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A Key to Startup Success

Monday, June 13, 2011
Posted by Leah Yomtovian

Venture capital and angel investors are approached regularly by thousands of entrepreneurs looking to raise capital. At the most basic level, these investors are looking for unique, breakthrough, and protectable ideas that address a market of at least $1 billion. But, as GRP Partners’ Mark Suster notes, a great idea that fits a huge market will not ensure company success. Ultimately, angels and venture capitalists want to invest in entrepreneurs who have demonstrated their ability to learn from market feedback, recognize when to fine-tune their product and model, and adjust their businesses appropriately. Groupon is a great example of a company that realized its business model was not working and had the willingness and foresight to shift course.

 

As Cathy Belk noted in a previous blog post, Groupon pivoted from an online fundraising site, called ThePoint, into an online coupon service after analyzing feedback that signaled 1) the company may never gain viral traction; and 2) its focus on the tipping point of consumer buying power had proven successful. Companies like Flickr, PayPal, and Pandora have also pivoted. And, according to the Startup Genome project, an initiative started by a group of Silicon Valley investors that seeks to identify the DNA of successful internet startups and entrepreneurs, web companies that pivot once or twice raise two-and-a-half times as much capital and see 3.6 times the user growth.

 

The story of Findaway World, a Cleveland, Ohio-based company that successfully raised $11 million from local investors, demonstrates how pivoting can save, and even strengthen, a fledgling company looking to gain market share and become profitable. Less than five years after Findaway’s initial launch of its Playaway product, a preloaded digital audiobook, the company was recognized as one of the top 50 fastest growing consumer product companies in the country by Inc. magazine and one of the 2010 Weatherhead 100 fastest growing companies in Northeast Ohio. Before surpassing $25 million in revenue, however, the company struggled to make inroads. By Findaway’s one-year anniversary, its founders realized they needed to pivot.

 

When Christopher Celeste launched Findaway in 2004 with his four partners, the business seemed destined for success almost immediately. The Playaway was created as a deck-of-cards-sized player that was preloaded with content and could be used like a Walkman—by plugging in headphones, listeners could hear their book and could forward, rewind, or bookmark their place. With only a working prototype, Findaway secured a $1.7 million order from Borders followed by orders from Barnes & Noble and OfficeMax. Despite the high-profile contracts and national media attention from The Wall Street Journal, The New York Times, USA Today, People, Time, and Oprah, the founders realized that their model needed tweaking. “The general public did not understand how the product worked, our manufacturing and distribution costs were too high, and our profit margins were too low,” explains Celeste. Findaway was losing money on each Playaway sold to Borders and saw almost 25 percent of their products returned by book readers who did not understand the technology.

 

Rather than give up on the Playaway or ignore the writing on the wall, Celeste and his partners sought an opportunity to pivot their business model. Maintaining their momentum, the founders did a trial run in a couple of local libraries and were impressed to see the librarians teaching their patrons to use the digital audiobook. Once consumers understood the technology, Playaways were an instant hit. Not only were the libraries thrilled to offer a new, easy-to-manage, easy-to-use technology, their patrons were eager to take advantage of the digital audiobooks. Hearing the feedback loud and clear, the founders moved quickly to shift course. Whereas their business-to-consumer model via big-box retailers meant a high percentage of returns, higher costs, and lower margins, a business-to-business model would remove the return and cost issues (librarians would teach the patrons to use Playaways) and alleviate some of the price point issues (consumers wouldn’t have to pay for the technology). This shift meant a non-trivial investment in a new manufacturing and distribution model. Rather than fill bookseller orders for 30,000 copies of the ten bestsellers (high quantity, low volume), Findaway now had to fill institutional orders for three copies of every book ever published (low quantity, high volume). To meet this new demand, the company developed new in-house capacity for distribution.

 

“We changed the backend of our business, moved our office to a bigger location with the capacity to load, label, and ship our products, and hired 100 employees for light assembly work,” says Celeste. Additionally, since the Playaway was a new, unique product, Findaway had to build its own equipment to load content and label, package, and ship the product.

 

Celeste and his partners used what they learned from the retail and institutional markets to make adjustments to their model. After gaining traction in the library market, Findaway launched into the military and school markets. In 2007, the company signed a multimillion dollar contract with the Department of Defense for more than 150,000 Playaways that would be shipped overseas to soldiers and their families. And in 2011, the company launched the Playaway View, a preloaded digital audio player.

 

“A business plan is good to have so you have a sense of where you’re going. But you have to realize when you’re wrong and be willing to experiment and learn,” says Celeste. Entrepreneurs with great ideas have the potential to raise capital, but it is those who demonstrate resilience, a willingness to learn, decisiveness, and the ability to take swift action to change course—like Celeste and his partners—who seem more apt to succeed.

 

Leah’s primary focus as JumpStart’s Market Analyst is developing a deep understanding of the key challenges and opportunities facing entrepreneurs and early-stage companies. Using her experience leading research projects and framing problems to identify creative solutions, Leah works to build stakeholder relationships, ensure the growth and success of client and portfolio companies, and drive organizational strategies. Additionally, Leah brings her insights to life through communications and advocates for and connects entrepreneurs to additional capital and service resources beyond those provided by JumpStart.

Categories: Taking-the-High-Growth-PathIns-and-Outs-of-Venture-Economics
Tags: business planearly-stageentrepreneurentrepreneurshipgrowth strategyhelp for entrepreneursJumpStartstartup

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