Failure Is a Precious Thing

Ahem. Failure is actually an awful, painful and humiliating thing but its retelling sticks so much more firmly in our minds. Hearing how smart, motivated, honest people fail is valuable: put yourself in their place, empathize with their horrible decisions; the likelihood is that you’d do the same in their place. Learn from it.

Here is a little piece on why Vinetrade (a wine distribution startup) failed.

The business strategy is a perfectly reasonable push to apply modern inventory and sales systems to a very old-school business:

We wanted to revolutionise the fine wine industry, a market with many layers of middle men, and one that has traditionally eschewed technology, failing to patch it’s many inefficiencies.(sic)

The core problems of this business idea are very common. None are truly toxic, sometimes they work. This time they didn’t.

1. Starting with the solution.

If you haven’t worked in a business and acquired what is known in startup lingo as “domain expertise”, you are unlikely to really understand what works and what does not in that business. I don’t know whether the founders of Vinetrade had any domain expertise, but judging by the tone of the post I am guessing not.

Now, in one school of startup thought, this is a feature, not a bug. A fresh perspective facilitates DISRUPTION, the holy grail of startup achievement. In this case, as is usual, it did not. That speaks to how tough pulling off disruption is more than anything. Industries are organized the way they are for a reason.

2. Assuming that middlemen are a sign of waste and inefficiency.

As a society we have an aversion to middlemen. See this podcast with Russ Roberts, from which I learned of an amazing article: “The Economic Organisation of a P.O.W. Camp” by R.A. Radford. Story goes like this:

There once was a P.O.W. camp where the prisoners got Red Cross packets full of various things: food, cigarettes and so on. Everybody has the same stuff but people have different tastes. Some people don’t smoke, some don’t eat beef, etc.

Enter the Itinerant Padre, who goes around and makes voluntary exchanges with people: carrots for molases, cigarettes for candy. At the end of the day he has two full packets plus a little more to himself. He wasn’t dishonest, he didn’t empty one of the tins. Could have extorted, but didn’t. Yet everyone was better off.

A middleman is someone who creates markets, a function we instinctively disdain. Middlemen happen to be really important in the wine industry, I think because it has many suppliers and many buyers. When a network is really complex you need a lot of humans to keep all of the relationships straight. Consolidation of middlemen can only follow and never lead consolidation of principals. 

Well, at least as long as #3 holds, which is:

3. Hoping we have the technology to replace human interaction.

We haven’t hit the singularity yet and there is no substitute for human interaction. Principals (buyers and/or sellers) resent anything other than the personal touch.  Eventually, firms will be able to spawn human minds inside machines, meaning a central technological force can manage relationships in an infinitely complex network.

But until the human mind is itself commoditized, there is no substitute for an attentive salesman.

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