Friedrichshafen, December 10, 2009

Paper »Entrepreneurship«

Entrepreneurial Risk Reduction

Threadless – A community-based perspective
Christian Rudolph matriculation number 9200192 (1. Semester)
Jan Schmiedgen matriculation number 9200251 (1. Semester)
Paper »Entrepreneurship«

Table of Contents
1 Introduction ........................................................................3

2 Risk Framework..................................................................4

3 Methodology ......................................................................7

4 Threadless ..........................................................................8
4.1 Business Model Canvas .............................................................................9
4.2 Deconstruction........................................................................................ 11
4.3 Findings ................................................................................................. 17

5 Conclusion ..................................................................... 18

References ............................................................................. 19
Appendix ............................................................................... 23

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ABSTRACT

As a cornerstone of entrepreneurial success and organisational survival, the reduction of risk has
been subject to the scientific community ever since. By elaborating on the theory of risk from differ-
ent fields and perspectives, this paper shows why today’s reduction of entrepreneurial risk can effec-
tively be reduced when focussing on organisational risk reduction potential which can be found in
innovative business models. By applying the ontology of Osterwalder we deconstructed the business
model of Threadless, a (internet) community-based apparel store and identified those factors (build-
ing blocks) that reduce organisational risk. Apparently, the (pro)-active implementation of a user-
community reduces organisational risk too the extent of activities taking over by the community
itself; thereby reducing risks that are attributed to the “outsourced” functions.

1 Introduction

By the end of the day, the consequences of failures and misperceptions within firms exclu-
sively affect individual actors. Luhmann (2005, S. 163) points out that the risks
[f.e. within organisations] adhere to the modules, the enterprises and households that
decide on the uses to which money is to be put. The economy can thus be regarded to
as a “gigantic market of risks” (Luhmann, 2005).

Why do so many new ventures fail? The risks of failure facing a new venture are
derived from several sources: including the costs of learning new tasks (Stinch-
combe, 1986); the characteristics of the new product (Aldrich & Auster, 1986); the
strength of conflicts regarding new organisational roles (Stinchcombe, 1986); the
presence or absence of informal organisational structures (Gulati & Puranam,
2009); the stability of links with key stakeholders (Stinchcombe, 1987); and the
degree of organisational stability/inertia (Hannan & Freeman, 1989). Stinch-
combe introduced the concept of the liability of newness to explain why more new
ventures failed than did established businesses (Stinchcombe, 1987).

Risk taking is an important property of entrepreneurship. Since Cantillon (Winch,

1980), who can be considered as a founder of the term entrepreneur, defined the
entrepreneur as a person that bears risk of profit and loss, risk taking has been seen
as a defining element of the entrepreneur and entrepreneurship (Hisrich, 2009;
Knight, o. J.; McClelland, 1961; Schumpeter, 1982). Entrepreneurial endeavour
in terms of new venture creation can be considered risky since the failure rate of
new firms is substantial. Consequently entrepreneurs assume psychological, social
and financial risk, when they form new ventures (Hisrich, 2009).

Early research on entrepreneurial behaviour concluded that under the assumption

of economic rationality in people behaviour, in equilibrium, more risk-averse in-

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dividual become workers while less risk-averse individuals become entrepreneurs

(Kihlstrom & Laffont, 1979, S. 719). This conclusion, however, was disproved by
findings of the study Brockhaus (1976), who found that risk-averse behaviour
cannot be considered a distinctive characteristic of entrepreneurs because it does
not differentiate them from other people. His findings showed that risk should not
be approached in terms of an enduring psychological characteristic (trait). Rather,
it can be considered as being related to entrepreneurial behaviour, where possibil-
ity of failure or loss related to that behaviour exists. In efforts to answer the ques-
tion, whether entrepreneurs have a different attitude towards risk than others
scholars tested whether the risk propensity of entrepreneurs was greater than that
of managers. (Simon & Houghton, 2000, S. 114). The propensity for risk taking is
defined as the perceived probability of receiving the rewards associated with suc-
cess of a proposed situation, which is required by an individual before he will sub-
ject himself to the consequences associated with failure, the alternative situation
providing less reward as well as less severe consequences than the proposed situa-
tion. Such a definition might best describe the situation that faces the potential
entrepreneur when he decides to establish a new business venture (Brockhaus,
1976, S. 513). In other words, risk propensity is the tendency to take actions that
one has judged to be risky (Sitkin & Pablo, 1992, S. 9-38). Surprisingly, research
found that this trait did not differentiate entrepreneurs from others (Brockhaus,
1976).

