Araby.com Business Plan
Joel Brodie
Joelo@yahoo.com
202.686.2543
2800 Quebec Street, NW
Suite 1049
Washington, DC 20008
Confidential
Page 0
3/3/2016
Table of Contents
1. EXECUTIVE SUMMARY ............................................................................................ 2
2. MARKET OPPORTUNITY ........................................................................................... 4
3. THE SERVICE ............................................................................................................... 7
4. BUSINESS MODEL ..................................................................................................... 9
5. MARKETING STRATEGY........................................................................................ 10
6. OPERATIONS & TECHNOLOGY ............................................................................ 12
7. COMPETITION .......................................................................................................... 13
8. CRITICAL ISSUES ..................................................................................................... 14
9. MANAGEMENT ......................................................................................................... 15
10. FINANCIALS ............................................................................................................. 16
11. APPENDICES ............................................................................................................ 19
Confidential
Page 1
3/3/2016
1. Executive Summary
1.1 Overview
Araby (“Araby”) is developing the world’s first centralized online barter (“e-barter”) trading community on
the Internet. Imagine a Web site where you can trade anything, music, books, timeshares, and gifts you’ve
received without receipts, directly for millions of tradable items with people around the world. What eBay
did for auctions, Araby will do for barter.
1.2 Market Opportunity
The Company plans to transform and exploit two major market opportunities:

The multi-billion e-barter market
Araby believes that the Internet transforms e-barter from a niche to mass-market activity. In the offline
world, barter markets are inefficient because they are local, finite, fragmented, and expensive. The Internet
solves these problems and creates huge economies of scale by being global, infinite, centralized, and
inexpensive. Among the items that people may be interested to trade include:





Trading cards (sports, Pokemon)
Vacation timeshares
Collectibles
Books
Used clothing




Computer software & hardware
Entertainment (DVDs & CDs)
Games (Sony PlayStation, Nintendo, & PC)
Small business services
To reach critical mass, Araby will pass on cost savings to its members, charging a small transaction fee ($2
per trade) only after a trade has been completed.

The $162 billion a year direct marketing industry
Every time members initiate or accept a trade online, they voluntarily tell Araby valuable data regarding
their consumer preferences. Araby will use its database of members’ previous purchase and trading history
to sign lead distribution deals with e-commerce Web sites for access to these targeted audiences. Since this
data is based on goods and services members own and want, instead of online polls, surfing habits, or
contests, Araby’s database will be among the most valuable on the Internet.
Araby’s multiple “zero-gravity” models are attractive. With no warehousing or fulfillment costs, the
Company is pure Internet play.
Though the Company faces intense potential competition from newsgroups, portals, online auctions, and
offline barter exchanges, no credible direct competitor currently exists in the person-to-person (“c2c”) ebarter space. By being first to market, Araby has the opportunity to build its brand synonymous with ebarter and dominate the market for years to come.
1.3 Management
Joel Brodie (CEO & Founder) is Director, Business Development at Simutronics Corporation, the
leading developer of Internet games and one of the fastest growing companies in the Washington DC area.
Mr. Brodie launched two major online products and developed distribution relationships with high-profile
Web partners, including Microsoft, Lycos, Excite, Mplayer, AT&T WorldNet, and theglobe.com. In
1996, Mr. Brodie worked at FreeLoader, Inc., the first Internet start-up success story to be launched and
sold for $38 million within a six-month period of existence. Araby has firm commitments to work with
Cooley Godward LLP, PricewaterhouseCoopers, and Silicon Valley Bank in the future.
Confidential
Page 2
3/3/2016
1.4 Products & Strategy
Araby will create a proprietary and centralized e-barter platform to facilitate active trading and foster online
community. The site and service will be user-friendly, entertaining, customizable, community-oriented,
scalable, reliable (open 24/7), and frequently updated (every half-hour).
Araby’s strategy is to immediately develop the e-barter market online and establish its brand as the number
one place to trade goods and services over the Internet. Once the Company establishes itself as the leading
c2c e-barter community, it will leverage its brand to develop the business-to-business (“b2b”) e-barter
market.
Araby will launch its site during 4Q 99 Holiday season through promoting “The World’s Largest Gift
Exchange” special event. In addition, the Company will aggressively pursue Web distribution deals,
encourage word-of-mouth viral marketing, and hire a public relations firm.
1.5 Summary of Five-Year Financial Projections
Within a five-year period, the Company forecasts that net revenues will increase from $750,000 to
$45,000,000 and operating expenses will rise from $3,000,000 to $29,250,000. Revenues will grow 700%
between year one and year two and stabilize at 200% by year five. Operating margins are expected to
reach 35% by the end of the forecast, which is compatible with equity analysts future expectations
for typical online auction and direct marketing Web sites. By year three, the Company will reach
profitability.
1.6 Funds Requested and Uses
Araby requests a first-round of venture capital of $3,000,000 to develop the proprietary trading and
database system, create a first-class, user-friendly Web site, hire a strong management team, and launch the
service during 4Q 99 with the “Gift Exchange” special promotion.
Confidential
Page 3
3/3/2016
2. Market Opportunity
2.1 Overview
The Internet is among the fastest, exciting, and most lucrative sectors of the global economy. Unlike
passive mediums like television and radio before, the Internet is entertaining, communicative, inter-active,
and, commerce-oriented. And it is growing faster than any other medium before. In 1998, the total number
of worldwide Internet users was 150 million; by the year 2000, this number will rocket to 500 million
worldwide.1
More people and businesses are buying and selling goods and services online (“e-commerce”). Total ecommerce revenues surpassed $13 billion during 1998 and are currently growing at an annual rate of
200%.2 Forrester Research predicts that the total value of goods and services purchased over the Web will
grow to over $1.3 trillion by the year 2003.
2.2 E-barter
There are currently four major ways to trade goods and services online through the Internet:




Online classifieds (Classifieds 2000)
Traditional e-commerce (Amazon.com)
Online auctions (eBay)
Reverse auctions (Priceline.com).3
The last remaining offline market activity not yet adapted to the Internet is barter, whereby goods and
services are traded with one another without the use of money. Like auctions, the Internet presents unique
opportunity to transform e-barter from a niche to a mass-market activity.
The Problem
In the offline world, barter markets are inefficient for the following reasons:

Barter markets are local. People are limited to trade for items and participants by regions.

