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!
espite being coastally challenged (currently living in Philadelphia), Josh has been an active entrepreneur and investor in the Internet industry since its commercialization. In 1992, while he was a student at the Wharton School of the University of Pennsylvania, Josh co-founded Infonautics Corporation – an Internet information company. In 1996, Infonautics went public on the NASDAQ stock exchange.