In response, some scholars suggested individuals take risky actions (i.e., actions
that have a high possibility of disappointing outcomes) because they perceive less
risk than most (Brockhaus, 1976; Kahneman & Lovallo, 1993; MacCrimmon &
Wehrung, 1990). Even when individuals evaluate identical situations, some peo-
ple conclude the situation is very risky, whereas others believe it is not (Nutt,
1990, 1993). Even if they do not have a high-risk propensity, individuals who per-
ceive less risk than others might unknowingly take risky action. Either way, all
these models and theories see the reduction of risk as a desirable objective.

2 Risk Framework
Janney & Dess (2006) tried to capture this atomised view by setting up a risk con-
struct from a functional point of view distinguishing between risk reduction as
variance, downside loss or opportunity.1 Risk as variance deals with all activities
where monetary streams have a high variability or spread (f.e. variability of reve-
nues). Risk as downside loss and opportunity are comparable to the metaphor of

1
Figure 3: , p. 22 (Appendix)

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Paper »Entrepreneurship«

“sinking the boat” and “missing the boat”, introduced by Dickson & Giglierano
(1986b). Risk as downside loss focuses on the likelihood and magnitude of poten-
tial losses, while risk as opportunity focuses on the upside potential.

But how can possibilities for this risk reduction/potential be detected, analysed
and applied in an already existing business model?

During the process of research for this paper it became salience that to analyse this
further and understand the concept of risk in entrepreneurial studies fully, the
distinction between risk and uncertainty has to be to clear.

THE DISTINCTION BETWEEN RISK AND UNCERTAINTY

Risk can be defined as an attribute to all those activities where the likelihood of possible outcome is
known and calculable based on experience gained from previous or comparable activities. Schon
(1985) describes the risk of an action as the likelihood that it will produce an unwanted result.

Activities where there is no calculable likelihood of possible outcome or even no certainty about the
exact number or extent of outcome are considered as being uncertain. Respectively, uncertainty can
be found when a situation requires action but resists analysis of risks (Knight, o. J., S. 12).

Our paper elaborates on risk; and its reduction through an innovative business
model (see chapter »Threadless«). As easy the distinction between risk and uncer-
tainty is in theory, as difficult it is in reality. Observations of organisational activi-
ties and therefore entrepreneurial behaviour show constant transitions of risks to
uncertainty (and vice versa). As an illustrative example one could think of an ex-
isting firm introducing a CRM-software to its Human Resource department for
the first time. As no experience data of a comparable project exist, the likelihood
of failure (risk) cannot be calculated. The outcome of the activity in terms of costs
and expected returns is therefore highly uncertain. If the same organisation would
later implement the same or similar software to another department, it would be
able to at least some extent calculate the likelihood of failure based on previous
experience with the software. This second implementation thus has a certain risk
involved. Uncertainty (to some extent) became calculable; became risk.

Assuming the general economic motivation of an individual to reduce the risk of

its activities in business ventures, one has to face different levels of risk. Ventures
in this context contain all those activities that are entrepreneurial. Besides the fun-
damental activity of starting up a business, entrepreneurship can also be found
within existing organisations (intrapreneurship). This chapter elaborates on di-
mensions of risks that can be found in both cases of entrepreneurial activity. In the
following we generally distinguish between two levels of risk, entrepreneurial and
organisational.

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TWO LEVELS OF RISK

Entrepreneurial risk puts the individual within an organisation in the focus of being the one affected.
Hence, entrepreneurial risk predominantly deals with personal risk (f.e. financial) that result from
business-related activities. Dickson & Giglierano (1986) defined entrepreneurial risk as the probabil-
ity of failure and personal loss when doing business.

