How Startups Can Turn Failure into Success

Welcome to HBR on strategy, case studies and conversations with the world's top business and management experts hand selected to help you unlock new ways of doing business. ABT Deco is a marketplace for used furniture that launched in New York City in 2014. The company was growing steadily despite its complexity and high costs, but after that strong start, there were several different options for scaling the business business from expanding into new markets to rebranding with a sustainability focus. Which path did they take and where are they now? Today we bring you a conversation about how to scale a startup with Harvard Business School professor Ayelet Israeli, who studies E commerce and App Deco co founder Colm Dennis. In this episode, you'll learn how to translate early failures into information that can help your business move forward and grow in the long term. You'll also learn how to use data and analytics to improve your performance and get a better value proposition. This episode originally aired on cold call in February 2022. Here it is.

Heirloom. According to Merriam Webster, it's a valuable object that's been given by older members of a family to younger members of the same family over many years. Things like jewelry, timepieces and art. Or that ornate walnut cabinet that holds the even more ornate fine china that no one's allowed to use. There was a time when the sentimentality and usefulness of heirlooms made sense, but those days are long gone. Baby Boomers, Gen Xers and Millennials are shedding their parents possessions at record rates. And in today's disposable culture, it's cheaper to buy a sofa from Ikea than it is to pay to move Aunt Claire's overstuffed ottoman. The evidence is piling up. Americans tossed about 12 million tons of furniture in landfills in 2021, creating mountains of waste even as we spent about 120 billion on new furniture. Seems like there must be a better way. Today on Cold Call, we've invited Professor Ayelet Israeli and case protagonist Colm Dennis to discuss the case entitled Apt Circular Economy Furniture Marketplace. I'm your host Brian Kenny and you're listening to Cold Call on the HBR Presents Network. Ayelet Israeli studies omnichannel and e commerce markets with a focus on pricing, channel management, online marketing, and marketing analytics. Colm Dennis is the protagonist in today's case. He's the co founder of Appdeco along with his partner Rehan Fagiri. According to my quick glimpse at LinkedIn column, has had pretty much every job that you can have in a company in the time that he's Been with appdeco. Thank you both for joining me today.

Thank you so much for having us.

Yeah, it's excited to be here. Thank you.

Great to have you on the show. This is a really fun case. I think a lot of people, particularly our younger listeners, are going to really relate to this. People who are moving around. I think it's a pretty transient population we have these days, just based on my own children who seem to move about every six months or so. So I think there'll be a lot of interest in hearing about this business idea and how it came to life and what some of the challenges are that you faced as you've brought this company online. Let's just dive in. Ayla, I'm going to ask you to start for us by just telling us what what's the central theme of the case and what's your cold call to start the discussion?

Like you said, this is a case about apdeco, which is essentially a used furniture marketplace coming out of New York City. What is really cool about this peer to peer marketplace of used furniture, as you will see as you read the case, is how the company focus initially was to actually be profitable and only later to grow and get more scale. This is a very unique theme that we don't see in many other cases. The case lays out a bunch of different options for them on how to grow. I like to start the discussion with what should they do, how should they grow, which of the options or avenues they should take.

Yeah, we've done a lot of cases on cold call over the years about companies that tried to grow too quickly, didn't focus on profitability. So I thought that was a really interesting defining theme in the case. Let's just talk a little bit about why you decided to write it. How did you hear about them and how it relates to the kinds of things that you think about as a scholar.

How did I hear about them is one of these opportune moments where a student comes to you and tells you you have to write this case. And actually Jamie, my co author on this case, worked at appdeco. She was an intern there and she told me it's such an exciting company. She's so inspired by seeing first getting profitability and then growth, which again, it might sound trivial to some of our listeners, but this is something that is pretty rare in the marketplace. And then one of the other interesting things is that oftentimes when we see cases, a lot of the cases are about kind of success stories. And what is interesting in this case is that they did try to actually scale at some point and had kind of a failure. And she said, it's so rare. I've done hundreds of HBS cases. I've never heard of how a company learned from failure. And this is one additional aspect of this case. HBS students do so many cases and they're the perfect people to identify great cases. And for me, how does it relate to what I do? I study e commerce businesses. We know that the Internet enables all these businesses by eliminating a lot of different frictions that we see in the marketplace. And this is a great example of how do you eliminate frictions? How do you introduce transparency and create a better transactions between sellers and buyers of furniture and how you improve the entire process? The second aspect that I really like here that also relates to my research is the usage of data and analytics to get better performance and to get better value proposition. And again, this is something that App Deco does really well.

