Reprinted with permission of eMarketer.
We’ll say it outright: If you are thinking about starting a business online, read this Q&A. Jim Medalia is a straight shooter, with speech free of jargon and full of common sense.
Medalia, president and founder of Justballs! is an entrepreneur who has consistently identified emerging technologies with commercial potential, and structured successful businesses around them. Unlike many of the commerce players, his background is in graphics and production rather that software or computers.
In 1979, Medalia created the Stat Store, which was based on the then-unique concept of providing Photostat services in a storefront environment, and inviting graphic artists into the working area to participate in the creation of their work. In the mid-1980s, he ventured into desktop publishing. The services soon migrated toward high-end color, scanning, and digitizing. And in 1990, the Stat Store adopted the name Digital Exchange.
In 1993, Medalia recognized that the web was emerging and formed DX.COM to capitalize on the opportunities. As the internet became a force in business, he opened the Internet Business Center (IBC). IBC offered internet access in a coffee house atmosphere and became a gathering place for the digerati, hosting seminars, meetings, and conferences.
In 1998, Medalia sold Digital Exchange and DX.COM to devote his full attention to Justballs! So what is that? Read below.
Q: Many internet entrepreneurs come from technical or software computer backgrounds, but you have a different history. Could you explain how you wound up here?
Medalia: We had a computer graphics business in New York City — when I say “we,” I mean I had it with my wife. She is the technician. Very detail focused. I’m kind of forest-focused.
Computer graphics turned out to be an almost perfect segue into a new media.
As I was saying, though, we started shooting with an old Photostat camera. It went from there to digital exchange — we were one of the first companies to pick up on desktop publishing, and it was through desktop publishing that we began to understand computers and computer communications.
In September ’94, I saw the world wide web for the first time. I had seen the internet before. My wife’s uncle is the Dean of Aeronautical Engineering at Princeton — he is a rocket scientist — and we would go to his home and he would show us the internet. But even he would type in the wrong code sometimes. It used this arcane command language, and often he couldn’t use his computer for three hours because it locked up. I didn’t see that there was any commercial value to the internet then.
Q: But that view changed, obviously.
Medalia: When I saw the WWW — at that point even Netscape didn’t exist, the only browser was Mosaic — the minute I saw it I said, “That is the business I’m going to get into.”
I had no idea what business — and it was foolish to even think there was a business at that point. We decided first to become an ISP. There were only one or two in New York City. But then I thought no that business was going the way to the large phone companies. Then we said, “Wait a minute. We’ve been in the graphics business – let’s do electronic graphics, let’s create web sites.” So we started up and built web sites for about four years.
But we kept thinking. We said, “Here is a chance to reevaluate our whole lives. What things do we like? What things do we do well?” We loved designing sites. We loved technology. There was just one thing wrong. We didn’t like building sites for other people. It was difficult to control the customer, and this was four years ago, almost no large corporations had internet departments or webmasters or communications people who understood this new media. So we decided to become our own customer — to go into the publishing business and build our own web sites.
The next big decision was that we decided we wouldn’t do it with our own money.
Q: Why was that?
Medalia: All my life I had started businesses — but I had never focused on exiting a business. Venture capitalist and investors, for the most part, are totally focused on exiting a business. So I thought if I could find the right venture capitalist I could learn that part, too.
The other thing is when we were funding ourselves, it was great. We could do whatever we wanted. We could change course very quickly. But the problem was that we were perpetually under-financed. We could never get our business to the scale that I thought it could attain because we didn’t have the funds to acquire the customers we needed to grow.
When we started doing web sites, we had been written up in the Wall Street Journal and the Times. A couple of venture capitalists came to visit. I learned that talking to investors, you had to keep your story very simple. The simplest thing that we could think of to explain how we were going to make money on the internet — which was the question of the day back then — was to sell something.
We were going to buy for X and sell for Y, and I make a profit.
Then we had to determine what we wanted to buy and sell. We felt we were good at retail — our graphics business had been in a store front, over the counter as opposed to just accounts. We liked retail. We felt good about it. Then we looked at the two top retail sites. One was Amazon.com, obviously, and the other was CDnow.
The first thing we asked ourselves was, “Why was selling books successful over the internet, and why was selling music successful over the internet?”
We looked at the industries first, as opposed at what particular companies were doing, and the first thing that we determined was that the book industry was a huge, very mature market and it wasn’t really going anywhere. Growth was only 1 or 2 percent. It was pretty stagnant. It desperately needed a new channel of distribution.
Next, it was a market that was very fractured. What I mean by that is that even Barnes & Noble, which was the largest retailer at that time, owned only 10 percent of the market. So a predominant part of the market was still small shops. There was no clear-cut industry leader.
The market was large, mature, fractured, and the big new idea in selling books was bigger bookstores. Also, there was very little after-market support needed for selling a book. If you buy a certain book and it arrives, and it’s the title you ordered and the author you wanted — you are a happy camper. I don’t have to send you a 75-page manual to tell you how to read.
