Fresh Mown Hay

Finding the Right Level of Customer Service

Imagine Amazon.com answering each technical query with a personal phone call and following up with a thank-you note one week later. Or Cingular dispatching a technical crew to investigate the slightest technical hiccup with my cell phone.

While it would be great to simply get a person when you call customer support, it is also very expensive. Generally, the resources required increase exponentially with the quality of customer service provided. The secret is then not to go overboard, but instead to focus resources on the two or three customer service attributes your core customers value the most.

Which brings me to Zappos.com, the self-proclaimed “web’s most popular shoe store.” I am a huge fan. I placed my most recent order Thursday afternoon. Not only was shipping free for the pair I wanted, but I received an e-mail saying that I was upgraded to overnight shipping. I had my shoes Friday afternoon.

They have a 365-day return policy, provided you return the shoes in the same shape that you received them in. I have never returned any shoes, but it is as simple as printing a shipping label from their site. And it’s free.

And with that, they have addressed the two largest potential hang-ups for online shoe consumers: 1) waiting for things in the mail really sucks, and 2) what if they don’t fit?

Sequoia-backed Zappos projected revenue north of $175 million for 2004, which would maintain their clip of doubling revenue every 12 months since 1999. Mike Moritz the active partner on the board from Sequoia, said that “we were impressed with the focus that Zappos.com has on service and creating the best possible online shopping experience," (For those who do not know Moritz, Private Equity Week once described Moritz as someone who “could create buzz just by buying a box of Tic-Tacs and muttering something about how he likes the orange ones best.”)

At the other end of the customer service spectrum are companies like AT&T Wireless and Bally Total Fitness. Both are legendary for terrible customer service. On an industry level, only used car dealerships finish lower than cellular providers, and AT&T led the pack before being acquired last year. Type “Bally Total Fitness” into Google and the second hit is “ballysucks.net”

Bally bilked my for several hundred dollars a few summer ago, so I still get the occasional Bally spam. When the most recent one arrived, I clicked unsubscribe and it paradoxically said it could not unsubscribe me because my name could not be found in their database.

AT&T is no longer among the living, and by the looks of Bally’s financials it may not be around to torture customers much longer. The lesson here is a simple one: if your customers hate you, come clean. Give the money back to the investors, so that they can be buy shoes online and be satisfied.

AT&T Euthanized, Will Be Missed

Quick, Humane End

AT&T’s twenty year death spiral has finally come to an end.  Once the largest company in the world, last week it was acquired by SBC, one of the Baby Bells spin-offs from the government mandated breakup of AT&T in 1984. The child bought the parent.

A shadow of its former self, AT&T was acquired for $16 billion (or roughly a quarter of Google’s current market cap.) It will be interesting to see what will happen to some of AT&T’s forward-looking projects.

Relaunch of AT&T Wireless Now Unlikely

To the great confusion of consumers everywhere, AT&T Wireless and AT&T were separate companies. When AT&T Wireless was purchased by Cingular recently, the AT&T name reverted back to AT&T.

For the past few months, rumors had it that AT&T would relaunch the the AT&T Wireless brand through an MVNO partnership with Sprint. It seems safe to say that SBC, which is a 60% owner of Cingular will kill this project. (If they wanted to do something creative, SBC would relaunch AT&T Wireless as an MVNO for senior citizens, an overlooked segment to whom the AT&T brand holds significance.)

Cloudy Future for AT&T’s Consumer VoIP Play, CallVantage

As a regional bell operated company (RBOC, also sometimes called an incumbent local exchange carriers, or ILECs) SBC does not see voice-over-IP (VoIP) as an imperative. AT&T’s consumer VoIP offering, CallVantage, is actually quite competitive .

However SBC will likely squander the opportunity to embrace their inevitably digital, VoIP future. Instead, they will worry about cannibalizing their high-margin, but rapidly shrinking local phone business.