Kalam, let me turn to you for a second and ask you to describe appdeco. What is it? How does it work? What's your value proposition?

AppDeco is the easiest way to buy and sell furniture. That's how we like to describe it. The way that it works is pretty simple, straightforward. If you're a seller, you're looking to sell a piece of furniture, you can go to our platform. It takes a couple of minutes to list. We do some curation, basically judging up the listing to make it as appealing as possible. The item goes live within a few hours and then posted on our platform. We market that item too, so it's introduced to buyers in the areas that we service. And then when the item sells, we have our own internal logistics team where we pick up the item from the seller and then deliver to the buyer in the same day. Buyers, they transact like they transact on any e commerce website so that you buy with your credit card, you and then the seller is paid via direct deposit.

It sounds great. It sounds like one of those ideas that, like, why didn't I think of that idea? Who came up with the idea? How did it evolve?

It came out of our own frustrations. You know, my co founder was in grad school at Wharton and was moving back from Philadelphia to New York and had a lot of uncomfortable experiences with strange guys in her house trying to sell furniture. And as a single female at the time was kind of put in an awkward position in her apartment alone with strangers. And just how weird it was to kind of have this cast exchange. And at the same time, I had a couch that I was trying to sell, but people were very non committal and using Craigslist at the time. When Raham came back to New York, I was like, you know what, like let me just borrow your truck for a day. And I posted, hey, this couch for sale and I'll deliver it. It sold like that.

Yeah.

And I was kind of commiserating over this and having that aha moment. I was like, wow, this is something that has a lot of utility. And that was the kind of the genesis of it. We took a lot of inspiration from Airbnbs and other marketplaces and then just start looking into the actual size of the category. Like, wow, this could be something again useful and really big.

So you had a really good idea and then the hard work began. We're going to talk more about the hard work of actually building the company, but before we do that, Yelet, I want to ask you what column describe sounds to me like a platform company. We've talked about them before, but can you remind our listeners what a platform company is? And I'd also like you to talk about the term circular economy. I read that in the case and I thought, wow, this is a cool. And then I looked it up some more and I found out that that term's been around since 1988. So clearly I am not on the cutting edge of this kind of economics jargon. So maybe you can explain both of those things for others like me who weren't familiar with that concept.

Let me start with the circular economy piece because that was news to me as well. It's essentially a rebranding of the word buying used things or vintage or pre owned. But really it was a right time in history to be rebranded because people started caring more about sustainability. And so we see more, more companies nowadays in this space trying to figure out how to induce people to recycle or to reuse things that other people dropped. We see this in furniture with this company, but also jewelry, clothing, many, many other companies. With regards to platform companies, we think of a company that facilitates interaction between different sides on their website or on their platform. In this case we're talking about a two sided platform, which is where there are people that want to sell furniture, there are buyers, people that want to buy furniture, and the platform helps them meet and helps facilitate a transaction. What's interesting here, like Colm just mentioned, is that above and beyond what Craigslist or other peer to peer marketplaces offer, they also close the loop on the delivery part and the logistics part of actually Delivering furniture from the seller to the buyer and completing the transaction.

Okay, so Colm, let me turn back to you for a second. I'm just curious. Did you set out to be an entrepreneur? Was that something that you self identified as? You know, you came up with the idea, but there's such a difference between somebody who comes up with a good idea and then somebody who makes it happen. That's what being an entrepreneur is all about. And that's not for the faint of heart, I would say. But I'm just curious, what's your background and did you identify as an entrepreneur?

Honestly, I don't think that I did at first. You know, I come from parents that are a bit risk averse. You know, it's like, get a good.

Job and like, hey, I'm a parent, so that's not a bad quality on a parent. Let me just say they're like, get.

