This is a truly wonderful writeup. I especially appreciated the insight that "Marketplaces need a big disconnect between buyers and sellers".
I try to tell this to startups that try to add indoor location-based technology to businesses like Men's Warehouse. What they fail to understand is that those places run better because they are staffed by people who understand their customers. When someone drives into the parking lot of a Men's Warehouse, they are already there to buy a suit. They don't need discounts or information about the products from an app on their smartphone, they need real customer service.
A skilled salesperson can upgrade anyone on warranties and other items. Having a piece of software do it, especially one built by a group of programmers and marketers that know nothing about suits, is ridiculous, and so is the idea of training skilled salespeople to also be system administrators for software that's not needed.
One thing that a lot of tech people forget (including, frequently, myself) is that there are reasons systems are the way they are. It might be inefficient, it might be stupid, it might waste everyone's time, but if they wanted to change things, they'd already be looking for a solutions. That they aren't is evidence that they don't see it as a problem.
yes, creating an app to supplement an existing business (Men's wearhouse) can yield sub-optimal results at best. A better way to do it is to disrupt the model like IndoChino did. They realized that buying a suit is all about the materials and the fit and did everything possible(refunds, alteration fee) to ensure that customers were satisfied.
Reading this post I can't help but think that if they had built services that the middlemen needed that they would have succeeded. For example, take the following two quotes:
"We wanted to revolutionise the fine wine industry, a market with many layers of middle men, and one that has traditionally eschewed technology, failing to patch it's many inefficiencies."
"Unfortunately, the service offered by all of these warehouses is poor. Again, we see little technology (basic online systems, preset passwords, refusal to spend money on an SSL certificate), and lots of human errors (such as very expensive wine being moved to the wrong accounts)."
If these statements are true then there are very real pain points here. Selling services to these vendors, solving their pains, is likely where there is money to be made.
We tried this. The middle men simply weren't willing to pay for software (or at least enough to build a viable business).
It's a very antiquated market - with a lot of independent traders. Their view on software (particularly web based) is often that it's something you can get a teenager to build on the cheap and isn't worth spending real, hard cash on.
I would have enjoyed being a fly on the wall to hear your sales pitch. I don't know the market well enough to know whether they truly would sieze the opportunity to make more profits or not. Anyhow, sorry it didn't work out for you and good luck in your next venture, whatever that may be.
You are missing the point. Being Italian I know exactly what problems OP is facing because are problems that almost any Italian sector has. People do not want to move on.
Coming to the specific problem OP has. The wanted to work on fine wines, not WalMart wines. If the best wine in the world, would be sold at WalMart(or any other super market) even at the same price and in the same conditions it would lose immediately value because all the research, experimentation, and everything is lost, and that is a huge part of the experience that you taste with the wine.
A practical example: you know how to make the best cake in the world, but it takes a lot of time and it's hard so you can do it only once a year, but you love it, it's your favourite cake so when you make and eat it you love it and you wish you could do more. If WalMart started to sell the same cake you would buy it once or twice but it would not be the same and you probably would end doing once a year as you always did. This is the same problem of OP, people wanted the service, used once or twice and then went back to the old habits.
I'm sure there's an audience for which that's true, but it would seem like that's an edge case of people who prefer to overpay for nostalgia purposes if they could get the same product cheaper and more conveniently. Wine is often a luxury good though, so I'm probably underestimating the people who are willing to be snooty about it :)
I think it's an important insight that certain inefficiencies can be tied to livelihood of the customer (wine sellers) and even the end user (wine buyers). There are strong emotional attachments to the PROCESS of making wine, promoting wine and selling wine. If you go to wineries throughout Sonoma county, you can clearly see that small, independent wineries often take pride in doing everything by hand and controlling their own selling to restaurants etc.
It is very similar to bookstores and record stores. Yes, there are big players that are handling there own optimizations but if you are a small winery (or bookstore/record store) you are doing it at this point in part as a preservation of an artisanal experience. There are countless ways they can do things better but there is a genuine fear that "optimizations" can be a slippery slope to Walmart-ville, both in how they think and how they are perceived.
That would have taken a lot of money (to buy stock), and expose us to a lot more risk. Investors were backing us for the disintermediation.
I quite strongly believe that someone with an understanding of tech, the ability to build something, and take a position on stock, could make a lot of money in this market.
