollars and spending a few years of your life on an idea that is likely doomed. (And then having to go on Shark Tank for more money?) This is why it's important to bootstrap and validate the main hypothesis with an MVP and a few iterations before going big. I am able to keep this app running cheaply for friends and family, learned a lot and improved my design skills, and can focus on something that has more promise being confident I know what the opportunity cost is.

ChuckMcM• 13 years ago

Thanks for sharing this. It really does seem like it is all about execution and not the idea in this particular case. The get one free to start is directly tied to conversions, minimal features versus added features tied to profitability. And above all the App has to be super dead simple to use.

Given that the ideal monetization would be a 'refillable' credit card type deal where you work off your balance and 'refill' automatically when you get below a certain threshold might have problems in the Apple moneygrab pipeline though. Still it works for the NYT so there must be a way to do it.

So discounts on holidays, calendars to pre-setup sending a card on various events, premium features like multi-picture, or instagram like filters, and card-on-demand with things like QR codes to blog entries or something. I could see the feature set that would be interesting but man it would not tolerate a hiccup in the pipeline that is for sure.

gfodor6• 13 years ago

Yeah, the majority of my app's revenue is from bulk-credit orders, so people drop $20-40 at a time to buy in bulk. Most of them don't use all their credits actually, and I'd guess this is probably in my favor in the long run vs. getting them to keep coming back since that is essentially all profit. (If credits expire.)

Here's the thing though. If you assume that you need to give someone a free card, which I'm all but certain of, it doesn't really matter how easy your app is to use, how many features it has, or anything like that. All those things control is your conversion rate of people who get to the point of sending a free card. (In my case, I was getting about 33% conversion rate here, which I think is pretty great.) So, 1 in 3 people who downloaded the app got all the way to the point of sending a free card.

The catch is who comes back and spends money? It's this conversion rate that determines the fate of the business. You don't have a lot of wiggle room here. You can spam them. You can try to improve the design and fullfillment of the cards so they get positive feedback from the recipient. You can give the recipient a way to notify them they enjoyed the card. You can even get people who receive the cards to pay for credits for them. I did all this. But beyond that, what else can you really do to entice users to come back and spend money? This isn't about improving the flow of the app, the use cases, qr codes, or whatever, it's about taking someone who experienced the product for free to decide to pay for more. It's all about sales.

There aren't many levers here at this point in the funnel, and in my experience this conversion rate I was getting (about 1 out of 8 people) is so low it's fairly hopeless when you consider sunk costs for free cards and not to mention marketing costs. You've spent money to send 8 free cards, which came from 24 installs, and you have one person left who is paying you for more. Ballpark you spent about $15-20 to find this one person. The margin on this person's purchases needs to pay for this plus server costs, employees, support, etc. Depending on your pricing they'll need to send (or buy up front) probably around 10 postcards on average per paid user. You have like no margin of safety here.

You'd really need it to be more like 1 out of 2 or 3 for it to be worth the "lets raise $1m and get to the top of the App Store to reduce marketing costs to zero" case. Also don't forget I was in a highly vertical market where there is a real obvious need (grandparents receiving pictures of grandkids.) Good luck to those guys :) The only way I could see it working is if you are at the top of the app store and you leverage the fact that a large % of your credits go unspent, and you can realize this as a profit. This isn't a business though, it's a ponzi scheme. It might be how Postagram has stayed afloat while they try to make the product solvent.

abracar• 13 years ago

Great insight, you should turn this into a "Lessons Learned" post!

jonemo• 13 years ago

I've been involved in (but did not run) another smartphone-to-postcard app, popular mostly in the German market (http://www.kartensender.de/web/us/) but also available in the US. The main difficulties we faced were payment options and lack of control over the user experience.

Payment options: While the situation is slightly better in the US, accepting micropayments is still very difficult. You can basically count on losing 25-40% of the end user price to payment processors. More if you accept credit cards. But with Mastercard Secure et al. rolled out all over Europe these are useless for mobile anyway thanks to the abysmal usability of those systems. In-app payments don't work because those are only permitted for virtual goods (though I've seen some competitors do it for a few months before being shut down). Selling batches of cards (we called them "voucher codes") is a neat workaround but customers aren't huge fans of the idea in my experience.

Lack of control over user experience: You can spend as much time and money as you want on making the app perfect and perfecting the print process (sth. the Sharktank guy didn't do--since when are postcard glossy on both sides?). In the end you hand the card to the mail carriers and those suck all. I'd estimate that 1% of cards don't arrive due to mail carrier error, with USPS causing so much trouble that the US market seemed unatttractive. Those 1% of disappointed customers whose card didn't arrive are 50% of your app store reviews and 100% of your Paypal disputes. And because a postcard is a physical product, Paypal will ask the vendor for a tracking number. Don't have one? Get your Paypal account frozen.