Organisational risk focuses on the risk for the firm and its business activities. Under the premise of
survival and/or growth as primary objective of a firm, organisational risk describes all dimensions
and factors that may either lead to the inability to maximise profits or the disappearance of the firm.
In other words, organisational risk defines the likelihood of mortality of an organisation (Dickson &
Giglierano, 1986a).-

When focussing on the interrelation of entrepreneurial and organisational risk in

daily business, one has to consider that consequences of organisational risk-taking
ultimately affect the individual within an organisation. Although we are speaking
of organisational risk, the risk involved, simultaneously embodies an entrepreneu-
rial risk. In case of a start-up this becomes even clearer, as the entrepreneur some-
times even equals the organisation. As a consequence, to identify those factors
that reduce risks for the entrepreneur [employee] we foremost have to focus on the
reduction of organisational risk.

In the rise of information technology in today’s’ knowledge society, internet

community based ventures have become of increasing interest to the scientific
community. This paper adds value to this line of research by focussing on organ-
isational risk-aspects in a recent community-based venture from the apparel indus-
try. Moreover we highlight those factors of the business model that distinguish it
from the traditional apparel industry business model in respect to organisational
risk reduction; thereby we define organisational risks as those activities ultimately
causing too much costs/lack of revenues, causing lack of profits, leading to risk of
mortality.

Consequently, this paper elaborates on and tries to find an answer to the question:

RESEARCH QUESTION

How to reduce organisational risk using an internet community-based business

model?

We will bear that in mind when analysing the case study. But first, some words
concerning the methodology applied in the following.

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3 Methodology
Regarding the two facts, that a) – as shown above – the term risk in organisational
contexts is very broad and complex and b) that we wanted to examine it related to
community-based approaches, we opt for a research method that was suited to
“explain the presumed causal links in real-life interventions that are too complex
for the surveyor or experimental strategies [and the like] “. (Yin, 2002, p. 15) We
needed a method that allows retaining the holistic characteristics of real-life
events; in our case organisational processes (Yin, 2002, p. 2). Therefore we de-
cided to perform a single case study research. This type is most suitable if „the
case represents an extreme case or a unique case“ that is „worth documenting and
analyzing“ (Yin, 2002, p. 40 f.). As we choose Threadless – due to extraordinary
growth and press coverage in the last years – we thought this distinct example of a
user community would serve well as research object. As the case study „does not
represent a »sample« [...], [our] goal will be to expand and generalise theories
(analytic generalisation) and not to enumerate frequencies (statistical generalisa-
tion) “ (Yin, 2002, p. 11) According to Yin (2002) several components are needed
to properly conduct a case study research. Besides the clarification of the research
question and its propositions he emphasises one criterion that is crucial for a struc-
tured examination: the unit of analysis (Yin, 2002, p. 21).

As organisational risk is distributed throughout the whole organisation we de-

cided to analyse and deconstruct the whole business model (as unit of analysis) of
Threadless with regard to risk reduction. We therefore decided to use the business
model ontology proposed by Alexander Osterwalder (2009). His ontology pro-
vides a structured way to decompose and analyse a business models components
in detailed but as well in a holistic manner – depending on the focus of the analy-
sis. As it is an elaborated synthesis of the latest research in this field, his frame-
work provides a solid foundation for our purposes.

Osterwalder terms the visual representation of his ontology the Business Model
Canvas (Figure 1: The Business Model Canvas). It consists of nine building blocks
and provides a structured way to analyse the particular and overall risks of
Threadless.

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Figure 1: The Business Model Canvas (Osterwalder et al, 2009)

In the following, we analyse the several blocks of Threadless’ business model with
regard to our organisational risk reduction focus. Simultaneously we will – if rea-
sonable – compare our findings to the traditional apparel industry, respectively to
»traditional« online retailers.

4 Threadless
Threadless is a community-centered online apparel store that started with $1,000
in seed money won by the founders in a web t-shirt design contest. Inspired by
that experience and motivated by their success they decided to start up their own
business. In substance, the website works like a never ending design competition.
Members of the community submit t-shirt designs online, which are put to a
community vote. The winner design is then printed and sold online. In return, the
winner receives a prize of cash and store credit for his/her own purchases on the
platform.