A good, you know, steady job or work for the government or something. And just like steady Eddie. Even before starting at Deco, I worked for l' Oreal and I worked there my entire professional career and had the opportunity to do a lot of really wonderful things within that organization. The seed of entrepreneurship, like, really was there is like, wow, like I'm, I'm accumulating, you know, a certain level of skills, you know, that wow, like, if I did my own thing, it'd be great. And you think that those things would apply, but the truth is they really don't at all. And not until later on. Not until later on. I would say it kind of really came on later and answered your question directly about the desire to go into entrepreneurship. And then once getting into it, it's like, wow, what a journey it's become.

For sure, it's a big industry. Ayelet, if you can maybe just give us sort of a sense of the landscape of the furniture industry in the.

US it's an industry of over $100 billion. Traditionally, as we all know, it was all physical retail, mostly new furniture. Over 90% of business was attributed to being new furniture sales. There was some used furniture, roughly 10% that was usually in vintage shops, antique markets, maybe peer to peer, but very scaled down. With the introduction of the Internet, everything moves online. There were several companies like Ikea that added an online channel or at least a way to order something online and receive it at home. In Boston, there is Wayfair, a company that is digitally native and started online and did not have a physical store. And then we've also seen with Craigslist, starting with a lot of different product categories including furniture. This idea of how do you utilize the Internet for peer to peer sales.

Column, it seems like one of the differentiators for you guys obviously is delivery of the product. I'm curious as to what kinds of things people are buying, what are the transactions look like, what are the products that people are buying and selling on the platform.

70% of our sales are of seven brands. West Elm, Crate and Barrel, Restoration Hardware, CB2, IKEA. There are other companies out there like Cherish or First Dibs where they're more vintage items. First Dibs is like for the 1% of the world. So it's extremely, extremely expensive. But I definitely think that the need that we're filling is for the mass consumer in terms of what's transacting on the site. And the one thing I mentioned too, just about the delivery component of it, is that we actually did that kind of kicking and screaming, if you will. We didn't start the platform in that way. Our idea was we're going to make this nice platform, we'll handle the payments and then we'll utilize moving companies to facilitate the delivery. And we quickly learned that the quality of service is really bad and the price was higher. You know, we realized that we could do it quicker, faster and better if we invested in the technology and the routing algorithms in order to be able to do so.

Yeah, and to piggyback on that, you mentioned Amazon prime or truck deliveries. But what is really neat here is not only does the delivery person does the actual delivery and you know, when I order something on Amazon, it waits in a box downstairs. A lot of New York apartments are walk ups. Delivery people here actually help carry the furniture to its place. Also they facilitate the transaction even more so by actually examining the item at the house of the seller, checking if there are any discrepancy, doing a bunch of the quality assurance, which is the key value proposition that App Deco has to offer. Because someone external, a third party if you will, that is not the buyer or the seller, actually ensures that everything is okay. And they sometimes go back to the buyer and say look, there's a scratch here that wasn't mentioned earlier. Do you still want to buy it? Or might even talk about some discount and only then we'll take it to the buyer. That's an interesting aspect. The clever thing here is that they can still do all of this without having to have warehouses to store the furniture, but they take it directly from the seller to the buyer in an agreed upon time. Lots and lots of frictions that you think about when you think about buying furniture from a stranger online, but they solve for all of these problems.

Yeah, the quality assurance thing is huge, but having that fleet of delivery vehicles changes the business proposition. Most platform companies are asset light and you don't have to worry about that dimension of it. So I want to talk about that. But maybe we can start by talking about the strategy of going for profitability over growth. At the outset, Ayelet pointed out that that's pretty unusual and it is in terms of the cases that we've had on the show before. In fact, I can't think of one actually. So you guys are unique from that standpoint, but it seems to be working. Kalam, can you talk a little bit about why you decided to pursue that avenue rather than the other 50% of.

It was, I think just in our inherent nature from our professional experience, Raham, we're working for large institutions that are profitable by nature. L' Oreal is a very profitable organization, or Goldman Sachs is extremely ridiculously profitable. And so truthfully, I just think the concept of growing but not having the true product market fit buying customers in a way that's not realistic is kind of inherently not really in our nature. But the other part of it too is that it was actually out of necessity because although we tried to really secure a good amount of funding, we never were able to do so out of necessity. You have to build a real business that is bringing in revenue in order to be able to sustain and grow the business. We didn't want to sacrifice growth. We had the metrics that were commensurate with any fast scale growing startup which is growing 300% year over year. And we had all of those metrics. We were just doing it on a shoestring budget. And when we were doing it still being close to profitability, which kind of speaks to the proposition of the company itself.

