A blog on using the power of Disruptive Business Models to build successful businesses...and other stuff. by Joe Agliozzo

Monday, May 10, 2004

Blog Moved

Moved my blog over to Blogger.com today, thus the posts all have the May 10, 2004 date.

Original Postings were Feb, March, April and May, roughly...

Coreflix sold to public company

Today we completed the sale of the Coreflix (tm) online DVD rental business to Americana Publishing, Inc.(OTC Bulletin Board: APBH). I have written about this business before, but in short it was a DVD rental service geared towards "action" and "extreme" sports titles. This was the first "disruptive" business I have launched and it proved to me the basic tenets of disruptive business model design, as described by Clayton Christensen in the Innovators Dilemma and the Innovator's Solution:

1. An initially smaller or niche market where there was a need, but not a lot of solutions. This was great because the customers were basically "nonconsumers" of DVD rentals in action sports (because no rental program existed). The best part was that we were able to launch early in the process with a very basic product and the customers were happy to have it and we had confirmation right away that we had a business.

2. We were patient for growth (and still are) but impatient for profits. We bootstrapped this company (VC's saw the market as too small, and they may yet be right, for their purposes such as hurdle rates of return, how much capital they need to invest, etc.), so we wanted to launch as cheaply as possible and then use cash flow to finance refinement of the business and expansion of the customer base. This is exactly what we did, and combined with 1. above, it worked beautifully.

3. We chose a rental model. I believe that rental models are inherently disruptive, because you are providing a solution that is inferior to the full benefits of ownership, yet fits the needs of many segments of customers. It also uses the principal of looking at the "job" the customer is trying to get done - which in this case was "view" DVDs without necessarily needing to pay the high price of owning them. Many/most action sports DVDs are also typically viewed only once, so the "job" the customer is trying to do is watch a DVD once, which is definitely better satisfied by renting than owning (especially given the stubbornly high prices at retail for purchasing these DVDs).

Emergent Business Strategy

An important part of a disruptive business model is the concept of an "emergent" strategy. In short, startups never start out with the right strategy, part of the entrepreneurial effort is figuring out the right strategy as you go - thus the right strategy "emerges".

As Clayton Christensen points out in "The Innovators Solution" (see link in previous post), a limited or "right" amount of funding can go a long way towards prompting the management team to focus on emergent strategy - they simply have no choice if they want the company to survive. In our Netfreight experience (see post below) we didn't focus on changing our strategy as quickly as we should have because we had the luxury of being patient because of our venture capital funding. When the funding dried up, we didn't have time to create a new strategy.

Contrast that with Coreflix, which was/is a bootstrapped company, so we were constantly focused on changing/emerging our strategy in response to customer feedback (and getting customers right away was in itself an emergent strategy!). We learned what worked and what didn't work much more rapidly and also connected with the customer much more rapidly, at far less cost.

Emergent strategy is key, and has also been pointed out using other terms, by Guy Kawasaki (who's garage.com - now garage technology ventures - also funded NetFreight.com). One of Guy's mottos was "Don't Worry Be Crappy" - which meant, "get your product to market and get some customer feedback." Then you could change your product and strategy based on the feedback. This weeks article by Robert X. Cringley also includes some interesting references to the emergent strategy concept. Instead of focusing on an individual company though, Bob points to VC investment models, and the generally known principle that only through taking chances on a lot of companies can VC's hope that one will be a big hit (Bob also points out that how much of a hit the winner needs to be has also developed into a problem for the VC business).

Referring to Christensen, the emergent strategy as applied to VC investing consists of hoping that one of your portfolio companies gets their own emergent strategy right! If VC's were to additionally impose some of the funding discipline espoused by Christensen on their portfolio companies (say through staged investment, etc.) rather than giving a thumbs up (you get $3M at once) or thumbs down (not well developed enough, not a big enough market, etc. - you get nothing). Maybe their batting averages would be higher overall, and maybe some of the investment "overhang" we read so much about would start to dissipate, and a whole new crop of startups would be created (which could be nothing but great in light of the current job growth/offshoring/outsourcing controversy).

This type of investing model is even more important today because most angel funding and corporate funding has basically disappeared. VCs no longer have the luxury of having these seed stage investors nurture companies to the first round institutional stage that the VCs are known for. However, given the incredibly cheap resources (including offshore development) available to today's entrepreneur, the bright side is that most startups can test their concept/business model/product relatively cheaply, in fact this can generally be done for $200,000 to $500,000 max. With the billions of dollars in VC funding available, it makes sense for VC's to devote $10M to $20M per year to these types of investments. Funding 50-100 companies a year with these small amounts would provide the VC investors with their next "institutional round" candidates, and would also spur innovation, employment and create the next generation of entrepreneurial risk takers. More on the details of managing a program like this in the next post.