„Threadless encouraged community members to actively participate by critiquing submitted

designs, blogging about their daily lives, posting songs and videos inspired by the designs,
and, most important, purchasing t-shirts that have won the weekly design competitions. All
printed designs typically sold out, and were then retired from the active catalogue to make
room for new designs. In 2007, Threadless was well on its way to selling more than a mil-
lion and a half t-shirts. “(Kanji & Lakhani, 2008, p. 1)

On average, around 800 designs compete in any given week and prizes worth
$6,000 are rewarded. Today (2009) Threadless has a user stock of over 500,000
community members and a turnover of $50,000 million, tendency increasing.

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THREADLESS – AT A GLANCE (LEVEL OF INFORMATION: 2007)

Website www.threadless.com
Established 2000

Founders Jake Nickell (Chief Executive Officer),

Jacob DeHart (Chief Technology Officer),
and Jeffrey Kalmikoff (Chief Creative Officer)

Community members population > 500,000 (2007) / > 900.000 (2009)

Full time employees 30

Average t-shirt price $16

T-shirts sold more than 1.5 million
Revenues1 $23 million

Designs received since 2000 133,000

Designs voted and scored since 2000 68,547

Figure 2: Threadless – facts and figures (Kanji & Lakhani, 2008) → list is not exhaustive.

4.1 Business Model Canvas

"[The] apparel industry is characterized by short product life cycles, volatile and unpredict-
able demand, tremendous product variety, and long and inflexible supply processes. (Sen,
2008, S. 1)" therefore it has been under constant pressure since the early 1990's,
with all the known consequences; global supply chains, manufacturing in low-
income countries and extremely complicated and expensive foresight / trend re-
search activities.

In order to now fathom out Threadless’ obvious outstanding success compared

not only to the traditional fashion industry, but also to other online apparel sup-
pliers we need to have a closer look on its activities.

In the following we will examine how Threadless circumvented the typical prob-
lems in his branch of industry and how it reacted to challenges, especially in re-
gard to risk prevention. Therefore we deconstruct its business model following
Osterwalder by comparing the elements to the corresponding »industry standard«,
or respectively other online apparel stores.

1
Operating margins for firms in the casual designer retail space were as follows: The Gap 9.5% (2008) ; Urban Outfitters
14.9% (2008); Inditex (Zara) 17.5% (2008) and H&M 23.7% (2007). Source: Google Finance.

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EXCURSUS: MARKET SITUATION BEFORE THREADLESS:

The fashion and apparel market before Threadless was characterized by either large players
players1 or so
called »boutique
boutique or fashion-
fashion-led houses« . The former had to take care of a certain mass-compatibility
2

of their offering, which did not allow for experimenting with seemingly unprofitable niche trends. The
latter had not to react but to better create or at least adept new trends as soon as they emerge and
could therefore also specialize into niches. However, both were not able to offer customized and
affordable fashion to a larger market.

When the first online apparel shops emerged in the mid and late 90's, they usually focused on cus-
tom-designed fashion items (mostly t-shirts or hoodies), that users could order in small quantities
either with their own uploaded designs or by choosing from a predefined set of the latter offered on
the platform. Although having developed more and more sophisticated over time, this rough descrip-
tion is true even today for most of the online apparel fashion stores like zazzle.com, spreadshirt.com,
caffeepress.com and many more.

Threadless »combines the best of the two (or better three) worlds«. On the one hand it offers a wide
variety of designs ranging from »mass taste« to special design niches that even expensive boutiques
couldn't offer. On the other hand it relieves his users of the burden to design their own subject if they
are not capable doing this. Rather it helps them to influence design processes performed by others
in order to get what they want in a quality they couldn't get elsewhere. That is the big difference in
comparison to other online apparel stores and one of the main arguments, when arguing that it is
the current »best practice example« of online apparel retailers.

How this affects Threadless' risk diversification will – as already mentioned – now be examined in
the following. When possible the authors will compare the risks of the »traditional« and the current
»online apparel business« to Threadless.

1
Usually with scale economies, sophisticated logistics, low labour cost and assembly operations as well as advanced retail and
distribution networks.
2
Usually with an emphasis on design, quality and customisation as well with customers who are prepared to pay respectively
high prices for these attributes.

