Domino Rally Business Models

As a kid, I used to play with a game called Domino Rally -- where you would spend hours setting up an intricate course of hundreds of dominos, with the hope that you can create a spectacular "chain reaction" at the end. However, if one domino was misplaced, the rally would be ruined...and you had to start all over again.

Today, as a VC, I've begun to see a trend toward what I call "Domino Rally" businesses. These are business models that require a number of disparate events to occur in order to be successful - and if any one event is missing, the entire business fails. 

"If we can negotiate a deal with the top 10 publishers on the Internet AND cost-effectively convince millions of users to install a co-branded plugin AND convince advertisers to buy a new form of advertising THEN we have a billion dollar business"

The problem with Domino Rally business models is that they tend to have a binary outcome -- everything either lines up perfectly or it doesn't work at all.  Even if each component has a high probability of a successful outcome (say a 75% chance of a positive outcome), the combined probability outcome for success is not high.  For example, "a 4-Domino" business plan's chance of success is .75 x .75 x .75 x .75 = 31%.
Moreover, most of these business plans require major up-front investment to get the company to the point where it is able to get visibility to the next domino.  (ie, it takes $1M to see if we can get the first domino to fall, and $2M to see if we can get the second, etc).

Rather than have a business model which requires all the moons to line up in your favor, I'd much rather see: (a) a business plan which has several different paths to success; or (b) a business plan where the outcomes of the each component has been tested or proven individually; or (c) a business plan which only requires one or two dominos to fall; or (d) if you still think your business needs multiple dominos, you can show how you can get there cost-effectively.

When we started Half.com our two major dominos were (1) can we get sellers to list inventory, and (2) can we get consumers to buy stuff. To offset the risks of the former, we went out and signed contracts with dozens of used book, CD and movie stores to list their inventory -- launching with over 1 million items available. To offset the risks of the latter, we launched with partnerships with all the major price-comparison shopping engines, providing us with quick access to millions of price-sensitive consumers.  While we didn't eliminate the risks, we were able to credibly convince our investors that we were able to position the dominoes in the right place.

Remember - If one domino is misplaced, your rally is ruined!

Comments

[gl hoffman]

Well stated. I find this particularly true with young entrepreneurs. In most, they erect "dominoes" to solve their lack of sales ability. "I don't know anything about sales, so if i just build this social-type site, people will come automatically, see my offering and buy."
I know one guy who had a simple franchise local business for fitness. Instead of doing some basic sales/marketing stuff, he bought himself a popcorn machine because he thought if he made popcorn at street fairs, with his logo on the bag, that people would flock to his biz. Why erect dominoes like this?

[Kedar]

Josh,

Your posts are always on point. Every time, I see one of these posts, I recheck on my business model and think that whether I thought of this. Thanks for sharing wealth of information.

I am going to be at Demo next week and would like to meet you for Lunch/dinner/drink whatever. I am just starting a company. I need very small amount of money so I don't think I will be pitching you but it will be great pleasure to meet you.

[Scott Milener]

Josh,
good insights. It seems like these days, especially in consumer internet plays, the ONE domino is user adoption at low or no marketing cost. If what you are doing is not inherently viral or designed from the start with high likelihood of major distribution, that one domino may not fall. Certainly that's what all the VCs are looking for, virality to avoid the need for marketing dominoes.

Your post made me rethink my plan as well.

Also, To Kedar, previous commenter - I'd be wary if you are looking for less than what First Round will put in that you have a business worth pursuing or you have your plan well thought out. I'd talk to Josh, he invests 'small' amounts and is great to have on board.

thx!
Scott

[Dick Costolo]

Everybody who wants to start a mobile services company should read this, because too many of those start with the pitch "If we can get the mobile operators to agree to X, and we can get this on N% of the devices, and LBS takes off....". I love hoffman's comment about erecting dominoes, that is spot on.

[evbart]

Dick is right about mobile services providers. You're setting up a tough domino to knock over if thats the first thing you need to get your company started.

It's probably best to build companies that only require 1 or 2 dominos, at least initially, to get going. You can line up more once you get off the ground and are doing that one thing well.