How to launch a data-based business (that will fail)

Summary:InfoArmy learns that it can't create a high-margin business with low-margin practices.

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Allow me to indulge in a hypothetical.

Let's say you're an entrepreneur who wants to get into the luxury goods business -- bespoke suits, let's say. Your target audience? High-powered business people who can afford to spend serious dough on the finest, fittest threads that make them slay audiences in meeting rooms. It's a low-volume, high-margin business. Got it? Good.

So when you're preparing to create this new suiting business, you probably want to find the finest, most exclusive materials, right? And you probably want the best tailors in town, too. You don't need to cut corners -- OK, OK, unless it's a notch lapel -- because your target audience isn't buying on price. It's buying on quality, and perhaps service, too. That's the value proposition in a high-margin business.

Now let's pivot, from suits to statistics, double-breasteds to data. Both are extremely valuable to certain people. And both -- particularly if they're of quality -- command a high price. You can't scale a business like this that easily, if at all, but that's OK -- you're not Walmart. You're a luxury good for business customers. This is precisely why market research -- and a custom suit -- costs so much.

San Mateo, Calif.-based InfoArmy launched in 2012 to turn this model on its head -- in its own words, "disrupt the business information industry." To do so, it wanted to widen a wide margin further by pushing down the cost of generating research while holding the line at the point of sale. They're calling it "data-as-a-service," and they want to embrace the economies of scale seen in other as-a-service areas -- software-as-a-service, infrastructure-as-a-service, and so forth -- in the research business.

It's the Holy Grail of business models, applied at a time when, as some have said, "data is the new oil." To continue the metaphor above, it is the equivalent of manufacturing bespoke, handmade goods at ready-to-wear, factory prices.

To do so, InfoArmy sought to crowdsource information from a wide network of contributors and sell it as a premium product. But that strategy has proved full of holes, as TechCrunch's Ingrid Lunden found out: the company has found itself with a low-quality product that no one wants to buy.

An excerpt from a company letter, courtesy Lunden:

Unfortunately, the current business model has several large and unfixable problems:

-- Sales are not happening. So far InfoArmy has sold just 44 individual report subscriptions ($4,356). All of this revenue was distributed to researchers (InfoArmy did not take 50% as planned under the Revenue Share model).

-- Almost two months ago we hired a full time sales person. He has been unsuccessful so far. Data quality is the main issue preventing sales. Common complaints include incorrect revenue estimates and competitors.

-- Publication bonuses have created the wrong incentives. Some researchers have published the lowest quality reports they can get away with.

Translation: "This business is sinking faster than the RMS Titanic towing the HMHS Britannic."

To stem the losses, the company has decided to offer all of its reports for free (there goes the point-of-sale revenue), stop paying its contributors (there goes quality assurance) and overhaul the entire business model.

Faced with a business making custom suits on a T-shirt budget, our "bespoke" startup began actually making T-shirts. So to speak.

I can't imagine how InfoArmy didn't see this disaster coming. No disrespect to those researchers who contributed to the reports, but it's unlikely that business customers engaged enough to want to be in-the-know would pay for information create by people who know less than they do. Nevermind that such information might even be outright inaccurate.

I don't intend to kick sand in founder and chief executive Jim Fowler's face; I'm sure he saw something special in this concept. (In fact, enough to throw $2 million of his own money into the pot.) And the company was convincing enough to attract Norwest Venture Partners, a typically savvy U.S. venture capital firm that invested $17.3 million in October 2012.

Indeed, Fowler foreshadowed the troubles ahead in a blog post published two months ago:. "Without high quality reports InfoArmy will fail," he wrote. That's already proving out.

InfoArmy's biggest hurdle to overcome? The reality that high-quality content costs a lot of money to produce. I have no doubt InfoArmy is capable of top-shelf research. But it may erase its profits doing so.

Don't believe me? Just ask any publisher.

Topics: Business Intelligence, Outsourcing

About

Andrew Nusca is a former writer-editor for ZDNet and contributor to CNET. He is also the former editor of SmartPlanet, ZDNet's sister site about innovation. He writes about business, technology and design now but used to cover finance, fashion and culture. He was an intern at Money, Men's Vogue, Popular Mechanics and the New York Daily Ne... Full Bio

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