Building a Facebook for Wine
Michael Stajer bet big on his idea to start an eBay-style (EBAY)Web site for buying and selling wines in 1999. The Bay Area attorney sold his personal wine collection for $25,000 to finance the site, called WineCommune. At the time, he hoped to get venture or angel funding early on. "My original plan was, 'Hey, I'll get this product up and then I'll shop it around and see if I can get some money, hire some people, and then take it to the next level,'" Stajer says.
That didn't happen. The dot-com collapse came a year after he started WineCommune, and investors were wary of the regulated market of alcohol sales. Stajer kept his day job and gradually developed the site. He amassed more than $40,000 in credit-card debt to finance the business. But despite the time he spent wondering how he would ever pay the bills, Stajer says he's glad he never got funded. The company expanded by launching online retailer J.J. Buckley and WineZap, a price comparison site with a social network. He expects WineCommune to have $17 million in revenues this year from a mix of advertising, paid referrals, and retail wine sales across the three sites. "Now, of course, [the credit-card debt is] paid off, and I got my wine collection back," he says.
The online wine niche is filled with oenophiles turned entrepreneurs like Stajer. Instead of relying solely on sales and competing with established sellers such as Wine.com or brick-and-mortar stores, where most wine is sold, they are building social networks aimed at wine lovers. Some are attracting investors' attention—wine search engine Snooth announced a $1 million round of angel funding in November. But most remain self-funded projects by wine lovers hoping to turn their passion into profits.
Building Community Before Seeking Financing
Sagi Solomon founded OpenBottles in 2005. An attorney in San Jose, Calif., Solomon hopes to make the wine review and social-networking site his only full-time job next year. He deliberately avoided outside investment, however, because he does not want his vision for the company diluted. "It's costly to get venture financing, and you do give up not only equity in the company but overall control of strategy and where you want to take the business," Solomon says.His model for growth is Craigslist: "He started it on his own with no financing, and it's grown into this really vibrant community," Solomon says.
Some of his peers agree and are forgoing the search for outside investment. The founders of Bottletalk, a Britain-based social network launched in December, 2006, spent the first year expanding the number of users before trying to commercialize the site.
Being self-funded presents its own obstacles, however. Stajer of WineCommune faced competition from venture-funded companies that could afford expenses on advertising and marketing that were out of his reach. But not having cash to burn forced him to be disciplined about developing the business. With every change to the site costing him time and money out of his pocket, he had to ask himself, "Am I adding features that make a business case?"
Stajer, who now mentors two entrepreneurs, advises startups to question whether each decision will help make the business profitable. "You can't just wait for profits. They don't just magically show up. You have to plan for them," he says. "If taking on debt does not contribute to plan, then don't do it."
Even with a solid plan and good product, building a self-funded startup takes patience. It's not the approach for entrepreneurs looking for big returns right away. "It took four years, to 2003, to get to a sort of tipping point where I had enough customers and cash flow, my first initial employee, enough hype, and a good enough product that now, things finally started to happen," says Stajer.
Self-funded entrepreneurs also face the risk that the significant time and money they put into their businesses may never yield profits. "It takes a lot of work," says Solomon, who invested $10,000 of his own savings in OpenBottles. "You're working nights. You're working weekends. You've got to make that investment."
Backup Plan Needed
The prospect that your venture may never make money makes it important to have a backup plan, says Stajer. His father, a hotelier and restaurateur, advised him that "if you want to be an entrepreneur, that's fine, but have something to fall back on." Stajer knew that if his business failed, he could always work at a law firm for a few years to pay off his debt.
Still, the self-funded model can be more rewarding than giving PowerPoint presentations to potential investors. Says Solomon, "My time is better spent building the community and making it more useful and helping my company make the most of it."
For tips from a variety of entrepreneurs trying to create viable wine businesses through social networks, flip through this slide show.