Barter markets are finite. People are forced to make non-optimal trades before the market closes.

Barter markets are fragmented. The barter market is highly segmented by region and exchange.
No dominant players exist. In the US, there are officially 1248 barter exchanges servicing
380,000 member companies, the largest exchange with only 3500 member companies. 4

Barter markets are expensive. Due to lack of perfect information and a limited supply of available
goods to trade for, intermediaries charge a huge participation fee. The average barter exchange
charges members $200 to $300 to join and takes 10 to 15% off of every completed transaction.
For these reasons, it is extremely difficult for members to exchange items that completely satisfy their
individual needs.
1
International Data Corporation
The State of Online Retailing, A Shop.org Study by Boston Consulting Group, November 1998.
3
List does not include newly created Internet market activities not yet accepted by the mass market, such as
herd marketing (Accompany.com).
4
International Reciprocal Trade Association
2
Confidential
Page 4
3/3/2016
The Solution
The Internet has the potential to solve these problems in the following ways:

The Internet is global. The Internet expands the online trading floor to the entire world’s
population of online households.

The Internet is infinite. Open 7 days a week, 24 hours a day, people are not pressured to make nonoptimal trades before the market closes.

The Internet is centralized. The Internet offers one single destination on a massive scale to
conduct all barter transactions.

The Internet is inexpensive. Due to the above, the Internet and devalues the role of intermediaries
and offers huge economies of scale.
Araby plans to transform barter from a niche to a mass-market activity through developing the world’s first
and largest c2c e-barter trading community on the Internet. The Company will reach a critical mass
quickly through leveraging economies of scales provided by the Internet and passing the cost-savings onto
member traders. In turn, this will fuel growth even further (see table 1).
Once the Company establishes itself as the leading c2c e-barter community, it will leverage its brand to
develop the b2b e-barter market.
The Upside
The upside is huge. According to the International Reciprocal Trade Association, “official” domestic
barter grew in 1996 to $9.6 billion at an annual growth rate of 15%.5 Business-to-business (“b2b”) barter,
which includes corporate barter (“barter between large domestic corporations) and counter-trade (“barter
between U.S exporters and developing country governments) is estimated to be a $600 billion annual
industry on a global scale.6 These figures do not account for the tremendous amount of barter that occur
“unofficially” through the underground economy nor the economies of scale generated through a global,
Internet-based barter market.
The best gauge to measure the potential opportunity of the e-barter market is the explosive growth of online
e-commerce and auctions. During the first six months of 1998, online auctions generated $898 million and
were the third most successful e-commerce sites, behind computer goods and financial services. 7 eBay, the
largest online auction site, generated net revenues of $34 million for 1Q99 alone, for a 469% increase over
revenues reported for the same period the previous fiscal year. Forrester Research estimates that gross
merchandise sales in the online auction space will grow from $1.4 billion in 1998 to $19 billion in 2003.
Like auctions, the Internet has the potential to turn e-barter in a multi-billion dollar opportunity and Araby
will be the first Company to market.
2.3 Direct Marketing
Araby will leverage its massive database of member trading activity to exploit the $162 billion direct
marketing opportunity.8 Every time members initiate or accept a trade online, they voluntarily tell Araby
valuable data regarding their consumer preferences. Collection and analysis of this data provides Araby an
ideal platform for direct marketing.
5
International Reciprocal Trade Association (IRTA) White Paper, 1996, http://www.irta.net
Gershman, Michael, Smarter Barter, Viking Penguin, NY, 1.
7
Jupiter Communications
8
Direct Marketing Association
6
Confidential
Page 5
3/3/2016
By examining customer purchasing patterns and demographic data, Araby will segment its membership
bases across several different targeted areas. Araby then will be able to sign lead generation deals with
other e-commerce Web sites or terrestrial-based businesses that wish to reach these targeted audiences. For
example, members who have traded books or traded for books will be sent an email from Araby on behalf
of Amazon.com.
The targeted audiences will result in high CPMs for advertisers. Since this data is based on goods and
services members own and want, instead of online polls, surfing habits, or contests, Araby’s database will
be among the most valuable on the Internet (see table 2).
Table 1: E-barter Value Proposition
Araby ebarter Web
site & service
Economies of
scale
Greater
economics of
scale
Cost savings
(pass to
consumers)
Critical mass
Table 2: Direct Marketing Opportunity
Trading
members
Araby online
trading floor
Trading
members
Database of
member
trading history
Add value
$$$
Target direct
marketing
offers for
partners
Confidential
Page 6
3/3/2016
3. The Service
Araby will develop proprietary and centralized e-barter platform and Web site to facilitate active trading
and to foster vertical trading communities. The service will be:









User-friendly
Simple-to-navigate
Customizable
Sticky
Entertaining
Community-oriented
Scalable (for thousands of simultaneous users at one time)
Reliable (open 24 hours a day, 7 days a week)
Frequently updated (at least every half-hour).
3.1 How it works
Registration (see Appendix 1)
For people to trade a good or service, they must first sign up as a registered member. To limit fraud, all
members are required to enter their contact information, as well as a valid email address and credit card
number. Though optional, members are further encouraged to include their driver’s license and social
security number through a third-party vendor. The more verifiable information the site has on its members,
the easier to limit fraud. Members must also review and accept the site’s Terms and Conditions, explaining
the Company’s policies and procedures.
Adding Items to the Trading Floor (see Appendix 2)
To add goods and services on the trading floor, members click ADD ITEM and enter the following
information about their item: 9





Category & sub-categories (in the case of a music CD, entertainment>music>CD)
Product description
Estimated value amount
Product condition (new, excellent, good, fair, used)
Graphic (optional).
After entering this information, the item is given an item number and placed on the trading floor under the
appropriate category.
Searching for items/Making an Offer (see Appendix 2)
There are four ways to find items to trade for through the service:




Conduct a keyword search
Browse by category
Set up a personalized agent that notifies members when requested item is online
Request items through “items wanted” message boards.
Once members find an item, they click on the item profile to learn more about the item, as well as view a
list of all other offers for this item. To make an offer, members click MAKE OFFER and the site
automatically adds their offer to the item list.
9
Items on the trading floor are further classified and searchable by location. Araby derives this
information from the zip code number that members enter during registration.
Confidential
Page 7
3/3/2016
Completing a Trade (see Appendix 3)
If the owner of the requested item decides s/he wants to make a trade, s/he clicks ACCEPT OFFER. Araby
places both items off the trading floor, automatically bills both member accounts (see Section 4, Business
Model), and sends a message to each member with the other’s email address.
Members also have the option to send back a counter-offer by clicking the HAGGLE button. Offers and
counter-offers are published on the site under trade history in a format similar to threaded messages.
Members are responsible for shipping the items to one another and are encouraged to use the feedback
forum to rate each other’s roles in the trade. Ratings are published next to the member’s profile and
members earn reputations on the site based on their trade activity, similar to eBay.
3.2 Personalization (see Appendix 4)
When members initially sign up, they have the option to accept a cookie to remember their user name and
password and to personalize their front page. The personalized front page (“My Araby”) includes
information regarding the member’s trading history (offers made, trades pending), reputation, and hot links
to favorite trading communities.
3.3 Notification
Members may set up a personal agent to search the site for items of interest and notify them via email when
a requested item is on the trading floor. Members may also install an ActiveX agent component placed on
the desktop to notify them when new offers have been made or when requested items have been placed on
the trading floor. Members have the further option to list requested items within “items wanted” message
boards throughout trade categories.
3.4 Goods & Services
Araby will accept all goods and services through the online trading floor, except for items that are illegal,
fraudulent, and/or items that may lead to legal action against the Company (hand guns). Each item is
grouped and indexed within a set of main categories and additional sub-categories.
To maximize trading activity and revenues, Araby will focus on developing trading forums for goods and
services that are most (a) suitable to e-barter, and/or (b) highly valuable to potential direct marketing
partners. These include:

Collectibles – Premium goods that people may desire to have as a part of a greater collection of
similar goods.

Zero-sum products – Goods and services that depreciate over time for the owner but appreciate
back to full value for those interested in trading for the item. These include books, music CDs,
movies (DVDs), and entertainment game software.

Traditional barter products – Goods and services traditionally bartered in the offline world.
These include vacation timeshares, small business services, and gifts without receipts.
For a complete list of the goods and services that people may be interested in bartering online, see
Appendix 5.
Confidential
Page 8
3/3/2016
3.5 Community Services
Fostering online trading communities is a key component to the Company’s success. Araby will develop
active online communities for each of its trading categories featuring:





Items-wanted message boards
Chat rooms
Monthly newsletters
Syndicated content & articles
Trading tips.
To develop and maintain communities, Araby will hire a remote staff of part-time community leaders and
compensate them with a revenue share and/or stock options.
3.6 Customer Support
Araby will be designed from the ground-up to offer members excellent and responsive customer service.
Such actions are necessary to limit fraud and develop trust among member traders. There are four levels
of customer support:




Web Site – Publish prominently on the Web site the Company policies, FAQs, instructions to
report abuses, and ways to contact the Company through e-mail.
Online Assistance – Outsource with LivePerson.com (http://www.liveperson.com) so that a
customer-service representative is online 24/7 to answer general questions.
Contact Information – Offer numerous e-mail addresses for people to seek information and report
fraudulent claims, and respond within a 24 – 48 hour period.
Customer Service Staff – Develop a full-time customer service department to personally handle
billing, fraud, and customer service issues.
3.7 New User Experience
To encourage new users, Araby will offer the first trade free of charge. In addition, Araby will publish a
comprehensive “New Trader’s Online Tutorial to E-barter” on the Web site and organize “New Trader
Nights,” whereby online staff will be available within the chat rooms to offer barter tips, answer questions,
and give away prizes.
4. Business Model
Araby will generate revenue in three ways:
4.1 Transactions
Araby will charge for providing the trading forum. Unlike offline barter exchanges, it is free to join the
community and to offer items on the trading floor. Once a trade is accepted, however, members will be
charged a flat fee of $2 once a trade. This means that for every successful trade on the site, Araby will
collect at least $4 since both members are charged equally. In addition, Araby will charge members for
special promotional listing within the site for their wares, replicating eBay’s model.
4.2 Direct Marketing
Araby will use its database of members’ previous purchase and trading history to determine direct
marketing opportunities. Araby can then sign lead distribution deals with other e-commerce Web sites for
access to these targeted audiences. For example, members who have traded books or traded for books will
be sent an email from Araby on behalf of Amazon.com. These deals can be signed either on a CPM or
revenue share basis.
Confidential
Page 9
3/3/2016
4.3 Advertising & Sponsorships
Araby will generate revenues from targeted advertising and sponsorships. Advertising/sponsorships can be
sold on the various categories within the site. Furthermore, email newsletters can be made available to
members which also offers an advertising opportunity.
Araby’s multiple, “zero-gravity” business models are attractive because the long-term overhead costs are
low. With no warehousing or shipping costs, or any other brick and mortar constraints, the Company is a
pure Internet play.
5. Marketing Strategy
Araby’s strategy is to immediately develop the e-barter market online and establish its brand as the number
one destination to trade goods and services over the Internet. The key is to establish first-mover advantage
and reach critical mass as soon as possible. This means that in the short term, the Company will sacrifice
revenues for high growth, profits for market share.
The key elements to Araby’s sales and marketing strategy are:
5.1 World’s Largest Gift Exchange Promotion
To officially launch the site, Araby will promote “The World’s Largest Gift Exchange” during the 4Q 99
Holiday season. Retail studies reveal at least 10% of the billions of dollars worth of gifts purchased during
the 1998 Holiday season were returned or exchanged. 10 This does not include the amount of gifts that were
unwanted yet not returned due to lack of receipt. The “World’s Largest Gift Exchange” will create an
influx of items immediately on the trading floor and generate a massive amount of free publicity.
Araby will promote the event through public relations and partnerships with portal and/or e-commerce
sites. By cross promoting the “Gift Exchange” with their shopping areas, e-commerce partners offer
customers an additional incentive to purchase additional goods through their Web site, thereby increasing
transactions during the critical Holiday shopping season.
Araby may also offer a portion of transaction revenues to charity during this event to promote holiday
goods will and build market share.
5.2 Web Distribution Deals
Araby will develop co-branded trade exchanges with destination, e-commerce, and portal sites. Co-branded
partners will earn a continuous revenue share for money generated from the co-branded site, but Araby will
co-own all member information. These deals are based on the affiliate model, whereby neither partner pays
the other up-front cash.
There are two types of partnerships:
10

General audience partnerships – Araby will develop entire co-branded e-barter trade exchanges
for Web partners with attractive audiences. Partners include: portal sites (AOL, Yahoo!, Lycos);
online communities (ICQ, Xoom.com/NBCi); and group-oriented newsgroup/mailing list sites
(Deja.com, Topica.com, egroups.com, OneList.com).

Targeted audience partnerships – Araby will develop co-branded e-barter trade exchanges for
portal, community, and e-commerce sites targeting their unique audiences. Examples of “targeted
audience” trading communities include a:
National Retail Association
Confidential
Page 10
3/3/2016




Gift exchange of unwanted gifts with wedding sites (i.e., Weddingconnect.com)
Book swap with book sites (i.e., Barnesandnoble.com)
Sport card trading floor with sport sites (i.e., CBS Sportsline)
Time-share exchange with travel sites (i.e., Travelocity).
These partnerships are win-win for both parties. Partners benefit by increasing site stickiness, adding value
to membership, and developing a new revenue stream. Araby builds its brand, develops multiple
distribution channels, and lowers its customer acquisition costs to acceptable levels. Araby further gains
by improving its cash flow, since revenues are paid to the partner only after transactions are completed.
5.3 Viral Marketing
Viral marketing is a no cost way to promote a product online through encouraging users to spread the word
about the Company through e-mail. It is viral because if successful, word-of-mouth on the product spreads
quickly to millions globally on the Internet. Examples of successful viral marketing stories are ICQ, a free
instant message service and Hotmail, a free Web-based email service. Both companies grew their usage
levels into the millions within a year entirely through viral marketing.
The Company will expose its e-barter trading service to millions of Internet users online through an
aggressive viral marketing campaign. To encourage word-of-mouth, Araby will:





Develop a Friends & Family promotion - Offer members prizes for inviting their friends and
family to participate in the online trading community.
Create an evangelical group of hard-core users
Start a Link-to-Us program – Provide the Web graphic tools for people to directly link to Araby’s
Web site.
Offer an Affiliate program – Pay Webmasters a revenue share for all traffic and customers they
send to Araby.
Initiate a frequent trader program - Reward repeat traders with prizes such as frequent flyer
miles.
As mentioned before, Araby will encourage people unfamiliar with barter the opportunity to try out the
service by offering the first trade free of charge. Araby will also offer a prize giveaway (such as a monthly
drawing to win a computer) as a further incentive to register and try out the service.
5.4 Public Relations
The Company believes that Araby is a great press story. The business model is unique, the service is
simple to explain, and the venture is egalitarian in nature. It may also be positioned as the Internet’s next
eBay. One of Araby’s priorities is to hire a top-notch public relations agency to pitch the Company’s story
to the online, financial, and traditional press, as well as to raise awareness among the mass media about the
“Gift Exchange” promotion.
5.5 B2B Market
Araby believes that the b2b e-barter market is prohibitively too expensive to enter in the short term because
corporations will be reticent to barter on a public Web site. Corporations conduct barter as a result of
excess inventory and cash flow problems. Since corporate barter is a public admission of a mistake, and
could have a negative impact on stock value, corporations prefer to barter in secret. Nonetheless, the b2b
market is too huge an opportunity to ignore.
Araby’s plan is to reach critical mass within the c2c e-barter space and then to leverage its brand to exploit
the b2b and b2c e-barter markets. In the meantime, Araby will target companies that are more traditionally
receptive to barter practices, such as small businesses and cash-poor start-up companies. To reach them,
Confidential
Page 11
3/3/2016
Araby will develop partnerships with small business portals (Office.com, Inc. Online) and vertical industry
Web sites (VerticalNet, Chemdex, MetalSite.com).
In addition, Araby will create e-barter trading communities for the hospitality (hotels) and advertising
media (radio, television, online) industries. The online advertising market is particular interesting since a
majority of advertising banners on the Web are sold below rate-card or bartered away. By trading ad
banners directly through Araby’s e-barter site, instead of through existing ad barter networks, Web sites
avoid the middleman and gain a better value for their excess inventory.
6. Operations & Technology
Araby plans to build a robust, scalable user interface, user database, and transaction processing system
based on a combination of internally developed proprietary software, open standard off-the-shelf software,
and outsourced information management services. This system mix will enable Araby to more effectively
utilize research and development capital and employ world-class standards and practices to reduce time-tomarket. The system will handle all aspects of the e-barter process:









Searching through the database
Registration
User login and authentication
Personalization
Notification of new items by active search agent
Adding of items to the electronic bartering floor
Making a barter offer
Haggling and trade completion
Transaction billing
The system will maintain user registration information, billing and receivable information, current barter
items, and history barter listings. The system will employ a data warehouse to maintain, track, and
correlate user activities, preferences, online experience feedback, and impression response to
advertisements and partner links.
The system will also support community bulletin boards and chat areas where users may interact and build
community. The system will seek to employ a natural language-based search engine (through a partnership
with Ask.com or Inference Corp.) to enable users to search for items and barter bids without resorting to
use of complex Boolean expressions.
Araby’s architecture will be based on a “best of breed” e-commerce support model. The system will be
designed not only to minimize the occurrence of outage but also to minimize the effect of outages on the
service, thereby maximizing 24-hour-a-day, 365-day-a-year core trading service availability to trading
members. Araby’s system will consist of a suite Sun Solaris database servers running Oracle relational
database management systems interacting with a suite of Sun NetDynamics application servers. Oracle
provides the most scalable, reliable database solutions in the industry while NetDynamics provides
scalable, fault-tolerant application support and easy integration with heterogeneous technologies through
use of CORBA and stateless Enterprise Java Beans.
Araby’s databases will be horizontally partitioned by goods and services and/or users. In the event of a
database server failure, this will enable Araby to still serve a large fraction of its registered users and barter
among a majority of goods and services categories. Also, Araby’s data architecture will employ active,
read-only replicants instead of passive, read-write replicants, enabling the system to enhance scalability and
availability by employing replicated databases for read-based functions such as item searches. This
provides three major benefits: faster performance, more cost-effective use of data infrastructure, and lowerrisk system recovery in the event of a system failure. Araby is also examining the use of the Lightweight
Directory Access Protocol (LDAP) to organize barter items in a manner that ensures future support of
massive item data “inventory” growth.
Confidential
Page 12
3/3/2016
Araby’s application servers will be vertically partitioned by function classification. Mission critical
functions (login, item search, barter offer, and trade completion) will be supported by a static, extremely
fault tolerant server complex to ensure users can continue basic bartering (albeit with increased latency) in
the event of server failure. Meanwhile, user support functions (haggle, chat, bulletin boards, and
notification) will be supported by a less costly, but more adaptable, dynamic server complex. Although this
user support complex will be less fault tolerant than the static complex, it will be more easily adaptable to
accommodate changing user needs and barter market demographics. Araby is considering use of domain
name server (DNS) routing for availability-based load balancing across application servers within a given
complex. Araby may configure and implement these application server complexes internally or outsource
work to a local NetDynamics-certified application partner (such as Litton Enterprises).
Araby’s architecture and transaction support engine will be designed to support the highly bursty
transaction loading associated with seasonal peaks and special promotions (i.e., “The World’s Largest Gift
Exchange” promotion). This design will execute transactions quickly during loading periods in excess of
twenty-five times the average expected Araby site load. Such a design is critical to support the hypergrowth (exponential growth at a increasing degree over time) typically associated with other e-commerce
success stories such as AOL, Yahoo, and eBay.
7. Competition
Currently, Araby faces no credible direct competition. However, due to low barriers of entry and the
potential size of the market opportunity, the Company expects to face intense competition in the future.
Direct and potential competition may be separated into the following categories:
7.1 Offline Barter Exchanges
Numerous offline barter exchanges are interested in expanding their bricks-and-mortar barter exchanges
onto the Web, including ubarter.com barter.com, and ebarter.com. These companies, however, face
numerous obstacles migrating to the Internet, such as lack of Web expertise and the existence of legacy
barter systems.
Equally significant, none of these companies have the market power to leverage their customer base to
immediately become the dominant player on the Web. As stated before, the barter industry is highly
fragmented with an estimated 1248 barter exchanges servicing 380,000 trading members. The largest
exchange is BarterCorp. of Chicago, IL, boasting only 3500 trading members.
Finally, offline barter exchanges are generally more interested in using the Web to compete in the existing
offline b2b barter market, leaving the c2c market all to Araby to own.
7.2 Newsgroups & Mailing Lists
E-barter activity occurs informally through newsgroups and mailing lists. For example, game players use
games-related newsgroups to trade computer games with one another. Though free-of-charge, newsgroups
and mailing lists are inefficient because they are designed to facilitate communications instead of ecommerce activities among users. They do not provide a user-friendly trading interface nor allow for
trading across different vertical markets. In addition, most newsgroups and mailing lists are too complex
for the average Internet user to participate in.
Recently, numerous ventures have been launched to make newsgroups and mailing lists simple enough for
the mass market to join and participate in, including deja.com, onelist.com, topica.com, egroups.com, and
remarq.com. The Company believes these groups-related community sites share a common audience and
present a unique distribution partnership opportunity (see Section 5, Marketing Strategy).
Confidential
Page 13
3/3/2016
7.3 Portals & Online Auctions
Araby competes indirectly with c2c online auction sites in regards to marketing and audience. Someone
who wants to trade a used book will have two options. They may either trade the book directly for other
goods and services through Araby’s e-barter site, or attempt to sell the book through an online auction.
There are thousands of competitors in the online auction space, most notably eBay, Amazon.com, Excite
Auctions, City Auction, Auction Universe and Yahoo! Auctions.
Though the competition is fierce, the Company believes the market is large enough to support both types of
e-commerce markets. In the same way that the market is large enough for e-commerce, classifieds, and
auction sites to exist, there is room for an e-barter site such as Araby to grow and prosper.
Moreover, online auction and trade exchanges appeal to vastly different audiences. The online auction
community is driven more by competition and the entertainment value of the “Final Bell.” The e-barter
audience, on the other hand, comprises more of bargain hunters. Whereas auction participants like the
stock market, e-barter members are more apt to enjoy a flea market.
8. Critical Issues
Araby faces numerous critical issues, all surmountable, in developing its Web site and service.
8.1 Low Barriers of Entry
Similar to online auctions, developing an online trading environment is not prohibitively difficult. Once
Araby becomes popular, portals, e-commerce, and auction sites may be encouraged to create their own
online trade exchanges. To increase stickiness, portals may offer the service for free, similar to Yahoo!
Auctions.
While developing an e-commerce site is not complex, creating an online trading experience that is fun,
simple and valuable is. Araby will discourage potential competitors in the e-barter space by creating a
best-in-class e-barter trading platform and developing a critical mass of loyal customers quickly. Araby
will continuously raise barriers to entry, adding new features and services to the site to ensure that the value
of its paid service is greater than that of free services.
It should be noted that potential competition offers the Company a major business opportunity. Entry of
major Internet companies legitimizes the Company’s unique business models and market opportunities. In
addition, major Internet companies may strike deals with Araby to provide the back-end to their trading
floor or acquire Araby completely.
8.2 The Trust Factor
A major weakness to Araby’s model is the same weakness as eBay, that the user experience is partially
dependent on its members’ behavior. If a member is dishonest and lies about an item, or reneges on the
trade, the other member will have a bad experience and not return to the site. Since trades do not involve
any changing of money, enforcement of trades may be extremely difficult.
There is no way for Araby to guarantee a positive trading experience. However, Araby will enact policies
to develop a level of confidence in the service and to minimize fraud. Araby will:






Initiate random spot-checks
Offer a feedback forum feature whereby users publicly rate their trading partners
Provide incentives for members to submit verifiable information through a third-party vendor
Offer escrow service through a third-party vendor
Establish an active and responsive customer service department
Enforce a zero-tolerance policy for fraud on the Web site.
Confidential
Page 14
3/3/2016
Araby will also actively kick out abusers of the system and press criminal charges in fraudulent cases to set
precedence.
8.3 Lack of Precedence
Araby is risky because no one has ever successfully built a global, massive-scale, c2c e-barter exchange in
either the online or offline world. No model exists to base the future success of the Company, aside for the
extreme success of all other market types adapted to the Web. It should be noted, however, that no
precedence existed when Jeff Bezos decided to pack his bags, move to Seattle, and launch a start-up called
Amazon.com. Before Amazon.com, no one was selling books online. Before eBay, no one was buying or
selling goods via auctions online. Within three years, both companies have market capitalizations worth
billions of dollars.
So far, every market activity that has been adapted online has been successful, if not improved upon. As a
case study, one must only compare the market valuation of Amazon.com with the market valuation of its
bricks and mortar competitor, Barnes & Noble.
There are numerous reasons to suggest that Araby and e-barter will succeed tremendously online, following
in the pioneer footsteps of Amazon.com and eBay. If successful, Araby has the unique opportunity to
dominate the online trade exchange market as AOL dominates online services, Microsoft dominates
operating systems, and Amazon.com dominates e-commerce.
9. Management
9.1 Joel Brodie, Founder & CEO
Araby’s founder and CEO, Joel Brodie, brings over four years Internet start-up experience successfully
formulating marketing strategies, developing business relationships, and growing brands online. In 1996,
Mr. Brodie developed grassroots marketing programs at FreeLoader, Inc., the first Internet start-up success
story to develop a product and be acquired for $38 million within a six-month period.
As Director, Business Development at Simutronics, the leading developer of Internet games, Mr. Brodie
was responsible for developing a Web distribution strategy to replace AOL as the primary distribution
channel. With no marketing budget, he negotiated and implemented multi-year, revenue-share deals with
portal and games destination sites, including Microsoft (MSN Game Zone), Lycos, Excite, Mplayer, AT&T
WorldNet, and theglobe.com. As a result, Simutronics was placed on Washington Technology’s Fast 50
list for the past two consecutive years.
9.2 Future Partners
Araby has a firm commitment from the following partners to work with the Company in the future:



Cooley Godward, LLP (law firm)
PricewaterhouseCooopers (audit firm)
Silicon Valley Bank (commercial bank)
9.3 Future Management Hires
Upon raising a first round of venture capital, the Company plans to hire numerous key players to round out
its management team, including:




Vice President, Product Development
Chief Financial Officer
Director, Customer Service & Quality Control
Director, Community Development
Confidential
Page 15
3/3/2016


