The Importance of Doing Your Homework

Knowledge@Wharton published an article Wednesday that uses some Kelsey Group information. It’s a mini case study titled “All Politics Is Local and So Are Sales Leads: The Birth of an Internet Search Company.” The subject is a company called Natpal whose goal is to get local businesses online and offer them sales leads through key word purchases. Essentially it’s the story of a few young people who believe they have invented a better mousetrap. They team up with a Wharton professor who provides a search algorithm, and they find some venture capitalists who take the bait.

This group of people has fallen under the spell of believing that since there are so many small businesses, and since they themselves are not heavy Yellow Pages users, that there is a huge market for helping small companies get new business. A little more than a year ago, the company’s founder, who had been a Wharton student, and a venture capitalist, who is a Penn alumnus, did a mock fund-raising/Q&A presentation at Wharton, which you can read about here.

Unfortunately, a major purpose of that session was to show that venture capitalists are just folks. It is too bad because near the end of the story the VC focuses in on the key issue of testing the business before rolling it out. The president, Nathaniel Stevens, was reluctant to do a slow roll-out because “he wanted to become the market leader before some Internet leviathan lumbered into his niche. ‘If we wait a year, then Denver, Seattle and Houston will get gobbled up.’ ” This is the same philosophy that such Internet giants as Microsoft pursued with Sidewalk back in the mid-’90s. They introduced the business in too many cities before they got it right in one.

Natpal has a lot of competition, including both print and Internet Yellow Pages publishers, large and vertical search engine companies, and such experienced businesses as ReachLocal, LocalLaunch (a unit of Yellow Pages publisher R.H. Donnelley) and Leads.com. The founder says it is critical to understand both the business marketplace (vertical) and the geography of the area he’s entering. He is right, but years of experience indicate that is just not enough. We wish Natpal success, but it will have a better chance if it does its homework thoroughly.