The Start-Up Toolkit is above all a resource for start-ups and it is my intent to help them better manage, market, sell, protect their businesses, and prosper. Sometimes that means telling people how to avoid problems. For my first column of 2011, I have been privileged to speak to a start-up founder who ended 2010 by closing his business. We can all learn from the story of David Reinke and StyleHop. The key lessons are on the value of planning, the need to test your market, knowing who is going to pay you and focusing on them, and finally, the challenge of changing the way an industry does business.
Reinke had fifteen years of experience in brand marketing, sales and operations. While working at Liz Claiborne, Reinke had an idea about using the idea of crowd sourcing to help improve the merchandising assortment for clothing at major retailers. He presented it to his management as an idea for an internal venture, but they ultimately encouraged him to take the intellectual property and start the company on his own.
'I wanted to change the way buyers decide which dresses to order. Today, they use their own research and intuition, as well as the history and data they have. I wanted to improve their process by letting the crowd vote on which fashions they preferred, and see if that connected with actual sales,' said Reinke. He conceived a fashion-oriented Social Network destination with a back-end that would be relevant to the B2B market. He skipped a business plan, dove in and hired a CTO to start building out a fashion social network with user profiles, the ability to upload favorites, and affiliate feeds so users could rank new fashions and put them into wish lists. His idea was to build his network first and show it to potential B2B clients who would be the real customers.
'We did everything we were 'supposed to' – we built a successful and popular social destination - but by building the panel first, I created more market risk. I didn't have any paying clients. That market risk became clear when we wanted to raise money in October 2008. As an entrepreneur, you have to think about risk from your own perspective. If I could do it over, I would have started by validating this crowd source model with the large retailers.' It turns out the buyers in these companies weren't ready to change the way they had always done their buying.
By January 2009, Reinke and his team had shifted their focus completely to getting clients on the retail merchandising side. By March they had their first client and it turned out that their model worked quite well. 'After a season, on three classes of clothing, our panelists were 7 times more accurate on what people would like and what was actually sold.' The caveat is that merchants make picks way in advance, and companies argued the fashion panels wouldn't be as accurate doing future predictions. 'Merchant guesses see-saw all over the place, but our panelists had .75-.85 correlation - very consistent - which would help them predict better over time as we kept a network going and growing.'
The problem was that StyleHop was running on fumes. Even though they found a second client, they couldn't price the service well enough to keep the destination running and service the retailer's side. Meanwhile, the customer social site had gotten stale.
Reinke knows now he should have built the retailer's side of the business first, and used Facebook, Twitter, Google, and other sources to assemble panels as needed. He would have had more of an online focus group and less of a network of fashion fans, but it would have entailed less risk and less cost, giving him more margin to build the network part of the vision later. Ultimately, he didn't have the cash to pay or increase staff. If he had attracted B2B clients first and proved his model, he would have been much more attractive to investment.
Reinke's third insight: 'We had one major client and that highlighted the risk of having all my eggs in one basket. Our internal contact switched roles in the company, and we were set back to square one, trying to show our value.' He didn't listen to advisors who told him fashion people always go on intuition even though he had solid data to back up his ideas. 'I would have focused energy on the Board of Directors and CEO buy-in instead of the merchandising level. That would have provided executive approval and given people an ability to try something new.'
Reinke has moved back to an in-company role, but still feels he had a great potential business. 'StyleHop was knowledge and methodology, not technology. Maybe we'll get a chance to try it again in some form.'
Thanks to David for being incredibly open and sharing his story in hopes that others will learn from his company's failure. Share your thoughts on this story and the lessons learned in the comments.