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!