You need a hedge-fund billionaire that is obsessed with wine to back you. He would own, (or have a perfect lean) on all the inventory allowing him to buy $10M in wine as a business investment. He would get the satisfaction knowing that he was arbing the wine market as a side project, and if it failed, he would be "stuck" with a bunch of inventory that he liked.
I think this is actually a decent idea worth testing. Not as the typical startup but more as a one customer at a time but big customers sustainable business.
The warehouse situation seems like it needs solving. I don't quite get why someone that buys 5k of wine wouldn't pay for a good warehouse.
High tech new age warehousing for wine seems to be the in.
With some big customer that loves wine you'd basically switch to building and running his warehouse and then see how you can scale that to warehouses that store wine for multiple people.
Premium wine is pretty much comparable to art imo. Show effect and "because I can" are big drivers for buying. If you successfully run the warehouse for one rich guy you can leverage that as marketing.
Either way: Very fascinating article. Thanks for posting it.
Having read many of Paul Graham's essays about his time trying to start a company selling web services to art galleries, I can totally relate to the fact that there are indeed still many industries that are extremely archaic and uninclined to change the way they do business (even if small changes would make their lives simpler and their businesses more profitable).
Thanks for sharing this. You clearly understand well what your core challenges were.
The interesting part is that you probably knew all of this going in. Perhaps you were so enamored with your idea, that you wanted to believe these were not the insurmountable challenges that they were. Reminds me of couples who marry knowing of certain glaring problems, but proceed anyway because they are "in love". Whether they downplay the problems, convince themselves they can overcome them or otherwise, these are frequently the very problems that lead them to failure (divorce).
But, more frequently, we probably just think these challenges will melt away or work themselves out somehow. Maybe that's why these businesses always look so good going in!
This is not to lambast you--quite the opposite actually. I have been there and I am still susceptible. I applaud you for acknowledging your challenges and getting out relatively early.
We knew exactly what the problems were - we just had a vision for how to overcome them and how things could be different. Every business starts as an idea, with a set of hypothesis to validate (even if you don't realise this at the time).
It was tough to decide to stop - but when you take a step back, look at the data we had, it was the right decision.
That's absolutely true. I think it's very common in the startup world to tackle fairly big problems with known challenges--armed with a set of hypotheses--only to be later stopped out by those same challenges.
But, how much confidence in our hypotheses is enough when it comes to the key "show-stopper" challenges? How clear should we be on the path before moving forward? Speaking from personal experience and observation of others, I would say that we founders tend to be optimistic when assessing these challenges at times. There's a little hope in there.
I suppose a certain degree of that optimism is necessary, else no one would move forward. It's just a bit painful to fail for all of the reasons you knew beforehand.
Because, testing the proposed solutions can be exceedingly difficult and resource-intensive. I've often wondered if there's a better way to test assumptions than just going all-in. I've found the much-lauded MVP approach to solving this doesn't cut it for me or for a lot of models/founders. For models that require things like network effects, brand credibility, and more advanced functionality to even be usable the "MVP" is, effectively, the full product. And, this doesn't even consider the marketing/PR/etc. that must be put behind it.
Given all of that, you actually did well to move on in only 18 months. Congrats on making a tough choice and freeing yourself up for the next opportunity.
The statement about wine buying being part of the fun is the crux of the issue. I'm not into wine but I am into whiskey, and rather than buy from an online merchant, I much prefer walking into the local shop and getting a recommendation. That process is extremely enjoyable, and one I happily pay a bit more for. Same with craft beers. There are some really great high end sites that cater to luxury goods which are great examples of providing this experience online, but they require a lot of time and design experience, and are about as far from a marketplace as possible, conceptually.
It's a little more complex - a lot of our customers were trading wine to make a profit, and were far more price sensitive. They traded on the site in the early days.
Sadly, the novelty soon wore off, and it turns out the social element is one of the reasons why they enjoy their trading.
> We always knew that people bought this wine for fun.
> The buying process, and talking to others about the wine,
> turns out to be part of that fun.
So yes, you can strip out all of the fun bits and come up with a very efficient transaction process, it's just that the customers want the fun bits more.
If you have not tasted that exact label from that exact winery, you have no idea what you are getting. Same grape, same winery, same year is not necessarily good enough, especially when dealing with interesting and not well known wineries.
