Lessons from Failure: Renting High-end Jewelry


Lessons from Failure

  Diana Kander is an Entrepreneur-in-Residence at the
  Kauffman Foundation.  Visit her blog on idea validation
  at www.dianakander.com or follow her on twitter.

At age 25, Laura Sanko was a founding member of a startup that raised $3.5 Million from some world-famous investors and the Founder’s Fund.  The business model was simple: a website that rented high-end jewelry for special occasions for a fraction of the retail value of each piece.  Three years later, the investment money was all gone and while the site continued to operate, it had failed to meet the investors’ expectations.  I sat down with Laura to figure out what went wrong.

Diana:    What was the problem you were trying to solve?
Laura:    We thought that women wished they could wear real diamonds on their wedding day and other special occasions, and that the only thing stopping them was that they couldn’t afford purchasing the jewelry.

Diana:    So you bought several really expensive pieces of jewelry and rented them out?
Laura:    That’s right.  Our pieces ranged from a few thousand dollars in value to over fifty thousand.  And you could rent them for your special occasion for as little as a hundred dollars.

Diana:    This might be a silly question, but where did you keep all those diamonds?
Laura:    Actually, I kept most of them in my apartment.  Our investors thought a New York City presence was important, so I moved out there.  I was the only one in New York for a while and I had to travel around the country for TV segments and conferences, so I would regularly be carrying around up to five hundred thousand dollars worth of jewelry.

Diana:    Wow. Were you nervous carrying all those diamonds around?
Laura:    I got used to it.  Traveling was always interesting, especially if you were selected for a security screening.  I learned quickly that you can always ask for a private screening.  Remember that…when you’re traveling with six figures worth of diamonds.

Diana:    (Laughing) That’s very helpful advice, thank you.  So back to the problem you were trying to solve.  Did you do anything to test your assumption before you went to the investors or bought all those diamonds?
Laura:    Not really. We did a lot of research and had a ton of comparable examples for each of our assumptions, but our first real test was launching our site.

Diana:    So what did you learn after launching the site?
Laura:    We learned that it was really difficult to gain customer trust for high-end jewelry rental online.  We got a lot of very positive publicity and were strong at getting traffic to the site and getting visitors to put something in their shopping cart, but we had an extremely difficult time converting them into paying customers.  Some of the visitors thought it was a scheme, some were worried about losing the diamonds, and many weren’t convinced why real diamonds were better than fake ones.

Diana:    So how did you try to get past this setback?
Laura:    We tried all kinds of design changes to improve conversion on the site, but they didn’t seem to make a big difference.  So we resolved to partner or advertise with the large, well-known players in the wedding industry and hope that they would lend us their credibility and help convince the marketplace that we were a smart decision.

Diana:    Did that work?
Laura:    Not really. The wedding industry turned out to be a lot more fragmented than we thought.  The large, well-known companies in the industry just weren’t able to lend us the credibility we needed to increase conversions.

Diana:    So then what?
Laura:    We had already gone through a lot of our investment dollars, but we thought our only option was to have a personal interaction with the customers.  So we opened a physical location in New York City.

Diana:    How did the physical location work out?
Laura:    It was really strong.  Our ability to convert visitors to the physical store into paying customers was very high, but we only had one store and the foot traffic was limited. Maybe if we had implemented the physical location earlier in our lifecycle things would have been different, but at that point, we didn’t have the capital to scale the physical locations, and the investors didn’t have the appetite to invest more money and make a big gamble on the small success we saw at the physical store.

Diana:    So what happened to the company?
Laura:    We eventually just ran out of money.  Our CTO decided to keep running the site on his own at a smaller scale than what we were trying to accomplish.  And the rest of the team disbursed throughout the country.

Diana:    When did you know your concept was in trouble?
Laura:    (Smiles). There’s a pretty clear moment in my mind.  We were having trouble increasing sales past a certain baseline and money was running out, so we started trying more and more extreme marketing tactics to try to get ourselves back on track.  We hired a company to make a viral video about us.  The company said they could virtually guarantee 300,000+ views on the video because of some proprietary technology and viral video formula they had come up with.  They charged $60,000 for their services. And our team thought that was a small price to pay for the hundreds of thousands of bride email addresses we would collect and the publicity we would receive.  I really didn’t like this idea.  I tried to explain to our team how hard it was to create a viral video but I was the only one opposed to the concept.

Laura showed me the video. It was a “Pimp my bride” contest offering a makeover to brides on their wedding day in exchange for their contact info.  It was really hard to watch. The cinematography and acting resembled a bad B movie from the 80s and it needlessly made fun of southerners, and for some odd reason, George W. Bush.  The video was posted to youtube in February of 2009, and at the time of my viewing in 2012 it had 275 views.  Not 275 thousand.  Just 275.

Laura:    That’s when I knew.  I knew that we had run out of runway to make sober strategic decisions and we were now just hoping to get lucky with marketing ideas.  I really believed in this idea.  I think it provided a valuable service and with additional capital, it could have been successful.

Diana:    So what was your biggest takeaway from this experience?
Laura:    I learned that you need to treat investor money like it’s your personal money, because otherwise you are going to substantially cut down your runway (the amount of time and money you have to get your business to take off).  I think we could have had another 2 years of trying to make it work if we had been more careful with the money.  And it wasn’t like there were any extravagant expenses that did us in, it was the little decisions to overnight a business package when standard shipping would work.  It was the office space we could have grown into rather than the smallest amount of space we needed. It was death by a thousand paper cuts.  With more discipline over our use of resources, we could have made all the same marketing mistakes, and had time to bounce back.  But instead, just as we started seeing positive traction in the physical location, we ran out of money.

Laura’s experience is not uncommon.  Many startups raise money before they’ve had an opportunity to test their assumptions. As a result, they spend the money validating their ideas instead of using it to execute a sound business model.  Startups are all about runway.  Almost all startup failures are the result of founders running out of resources to keep pursuing their ideas. The more runway you can give your startup, the greater your chances of success. Laura’s experience could have been a lot different if she and her team just had an extra year of capital or – more specifically – if they had tested some of their assumptions before spending their investors’ money.

For the last two years, Laura has been training as a mixed martial artist full time.  Today, she has an amateur record of 4-1 and is three months away from her first professional fight.  She is also launching a new company, Grassy Pants, a locally raised, grass fed, ground steak company.

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  • Diana Kander