What surprised me in Sharktank episode is that they guy who invested seemed to consider the idea novel when in truth it's been tried and tested since the first opening of the app store. I haven't been involved with that app for several years now but they seem to still operate and last time I checked I could find around 20 competitors. Does that mean the sharks make their investment decisions without any research into the markets they are getting themselves into?

samstave• 13 years ago

What if you turn it into a physical marketing tool for companies. Let them upload and mass mail out postcard adverts?

fiatmoney• 13 years ago

Most of these inventory-financing deals for physical products seem like they would be much better dealt with via loans, unless the equity stake is really more of a quid-pro-quo for whatever connections the sharks have.

jonnathanson2• 13 years ago

A lot of the Shark Tank investments seem like bets on the underlying technologies or products, but against the entrepreneurs themselves. When Mark Cuban (for instance) invests in Company X on Shark Tank, he basically buys the founders out of their controlling stake for what amounts to pennies on the dollar, figuring that he can always monetize whatever inventions the entrepreneurs have developed.

From Cuban's perspective, that seems pretty reasonable. He's basically figuring "You got lucky, you came up with something interesting, but you're not the guy (or girl) to make that something work. I'll take it off your hands and let you cash out." In a way, that sort of deal feels more like corporate M&A than it does a VC investment.

As Jeremy puts it in his recap: "If barriers to entry are low, all the startups do is serve as outsourced R&D for the big incumbents who can come in and use their scale to eventually recapture share from the startups who proved out a new market."

That's basically the Sharks' playbook. I wouldn't be surprised to learn that the first thing a Shark does, upon buying a controlling stake in Startup X, is take it to BigCo Y to flip or license it.

adventured• 13 years ago

I've watched Shark Tank from the first season. The radical majority of Cuban's deals in fact are minority positions. He very rarely buys controlling stakes.

His most valuable asset is time, and he's already loaded up on investments. He doesn't want to run the companies, so most of the time he prefers to retain the entrepreneurs or not invest, and he makes that clear routinely on Shark Tank.

Kevin is the shark that most frequently seeks complete buyouts.

RogerL• 13 years ago

I've wondered about that. Take your PO to the bank, and they'll be more than accommodating in setting you up with a revolving line of credit. Why give up equity? Sometimes they do say "go away, you don't need me", but other times they snap the company up.

mason55• 13 years ago

A lot of people are pretty explicit that they are looking to leverage the sharks specifically. The sharks are also pretty explicit, frequently saying "this is a good idea but not good enough for the amount of work I'd have to put in".

You can tell the ideas that the sharks think are good because they talk about how much of their time they're willing to give, not just the money.

powertower• 13 years ago

Does anyone watch "The Profit" on NBC?

I love the few episodes I've seen so far.

rorrr2• 13 years ago

You can watch them online for free

http://www.cnbc.com/live-tv/show/The%20Profit

mattmaroon• 13 years ago

Zynga's not a great example because startups got a foothold and are now doing well why Zynga flounders. Kabam, Kixeye, etc. Zynga's audience was 100% casual users, and they've been unable to use any cross-promotional muscle to get into the mid to hard-core segment. Also there aren't real economies of scale and there is no third party distribution problem.

jseliger• 13 years ago

Flip video isn't a great example either, for reasons I left in a comment there:

One example of this was the Flip video camera. [...] These huge companies put pricing and margin pressure on the category, and about a year from the acquisition, Cisco shut down the Flip business altogether

I'm not sure this is a great example: most of the press at the time claimed that Flip was still profitable and that Cisco shut Flip down not so much because of the company's profitably as because it wasn't profitable enough for Cisco, which had too many product lines and distractions.

Was this analysis accurate? It's hard to say, and I liked the company but found the narrative around itself shutdown unlikely: http://jseliger.wordpress.com/2011/05/08/will-we-ever-find-o....

Perhaps the strangest thing, as noted at the link, is that Flip had a new suite of products ready for rollout the same week Cisco shut the company down.

uptown2• 13 years ago

Seems like GoPro validated the market that Flip could have continued to serve. They've seemingly done well (though I have no clue whether their financials agree) despite increased competition from cell phones.

brown9-2• 13 years ago

Funny that the author has confused Mark Cuban for Steve Case.

joshontheweb• 13 years ago

Ohhhhhh. I was wondering who he was referring to. They do kind of look alike but seems like a hard mistake to make.

A VC’s take on the Season 5 premier of Sharktank

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