Director, E-commerce & Advertising Sales
Director, Marketing (focus on viral marketing)
The Company also plans to develop an in-house development and system administrative team.
9.4 Board of Advisors/Board of Directors
The Company is currently in discussions with numerous key players within the Internet industry for
placement on its Board of Advisors and Board of Directors.
10. Financials
10.1 Pro Forma Income Statement
The Company’s pro forma income statement for the first five years of operations contains certain forwardlooking statements involving risk and uncertainties (see Appendix 7).
Main Points

The Company’s operating margins are expected to reach 35% by the end of the forecast, which
is compatible with equity analysts future expectations for typical online auction and direct
marketing sites.11

The Company’s long-term operating model is consistent with the long-term operating model of
eBay as projected by BT Alex. Brown.12

Due to its attractive zero-gravity revenue models, the Company expects to reach profitability within a
three-year period.
Revenues
Net revenues are gross revenues minus the cost of net revenues.
Gross revenues consists of four revenue streams: transactions (cost per trade, pegged at $4 per transaction),
direct marketing, advertising (ad banners), and sponsorships. During year one, transactions will account
for 75% of revenues, followed by direct marketing (15%), sponsorships (5%), and ad banners (5%). As the
site reaches critical mass, the percentage of revenues accounted by direct marketing and sponsorships will
increase to 20% and 10%, respectively.
Cost of net revenues include commissions to Web distribution partners, costs associated with customer
support, and to a lesser extend, credit card fees, and ISP connectivity charges. The Company expects that
costs of net revenues will consist of 25% of gross revenues.
The annual growth rate is based on the percentage change of net revenues on a yearly basis. The Company
expects the rate to increase to 700% within the first year of existence, as the Company aggressively grows
its service through higher marketing expenses. This rate will stabilize at 200% within a five-year period,
consistent with the growth rates of eBay and similar Internet sites.
The Company expects that net revenues will grow from $750,000 in year one to $5,250,000 in year two,
$11,250,000 in year three, $22,500,000 in year four, and $45,000,000 in year five.
11
12
BT Alex. Brown, eBay Equity Media Report, October, 27, 1998.
BT Alex. Brown, eBay Equity Media Report, October, 27, 1998.
Confidential
Page 16
3/3/2016
Operating expenses
Sales and marketing consists of expenses for sales and marketing personal, public relations, and the
creative design of the Web site. Araby will invest heavily in sales and marketing in order to gain market
share and build its brand within the first two years of operation. As the Company reaches critical mass and
becomes the number one player within the e-barter market, sales and marketing expenses will decrease to
35% of the total operating model, consistent with the long term operating model of eBay and similar
Internet companies.
Research and development (R&D) includes compensation for internal development staff and payments to
outside contractors. Within the first year of operation, R&D will account for the highest percentage of
expenses as the Company develops its proprietary e-barter trading service and Web site. The initial
architecture deployment (excluding internal staff compensation) will be approximately $1.5 million (for
specific details, see Appendix 6). Since the technology will be scalable, the Company expects R&D to
decrease over a five-year period to 20% of total revenues, accounting upgrading and maintaining the
system.
General and administrative (G&A) includes compensation for personal and fees to professional services,
including legal counsel and overhead costs. The Company anticipates that G&A costs will start at 13% but
stabilize at 10% of total revenues within a five-year period, consistent with eBay.
The Company expects that total expenses will grow from $3,000,000 in year one to $5,250,000 in year two,
$9,000,000 in year three, $16,875,000 in year four, and $29,290,000 in year five.
Income
During year one, the Company anticipates that operating expenses will be greater than revenues. However,
the Company expects to break even by year two and reach profitability by year three. This will occur as
sales and marketing and R&D costs decrease and revenues (as a result of Araby reaching critical mass)
grow at 200% a year.
Operating margins (“earnings before income tax divided by net revenues”) and net margins (“net income
divided by net revenues”) will be 20% and 12% respectively by year three. By year five, operating margins
will stabilize at 35%, consistent with the margins of similar Internet sites.
10.2 Funding
Araby requests a first-round investment of venture capital of $3,000,000 to:




Develop the proprietary trading and database system
Create a first-class, user-friendly Web site
Hire a strong management team
Launch the service during 4Q 99 with the “Gift Exchange” promotion
10.3 Exit Strategy
Araby presents investors with numerous opportunities to gain extremely high returns on their initial
investment.
E-barter is a revolutionary new concept in e-commerce. It is so simple, it will touch everyone online –
from consumers to small businesses to huge corporations on a global scale. Araby’s centralized,
proprietary, Internet solution transforms barter from an inefficient, fragmented, expensive and marginalized
economic activity into an efficient, universal, inexpensive, and popular way to exchange goods and services
online. By being first to market, Araby has the opportunity to build its brand synonymous with e-barter and
dominate the market for years to come.
Confidential
Page 17
3/3/2016
The direct marketing opportunity is just as huge. The data Araby will collect on its members will be
among the most highly valued on the Internet, since it is collected voluntarily and based on member
preferences as determined by their trading activity through the Web site.
Unlike other Internet ventures, Araby not only will make money, but also it will reach profitability once it
hits critical mass. This is guaranteed by its attractive, multiple “zero-gravity” models, whereby long-term
overhead costs are extremely low.
Within a one to two year period, Araby faces two likely scenarios:
First, Araby will position itself as an attractive IPO candidate. This will bring in a large influx of capital to
ensure continual dominance within the marketplace, grow membership, and discourage credible
competition.
Secondly, a partner interested in exploiting and entering the e-barter and/or direct-marketing markets may
acquire Araby. The number of potential acquisition partners is limitless due to Araby’s dual, attractive
business opportunities:









Online auctions – eBay, USA Networks (City Auction)
E-commerce sites – Amazon.com
Portals – Yahoo!, Lycos, Excite/@Home
Online Services – AOL
Broadband Cable Companies – Paul Allen’s Vulcan Ventures, AT&T
Online Direct Marketers – Xoom.com/NBCi
Offline Direct Marketers – Federated/Fingerhut
Traditional Retail – Wal-Mart
Other – Microsoft
In both scenarios, Araby will be valued at a high premium, due to its lucrative “zero-gravity” business
models, unique e-barter market opportunity, valuable direct marketing database, proprietary technology,
massive online community, and tremendous upside.
Confidential
Page 18
3/3/2016
11. Appendices
Appendix 1: Registration
Home Page
New?
Trade Now
Member
User:
Password:
Save Password:
Personal Info
Email
Credit Card
Demo (optional)
Terms of
Service
More Info
(optional)
Drivers
SS #
3rd Party
Verification
Verification
email with
Password &
user name
Appendix 2: Adding Items to the Trading Floor
Jack’s Page
Add item
Add Item




Select category
Product
Description
Value
Add graphic
Sample
Yes
Approve? Y or
N
Celine Dion CD
Category: DVD
Description: xxx
Pix…
Create Item
Number - 01
No
Modify
Add to trading
floor under
entertainment>
Music>CD
Example
 2 Traders, Jack & Jill
 Jack wants to trade his
Celine Dion CD for Jill’s
Titanic DVD.
Confidential
Page 19
3/3/2016
Appendix 3: Searching for items/Making an offer/Completing a trade
My Araby (Jack)
Search by:

Product

Keyword

Value
Categories

Trading cards

Households

Entertainment

Etc…
Personal Agent
Entertainment>Movies>
DVD
User Item ID Value More
Jill Titanic 01 $10 click
Xxx xxx
xxx
xxx
Item 02
Member: Jill
Description: Titanic
Value
Days on Floor
Pix
Offer History
Member Offer
ID
Bob Marley CD 05
Xxx xxxx
xx xx
Make Offer?
Automatically adds
Jack’s item as offer
Email to Jack
verifying
trade
Automatically
bill account
Jill
accepts
Make Trade
Email to Jill
verifying
trade
Item 01
Member: Jill
Description
Value
Days on Floor
Pix
Offer History
Member Offer
ID Accept
Bob Marley CD 05
Jack Dion CD 02 
Automatically
bill account
Appendix 4: Personalization
New?
Home Page
Trade
Member Page
Member
User:
Password:
Save Password:
Agent
Trading History
Reputation
Hot Links
Cookie
Confidential
Page 20
3/3/2016
Appendix 5: Goods and Services










Trading cards (sports, Pokemon)
Vacation timeshares
Collectibles
Books
Used clothing
Computer software & hardware
Movies (DVDs)
Music (CDs)
Games (Sony PlayStation, Nintendo, & PC)
Small business services
Appendix 6: Initial Architecture Deployment (Costs & Equipment)








$650,000 for NetDynamics servers and consulting support
$125,000 for Oracle licensing
$25,000 for Oracle Consulting Support
$175,000 for Sun Solaris data servers
$75,000 for data storage and replication technology
$300,000 for consultation support and application development
$50,000 for data communications and power
$100,000 for systems integration (with advertising, shipping, and other partners)
Confidential
Page 21
3/3/2016
Appendix 7: Pro Forma Income Statement
Year 1
Revenues
Transactions
Direct Marketing
Advertising
Sponsorship
Gross Revenues
Cost of Net Revenues
Net Revenues
Annual Growth Rate
Operating Expenses
Sales and Marketing
Research and Development
General and Administrative
Total Expenses
Year 2
750,000
150,000
50,000
50,000
$ 1,000,000
250,000
$ 750,000
$
Year 3
5,250,000
1,050,000
350,000
350,000
$ 7,000,000
1,750,000
$5,250,000
700%
1,200,000 $ 3,150,000
1,700,000
1,575,000
100,000
525,000
$ 3,000,000 $ 5,250,000
EBIT
EBIT Margin
$ (2,000,000)
NA
Income Tax (39%)
Net Income
Net Margin
NA
$ (2,000,000)
NA
$
9,750,000
3,000,000
750,000
1,500,000
$ 15,000,000
3,750,000
$11,250,000
214%
$
-
$
-
$
NA
Year 5
19,500,000
6,000,000
1,500,000
3,000,000
$ 30,000,000
7,500,000
$22,500,000
200%
5,625,000 $ 10,125,000
2,250,000
4,500,000
1,125,000
2,250,000
$ 9,000,000
$ 16,875,000
NA
$
Year 4
2,250,000
20%
877,500
1,372,500
12%
$
$
39,000,000
12,000,000
3,000,000
6,000,000
$ 60,000,000
15,000,000
$45,000,000
200%
$
15,750,000
9,000,000
4,500,000
$ 29,250,000
5,625,000
25%
$ 15,750,000
35%
2,193,750
3,431,250
15%
$
6,142,500
9,607,500
21%
ASSUMPTIONS:
Operating Model (Expenses as a % of Revenues)
Sales and Marketing
Research and Development
General and Administrative
Operating Margin
Net Margin
Confidential
160%
227%
13%
NA
NA
60%
30%
10%
NA
NA
Page 22
50%
20%
10%
20%
12%
45%
20%
10%
25%
15%
3/3/2016
35%
20%
10%
35%
21%