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4.2 Deconstruction

Figure 1: Threadless’ business model canvas (following Osterwalder, 2004, 2006, 2007; Osterwalder &
Pigneur, 2009; Osterwalder, Pigneur, & Tucci, 2005)

In the following we elaborate on the case of Threadless with the help of the par-
ticular building blocks pictured in »Figure 1«. Because of the interrelations of cer-
tain building blocks, some risks will be (partially) dealt with in several blocks. As
Threadless represents a very progressive community-driven business model we
chose to have a closer look on the customer block at first.

CUSTOMERS

The customer base of threadless is very diverse. It ranges from professional

graphic designers to semi-professionals and amateurish users up to ordinary and
just consuming users1: „There is the simple consumer who wants to go to our Web site
and buy new shirts. There is the designer, perhaps a college student or someone who likes to

1
Which interestingly have a strong feeling of commitment and co-creation influence as well, because of having the opportunity
to vote and comment the designs. In a way they feel as co-creators of the designs, other people are refining with help of their
contributions.

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Paper »Entrepreneurship«

design t-shirts in his or her free time, which uses the site to practice design skills and get feed-
back from fellow artists. There are also just a lot people who like the idea of Threadless and
enjoy interacting with consumers and designers and participating in our blog section“
(Threadless Founder Jacob DeHart in Kanji & Lakhani, 2008, p. 3).
Aside from the shopping function, nearly all users share the same goals, for in-
stance »intellectual« challenge, enjoyment of the task, strong sense of identity and
community belonging (Lakhani & Panetta, 2007) and concrete motivations to use
the platform (Making Money, Improving creative skills, Freelance Opportunities, Com-
munity Love, Addiction (Brabham, 2009, S. 7-12).

Thus, when every user is motivated to contribute to the further development of

the platform one can say that Threadless is in the comfortable situation to be able
to broadly disperse its »shared risks« (Clemens, 2008). Nevertheless, its »cost of
coordination risks« (Grossman & Hart, 1986) as a consequence thereof increases.
This becomes more apparent when looking a bit more in detail at the building
block of »Relationships«.

RELATIONSHIPS

One of the greatest risks in traditional fashion business is to miss a certain trend or
equal worse being too late in taking up. Due to the fact, that the community itself
produces and ranks the emerging trends via voting, Threadless is able to predict
which designs will sell and which ones not. This reduces the »risk of new product
development« (Becker & Perters, 1998) dramatically. With the data collected from
its customers it can serve a few mainstream trends (in a figurative sense, the mass
market) as well as many niche trends (long tail) as long as there are enough pre-
orders collected. This has several positive side-effects: Threadless knows exactly
what customers want and when they want it. Therefore it can react more quickly
to changing preferences what in turn helps to serve the heterogeneity of demands
and makes micro segmentation possible that is far too expensive for traditional
ventures, because of their inability to forecast the exact specification and potential
sales volume of a specific item. Threadless owns this data and therefore benefits
from two advantages. On the one hand, it overcomes the limitations of traditional
market research (also see → »Cost Structure«, p. 116) what can be subsumed in a
lowered »financial risk«. On the other hand it faces no »risk of overstocking« (Ogawa &
Piller, 2006) that in the traditional market often leads to the so called »lost sales risk«
(Gernaat, 2006; Sen, 2008).

Another risk concerning high-value fashion items is being copied too fast. In the
traditional fashion industry designs are created by highly skilled and therefore
expensive designers, either in-house or with a contracted partner (Sen, 2008, S. 6).
Thereby, Threadless reduces not only »financial risk« by reducing costs as it rewards
just those winning designs which will sell but also by not only outsourcing »IP-loss-

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risks« like being copied to its users "there is also the risk of submitted ideas inspiring
others to create related but different designs that might outperform the designs that inspired
them. Most designers will also need to be psychologically prepared to lose in public, as very
few designs are converted into t-shirts. Finally, whereas non-winning designers retain all
rights to their work, winning designers, in exchange for the cash prize, assign the copyright
for their work, and exclusive use of the design on t-shirts, to Threadless." (Lakhani & Pa-
netta, 2007, p. 108). Furthermore, by utilising the attention of the community
concerning their design, Threadless is even reducing the risk of unknown »plagia-
rism « Recently for example, issues of copyright infringement over a winning de-
sign were identified and rectified through direct involvement of the community.
Threadless retains sufficient rights to IP to ensure the viability of its business
model, but leaves rights to all other uses to the designers. While in the traditional
industry this monitoring would require heavy monetary efforts, Threadless gets it
for »free«.