In particular, I enjoy getting to know the people who work at a local establishment and understand their taste. For instance, when it came to fine teas, I got to know one tea merchant well enough that she'd say, "This new green came in and I hated it! I thought you'd love it!" because we had entirely opposite tastes when it came to the astringent characteristics of tea. (Think a Pi Lo Chun versus a Sencha, for instance.)
While we are getting better at recommendations, the best salespeople still have a better understanding of what makes you like a product than "people like you also purchased..." algorithms. This may be particularly important in markets that are about different things for different consumers: wine selection may be about taste, or it may be about social signaling. Same is true in the transaction: it may be about the best price, building a relationship, having a relaxing escape (buying cigars, for instance), or any number of other things.
Even when salespeople don't have a better understanding of your tastes they're more likely to be persuasive and more likely to add the perceived value to it... a salesperson who admits to hating something she recommends is a more memorable and compelling call to action than an algorithm
I'm sure Amazon's algorithms often do have a better idea of what I'd enjoy than many of my friends, but friends' recommendations are still more likely to induce me to act than a personalised promo email.
"Unfortunately, over time we found that while people used the site once or twice, they quickly reverted back to emails and phone calls. We always knew that people bought this wine for fun."
Do you know why is that? It's not only about 'fun'. It's about knowing about the wine.
For the technically minded people it is easy to assume this 'wine talk' is BS (I'm not saying there isn't BS) but most of it isn't.
So the experience of buying it with someone who understands it is superior to seeing lists of pictures, prices and generic descriptions.
Also, I bet most wine consumers that would go for this service don't care to learn an iPhone app.
1st lesson for startups: Know your market! I can't make a "disruptive marketplace removing inefficiencies" for selling sand at a beach (absurd example, but you get the spirit)
How is it done today? Remove the pains, but don't take the good things out.
Another analogy. People won't exchange eating pineapples for bananas because bananas are easier to eat, rather, remove the pain of peeling the pineapple, but sell pineapple.
This is one of the most interesting "Why my startup failed" type post I've ever read. You brought up real insights and didn't fall into the "I'm just gonna generically rehash 4 Steps to Epiphany and Lean Startup to look smart" trap. Thank you for taking the time to write it up, really excellent read.
I'm sorry to hear about the closing of your start-up, but your write-up really shows how much you have come to understand the business of solving peoples' problems. You aren't in denial about how the start-up failed and it is very refreshing to see!
In my opinion, you are poised for incredible success in your next start-up, because of what you learned at Vinetrade.
> people were often happy to spend £5,000 on a case of wine, but not £10/year for proper storage
Irrational stuff like this really pains me, especially when it's part of the reason I'm failing. But people are the way they are, for better or for worse. You have to find a way around it.
I think the exact opposite may eventually work. Offer some storage for £250 (or even £500) per year, along with a convincing narrative about how much wine deteriorates if not stored properly, and why your storage is better than anything else.
It's somewhat plausible that storing expensive wine must be expensive. But £10 per year? Meh, someone who is really into wine has his own cellar which costs way more than that.
You should take your technology and apply it to the nursing industry. I've been saying it for years: Healthcare is an inefficient marketplace. Hospitals always have a hard time filling nursing demand, so they go to extraordinary lengths. For instance, we currently live in Portland, OR rent free while my wife makes more than she would if she lived here, all because they don't have enough nurses. My wife has a recruiter, who sends her loads of paperwork.
There's totally a startup that could make a lot of money. Maybe start out as software for recruiters to manage their "inventory" of nurses? Then expand into a full on marketplace, eventually disinter-mediating said agencies.
There are already quite a few products that do exactly that. I work for one of those companies - we specialise in nurse scheduling (though also cover doctors and other healthcare staff), and have systems that both manage the hospital's demand (and using their own permanent and temp nurses), and systems for agencies to manage their 'inventory' to fill the gaps. You're right that it's a massive problem and therefore there is a good market here. The full on marketplace idea is also starting to be a possibility but isn't really a big deal yet.
It's also (unsurprisingly) really complex and I'm sure very far from their wine marketplace technology!
Yeah, Traci is a travel nurse. She's also done "registry" nursing, which is like local agency nursing on a shorter term basis. When she was a registry nurse, she would work at different hospitals, once or twice a week.
And last, but not least - wine market is a bubble itself. As one of my friends, very high profile sommelier, tells me every time - never pay more that 7 euros for a bottle, everything more expensive is a fluff.