We looked at the music industry and found the exact same circumstances. A large market, mature, fragmented, and the big new idea was bigger stores. Again, it required little after-market support.
Q: Sounds like a formula.
Medalia: That’s what we said. So we asked ourselves, “What’s an industry that’s similar to these two industries?”
We picked the sporting goods industry.
It’s a mature market, somewhat stagnant. It only grows by a couple percentage points a year. Sports Authority, the leading retailer, owns less than 10 percent of the marketplace. The big new idea is bigger stores.
Q: You make it sound easy. But clarifying your initial thinking takes a lot of hard work. And I’ll bet the next part was even harder.
Medalia: Yes and no. Basically, sports make people happy. They enjoy them. We liked that. But we had some other criteria. We wanted to create a new niche — pick one product category and become the best that there is at it. We wanted to aggregate whatever has to do with that particular product.
The model was the athletic shoe business. Twenty years ago there was no store that sold only athletic shoes. Then some guys from Kinney got together and said, “Let’s sell athletic shoes.” They started Footlocker — and a multimillion-dollar industry was born.
So now we knew we wanted to do retail, we chose sporting goods, and we wanted to find a new niche — we picked balls.
We did thorough research. It was an area pretty much ignored by retailers because there isn’t much mark up on balls — not like apparel or footwear.
Plus, on a personal level, at one point, I wanted to find a tennis ball to play on clay courts for a friend of mine. I couldn’t get the right information. I couldn’t find anything. Then I started to notice that the on-shelf stocking of balls was not particularly big. I started to look into it. Balls were easy to ship. There’s little after-market support needed. They can stay on a shelf — they don’t go out of style. I thought these things were really pluses, so we investigated the market.
Q: In your press kit, you quote John Evans of Biztravel.com, who says, “Justballs! is one of those business ideas which is so simple you have to wonder why you didn’t think of it first.”
Medalia: Once we thought about it — our hands went to our foreheads and we said, “This really fits our model!” Somebody once said KISS — Keep It Simple, Stupid.
If Justballs! works, everybody will say, “Oh, my God! Why didn’t I think of that?” If it’s not successful, they will say, “Everybody knew you couldn’t sell balls over the internet — you can’t make balls a category.”
Q: Trout and Ries and a lot of other business authors have written about the importance of focus in succeeding in business. The Justballs! concept seems focused indeed — from the name to the logo to the product you sell .
Medalia: I have a friend here in New York — call him my rabbi — we talk business on a regular basis, and his mantra is focus. “Find one thing and become the absolute best on it,” he says.
There’s a little bit more to Justballs! then just balls. Our goal is to expand in the same way as the athletic shoe market has done. They’ve done a great job. If you’re involved in let’s say, eight different sports, you probably have eight different pairs of shoes sitting in your closet. Maybe even a ninth pair because now they have sandals that you wear out of the shower. You have one pair of shoes for walking, one for basketball, one for tennis, one for baseball, one for soccer — it goes on and on.
And there are balls for all those sports. But there are also training balls and ball bags to carry the balls and ball racks and high-tech balls. Rawlings has a ball with a radar in it to tell you how fast you’re pitching it. There are all sorts of training balls. There are age-appropriate balls. We are definitely focused on everything around balls.
Q: When you think about expanding, do you see becoming “Justballs and Hats!” or creating a stand-alone “JustHats”?
Medalia: We also own the URLs Justbaseball, Justfootball, Justbasketball, Justlacrosse, I think about 27 different sports. We also own the name Juststicks! At some point we may get involved in bats and hockey sticks and lacrosse sticks and pool cues and stuff like that. But none of that will happen until Justballs! is really up and going.
I think the issue is that on the internet you can build a category around the product — as opposed to necessarily a sport. There are a lot of ways to dice-and-cut the retail market.
Q: Are there any offline businesses that target specifically on your niche?
Medalia: Not that we know of — and we looked pretty extensively.
Q: Balls do seems perfect for an online aggregation model. In an offline location, you couldn’t find enough traffic to support this kind of store.
Medalia: I’m totally intrigued by the idea of a brick-and-mortar Justballs! store. I think walking into a place where there are just thousands of different kinds of balls — maybe even a place where you could dribble or hit or kick or roll them around — would be fun. I believe that you can only get to a certain scale of business over the internet, and after that you have to start considering other outlets.
Q: One of the examples you talked about was amazon.com. Obviously, everybody in online retail is familiar with that story. But there is an on-going debate about Amazon vs. Barnes & Noble. Many people feel that although Amazon has a higher valuation, Barnes & Noble has a better model.
Medalia: We have based our business on the Barnes & Noble model, in that we are one of the few of what I call facility-based retailers on the ‘net. We actually buy the product. We have a direct relationship with our vendors — the manufacturers.
We buy the product and warehouse and ship it ourselves. We do not rely on a third-party distributor to fulfill our orders, because taking the orders is just the first part of the job. The next part is satisfying customer expectations, and the only way that we could be the masters of that was to control our own distribution. It means holding inventory, which no one really likes doing — a lot of our money has gone into that as opposed to other areas — but we think that ultimately it’s the best for our customers, and for us.