The utilisation of the user community reduces even more risks; for example, valu-
able cues on how to improve its whole business: "That Threadless management has
embraced openness and transparency is reflected in most decisions about the interaction
platform, voting and selection rules, and even manufacturing strategy being taken openly
and in consultation with the community, which has on many occasions provided direction
and guidance unanticipated by Threadless management." (Lakhani & Panetta, 2007,
p. 108). The other side of the coin however is reflected in the literally »customer
integration risk« (Enkel, Kausch, & Gassmann, 2005). Customer integration might
lead to insufficient IP-protection (e. g. regarding the common development of new
tools), involuntarily transfer of first-mover knowledge towards competition or
simply a loss of control due to increased transparency (cf. »Distribution & Acqui-
sition Channels«, p. 16).

PARTNERS

As the Threadless community is not only customer but also its most important
partner, too, from the partner-perspective (see p.11, Figure 1: »Partner«) a whole
set of risks has been shifted towards them. The community forecasts what and at
what volume they plan to buy on the platform, meanwhile performing critical key
activities1 (cf. »Key Activities« on the next page). In the traditional apparel indus-
try as well as in other current online apparel shops, these activities, which include
»planning risks« have to be assessed by the organisation itself and often solely.

The integration of a user community into the actual business model leads to the
fact that the majority of activities in the operating business are performed by the

1
Such as (product-)design, product R&D or even marketing and Sales.

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user community itself. Therefore every risk reduction or increase mentioned so far
seems to be caused by this fact. (also see: p. 15, »Key Activities«). In traditional
industries as well as in other online retailers, the organisation itself or at least a
contracted partner that is part of the internal supply chain, fulfil this obligation. It
also shows that the community-based approach does not limit itself to the building
blocks. Exemplary reduced risks connected to the role of the community as part-
ner are the »financial risk« or the possible »costs for learning new tasks«. Notably, the
latter is predominantly one of the key risks when launching a business (Stinch-
combe, 1986). Consequently, it can be concluded that the community-based con-
figuration at the time of launch had a big impact on the reduction of »market entry
risks«1 that traditional business models face. Some of the other online apparel re-
tailers certainly have similar approaches implemented partly2, but they didn't in-
stutionalised it that rigorous from the beginning, because they just transferred the
old real-world business to the web enabling users to buy small customised quanti-
ties.

However, Threadless managed not only to fully integrate a user community it also
outsourced other critical and costly activities to »regular« business partners.
Threadless outsources 1) the t-shirt production (organised within a special con-
tract with a bangladeshian supplier3) of several co-created and special shirt-designs
that are only available at Threadless. 2) the printing, respectively finishing (which
is done in the domestic market and therefore enables fast reaction times and there-
fore reduces »time-to-market risk« and »time-to-react«) that is also organised within a
special bulk-order contract4 and therefore shapes another essential competitive
advantage/barrier, that is hard to copy by other market-players. Furthermore,
they outsourced 3) delivery logistics (UPS, FedEx, etc.), 4) credit management
(VISA, Mastercard, etc.) and 5) hosting services which are performed by partners.
When looking at all the outsourced activities quickly, the questions arises what
functions then Threadless itself performs at all? The next section will shed light on
that.

1
One example would be the market entry risk of new players to heavily invest in market research or building up customer
loyalty
2
For example Spreadshirt with their »Shop-in-shop«-Offer (enabling users to open their own independent shops, where they can
sell apparel with their own designs → the difference to threadless is: the design(shop)-categories are not that easy accessible as
they are on the Threadless-site) or their Open Logo-Competition (as described in Reichwald & Piller, 2009, S. 5).
3
The risk of being dependent from that one supplier is reduced due to the fact, that Threadless can easily switch back to its old
suppliers like »American Apparel«, »Fruit of the Loom« or the like.
4
Due to its massive printing volume, Threadless contracted a special deal with its domestic printer. It collects even small
(re)orders to a bulk and prints them in one batch of e. g. 1,000 items, when enough orders have been placed. This creates a
competitive advantage, that is hard to copy for other competitors.

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KEY ACTIVITIES

A key focus of the operating business of Threadless is the community support.

