What Entrepreneurs Can Learn From The Grateful Dead

Tweedledee & Tweedledum“Contrariwise,” continued Tweedledee, “If it was so, it might be; and if it were so, it would be; but as it isn’t, it ain’t. That’s logic.”
Lewis Carroll, from Through The Looking Glass

Entrepreneurs often must take counter-intuitive, contrarian positions in order to succeed. As noted in Entrepreneurship Is A Compulsion, entrepreneurs often view the world from a slightly different vantage point, rejecting the oxymoronic term Conventional Wisdom

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In the video below, I discuss three business models which deviated from contemporary Conventional Wisdom yet each proved to be highly successful. In two cases, these once unconventional business models eventually became the industry norm.

I discuss these contrarian business models in the nine-minute video below, which can also be accessed here: http://youtu.be/NJQG1KMUErg

Baseball Radio

A number of highly successful business models ran counter to conventional wisdom at the time they were launched. One of these was the decision to broadcast baseball games on the radio.

The first radio broadcast of a professional baseball game occurred on August 15, 1921. However, it was not until 1935 that Philip Wrigley, the owner of the Chicago Cubs, agreed to allow his team’s entire season to be transmitted on the radio. Conventional wisdom caused the 15-year delay. It took another four years before every team agreed to broadcast their entire season on the radio.

During the early 1930’s, major league owners believed that radio broadcasts would negatively impact ballpark attendance. They asked themselves, “Why would someone pay to attend a game when they can sit in the comfort of their home and listen to it for free?” At the time, gate receipts represented the majority of the owners’ revenue, so their desire to protect this important cash stream is understandable.

However, rather than suppressing attendance, radio actually expanded each team’s fan base. During the first half of the 20th century, baseball parks were located in cities and most of the attendees travelled via public transportation. Radio dramatically broadened each team’s geographic reach.   

The owners had failed to anticipate the psychological kinship that radio created between fans and players. Instead of simply reading box scores and newspaper accounts of games previously played, radio broadcasts allowed fans to experience each game’s drama in real time.

The intimacy of radio caused fans to establish personal rapports with players which was previously not possible. This fan/player connection increased the teams’ live audience from fans who could walk or take the subway to attend a game to rural radio listeners who lived upwards of 100-miles away. Such remote devotees were motivated to make occasional visits to ballparks, trips that they otherwise would never have made had radio not bolstered their allegiance.

Grateful Dead Bootlegs

Grateful DeadRecord executives were dumbfounded by the Grateful Dead’s strategy of encouraging their Deadhead fans to create and share bootlegs of their live performances. Conventional Wisdom dictated that the proliferation of unauthorized recordings would supplant the market for concert tickets and commercial releases. However, even through their persistent ganja haze, the Dead knew better.

By allowing fans to make and share concert recordings, the Dead’s cult status was significantly enhanced. Fans began to collect bootlegs and follow the band on tour. Despite the record executives’ concerns, these hardcore fans also devoutly purchased the Dead’s commercial releases and other licensed products (T-shirts, bumper stickers to put on their Cadillacs, etc.). Instead of attending one show, the Grateful Dead’s fans routinely went to several, in some cases following the band on tour and attending dozens of shows.

Old School Software Distribution Is Doomed

On December 10th, 1993, a small group of software developers in Shreveport, Louisiana changed the software world. id Software’s first-person shooter game, entitled simply DOOM, could be downloaded free, allowing gamers to play the first nine levels. Players who wanted to continue their gameplay could purchase an additional 18-levels.

Due to poor record keeping and the proliferation of DOOM knockoffs, it is impossible to know exactly how many copies of DOOM were downloaded. Estimates range from 10 million to over 50 million. However, the game’s impact on the software industry is indisputable.

id’s unique business model was spawned by the company’s inability to place their titles in retail outlets. Rather than utilizing mail order to sell their game, as they had done with their prior title, Wolfenstein 3-D, id posted their game on bulletin boards and encouraged gamers to try it at no charge, effectively spawning the freemium software distribution model. The DOOM brand, which includes sequel games, consol games, merchandise and a major motion picture, ultimately generated over $500 million in total revenue.

The Economist magazine coined a term for this new business model, “Doomenomics.” By the late 1990’s, Conventional Wisdom dictated that companies should give their products away in order to quickly establish massive adoption. This irrational mindset paved the way for the irrational exuberance that culminated with the dot bomb crash of 2001. DOOM indeed.

Bigger Isn’t Better

“More businesses die from indigestion than from starvation”
David Packard, Co-Founder Hewlett Packard

When I was an operating entrepreneur, I was often asked, “How many employees do you have?” My answer was always, “As few as possible.” Another common question was, “How many square feet have you leased?” Again, my response was usually, “As little as possible.”

In many cultures, Conventional Wisdom dictates that bigger is better. However, at a startup, every expenditure should result in a direct and measurable return, as described more fully HERE. Keep your organization nimble by monitoring return-driven metrics, such as profit per employee, cost per customer, life time value per customer, profit per location, profit per square foot leased, etc. Never consider size metrics, such as headcount and square feet of office space, as measures of your venture’s success.

TriggerfishIn nature, the big often eat the small. However, it is not uncommon for faster, smaller predators to eat larger, slower prey. Consider the triggerfish. This nimble creature nips at a larger fish’s rear fin until it is sufficiently frayed. A frayed tail generates less propulsion and thus significantly slows their prey. Once the larger fish’s maneuverability is sufficiently compromised, the triggerfish then blinds it. This effectively results in a source of fresh food which the triggerfish can then dine on, at its leisure.

Just as the quick often eat the slow in nature, the same phenomenon occurs in business. As noted in countless business books (most notably The Innovator’s Dilemma), large companies that do not make a concerted effort to remain agile and keep their fins intact, are eventually devoured by their smaller rivals.

Consider id Software’s first game, Wolfenstein 3-D. It cost approximately $25,000 to create, if you include the rent for the apartment in which a half-dozen developers created the game. The first month’s royalties were $100,000 and the game ultimately generated over $24 million in total revenue. id’s next game, DOOM, was created by a team of approximately a dozen engineers at a cost of about $200,000.

Despite id’s success as a small team, Co-Founder John Romero decided that his new startup, Ion Storm, had to grow quickly in order to effectively compete with its larger rivals. To this end, he raised $30 million, hired over 100 employees and rented the penthouse of the Texas Commerce Building, one of Dallas’s premier office buildings.

Ion Storm’s first game, Daikatana, was delivered over two years late and is considered the first major failure of the gaming world. In 2009, ScewAttack ranked Daikatana #7 on its Top Ten Biggest Bust list, while in 2010 GameTrailers cited it as #2 on its list of the biggest gaming disappointments of the prior decade.

The game was as bloated and sluggish as the company which spawned it. According to its critics, it encompassed too many worlds, too many characters - too much of everything. Ion Storm ultimately racked up financial losses of $44.8 million and John Romero was eventually fired.

Conventional Wisdom Often Isn’t Wise

Question Conventional Wisdom. Impactful business models often arise from taking the road less traveled. In many cases, unconventional business models arise because of advancements in technology, such as occurred with: baseball (radio and improved automotive transportation), DOOM (Internet facilitating efficient and inexpensive software downloads and frictionless upgrades) and the Grateful Dead (smaller, higher fidelity recording devices).

Remain watchful for similar transformative innovations which will allow you to change the rules of the game. Fortunes have been made by entrepreneurs who proved that Conventional Wisdom is often trumped by unconventional contrariwise thinking.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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