The Barnes & Noble/Amazon saga has only started. I’m sure that you’re aware that Barnes & Noble just acquired Ingrams, which is the largest book distributor in the United States and — just so happens to be — the major distributor for Amazon.
Q: Reportedly they ship 60 percent of Amazon’s books. Now the question is when you buy from Amazon are you really buying from Barnes & Noble? Or — worst-case scenario — can B&N strangle Amazon’s supply? Maybe slow down those best-seller orders?
Medalia: Right. And I think Amazon has filed suit against Barnes & Noble.
Q: What kinds of services do you offer to people who come to the store? What is special to the online environment?
Medalia: Number one, we’re open 24 hours a day and seven days a week, and we’re accessible from all over the world.
I think one of the interesting issues for us is that the sporting goods industry is divided into two categories.
One is the individual part. This is the personal-usage or gift-giver part. Then there are institutions — schools, universities, clubs, camps, leagues, teams, people who are buying large quantities of balls. In the brick-and-mortar world, no one has succeeded in building a market place for both parts of the market.
We’ve been able to do that online. A big why is our three-step search. We put quantity pricing up on the site and just let the quantity of the buy make the distinction between institutions and individuals.
In addition, online shopping is not intimidating to women or kids or even men who want to get involved with a new sport, but don’t know much about it. They are afraid to go to Sports Authority and ask a stupid question about golf because they want to start playing golf.
We have a search engine that allows them to ask questions in more than 20 different fields. They can search for balls in categories from surface to gender to age-specific to manufacturer to price — almost anything that you can think of that has to do with a ball.
Online you have choice — because we have almost limitless shelf space. People can find the appropriate ball. When someone goes out and buys a #5 soccer ball for their four-year-old and the kid goes to kick and trips and smacks his head and never wants to see a soccer ball again — that’s bad. There are age-appropriate balls that make the game a lot more fun — and a lot safer — for kids to play. By offering a wider selection, we provide a service that’s hard to find offline.
Q: Let’s back up a little. How — exactly — did you go about finding the funds to bring the idea to reality?
Medalia: A good amount of work went into it. I had some friends in business in New York, and through them I met Dave Wetherell. Dave is the CEO of CMG, an internet venture holding company. They were the initial investors in Lycos, Geocities, Planet Direct — a number of very successful sites. Dave immediately understood what we were doing.
Q: Did you present a business plan formally, or just have a dialog with him?
Medalia: I just talked about the idea and told him where we were going. He was very interested and told me to make an appointment and to get him a business plan. At that point, we were just working on the plan. We didn’t have it.
One of the key issues is that we spent a lot of money and time to put together a good business plan. We went up and visited David in January, and our business plan was actually ready in March. We kept him abreast of what was going on.
In the meantime, we funded our efforts out of our own pocket. We started designing the site, talking to manufacturers and looking for a management team. When we sat down for serious negotiations, we already had two members of the team ready to join and a good idea of what the design of the site was going to look like. We had an extremely professional business plan. All the pieces were in place.
Q: What advice would you give to other web marketers who are seeking funding?
Medalia: Plan on the process being harder and taking a lot more time then you had originally thought.
The other thing is that even though you are emotionally desperate to find that money, the people who are giving it to you are as important — if not more important — than the money itself.
Go out and investigate who your potential investors are. See if there’s a fit with your potential investors. You don’t want a company that says, “We only do second stage funding. We’re only going to put in $5 million. You have to be on the West Coast. You have to have a business of four million dollars.” Don’t waste your time.
The most important thing to remember is that it’s a personal relationship and you are going to have to live with these people.
Hopefully, they’re going to guide you. So find somebody that you trust, someone you can work with. It’s even more important than funding. It’s hard to say that when you’re on unemployment and thinking about making payments. But it’s well worth that kind of focus. When you make a deal, base your decision on the people, not the money.
Q: Are you going to succeed online?
Medalia: Absolutely. (He laughs.)
No one can look into the future. Who knows what’s going to happen? The issue is…if you build a successful model, if you can efficiently take an order over the computer from somebody anywhere in the world, at any time, and go get that product and ship and deliver it back to them in a reasonable amount of time — you have an extremely successful model for doing business in the future.
That’s why I believe internet businesses have large valuations. They are not only building businesses, but creating a kind of intellectual capital.
Already, Amazon is starting to sell electronics. They are going to aggregate products around the books — their subjects, themes and stories — that they sell. It’s brilliant, and it’s something that is going to continue.
In the ’70s and ’80s it was the huge box malls. It was about Wal-Mart and the KMart formula. I believe the future of retailing is going to be about electronic commerce. And we haven’t seen the finished model yet.
We’re in a kind of primordial ooze of click and wait — but soon we will be able to quickly do e-commerce over cable TV’s. A lot is about to change. But the main thing is to be able to take an order electronically and fulfill it efficiently. That won’t change.
This article originally appeared in eMarketer. Reprinted with permission.