Why online collectibles company ShelfLife put its Dragons' Den deal on hold

Each week, Financial Post contributor Mary Teresa Bitti revisits CBC's previous week's episode of Dragons' Den. She captures what the cameras didn't and in the process provides a case study for readers, zeroing in on what pitchers and dragons were thinking and what the challenges for the deal are going forward.

The pitch Co-workers, friends and now business partners, James Chillcott and Nick Hoffman entered the Den to pitch their brainchild: ShelfLife, a subscription-based website they describe as the future of collecting. ShelfLife draws from eBay, Facebook and Wikipedia and is a one-stop hub where collectors can research, shop, sell and manage their collections, as well as interact with their peers.
In many ways, creating ShelfLife was a natural progression in their careers. "We've both been in the web design/development industry more than 10 years and have a wealth of experience. And we are both power collectors. Nick collects Magic: the Gathering a trading card game by Hasbro and I collect vintage action figures, designer toys and skateboards," Mr. Chillcott says.
"With the success of social commerce sites based on people creating yarn puppets in their basements we felt it could certainly be done for the biggest brands on the planet, which also happen to be brands beloved by collectors, the Transformers, Nikes, and Maple Leafs of the world."
The pair designed ShelfLife from the ground up to fill what they saw as a gap in the market for social commerce, starting in the spring of 2012. That summer they were part of the inaugural cohort of the JOLT accelerator program at the MaRS innovation centre in Toronto and in the fall launched a beta version of the site.
"As with many Google products, it will likely remain in open beta until we believe we have fulfilled our vision," Mr. Chillcott says. "That will likely take another year because the site is so massive and has so much functionality and we are constantly adding new features to enhance the user experience."
Besides managing and researching their collections on the site, collectors can add wants and haves into permanent catalogs of every collectible ever made, and then match buyers and sellers.
"This is a huge advantage over a site like eBay that relies on a shifting pool of incomplete data, which means users are constantly searching for the same thing over and over," Mr. Chillcott says.
ShelfLife also provides a suite of social commerce tools that let collectors build the site out similar to Wikipedia editors. These tools are largely about connecting the collectors and keeping them engaged.
The revenue streams are straightforward and include a 6% commission on vendor and user sales and an affiliate commission of 15% on average to drive business to other ecommerce sites such as Deal Now. Based on the platform's predictability capability, it is also able to sell select, in-demand products direct.
When the co-founders faced the dragons, it was still early days. They were still building out their catalog, which featured about 140,000 items being perused by about 5,000 users, and had earned about $10,000 in commissions.
The deal Mr. Chillcott and Mr. Hoffman asked for $100,000 in exchange for a 25% equity stake, valuing the company at $400,000. The money would be used to ramp up the more complex programming tasks such as creating international shipping calculators to predict shipping costs for any product in the database and for community development - locating, attracting and bringing new collectors on board.
On air, they accepted a deal from Bruce Croxon and Arlene Dickinson that gave them what they asked for. "During due diligence, we decided to table the deal because we realized we hadn't hit the plateau we wanted to hit in terms of user numbers," Mr. Chillcott says. "We elected to use viral marketing techniques to help get us there without further funds. That's when we'll revisit the deal."
Mr. Chillcott estimates they will need hundreds of thousands of users to achieve that. Meantime, they have increased the number of users by a factor of eight and revenue by a factor of 1,000. They've kept in touch with the dragons and are hoping to close the deal this spring.
They are also working on apps to bridge the gap between online and offline collecting that will allow collectors to scan the barcode on a product and add it to their collection.
"We are also working on an app that will allow collectors and vendors to connect on conference floors of huge conventions such as Comic-Con. So a user could be walking down an aisle and the app will tell them the GI Joe figure they were looking for is 20 steps away and on the left for a $1 less than they said they wanted to pay," Mr. Chillcott adds.
A dragon's point of view The idea fits nicely with Mr. Croxon's focus on digital. "They presented well and have a unique niche but it is just another version of doing what eBay and other sites do. The debate is how different is what ShelfLife does to what others do and how big is the market for people who will appreciate that difference? That's what is going to be the deciding factor in making a business or not. So far the traction has not been there. I'm not saying that won't change, but it is not an investable proposition for me today.
"Their challenge now is to market the heck out of it and show investors like me that they are able to attract and retain customers at an acceptable cost per acquisition."
A expert opinion At this point in its evolution, John Cho of KPMG Enterprise sees more downside than upside. "There are a lot of items of low value, which means you have to push through high volumes to get a decent return in absolute dollars," he says, adding that he shares Mr. Croxon's concern about relevance and scalability.
"Will they get enough of a profile in the collector community to drive traffic, particularly since they are competing with eBay and other big players for that traffic? As well, have they modelled out logistics and shipping costs?" he asks.

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