I promised a few weeks ago to write about my biggest project, but something happened that sidetracked our business model. I planned to wait until we had re-focused by testing the market for some signs of the right direction, but that is proving to take longer than I expected. So at the risk of coming off as not knowing what we are doing, I want to talk about this startup, warts and all. I will warn you in advance that the post will be long. After a brief intro, I've divided it into three parts: the history, the idea, and the challenges. If you want to skip around, that should make it a bit easier.
Two quick points:
1. This is a huge undertaking, and I can really use your help. If you have contacts for funding, partnerships, industry executives that may want to be our CEO, salespeople, or just advice, please send me email.
2. I can, and am willing to talk about any/everything about the business except for the provisional patents we are filing, and our single best marketing idea (can't give that one away just yet).
The basic idea is this… imagine you search through your phone book looking for a plumber, and when you get to the page with all the plumber ads, each ad is a short video that explains what is unique about that particular plumber. On top of that, you can also see which plumbers your friends have used, and recommend. Would you use that phone book?
The way I normally describe this latest idea is "YouTube + Yellow Pages + Myspace." The site is LouisvilleVideoPages, and the strategy is to figure it out here and then take it city to city. (Check out a sample listing) We have spent the last 9 months developing it, and still have a few months to go to get it all finished for phase 1. Of all the business plans I have ever pitched, this one is far and away the one investors liked the least. It's odd, because in my mind it sits on the convergence of four trends: online video, increased use of Internet Yellow Pages, social networking, and local search. I thought we would generate tons of interest, but instead, we haven't even been asked to give a presentation. I know part of the reason – our plan is contrarian, but I still thought that given the massive size of the market we are pursuing, that someone would step up to the plate.
Despite the lack of interest, I have spent so much time with the industry numbers and have lived and breathed this opportunity for so long that I simply disagree with all their complaints. I think we are on the right track, and if not, that we are smart enough to find the right track relatively quickly. So while I am surprised by the lack of interest, I'm not disheartened.
Since we are perpetually low on cash, but still need more programmers, we decided to take the approach by Ernest Shackleton, who supposedly place an ad (this has never been definitely verified) that read.
Men wanted for hazardous journey. Low wages, bitter cold, long hours of complete darkness. Safe return doubtful. Honour and recognition in event of success."
Stuff like that inspires me, so I wrote an ad for a Ruby programmer that, surprisingly enough, turned up a decent response. (You can see why I can't work for most companies. They would never endorse such tactics.)
The general crux of our idea, the part that is so hated by so many investors, is that we want to really be local. Call me crazy, but I think the answer to local search isn't to work on it from an office in California. Much to the chagrin of tech investors, we can't automate some of our processes. Call me crazy again, but I just don't think small business owners are ready to self-manage all their business data on Google local. I think they are busy, and they want some hand holding. They want a real person to talk to and answer their questions. They are comfortable having advertising sold to them a certain way, so why change that? I think a sales process that involves (Silicon Valley folks cover your ears) real salespeople can extract more value from the sales process. So yes, our strategy has been to go out and sell the way yellow pages have sold forever. But I'll get more into that in parts 2 and 3. For now, let me explain how we got here…
I've never had any success raising money for an idea, so about this time last year we decided to target an idea that investors were looking to fund – local digital media. There seemed to be a lot of interest in it, so we worked up a plan involving lots of local blogs, a local web show, a local shopping site, a local youth sports site, and a bunch of similar stuff. We came across Videonary, and thought their idea of a video business directory was cool too, so we would add that as part of our local package.
My role was to do all the research and analyze the economics behind each of these options. What investors wanted me to come back and say was that we could do all this cheaply and easily using user generated content. But I don't believe that. I know I'm in the minority when I say this, but I just don't think most people outside of heavy web users have the time or interest in contributing user generated content to websites. And if they do, they don't want to do it for your company, they want to do it in a way that they get credit and/or money from it. Honestly, I'm not sure why people put so much stock in UGC (other than that it's cheap) because the marginal value of an additional, say, restaurant review, is extremely low.
As I'm doing all this analysis, reading books on media economics, living on new media related websites, I realized that the video business directory was the one part of the equation that could be profitable. Not a little profitable, but mega-profitable. I never realized this before, but Yellow Page companies have amazing margins. Phone books are a serious cash cow, even though their use is declining.
