$1,500,000,000 investment down the tubes
by Axel Tillmann, The Los Angeles Tribune Columnist for Entrepreneurship, Innovation, and Science
Please spare me with the argument that Quibi was suffering from COVID., because it wasn’t. Quibi was suffering from several factors two of which were mania or grandiose delusion – based for one on the “high-profile” Executive Team (Meg Whitman and Jeffrey Katzenberg) and on their ability to have raised $1.5B for a pipedream.
But Quibi should become a textbook venture for any entrepreneur to learn on what not to do:
Lesson 1: Money is not everything.
As the old saying goes, money doesn’t buy you happiness and it neither buys you success, especially when you ignore Numero Uno: Your audience (also known as your target customers). Quibi spend around $1/2B in TV commercials trying to sway the audience that their SVOD (Subscription based Video on Demand) is worth while giving it a shot. They tried to bate the audience with a free downloads and a free trial period (we call this Freemium model). They reached at peak about 1.5M downloads but almost no retention rate (<5%). We also have in recent US political history a matching example: Michael Bloomberg running for President – $500M later and nobody cared. You can’t buy market share!!!
Lesson 2: Big names don’t count – especially in startup companies.
Meg Whitman is brass tax woman leadership, former CEO Hewlett Packard Enterprise, and Jeffrey Katzman one of the great names in Hollywood. But with this also comes a certain level of arrogance, which I feel was on display here. Because we are Big, the world must love us – not so. Especially when you ignore Lesson 4.
Lesson 3: Your investors should be Smart Money
The big wig names, of course, were so impressive that you got every other big name of rank and file in Hollywood to write big checks. What do you get when a bunch of sheep flock together? You get a herd where the one-eyed is leading the blind. As an experienced big corporate woman Meg was a leader – for big corporations but just not for startup companies. At least a strong top-notch VC board of experienced investors could have been her guidance and sounding board. But then again, Meg showed cracks in her leadership at HP, and I think that lack carried all the way through to Quibi.
Lesson 4: You need customers for your products.
Many startup companies are founded under the principle of “brilliant” ideas and spend millions in developing those into products without ever focusing first on the customers. You don’t need a ready product to talk to customers, you can talk to them about the principles of what you are trying to do. Get feedback early on to have a chance that release 1 gets enough traction. Did we need 3 min videos on an OTT platform? Wouldn’t people want to watch content at home and stream it to their smart TV? I feel the Quibi business principle was created in a boardroom and over fancy dinners and not in interactive experience with the customer. Quibi should have been a platform business and not a content creator, especially when nobody cared for the content. “Build it and they will come” was a nice Hollywood flick, but this is not how the startup world works. If you do a good market analysis you understand better what you need to do and how to cater to your market. Who is your target customer? If you tell me Quibi’s target customer was the teenage plus young adult audience, then one should have looked at the success of Tic Tok, which demonstrated that users want free content with which they can interact. The age of dictated content is over. SVOD = paid and not free! Quibi’s interaction = Zero! Recipes for disaster, a disaster that destroyed $1.5B in money quickly – actually in record speed.
Lesson 5: Going-To-Market Strategy
Free download and trial viewing period is considered a Freemium model. A quick look at startup companies with a Freemium model shows that they suffer from a ~5% conversion rate. So, for each 1,000,000 downloads only 50,000 are going to stick with you. This number is highly relevant. For one if you have a lower conversion rate 3% or even less, then you have a quick indicator that some things are wrong. Conversion rate leads to analysis of customer acquisition costs. For Quibi it was $500,000,000 for 1.5M downloads with 3% retention rate. This translate to a whopping $11,111.11 customer acquisition cost and $333 cost per download. Now the second factor is LTV (Lifetime Value). If you pay ~$11,000 per customer and you are selling $250,000 Rolls Royce that still might work, although even in this case your profit is more than cut in half. Now what does (pardon me did) Quibi sell? $10/month subscriptions. If you assume 24-month average membership fees, which is $240, then you basically paid >$10,500 more per customer than you make for it. You go into any VC presentation with those numbers even the least experienced VCs will break out in tumultuous laughs.
Alternative business models in the same OTT space are FICTO (AVOD = Advertising based video on demand) and RevShareFilms (a mix of AVOD and PVOD/PPV = Paid for Video on Demand or simply Pay per View). Neither is offers a $500M marketing blast strategy and both of them are concerned to be engaging with the audience. That’s what customers want. Long-term success on either needs to be build (organically grown) and the verdict for this is surely a couple of years out. But at least they avoid the blundering mistakes of Quibi.
The Los Angeles Tribune has recognized how important entrepreneurship is, but how difficult it might be at the same time. It business leadership summits are designed to inspire and teach. The next leadership summit will be held on Feb 20th and 21st and will be inspiring and educational. On the second day we will showcase startup companies and will stream live the session that enables the audience to also learn from the judging panels.