The other avenue is also a legitimate strategy. Right? The strategy of going for growth and worrying about the profits catching up. Is that a harder road, do you think?

We see now a lot of companies that have done that, even did an ipo, none of them are profitable. A lot of them are doing poorly these days. New SPACs that we've seen in the last year doing relatively poorly to how they started it is hard. Whenever anyone, students or entrepreneurs mention to me they all have this example of how Amazon wasn't profitable for so many years. But most companies are not Amazon. And also something changed for VC investors. Whereas 10 years ago, 5 years ago, they were willing to buy an idea. And nowadays they're actually looking for profitability. So they grew as well.

Imagine that.

You need to show a real path to profitability these days. And maybe with App Deco it was earlier than expected, but it seems like that's where things should be. Of course there is the theory of blitzscaling and scaling fast and all of that. You know, it's not a question that I can solve which way is better. We do see more convergence into trying to ensure that you're profitable or that you can be profitable in a reasonable time.

Right, let's talk about that a little bit because you certainly were demonstrating that you had a great idea and that you were working towards profitability when you started the Y Combinator approach. Can you talk a little bit about that experience and about some of the challenges that you faced coming out of that? It sounded like it didn't necessarily go the way you had hoped it would.

I mean, we wouldn't be here without Y Combinator. I'll go back to the point of like, hey, you know, accumulated all this great work experience at l' Oreal and Raham, she worked at the top banking institution in the world. Like, oh, we can figure this out. And you know, the truth is like getting a business off the ground, getting those first 100 customers, first thousand customers is very manual. It's not charts and data and analytics. It's like going to customers homes and getting that couch. The experience being there those three months was, man, we still apply those learnings to this day. After the Y Combinator experience, it culminates in demo day where you meet investors and based on your trajectory, your promise as an organization, that's when they introduce you to these investors. Many companies get a good amount of funding at that time. We were one of the most promising consumer facing companies coming out. And so based on our performance, they were like, be prepared for a really strong demo day in terms of interest from investors. And that didn't materialize. That's the part that we were surprised about. But our experience with Y Combinator was fantastic. We still work with them to this day. We still consult with them. They're still investors in the company.

We've done cases, in fact, we've done cases recently with black entrepreneurs that have had trouble getting what they think is a fair shake in the venture community. And I'm wondering if you think that might have played a role in this, if you think that has anything to do with some of the challenges that you had early on finding investors.

Yeah, definitely. I mean, we're very much Like a data first organization. I mean that to say just like the numbers just don't lie in terms of the distribution of venture capital to women founders or founders of color, whether it's black or Latino or anything like that. So it's just, it's hard to. When you look at the kind of apples to apples performance, it's like, what was the growth rate of this company that received $20 million in funding and the revenue that they were generating versus the growth levels that we have and the amount of revenue we're generating? We're doing the exact same thing. How were these companies able to raise this amount of money? And like we're kind of living check to check. Like it's just hard to understand. And I think that Rahaan's an engineer, we have a professional pedigree. Like it's hard to say that that's not there. And I just think the data around it just speaks for itself. At the same time, you know, we really, we don't wallow in that what is it going to lead to? You know, so you have to understand that it's there and you have to address it. But at the same time we always are kind of glass half full solutions oriented. You don't want to get kind of mired down in the obvious inequities that are.

I appreciate the candid response on that and I think if we don't address it in shows like this and if other people aren't talking about it, then it's never going to change. So we want to keep talking about it here. So I totally appreciate that. Ayelet, let me talk with you about the numbers. Because you're an analytics person, I'm wondering, would you define apptodeco as a digital company in the sort of definition of that term?

They're definitely a technology company. They have technology around logistics, around pricing, around figuring out customer preferences. Which items should I show which person in order to get them to buy? And they are digital first. All of the transactions are digital. Yes, there is a logistic arm, yes, there are delivery people. But that's true about a lot of companies that we would consider digital or digital first. Digital companies can sell physical goods and that's absolutely the case here.

