Entrepreneur

There's no room for common sense in startups

(Editor’s note: Jason Cohen is an angel investor and the founder of Smart Bear Software. A longer version of this story originally appeared on his blog.)

Let’s say you’ve decided to provide something tremendously fantastic for your customers, even though it meant great expense and hardship. It would be incontrovertible — you’d refuse to compromise on that one thing, even if it seems impossible to work out how to do it profitably.It’s easy to identify companies who became wildly successful with this technique. Of course this is survivor bias at it’s finest; these examples don’t prove this is a great strategy, they just illustrate that it can work:

Zappos decided to sell shoes over the Internet, even though it meant eating shipping costs as customers tried shoe after shoe, constantly returning merchandise on the basis of fit or look. The convenience of online shoe shopping is a game-changer — to the tune of billions of dollars of revenue — but how could they make up the costs?

NetFlix decided to rent out DVDs by mail for a flat monthly rate despite massive postage and logistic costs, loss from damaged disks, and people duplicating 30 disks a month for $29.95. Customers gleefully avoid the Blockbuster none-of-these-look-good-just-pick-one-already-zombie-walk — and NetFlix just put Blockbuster out of business — but is this a workable business model?

What’s the upside of sticking to “fantastic” even when it doesn’t seem sustainable?

Word-of-mouth by definition. Since I defined the Something Awesome as being holy-crap-you-have-to-be-kidding-me good, word-of-mouth “advertising” is automatic. You don’t even need your own Twitter account and Facebook page and WordPress blog because your customers will spread the love for you. If word-of-mouth can replace 90 percent of your advertising/marketing budget, maybe you can use that money to address the challenges of extra expenses.

Easy to get free press. For the same reason that customers want to tell their friends, the press will find your story worth retelling.

Naysayers stifle competition. When everyone else thinks it’s impossible, they’re welcome to sit on the sidelines and watch you kick ass, just as Blockbuster watched NetFlix steal customers by the millions. Every time an MBA says “no” while a customer says “yes,” you’re increasing your lead.

“I can’t believe they can afford do it!” That’s what most people say about NetFlix and Zappos. Of course if that turns out to be true, it means a bankrupted business, but if you pull it off… isn’t that one of the highest compliments a customer could ever pay a company? It has the ring of loyalty and delight. I’d rather that testimonial than “It’s a great ROI.” Snore.

Easy to attract passionate employees. Everyone wants to work for a company doing something genuinely wonderful for the world, and stellar people have their pick of where to work. An amazing concept means you can attract the best talent who are emotionally committed to making the company succeed.

Fun. In the emotional turmoil of a startup it’s easy to forget that you’re supposed to be having fun now and then. Blowing people’s minds by doing something awesome is a blast.

Sounds like a slam-dunk, so what’s the downside?

A swift death, of course. Since you’re riding on the edge of impossible, it’s quite likely you’ll end up running a charity instead of a business. If expenses are unsustainable, if you can’t innovate around the obstacles, then you run out of money. Simple.

Of course most startups terminate this way anyway don’t they? Turning a profit at a growing company is nearly impossible regardless of business model. Since it’s already difficult, why not at least give yourself an edge in having the Fantastic Thing?

At least those internal hardships — logistics, expenses, processes — are all under your control, which means you have a decent shot at addressing them. Think of all the difficulties you don’t control — competition, changing markets, new technology, fads — all of which have equally significant influence over the fate of your business. Given that, at least this challenge is something you can understand and manipulate!

And if you fail, why not at least have failed at something worthwhile?


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