Thereby we think of all activities related to maintaining and moderating relation-
ships (cf. »Relationships«, p. 12) with the users. Examples are print- and pre-press
support, general mail and post order mail support, mediating discussions in forum
and blog, development of common rules for collaboration and catalysing platform
promotion. Summed up, they all reduce »stakeholder-risk« as well as »lack of customer
loyalty-risk«. The stronger identification of the community with Threadless, the
more difficult it will be for competitors to overcome their loyalty towards Thread-
less. Although new entrants or current competitors might copy new functions or
features of the Threadless system, they will not be able to copy the business-
specific experience that developed and strengthened over time. Threadless evolves
with its users.

The downside of a community-based model online, that every innovative com-

pany faces, remains »technological risk« that is linked to the maintenance and further
development of the platform and their likelihood to influence trade activities, like
a temporarily server break-down. (Shepherd & Douglas, 2000).

The second important aspect one has to consider when examining the risks inher-
ent in this building block is the way Threadless handles its supply chain manage-
ment. We cannot elaborate this in detail here, but we just want to highlight the
fact, that the most important activities that require speed and flexibility are inte-
grated horizontally in a way, that reduces risks, players in traditional fashion
business with their (over)complex value-chains (Christopher, Lowson, & Peck,
2004; Doeringer & Crean, 2006; Gernaat, 2006; Sen, 2008; Taplin, 1996) usually
have to cope with.

KEY RESOURCES

Affiliated with the key activities are the critical key resources. At Threadless the
most important asset obviously is 1) the user community, that is, as mentioned
above, hard to copy (compare advantages and risk above, »Key Activities«) and 2)
the brand itself. Both are the main components building a market entry barrier
(respectively a barrier for »copy cats«) and are therefore reducing Threadless’ »pla-
giarism-risk«.1

1
The wealth of the Threadless community lies in the network ties between all members and the organisation. This so-called
„Social Capital“ is described by researchers in the field of social sciences, for instance in the studies of french post-structuralist
Pierre Bourdieu.

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COST STRUCTURE

The cost structure block elaborates on the cost pools of Threadless. Fixed costs are
the running costs of the platform, wages of the employees as well as rental of stock
and office accommodation. Variable costs arise by production on demand and
therewith connected expenses (e.g. intercharge fees, printing and logistics).

Compared to the conventional apparel industry Threadless has dramatically re-

duced its cost pools, because it has not to take care of a difficult to plan
stock/inventory, own production plants and printer and therewith connected la-
bour cost. It also saves expenses for the design process and rights of use or critical
activities like advertising and marketing (see also p.116, »Distribution & Acquisi-
tion Channels«). That means, Threadless needs less staff and less money than its
competitors to keep its business running. Even other online apparel stores are
usually not independent from huge efforts in paid affiliate marketing and targeted
(keyword) advertising. Especially word-of-mouth diffusion makes sure that
Threadless has an even lower »investment risk« than its progressive competitors.

REVENUE STREAMS

The inspection of the revenues in our case is rather simple. Threadless' earns
money 1) by regular asset sales (fashion items like shirts, hoodies and the like as
well as with art prints) and 2) subscription fees from the »12 club« (a premium
membership for monthly t-shirt shipment for »heavy users«). The advantages of its
forecasting capabilities have been described already and can (from a revenue-
perspective) be completed 3) by the special pre-order prices, which also lead to
predictable and stable revenue streams and a solid cost calculation causing a re-
duction in different aspects of »planning risk«, for instance cost-,budget or stock-
planning. In comparison to the traditional industry and its online competitors
Threadless has a relatively high profit margin of 30% (Rowe, 2006). The high
margin is caused by the high number of loyal customer in a customised environ-
ment with low investments by Threadless at the same time.

DISTRIBUTION & ACQUISITION CHANNELS

Unlike the traditional apparel retailers, Threadless needs no chain stores or a simi-
lar “physical” distribution network (although it recently opened two flagship retail
stores). Its main distribution channel is the Website with the dedicated voting,
forum, blog, shop sections and e-mail support. The same usually applies to other
online apparel retailers, but regarding the acquisition channels there are big differ-
ences again. While online apparel retailers as described in »Cost Structure« usu-
ally buy themselves into (pay per lead) affiliate networks, Threadless benefits from
reasonable word-of-mouth recommendations. This in return has led to a remark-
able press coverage and nearly cost-free PR.

