What we can learn from billion-dollar mistakes
Usually from the media, we can hear about the success stories. However, failed companies can be as important. If we analyse other people's mistakes we can learn to avoid them. There was a podcast with Tom Conrad (Quibi, Pets.com, Pandora, Snap). Now he is a successful CEO of Zero, but let’s see what we can learn from the failure of Pets.com and Quibi.
The original podcast episode is available here.
Not understanding the math formula of the business model
During the due diligence make sure you have this formula. This formula must be simple enough to be understood by anyone, even by non-technical or non-finance people. If you have this formula you can optimise operations, improve service/product or find flaws in the business model.
If you don’t know or cannot remember, Quibi was a short-form streaming service that aimed to revolutionise mobile entertainment but struggled to gain subscribers despite significant investment and celebrity involvement. Within a year of its launch, Quibi shut down due to a combination of factors including the pandemic's impact on user habits, content competition, and a failure to resonate with its target audience.
According to Tom:
…the math of Quibi, did require us to from day one land in the top 10 and stay there forever. The model would have worked if we could do that. And to the Hollywood marketing apparatus, the numbers that it takes to get there felt kind of small...
Now, those of us who have spent our life in Silicon Valley making software and really, really tried to get people to show up and download new IP in large numbers know just how hard that is.
So maybe if I critique my own contribution to the math equation, maybe I should have beat the drum a little harder about just how unlikely it was that we were going to land the kind of distribution in month one that the model sort of required.
One formula that works in one domain won’t work on a different one. Hollywood’s math and Silicon Valley’s math doesn’t add up. Making people show up in a cinema and making people download an app are two very different problems.
You just can’t afford not to be a hit
M&A is not like buying a lottery ticket. In every transaction there is a risk. There are assumptions and most probably the initial assumption is not 100% correct and some iterations are required to get it right. Make sure, you have a margin of safety if your original assumption is not a hit.
Tom’s experience at Quibi:
I imagined that we would launch, and when the likely thing happened that we got millions of people to download the app, which we did, and then when we inevitably struggled to retain those users at high percentages… I just imagined that what would happen next is the thing that happens in all young companies, you would iterate. You would grind on the funnel until a year later, two years later, six months later, whatever it is. You figured the formula out to get people in and get them to stay and get them to retain.
And what I didn't appreciate was just how quickly you go back to the foundational math and then the math really says you just can't. You can't spend two years iterating your way on optimising the funnels like you would in a startup that had a different cost structure. In a world where you have to spend a billion dollars a year of making content, you just can't afford to not be a hit.
Misjudge the cap of the market
As a buyer you want to get the lowest price possible. But if you misjudge the market cap you can pass over on great opportunities.
What happened at Pandora:
I think the biggest exit in digital music when we got going was I think Yahoo had bought Musicmatch for like $400 million. And so that was seen as kind of the ceiling on the opportunity.
But then I think we just completely misjudged one really important thing, which is that we were really inspired by disrupting terrestrial radio. Terrestrial radio is the predominant form of music consumption in the country. People spend, I can't remember the exact stats, but by minutes consumed, it's something like 10 times more music minutes a month on radio in the aughts and early tens than on owned music. And the advertising supported sort of radio market was a $30 billion category, and recorded music was $8 billion.
Wrong timing
I remember in the late 2000s when we built an online CRM system for opticians. Everyone wanted to move to the cloud. But at that time the business owners were mostly 50-60 years old and didn’t even know how to use the Internet. We were too early for them. Don’t just try to ride the latest trends make sure your audience is ready for the change.
Something similar happened with Pets.com too:
Chewy is an online pet store worth $9 billion today... They grew their business brick by brick and turned it into something really remarkable.
pets.com, which was in a very, very different moment in time and tried to go to market in a really different way. The critique that is often levelled at pets.com, or at least at the time, was like, this is just a stupid business. They're shipping dog food around. You could never make that work. That's just wrong. You absolutely can make it work. Probably can't make it work when 80% of the country on the internet is still on dial up. It was really, really early.
Summary
Learning from these failures lets us refine our strategies, make more informed decisions, and ultimately navigate the complex landscape of business with greater resilience.