There was a huge bubble, that popped. Our timing was off completely (a lot of our target sellers want to sit on their stock until prices go back up), but the other problems we faced (outlined in the post) were greater.
As for wine prices - they're starting to creep back up again. It's an interesting commodity - a finite amount is produced each year. It tends to improve with age, while supply decreases and demand increases.
Prices increased so much (more than the normal 10-15% per year) because newly minted Chinese people got a taste for it and bought everything they could get their hands on.
The Chinese have very few domestic investment option, so they invest like crazy in things like this, not really because they like or care about wine. They were responsible for the last wine bubble and will be responsible for the next.
I'm not sure if this was similar to your business model, but there is a site called cinderellawine.com that does daily deals for wines and does pretty well. I had a co-worker that was addicted to it, I don't think he even drank the wine. It does show that there is a market for "mail-order" wine that isn't based on personal connections.
My impression of the wine biz is that supply is fragmented. In which case the network of relationships is complex (many-to-many) and so costly to maintain.
In my business (insurance) disintermediation only followed massive consolidation on the insurer side. Many-to-many became Many-to-few. Cheaper to maintain, easier to scale.
Interesting writeup James, thanks for sharing. The point about talking to salespeople being "part of the fun" is interesting - it's counter-intuitive to my engineer's mind, but I can see how the sales process is actually part of the value they are paying for.
Agreed. It's an interesting lesson for tech focused people.
I think you can get around this by introducing social or gaming elements to the product. We didn't have the resources or the time to try that (and the size of the opportunity/market didn't justify the investment required).
Social, perhaps. Showing off your collection could be a motivating factor. But gamification I'm not so sure about. IMHO the typical wine collector will not be impressed by a "bought 10 bottles" badge, or something along those lines. Keep in mind I know nothing about the wine industry though, maybe the big collectors are all big kids at heart!
In hindsight, I suppose it's not surprising that an industry that prefers expensive, unreliable corks over cheap, reliable screw tops might eschew technology. If only it were that easy to figure out ahead of time.
OTOH that's also a data issue: some of the top quality US and even French producers are trying the Stelvin and other new tech closures, but it'll take 30-40 years to know if they're as good as the cork (but without the 10% spoiling problem). They hope so. Prmeability, reduction and all sorts of complex chemical issues are on the line, and it's not a linear, rctuangular, clockwork modernist problem!
And.. it's again a customer-driven thing. People like the ritual of a cork. It's soft data, but oh so important. Take a long time for people's expectations and preferences to change as many blind-utopian technologists find to their cost.
As an off-topic aside, it's worth noting that not all parts of the industry are so backwards in regards to bottle-sealing technology http://www.screwcapinitiative.com/ [edit: beware somewhat spammy industry-association link]
For instance, pretty much all New Zealand wine producers/exporters have been using screw-caps, even on expensive fine wines, since 2001.
I wonder if the customer in this case (the wine-buyer) is misunderstood. Not only does he go in for the relationship, but I suspect he wants to be able to show off the wine and tell stories about it to his friends/guests/people he's trying to impress. Buying a case of wine with a fantastic story may justify the premium, as opposed to a case of wine ordered directly from the vendor that comes unceremoniously in a fedex case.
Is this largely an illustration of the value of domain knowledge? And I mean as an industry insider, not just a consumer. You don't even know what you don't know when you enter a new world.
I bet having someone on the team that had spent a couple years in the fine wine industry would have made a huge difference, though perhaps that difference would have been to discourage the entire endeavor.
We did. I had a year of experience (on the operations side), our sales guy had several years of experience.
Many people in the industry were surprised when we closed - they fully expected us to do well. There are a lot of buyers who are very price sensitive (and happy to do things themselves / hunt around for bargains) - they assumed we'd scoop them all up in time.
Why do you think people resorted back to phone orders, etc? Did you have some type of recommendation component for users?
For example, when someone places a phone order (especially for wine), they may ask the associates preference or suggestions. It would be awesome if you had a program that took drinkers preferences into consideration and then suggested maybe 3-5 wines.
Good article. I enjoyed from start to the end. I wish you the best luck on new ventures, as I stated on Twitter. I'm doing something right now wich has similar things (not wine) and it was good to read what happens and all the things that are in the game.
From reading the post, it sounds to me as if people trading wine weren't necessarily crying out for an automatic process, but were in fact looking to cut out the middleman.