We decided to scrap the rest of the local digital media stuff for now and focus on the video business directory. Of course, we had to find ways to differentiate ourselves, and I'll talk about some of that in the next section. This decision ultimately caused one of the three partners to leave the business. Our programmer was a super sharp guy who built the prototype for the directory in just a few days, but was more interested in some of the other ideas we passed over. Yellow pages isn't that sexy, so I can't say I blame him. But that riff in the team set us back a ways while we regrouped.
There are a few ways our Internet Yellow Pages is different than anything else out there. First of all, we have a real local sales force. Our sales model is just like that of the regular yellow pages. We bill monthly because recurring revenue covers a multitude of business sins. Secondly, we focus on the business owner more than the end user, although we do consider their needs too. Finally, we focus on the online-offline connection. We really want to integrate the experiences on a local level, not just make this some site way off in cyberspace that uber-techies use. I want non-techies to use it too.
We chose this idea because it seemed that the trends were all in our favor. Regular yellow page searches are declining, internet yellow page searches are increasing, and sometime in late 2008 or early 2009, IYP searches will pass regular YP searches for the first time. Online video is increasing and getting watched more and more. Ad budgets are devoting a larger percentage to online advertising. Most importantly though, local information on sites like Google and Yahoo sucks. We always use the example of when Todd tried to send his girlfriend flowers and couldn't use the first 9 listings that came up in Yahoo local. One was a grocery store, one only sold silk flowers, one had gone out of business, one number was disconnected, etc. So our first decision that really set us apart is that we would have a real local salesforce, just like the yellow pages, and that this sales force would also help us insure the integrity of our information.
Yes, I know Google is offering $10 if you go take a picture of a local business and verify the information to them. I think that incentive isn't enough to get most people to do it, and as more businesses get verified and the potential pool of $10 opportunities dwindles, who is going to spend the time to figure out which ones to go after for a measly $10 a pop? I'll tell you who – not Joe Googleworker, but my sales guy that is making $100K a year if sells a lot of video listings. Full-time salespeople have the right incentives to go call on lots of buisness owners, which is why, mark my words – Google will buy a yellow pages company someday. They will buy them for the salesforce and the relationships the saleforce has with small business owners.
Of all the companies pursuing the IYP space, only one has it right – SmallTown. Most everyone else relies on UGC and Google ads. But here's the key thing that Smalltown understands – the real customer of an IYP is the small business. That is why, in addition to having a real salesforce, we decided to differentiate ourselves by embracing the needs of the business owner, because that is ultimately who pays you.
When what users want is in conflict with what business owners want, we favor the business owner. People hate this, and they tell me that users will abandon us in droves, but I don't believe it. It's only a small percentage of hyper Web 2.0 types that want some sort of ultimate online power over a business listing. Most everyone else just wants quality information. Who better to provide that information than the business owner? Yes, they may lie, but so do users. That's the rub. People seem to think business owners are all scoundrels that are out to sell you something you don't want, but users are all angels who would never utter a harsh word about a business unless it was really deserved. Those people have never owned a business. There are some customers who are crazy, and will fight you to the death over their unreasonable expectations. Some customers are never happy, and complain everywhere. Seriously. I know people who have never ever had good service at any restaurant. They complain every time. Catering to those idiots is not a good business model.
We also decided to build a social component to the site, not so much so that people could connect with each other (although there is some of that) but so that people could connect with their favorite businesses and be given coupons and discounts. It also helps you find the best service providers by using the recommendations of your friends. When you search for "plumber" and we show you a list of 200 local plumbers, say 12 of them have videos and 4 of those have been recommended by your friends. Which one are you likely to pick? Probably one of the 4.
Now, how do we promote a site like this? Well, SEO is important. That's why we went with separate domain names instead of subdomains. I own (insert city name)videopages.com for about 50 cities. I think that gives it a more local feel, and makes people more likely to use it, in addition to ranking better in Google. Also, since we are local we may as well do local marketing like radio and billboards. We are also doing, of all things, a print guide. We are distributing 25,000 copies of a local "Guide to the Web" that focuses on unique local sites that may be useful.
