
A VC’s take on the Season 5 premier of Sharktank - jeremyliew
http://lsvp.com/2013/09/21/a-vcs-take-on-the-season-5-premier-of-sharktank/
======
gfodor
I built a postcard sending product called babygrams over the last few months:

[http://babygra.ms](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
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.

~~~
gfodor
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.

~~~
cehrnrooth
Assuming the marginal cost of printing an extra card is fairly small, have you
considered sending a copy of the card to the sender?

Unless the recipient provides some sort of feedback the sender doesn't really
get anything to show for it. This could also let the sender see the quality of
product sent. You could limit it to just the first card sent to limit your
cost increase.

~~~
gfodor
This is a pretty cool idea. I had considered it but not deeply enough in that
it would likely increase the rate at which customers ended up returning which
is the key metric. I might give it a shot, since it's easy.

The only reason I'm skeptical is that I'm _already_ contacting people after a
few days to follow up with them how their order went, so I'm unsure how much
more upside there is to interacting with senders more post-free card.

The other two problems is you've now doubled your acquisition cost so it'd
need to at least double your return rate to be worthwhile. Also you'd need to
get people to enter their own address which will reduce your top-funnel
conversion rate, but this isn't really a huge deal in the long run if you
assume you can drive users cheaply to the app.

~~~
cehrnrooth
Additional thought, you could put a unique promo code on the senders copy
(code tied to their account) where if they buy X credits they get Z free.

~~~
gfodor
Yeah good idea! Right now recipients of cards have a code they can punch in to
buy credits for who ever sent the card. If I send a free card to the sender
also I could tweak this logic easily.

------
fiatmoney
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.

~~~
jonnathanson
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
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.

~~~
jonnathanson
You're probably right. I thew Cuban's name out there as a random example, and
I probably shouldn't have.

That said, I've seen most of the show (perhaps not much of the first season,
but most of the series since then), and I would guess buyout -- or at least
buy-to-flip -- deals are the majority and not the exceptions.

~~~
dham
No the buyouts are the exception.

------
powertower
Does anyone watch "The Profit" on NBC?

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

~~~
rorrr2
You can watch them online for free

[http://www.cnbc.com/live-tv/show/The%20Profit](http://www.cnbc.com/live-
tv/show/The%20Profit)

------
mattmaroon
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
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...](http://jseliger.wordpress.com/2011/05/08/will-we-ever-find-out-
what-happened-to-flip-video/).

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.

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

~~~
joshontheweb
Ohhhhhh. I was wondering who he was referring to. They do _kind of_ look alike
but seems like a hard mistake to make.

------
lawnchair_larry
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.

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

~~~
billybob255
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...](http://www.forbes.com/sites/jjcolao/2013/06/13/is-shark-tank-really-
worth-5-of-your-company-business-owners-say-absolutely/)

~~~
uptown
Not sure if these are still the terms, but here's the original 5% / 2%
document:

[http://a.abc.com/media/primetime/sharktank/SharkTank3OpenCal...](http://a.abc.com/media/primetime/sharktank/SharkTank3OpenCallApplication.pdf)

