Founders dream big. Founders see a need, envision a solution, then work tirelessly to realize their dream. Founders should shoot for the stars, but need to remain rooted in the reality that they might have to settle for landing on the moon. When setting goals, it’s important to aim high, but it’s also key to keep the realities of business or technical constraints in mind.
I witnessed this first hand in my first startup, an e-commerce retailer in the jewelry space. I joined after the company closed its Series A funding round and grew to about 20 employees. We embarked on a crazy schedule to build out an e-commerce web site in order to handle the upcoming Christmas shopping season and the expectation of hockey stick growth. We built out a beefy technical infrastructure, hired marketers and merchandisers, and installed an enterprise-grade inventory system with Amazon-like pick, pack and ship functionality. In the fall of 1999, we launched a beautiful luxury retail web site graced with glamorous super-models decorated in gold, diamonds, and pearls. Early sales were good, as we benefited from a strong Christmas shopping season, fueled by a big marketing and advertising budget.
But then reality hit. With the Christmas season behind us, sales slowed and web traffic waned. Given ambitious projections of big revenue, we built a muscular V-12 engine that guzzled gas like there was no tomorrow. We raised a lot of money, but were quickly burning through it. The Internet frenzy in 1997-1999 led to the B2C e-commerce crash in 2000. Our startup was no exception, as the investors lost confidence and pulled their support. The company shut down in fall of 2000.
As my team packed up their personal effects, someone found the original pitch deck used to raise the early-stage funds. One thing stood out: a graph with a $200M revenue projection by the company’s third year: classic hockey stick growth. This projection drove many key decisions around the size of the marketing budget, the “weight” of the big iron running the web site, and the bells and whistles in the inventory and logistics engine. I immediately recognized this as what it was: a catastrophic crack in the foundation of the business.
After I joined, one of the veterans from the jewelry business informed me that 70% of jewelry sales are Christmas gifts. So in order to do $200M in sales, that meant that we would have to do $140M in Christmas revenue. The Christmas shopping season is effectively about four weeks long. If you oversimplify your facts and assume the revenue is evenly distributed across the four weeks, that works out to $35M per week. Assuming an average order size of $300, that works out to 116,667 jewelry orders per week. If we further assume 90% of e-commerce orders are placed Monday through Friday with 12-hour shopping days, that works out to 21,000 orders per work day, 1,750 orders per hour, or basically one order every two seconds. There weren’t any reliable statistics that gave us the number of individual jewelry purchases in the US each day. But to assume our little startup retailer could rocket up to booking one order every two seconds — for luxuries funded mostly by availability of disposable income — is at best hyper-aggressive and at worst, fantastical.
But the jewelry industry sanity check above could be criticized on one important assumption: the average order size. Because the business plan included both high-end, low-volume luxury products and low-end, high-volume consumer products, predicting the average order size was an imprecise exercise.
Given this, a second sanity check is justified. So let’s take a look at it from a logistics perspective. In 1999, FedEx shipped about 1.2M Express boxes in the US each day. Our target of 21,000 orders per work day would represent about 1.8% of the total daily FedEx Express package volume. For a single fledgling Internet jewelry startup to go from zero package volume to one of FedEx’s top 10 customers in just three years is completely unrealistic.
The MBA Sniff Test
When you combine the unrealistic projection of how much of the jewelry market share this startup could capture with the equally unlikely logistics operations growth, you get an unfeasible business plan that was destined for failure.
The lesson learned here is that a couple of hours from an MBA analyst would have caught the overly optimistic projections. The business was viable, but the projections drove the company’s burn rate and investor expectations to an unsustainable level. Realistic targets would have given the company a fighting chance for success instead of a premature shutdown.
Grand Slams vs. Base Hits
It’s fine for founders to step to the plate and swing for the fences, but expecting to win by hitting grand slams every inning is poor game planning. When every batter tries to knock the ball out of the park, you end up striking out way more than you hit home runs. A better game plan focuses on getting batters on base, then advancing them methodically.
Every founder dreams of hockey stick growth, but most startups grow steadily, not explosively. Because a core premise of the business plan was unrealistic, the company overbuilt and overspent trying to hit an unachievable goal. Build a game plan with reachable stretch goals, execute well, and you’ll have a strong chance of success.