But because the market was so insular, once you cut out the middleman it turned out you probably knew the person you were buying from anyway, at which point you became far more willing to engage with them directly.
Consumers/collectors wanted a better deal (they were paying minimum 10-20% to middle men when buying and selling).
We did a lot of customer development work (and were customers ourselves) to validate these issues. The problem was keeping people on the site - they reverted to email and phone once the novelty of doing it online had worn off.
Fine wine "connoisseurs" are rarely honest with themselves, much less with each other. They pretend to be able to discern qualities that they can't. Their whole hobby is a bit of a farce.
Wine Connoisseurs don't WANT TO BUY LESS EXPENSIVE WINE. They don't even want to buy fine wine vintages for cheap prices. To do so would cheapen the fashion that is fine wine purchasing. Sure, they'd like to be able to say they got a "good deal" from a reputable distributor, but that only goes so far.
It would be like buying your Prada products at Walmart. If Prada were to sell through Walmart, it would destroy the brand and the appeal for the people looking to purchase it.
I'm guessing that reputable dealers don't even give 'good deals' (i.e. discounts), but rather provide VIP clients access to their secret stash of exotica.
Sometimes the only way to prove a solution won't work is to create it and find out. Even then, you don't know that it won't work for someone else in the future.
Do your market research but disruptive innovation isn't something which can be formulated. Else we'd be much better at it by now.
" Another round, and more time, was possible, but it wouldn't have been right to take more money for something that I no longer believed would work."
While I understand the sentiment, and I don't suspect it was done lightly, the rationale here is superficial. "I no longer believed would work". Well, whether it would work or wouldn't at one point you believed, and now you've got a team of people working for you. Closing primarily on the basis of your beliefs (which, apparently, were faulty before - perhaps they're faulty now too? market might turn around? network connections might kick in in 6-12 months?) comes across as selfish.
I don't think you actually were or are - I've no doubt there was a lot more going on that you didn't summarize in this one blog post, and it came across a bit off-handed. I say this as someone who's had to close down something with a team of people - I don't think anyone ever takes this decision lightly.
This doesn't make sense as a critique. There is no other way for a person to make a decision to continue to do something than to base it on their belief in its possible success. The frailty of these beliefs as proven by past failures in judgement is irrelevant. Imagine the absurdity of the situation:
VC: So how do you feel about this company going forward once we give you another round of capital?
Owner: I believe we will fail. I am going to take your money and continue anyway.
If the VC did not interpret the owner as being irrational, he would be suspect himself. You are suggesting that it is selfish to give up things you believe are doomed. What other criteria is there for giving something up?
VC: So how do you feel about this company going forward once we give you another round of capital?
Owner: I believe this is a lot harder than I originally anticipated, and have learned a lot about the industry that invalidates some of the original assumptions. Continuing down the same road isn't a good option, but I'm thinking there are some other opportunities that we've identified which would be more profitable to pursue. Given that you have paid for this education and research, would you be interested in continuing to support us during a change in direction?
Now you are arguing that OP should have pivoted to something new under the assumption that he had an idea of how to so pivot. That's fine, but it is not a defense of the point you originally made and instead agrees with my counterargument.
I was suggesting that there was probably more going on that wasn't divulged in the piece, but the phrasing of "i shut this down because I didn't believe it in" does come across as somewhat selfish. There were/are other people involved - perhaps they were consulted, but the post doesn't mention that they were consulted. Letting the rest of the team go on with someone else at the helm, perhaps with the funders selecting someone new to run things, would have been an option any more. But "I don't believe in this anymore" = shutting down something which some other people may have put their lives in - comes across as selfish.
Again... there's probably more going on that wasn't posted - I was reacting to what was posted, and trying to suggest there may be better ways to phrase what was said.
I try to tell this to startups that try to add indoor location-based technology to businesses like Men's Warehouse. What they fail to understand is that those places run better because they are staffed by people who understand their customers. When someone drives into the parking lot of a Men's Warehouse, they are already there to buy a suit. They don't need discounts or information about the products from an app on their smartphone, they need real customer service.
A skilled salesperson can upgrade anyone on warranties and other items. Having a piece of software do it, especially one built by a group of programmers and marketers that know nothing about suits, is ridiculous, and so is the idea of training skilled salespeople to also be system administrators for software that's not needed.