Yeah.

Just to kind of add on to that, the true intellectual property behind appdeco is our routing and scheduling algorithm. It's very unique to Abdeco. We're doing thousands of pickups and deliveries a day without ever warehousing it. And it's really a bit of like a logistical feat. To be able to pull that off. That's where our truly unique take is. This is the part that I think is really special to what we're doing and trying to accomplish.

And we hear that a lot with platform companies. It's sort of like the question about what business are you really in? And oftentimes it's not the obvious thing, but it's something like you just described, which is you've developed this deep expertise now in logistics, which is a hugely valuable asset for you to have. And I don't want to lose sight of the super user strategy column. I'm going to come back to you on this one. Can you talk about who are the superusers as you guys are looking at them now?

Very important with marketplaces to help you prop one side up or the other, depending on what stage you are through expansion. And so for us, to answer your question about the super users, we have real estate companies, management companies. You have these large buildings here, all over in the Bay Area, too, in the Northeast, where people are moving in and out of these buildings all the time. That is a super user, because we're getting access to 50 buildings, 100 buildings, with a thousand people in this building. And that's a definite user that can allow for us to kind of get the word out there without having to advertise. Interior designers continue to be a big channel. And then also I mentioned that, you know, a lot of our sales are like these very popular brands, but vintage and resale shops are utilizing our site as kind of a secondary sales channel and platform as well to kind of help bolster the platform.

Yeah. As the case wraps up, it does talk about your expansion plans. We know you did that experiment in the D.C. area. I'm curious as to what you learned from that experience and how that helps to influence what you're thinking about doing going forward.

I think the important thing, especially if you're getting into startups, is the highs can't be too high and the lows can't be too low. You really have to understand how to be steady and to not necessarily panic. That's probably the first one, and then two is you have to take that honest look to understand and learn your mistakes and then to grow from them. So we say that D.C. was a mistake, but in some ways it was really good for the organization because it helped us double down on our analytics. It helps us to understand that we need to diversify our advertising channels and it allowed for us to come out of it and be better, and it gave us the foundation to really scale in the future. I was listening to some podcasts earlier about that. Failures are not really failures. And it almost came off, like, as a cliche, but it's really true. You know, it's. You get knocked down, what are you gonna do? You gotta get up, you know. Get up.

Yeah. For people who are listening, you're in the New York area right now. You're thinking about going to some other markets. Where might they be able to find you in the future? I'm not making you commit to anything. I'm just curious.

Well, we currently are in the Northeast, so we're servicing New York, New Jersey, Connecticut, Delaware, Pennsylvania. You should see some kind of expansion into the Northeast pretty soon here.

Yeah. Boston would be an interesting place to explore, wouldn't it?

Yes. And we've also expanded into California last year, and that's been going really well, too. And so we're in the Bay Area and we want to continue to build on that. So going into Southern California and just trying to take that one step at a time. And then. So those are kind of the immediate next steps, I'll say that.

All right.

All right.

We won't hold you to that. Yelet, I want to give you the last opportunity here. Tell our listeners if there's one thing you'd like them to remember about this case, what is it?

As a marketing professor, I always have to go back to really understanding the customer very, very well and understanding their experience and understanding how you can create value into that. And it's not just with the initial idea of facing a real problem that both of the founders had to deal with and that sparked the idea for the company, but also adapting and adjusting based on what they learned about the collaborators and what is important for consumers, especially around this development of the logistic capabilities and, and the delivery and making it also the QA system and all of that. I think that's key here. And always start by really, really understanding your customer well.

Ayelet Kalam, thank you so much for joining me on Cold Call. It's been great talking about App Deco and we're going to keep an eye out for you here in the Boston area.

You just heard Harvard Business School Professor Ayelet is and Apt Deco co founder Colm Dennis in conversation with Brian Kenny on Cold Call. We'll be back next Wednesday with another handpicked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify or wherever you get your podcasts. And while you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books and videos with the world's top business and management experts, find it all@hbr.org this episode was produced by Ann Sani and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Nicole Smith, Erica Truxler, Ramsey Kabaz, Anne Bartholomew, and you, our listener. See you next week.