This is the hard part. Despite the normal challenges of not having enough time, money, employees, or resources in general, we face some very tough challenges around our business model. For instance, what is our price point? On the one hand, we need to get as many businesses in as possible to keep users interested and make the site useful, but on the other hand, we need to turn a profit. Where is that balance? I could charge $50/month and get thousands of businesses signed up, or $500/month and get in just a fraction of them. Where is the tradeoff between content and price point?
And who do we charge? Restaurants are the number one thing searched for on internet yellow pages, but they also have some of the smallest marketing budgets of local businesses. Should we let them in for free and charge plumbers, dentists, doctors, etc? Should we let everyone in for free and only charge featured listings?
Both of those models are off limits to us right now, because we don't have the cash to sustain them, so we've been focusing on finding those early adopters that are willing to pay. It some ways, it's good that we have to make money early to keep going, but at the same time, it ties our hands for some things. I wonder if we are forced to make poor decisions to bring in cash now that will ultimately hurt us later. Time will tell.
The development is a challenge, not just because of limited resources, but because of conflicting priorities. We really really want to work on our search algorithms, and have some cool ideas, but there are basic things that still don't work that we have to implement first. Plus, we know as soon as we can afford it, we have to start working on the mobile phone functionality for the site.
The business model has been shook up because, through a long series of random events that I won't go into, we began to discuss a partnership with a tv station who offered to let their salesforce sell it for us. They are looking for new revenue sources, they have video production capabilities, and they have existing local sales relationships. Once we realized this was a possibility, we realized that we had new opportunities.
For instance, we never planned to go to a small town. It wouldn't be economically feasible to go to Bowling Green, KY, for example. But Bowling Green has a tv station. That station may want to sell video yellow pages listings as an add-on. All of the sudden, I began to wonder if we were just an ASP – offering online software for tv stations to sell and brand as their own. Or, are we a content provider? Since business owners are ultimately paying for distribution of their videos, we could cut all these deals with small town tv stations, have them sell and make videos, then aggregate that content and sell it to yellow page companies via a revenue sharing API. Bowling Green, KY isn't worth much by itself, but get business videos from 200 similar small towns, and that's very unique content that no one else has.
This is why I love this idea. It is so amazingly complex that I can twist the mental models all around and there are so many permutations. It's just a ton of fun to think about it, and I can't wait to see how it turns out. Our plan, honestly, is to do the best we can. Test and measure. Stick with what works. Stay close to the customer. Listen to what they need. If we get funding, we may focus more on development and less on monetization. If not, we have to figure out quickly how to get the money to pay our bills. (We do have a few paying clients already)
That's all for now. Since this is out in the open, I'll write about it more frequently from here on out. I fear what will happen is that we have the right ideas and are on the right track, but we run out of money and will watch the industry grow with the winners having ideas similar to ours. That happens a lot when you try to raise money for technology ideas in places like Louisville, KY.
So far, we are primarily self funded. Mrs. Businesspundit has been amazingly patient as I write checks from our personal account into the business, while she puts off buying the things she wants for that much longer. We also won a grant from the state of Kentucky for $25,000, which has definitely helped. I struggle with how much time to devote towards seeking funding, because I would rather spend my time working on these problems and building the business. I've learned that investors don't really want to be convinced of your idea – they are looking for ideas they already believe in – the ones that align with the way they think.
So far, we are 0/14. Only one investor was interested enough to send back a list of questions. No one has invited us to present. The most interested party in funding us was actually a competitor out of Chicago called Get Fave. We've looked at hiring a yellow pages or internet CEO whose first job would be to go out and raise money. If you are one, send me email.
I've pursued a lot of ideas lately, which I would rather not do, but at the same time, there is some value in hedging my bets until one of them reaches the tipping point that lets me focus 100% on it. I really hope it is this one. I know this post has been all over the place, but I talk about it so much with so many people, that it all runs together in my mind. So I hope the way it was presented here makes sense. If you have any questions, comments or advice, feel free to drop me an email.
As a final note, people always ask how much money we are raising. Well, we started with $750K, because I don't think we would ever need any more money beyond that. But we went lower and lower until we basically decided any amount is fine. $50K doesn't get us that far, but it gets us farther than we are today.