Om Malik points out another factor confounding SBC’s adoption of VoIP may be AT&T’s willingness to cozy up to cable operators in order to speed the adoption of CallVantage. The RBOCs are sworn enemies of the cable companies, so it is unlikely that these partnerships will continue, thereby clouding the future of CallVantage.

 We Will Miss Their Intellectual Property Firesales

AT&T’s Bell Labs was the premier research and development institution for much of the 20^th century. For a variety of reasons, AT&T repeatedly failed to capitalize on technologies developed by Bell Labs. Areas where Bell Lab’s researchers made substantial contributions include semiconductors, voice-compression and cellular technology.  The invention of the transistor earned Bell Labs the 1956 Nobel Prize.

Instead of commercially exploiting the intellectual property (IP) generated by Bell Labs, AT&T either gave it away or licensed it for a nominal sum. The world was enriched by this intellectual property -- the creation of billions if not trillions of dollars of weath stemmed from Bell Labs. We would not recognize our telecommunications world today had AT&T followed the modern IP strategies of firms like IBM and Microsoft, which many argue hinder innovation.

Questions to ask VCs

SAP Ventures' Jeff Nolan posted his response to 10 questions to ask a VC.  All 10 of Jeff's responses can be found here, I've posted a few of the more interesting ones below (his responses are in red.)

When you fundraise and tell the story of your three most successful investments, how will you describe how value was created for LPs?

The answer to this question will give you some insight regarding how you might be expected to create value.  For example, if the firm's biggest success came as a result of increasing valuation multiples through the consolidation of a fragmented industry, your company's strategy of creating value through innovation and organic growth might not be a great fit.

Listen, any VC who says "we're gonna do this, this, and this for our investments" is talking out of their ass. Every investment is different and the requirement is to build a strong relationship with management in order to know what the needs are at any given point in time. If a VC has a strong relationship with management, and can deliver good results in recruiting, strategy, relationship facilitation, and fundraising, when the investment has requirements for any of the above, then that's a good thing. What I don't necessarily understand is the question about value for LPs... you are either making them through doing good investments, or you are not. It's pretty binary.

May I get a copy of the "book" you sent around when you raised this fund?
What promises did the general partners make to their limited partners when they raised their last fund?  How might those promises impact the fund's relationship with your company?

No

What do you think the exit will be on this investment?  Do you think it will be a financial buyer or a strategic buyer?
You are going to be asked this question.  It's only appropriate that you find out up front what the expectations of your investors are regarding this critical issue.

There are 4 possible outcomes, 1) you go out of business and lose all my money, 2) you get acquired by someone, 3) you go public, 4) this becomes a nice little business that is run for cash flow. Obviously #1 is bad, but #4 is bad as well because the only way I'm gonna get my money back is through #2 or #3. Can I predict when #2 or #3 will happen? No. Will either happen if you are executing on your business plan and become an opportunity or threat to other companies (for #3 specifically)? Yes. If it's an A round deal, well then you have more than a couple of years to figure it out, but if you are raising your EEE round of funding, then you better have a good answer for me about how you will achieve #2 or #3 pretty damn quick!

As you think about how to shape the company so that it is optimally positioned for that exit, what three things do you think need to be done in my company?
The general partners are measured against their ability to deliver value to their investors.  By what metrics will you be judged?

Can't answer this one without knowing the specific company. However I will say that investors shouldn't be afraid to say "well I think your management team needs to be upgraded" if that is in fact the case. It's better to just put it out there and not dance around it. Entrepreneurs usually gut feel when they need to be upgraded and respond well to a plan that details how to do it.

What was your firm's biggest disaster as an investor?  How did the investment go sideways?
There is a difference between a bad result and a bad investment.  Does the investor know the difference?  How did they behave?

I think it's fair to say that every bad investment is rooted in a sense that something will happen to turn it around and out of that hope we fabricate a reality to support it. Hope is not a business strategy. The best bad investment I was ever in was when the investor syndicate out of the blue said "hey this thing just isn't going to scale, let's shut it down now and return the money". We did, and we were right to do it rather than letting the company slowly burn away all of the cash.