New Investment: Shopify

One of the key trends we have been following at FirstMark is next generation retailing and e-commerce.  We’ve seen rapid adoption of consumers buying online across categories, and it’s no longer controversial that people are willing to buy even complex items physical sight unseen.  We’ve seen new business models like flash sales, Netflix-style rentals, and direct producer to consumer relationships blossom.  The Internet allows for sourcing, curation, and selling on a level unparalleled.  All in all, we are in a golden period for retailing online. 

With this renaissance in e-tailing, we noticed most of the e-commerce platforms out there were significantly dated.  Many had not changed for over a decade, offered very little flexibility, and did not take advantage of the incredible advances in software we have seen in that period of time.  But we found one – Shopify – which we are extremely excited to announce as our latest investment

Shopify is a unique retail platform company that allows merchants to have an online store up and running in 20 minutes, but with a unique app store model that allows it to also service the highest end commerce providers.  There are some interesting applications on the platform today, but the goal is to rapidly build out the ecosystem so a retailer can find everything they need to run their business – online marketing, billing, inventory, logistics, supply chain, mobile, etc.  With this approach, we should satisfy any retailer from small to large with a consistent platform and a best of breed set of options.

Shopify was founded by Tobi Lutke several years ago as he and his friends wanted to launch their own snowboarding store.  They found most of the alternatives out there very kludgy.  Fortunately for the rest of us, they are renowned Ruby On Rails core contributors and developers, and so they decided to build their own store.  They opened the platform for others in 2006, and have surpassed $100MM in Gross Merchandise Value with over 10,000 active stores on the platform a few years later.  It’s a real business that is poised to power the next generation of retail.

We are excited to partner with Tobi, the Shopify team, Bessemer and Felicis on this investment.

Facebook Credits: A Paypal in Training?

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I’ve been reading curiously about the new beta Facebook Credits platform.  Most coverage tends to focus on the unique elements of allowing users to vote economically for better content.  Give a good content producer some credits, and perhaps that will incent them to produce more.  Think Digg with economic value.  I think the launch of Credits again reflects the brilliance of Facebook and I for one see a much bigger play at hand.

Facebook understands very well the amount of money flowing into virtual goods, both from their own virtual goods, as well as the money machine created by their gaming partners like Zynga, SGN, and the like (who buy large chunks of advertising to feed their virtual goods money machine).  Enabling users to generate credits that work across games and applications would be of huge value, and allows Facebook to generate different and ultimately more economics from the platform developers.  In addition, Facebook now represents over 1 in 4 US pageviews.  Their user base is over 200 million.  They have HUGE scale, which allows them to have the credibility to pull off a payment play.  Users would inherently trust the FB platform over fragmented app creators.  This creates the perfect recipe for a Paypal alternative, and has inherent distribution that a Google Checkout or Amazon may not.

So why not just come out with the grand plan?  Well, the launch of a payment platform is non-trivial.  There are hundreds of ways it can go wrong; PayPal has spent years and huge sums of money learning lessons on how to deal with fraud.  Amazon, Google Checkout and others are all working through their own issues.  It also deals with one of the most sensitive items for people (ie, their money).  On a social platform like Facebook, the last thing you want to do is to alienate users.  Facebook cannot turn on a major transactional system that would be the immediate target of phishing, fraud, and rip offs without understanding the issues thoroughly.  The initial Credits approach lets them dip a little toe into the water, quietly and under the radar, and rapidly gain feedback/experience without exposing themselves to major financial or reputational damage.  With that knowledge, they can slowly train their way into the Paypal market.

I have a lot of respect for what Facebook has built.  And per my prior post, I think they are going to spread their tentacles broadly.  Facebook controls the social graph, Facebook Connect controls identity, Facebook “Communications” will come, and Facebook Payments on the roadmap…. Stay tuned, and note the date and time of publication, but that’s my highly speculative, uncorroborated and unsolicted vision for their future.

[Update 11/26/09 - looks like things may be happening behind the scenes .  This seems much more like a transactional fee, but I'd bet once it works internal to Facebook, it'll show up externally as a third party service but with a more paypal competitive pricing model.]

[Update 1/12/2010:  News flow indicating this is likely.]

Zappos & Amazon – Happy News For All

I had been asked a few times over the last week about my thoughts on the Zappos transaction.  I think this is a great story for innovation and startups.  Zappos started in a space many believed you could not transact online: selling shoes without people trying them on… Of course, as the world has grown increasingly comfortable transacting on the Web, that changed pretty quickly and Zappos took off.   With their focus on customer service and company culture (can watch a video by Tony Hsieh on that here), they were able to build sustaining brand advantage.

Ultimately, I think Zappos could have gone public, but Amazon stepped in and paid over 20x+ reported EBITDA of Zappos.  That’s a serious multiple, healthier than the public markets now.  And of course, in an online business at this scale there are significant capex cost, so I’m sure if you looked at cash flow, you get an even bigger premium.  Zappos built a dominant brand in a category, and Amazon stepped up and paid a premium to get the company.  To me, that’s a textbook entrepreneurial story.  I think you will continue to find next generation e-retailing companies thrive, but with an innovative new spin.  Gilt just raised money at a reported $400MM valuation, and had multiple bidders competing to get in.  There are a whole generation of companies pushing the ‘mass customization’ or ‘personalization’ theme, and doing well.  It’s all about finding a novel approach, attacking it quickly, and building scale at a brand level before someone can catch up.