James Maskell

Why Vinetrade Failed

14 March 2013

A few weeks ago, we announced that we were closing down Vinetrade - a startup that I founded, and have been working on full time for the past 18 months.

At Vinetrade, we were aiming to build a very disruptive business. We wanted to revolutionise the fine wine industry, a market with many layers of middle men, and one that has traditionally eschewed technology, failing to patch it’s many inefficiencies.

The market is valued around $5-6bn per year, with around $1.5-2bn based in the UK. It’s not huge (as I later learnt), but enough for a small team, with low costs, to build a valuable business in. We were playing a classic disintermediation game - connect buyers and sellers, increase transparency, cut margins, and take a small cut for ourselves.

In April 2012, we had raised a seed round from some reputable investors (including Passion Capital and Forward Venture Partners) on the back of small, but decent, early traction.

So what went wrong?

1. Don’t underestimate the value of personal relationships.

Fine wine buyers build up relationships with sales people. Through these relationships they gain advice, insight, and access to the wine that they want to buy (there is very little online ordering).

Our idea was simple - get the stock listed online, for a good price, and make it easy to buy. Consumers had been crying out for this, claiming that they no longer wanted to speak to a real person or pay the premium for doing so.

Unfortunately, over time we found that while people used the site once or twice, they quickly reverted back to emails and phone calls. We always knew that people bought this wine for fun. The buying process, and talking to others about the wine, turns out to be part of that fun.

2. Marketplaces need a big disconnect between buyers and sellers.

The best marketplaces succeed because they connect large and diverse groups of people, who had no previous way of interacting. eBay and Airbnb are great examples.

In wine, everyone knows everyone. It’s hard to make new connections, which makes it very easy for people to cut you out, and skip your fees. We made transactions anonymous (we acted like an escrow service, handling payment and verifying stock), but this didn’t help much.

3. The infrastructure doesn’t support a scalable business.

In the UK, fine wine is usually stored in remote warehouses, and only removed when the owner wants to drink it. Wine can be moved between different accounts in the same or other warehouses.

Unfortunately, the service offered by all of these warehouses is poor. Again, we see little technology (basic online systems, preset passwords, refusal to spend money on an SSL certificate), and lots of human errors (such as very expensive wine being moved to the wrong accounts). We tried to abstract these problems (hold wine on behalf of others, change owner in our database when it’s traded), but it was a huge headache and we couldn’t find a way past the human errors, and need for human reconciliation.

Wine warehousing and logistics is also a thankless, barely profitable, business. Current providers compete on price in a race to the bottom, and consumers expect prices to be driven down further (people were often happy to spend £5,000 on a case of wine, but not £10/year for proper storage).

4. The business wasn’t scalable, and we needed VC money.

Because of the issues outlined above, we found that the business wasn’t scalable (at least, not without far more time and money to throw at the problems). We were facilitating trades (volume was in the hundreds of thousands of pounds), and in time, we could have built a profitable business. But there would be a very real limit to our success. We wanted to be a marketplace, but in reality we were turning in to a normal wine merchant, masquerading as a marketplace.

Crucially, we had taken VC money, built a team and had other costs. While these were not huge (less than £20k per month), we needed to raise more money to keep going. Our investors did a great job of supporting us, some were willing to follow on with more money, and we had external interest. Another round, and more time, was possible, but it wouldn’t have been right to take more money for something that I no longer believed would work.

Summing Up

Running a startup has been an amazing experience, and one that I do not regret, despite the outcome. I’ve learnt more than I ever would elsewhere, and got further than the vast majority of others ever will. It’s emotionally tough (especially when you have to fire your team and tell investors you’ve lost their money), but I’ve come out better for it, and with newfound respect for others who try and those who succeed.

I’m about to take some time out (I’m looking forward to getting on a plane and being able to switch off), before joining the world of employment. I imagine I’ll want to do this again one day, but I’m in no rush.

Finally, I’d like to thank everyone who supported me personally, and the team, and helped us get this far. This wouldn’t have been possible without you taking a chance on me.

Comments and Feedback

I’d love to hear from you. I’m @jmaskell on Twitter or james@jamesmaskell.co.uk by email.

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