Of course, it didn't help Lenny that virtually everyone he'd been talking to, including me, is a baby boomer. We would like to believe we make cool, rational decisions, but not many pitches force the pitchee to contemplate his own mortality.
“So you think it would interest Frank more if we decreased our estimate of the total share of business moving to the Net?” he asked.
“Not necessarily. That could result in too small a target market to be interesting. I assume you estimated your sales bottoms up and projected the market tops down. But either you've underestimated your sales or you've overestimated the potential market. If you don't see yourself as the leader, or you believe the on-line funeral business is pretty small, you won't get much interest.”
“But I figured we could show that, even conservatively, we can build a nice, profitable business.”
“Fine, but make that the ‘worst case’ in your plan. Maybe it reduces some risk, but those market share numbers won't inspire investors. Don't even try to do this if you aren't planning to take it all. Then allow for some competitors, but hold the leadership spot. Nothing else is worth investing in.”
“Good. That's good.” He scribbled notes.
I put my feet up on one of the white plastic garden chairs that serve as café furniture in Portola Valley. When he was done, I asked, “Lenny, why is this a big idea?”
“It's a big market, big dollars.”
“Will it change the way the world operates? Will it change people's lives in any meaningful way?”
“Change the world? We're saving some people from the sharks that prey on grief. The current system is awful.”
“But basically you're just changing the way the product is sold and bought, substituting yourself for some brick-and-mortar intermediaries.”
“What's wrong with that?”
“Nothing, it's probably a good business strategy. How do you see this business in five years, though?”
“$400 million? $500 million!? Who knows?”
“But it's the same thing, right? Same products sold the same way?”
“Yes,” he said hesitantly, as though he were missing something. “Is that a problem?” he asked.
“Not necessarily, at least for some VCs,” I said. “Let's go to the second question. What kind of competitive position will you have? What makes your products or services unique and compelling enough to ward off copycats? Can you stake out a significant chunk of your market and defend it? Or can someone reproduce what you're doing overnight?”
Lenny explained that federal regulations aimed specifically at the funeral business created an opportunity for his venture. Funeral homes must accept caskets provided by third parties without fee. The trouble is that the regulations extend that opportunity to everybody, not just Lenny. Like other Internet merchants, he would bank on the limited ability of brick-and-mortar merchants to cut prices. But with these margins, who knows? And what about Internet-based competition? Where were the barriers to entry?
His answers were not satisfactory. He was offering nothing that another competitor couldn't also develop. The key to his business was swift execution. There's nothing inherently wrong with that. But fundamentally, there was a risk that, after Funerals.com gentrified the neighborhood, some brick-and-mortar heavyweight would sweep into town, or some Internet speed freaks would catch Funerals.com from behind. There were no safe havens unless Lenny could achieve Silicon Valley's new mantra, “Build Brand.”
“How will people find you when they need you?” I asked. “How will Funerals.com establish a brand and presence? E-commerce is all about distribution, building awareness, being seen, and the Web gatekeepers take a hefty toll before granting you access to their traffic.”
His plan was to work with the existing non-virtual infrastructure—social service departments, hospitals, clergy, and hospices—the people who know when someone dies. They would serve as referral points. But would they tell people about Funerals.com? Would that word of mouth suffice in an age of Internet portals?
“Price, convenience, no pressure,” he said. “They'll refer people because it's a better way to shop.”
“You said a while ago when someone dies, no one wants to shop around,” I pointed out.
He made a note, probably a reminder to take that sentence out of his pitch.
“Some won't. Some will,” he said.
“Besides, nothing prevents someone else from making the same offer,” I challenged. “If that happens, where are you?”
“So far ahead, nobody can catch us,” he said.
First-mover status might confer some advantage, but how much wasn't clear. The need to move with ferocious speed is the Internet's legacy. If nothing else, e-commerce forces every business to accelerate to defend its turf or cede precious market share to the fleet-footed mammals of the Web.
“If we beef up that point in the plan, will it make a difference to Frank?”
“You need to address it. It's a threshold question.”
He made some more notes. My chai was getting cold. Maybe Connie would be so kind as to warm it up. I turned toward the window and waved to her inside. She ignored me, deliberately not looking my way. No respect.
“That takes us to the third question,” I said, turning back to Lenny. “You and your team. Your first-mover status relies on rapid execution. That means the composition of your team is even more crucial than usual, because you won't have time to learn on the job.”
“It'll be a good team.”
He reached into his case of files and handed me a copy of his business plan. “There's a summary of people in here,” he said.
So there was. Unfortunately, besides Lenny, there was only one other founder identified by name. She was a marketing manager for one of the biggest funeral home chains, so she would be the domain expert. He obviously didn't suspect I had overheard his earlier conversation regarding his teammate bailing.
I told Lenny I was troubled by his and his partner's lack of startup experience. It heightens the risk. Startups are unique animals. We take them pretty much for granted out here now, but they are still endeavors that require very different skills from the ones needed in established companies.
Like tourists on safari, senior executives from some of America's largest corporations come to the Valley to study the exotic ways of the natives. Arriving from Chicago or New York or Dallas, they think they need to be more like Silicon Valley startups, but they usually end up scratching their heads. I recently met with some senior managers from a world-class package goods company who had been up and down the Valley. “We thought we could take a crash course in the Valley way and apply the lessons to our business. But this place is extremely foreign to us. We'll have to partner with experienced startup talent and Valley VCs if we really want to try our hand at being entrepreneurial,” a senior manager confessed.
Even when large companies try to set up small, intrapreneurial units, they are hard-pressed to find people inside the company who will drive them with the same fervor and penny-pinching zeal that desperation demands of independent startups. The accoutrements of established businesses— the company cafeteria, the clerical support, the illusory job security, the pension plans, and everything else a large organization can provide—are inconsistent with Valley startup mentality.
“I'm not concerned about it,” Lenny shot back. “We have a good plan, and we know how to work a plan.”
I thumbed through the material. It was a fairly polished presentation: market description, customer need, product strategy, competitive positioning, launch schedule, sales projections, expense forecasts, IRR and other rates of return, investment required, discounted cash flow. All the numbers you'd want. Year one. Year two. Year three. Everything worked out with an inevitable logic. Lenny had outlined in some detail how he planned to run this business.