My co-founder and I, Ben Padnos, along with another co-founder, started coreflix.com (www.coreflix.com) in late 2002 as an internet based DVD rental service for Action Sports (Surf, Skate, Snow, etc.). Learning from my last company, NetFreight, I had conceptualized this business to fit into the disruptive framework.

A little background on the Action Sports DVD industry.

1. There are no theatrical releases for the DVDs.
2. The DVDs are not available for rent at Blockbuster, Hollywood Video, Netflix, etc.
3. The DVDs retail for $24.95 to $34.95, are typically 40 minutes long and have to be purchased sight unseen.

So, we felt there was a good sized population of customers who would love to have a $17.95/month "all you can eat" (flat fee) rental service. (I believe that rental as a business is almost inherently disruptive because you are enabling a larger population of folks who either cannot afford to buy or don't use the product enough to buy it the opportunity to use it). Users would select DVDs through our website and we would use the USPS to mail them out in 2 way mailers.

Well we were right, we acquired hundreds of customers soon after launching and we get comments every day from our customers, telling us how much they love having an alternative to the old way of consuming these DVDs:

"Thanks Ben,

You guys are great to deal with. Coreflix has been a great way to find out which DVDs are cool and which ones suck, without spending a ton of $$$$.


The "Disruption" framework showed the way:

1. We targeted and enabled a population of consumers who previously didn't have the money or value this content enough to purchase it.
2. We gave them a simple, web based ordering process and used the USPS for fulfillment (customers were willing to accept the delayed gratification of receiving the product because they had no other alternative).
3. We helped them to more easily and effectively do something they were already trying to do - view a lot of action sports DVDS.

We also picked a niche that was not of interest to the major DVD outlets (asymetry).

Predictably, the "industry" (DVD producers) were mad at us and made all sorts of legal threats (all of which were basically hot air due to well established copyright doctrine). We believe, and tried to relate to them that a rental service was a way that the industry as a whole could gain more customers, by increasing the numbers of viewers of their product. There will always be more casual viewers who would rent but would not buy sight unseen (and so were not current customers), as compared to the "hard core" fan that purchases, and from which the industry currently makes its living. Fortunately (and critical to a disruptive business model) we didn't need their permission nor cooperation. Hopefully they will hopefully come around to our point of view, realize that this is good for the industry and help us promote the service.

Now we are trying to figure out how to grow the business beyond the die-hard action sports fan and get the more casual consumer. Stay tuned.


I founded NetFreight.com in 1998. It was the first business to business internet based marketplace to service the transportation marketplace (long haul trucking, both full truckload and less than truckload). Over the next two years, we raised and spent approximately $3.2M, built some cool technology but never really got traction in the marketplace (although we did have some cool test customers like Home Depot and Del Monte).

The reason we never got traction is that our service (and the internet enabling of logistics and transportation management in general) was really sustaining for the marketplace we were after -larger companies with big freight bills. We were trying to provide better/faster, and as a result butting heads with all the large, entrenched third party logistics companies (3PL's) out there. They had huge amounts of money, customers who depended on them, and salespeople with tight relationships with the customer. Hard to break through that.

What we should have done is focus on the small companies, the ones that couldn't afford sophisticated transportation management software (typically VAN and private network based), but would have accepted our product as being "good enough" to do a job they were already trying to do (manage freight and hold costs down). The problem is that this market was hard to quantify, and the sales model required to address it was uncertain, so second round investors were not impressed (especially given that in March/April of 2000 you needed to be pretty bulletproof to raise money).

In the end we shut down the company, at least finding a home for the IP and other assets with another company, where the technology could live on and we could take care of most of our vendors.

A valuable lesson learned - sustaining business models are tough to execute without heavy duty backing and a lot of patience. There is no doubt in my mind that our internet based solution was superior in almost all ways to the old, closed, proprietary software solutions out there, but changing the mindset of customers with a sustaining product is very, very difficult.

Disruptive Business Models - Weblog Launch

Today is launch day for my weblog describing my experiences creating and launching businesses based on Clayton Christensen's ideas in The Innovator's Dilemma and The Innovator's solution.