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 Paper »Entrepreneurship«

It needs to be mentioned that the disadvantage of outsourcing (f.e. parts of the

mentioned marketing activities) leads to certain new risks with regard to sensible
actvtities that are no longer in control of the firm and its community users. Due to
a system-inherent lack of control in communities, Threadless faces a certain »repu-
tation risk«. It could for example be the victim of a defamation campaign or users
could ask inconvenient questions concerning the factors of production in Bangla-
desh, thus forcing Threadless management to react.1

4.3 Findings
As shown above, Threadless circumvents a lot of risks in a clever way. Between
these diverse types of risks there exist many interdependencies that weaken and
reinforce each other and whereas effective directions are hard to predict. Never-
theless two of the building blocks obviously became crucial: partners and custom-
ers. Often the other blocks and their inherent risks have strongly been connected
to these two. As Threadless actually considers them as the same, one can say that
the user community is the main driver in Threadless’ risk reduction setting.

With respect to the initial research question of how to reduce organisational risks
using an internet community based business model, we can now sum up: Com-
munity-based business models like Threadless reduce their organisational risk by
an (pro)-active implementation of their internet-community, which maintains
traditional apparel industry competences (designing, producing and distributing)
on its own; thereby taking over those organisational risks that are attributed to the
functions. Contrary to the traditional apparel industry, the main focus of operat-
ing business thereby shifts from design, production and distribution to the mainte-
nance of the user community platform.

The only ultimate threat an organisation faces, is its own mortality

(Shepherd & Douglas, 2000).

1
As an informal reference we recommend the unoffical Threadless blog www.lovesthreadless.com that lists certain downside
points for Threadless customer.

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 Paper »Entrepreneurship«

5 Conclusion
In the beginning we theoretically concluded that the variety of risk-aspects within
an organisation is caused by the fact that every activity in an operating business
has certain likelihood to fail. Failure in this context is considered as an outcome
that does not benefit the organisations’ primary objective to survive (stay profit-
able). Consequently, every attempt to minimise risk within an organisation tries to
reduce the ultimate risk of organisational mortality.

In the descriptive part of this paper we highlighted the dimensions of risk and dif-
ferent approaches on how to construct a holistic understanding of the term risk in
entrepreneurial activities. The elaboration on the use of the attribute and concept
of risk showed, that the distinction between entrepreneurial and organisational
risk becomes obsolete when focussing on the risks involved in a business model. If
we break down the consequences of organisational risk, we ultimately end up at
the entrepreneurial (individual) level. Therefore, we conclude, that to reduce en-
trepreneurial risk within an organisation the focus of risk reduction has to be on
those activities inheriting organisational risk. By applying a deconstruction
framework to analyse the business model of Threadless, we were able to identify
those risk-reducing aspects of the business model that make Threadless competi-
tive successfully. The analysis revealed that Threadless’ community-based ap-
proach is the most important factor for their risk-reduction. The reason for the
resulting risk reduction lies in the combination of the two building blocks of part-
ners and customers. Due to the fact that Threadless community users design the
goods they later purchase themselves, the supply chain of Threadless’ business is
extremely simple. By also outsourcing production, the organisation can fully con-
centrates its human- and financial capital on the maintenance and maximisation
of its social capital, meaning the user community. Due to the fact that activities
with a potential of organisational risk are now executed by the costumer itself,
Threadless not only outsources activities like product design, market research or
production, but also “outsources” the specific risk attached to these activities (risk
of new product development, market entry risk and risk of overstocking).

The question remains, whether the reduction of organisational risk in some build-
ing blocks of the business model goes along with the increase of risk in other
building blocks. To what extent can the community itself become a risk to Thread-
less? Consequently, the foremost question that needs to be answered by further
research is: “Does a community-based business model absorbs/eliminate organ-
isational risk or does it just transfer it to other parts (building blocks) of the organi-
sation?

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Paper »Entrepreneurship«

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Appendix

Figure 2: Threadless Innovation Model (Kanji & Lakhani, 2008)

Figure 3: Summary of the risk construct (Janney & Dess, 2006)

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