Reading today about Apple redesigning their store experience got me thinking about the role of the store in the future. New online companies are exploding into multi-billion dollar vertical categories and growing rapidly. Does that mean there is no room for the store? Not in my mind, but it’s fundamental role will evolve consistent with our thesis around the convergence of offline and online models.
For the last few decades, retail companies expanded by driving greater and greater geographic footprint. Stores were the only point for transacting product and even today represent the preponderance of sales. “Same store” numbers helped to gauge the productivity of a store but top line most of the time was driven by number of new stores. Stores had P&Ls they were responsible for, and this system has created an entrenched infrastructure and KPI bias where many retailers measure and optimize around in-store traffic, rather than driving the “most efficient transaction” regardless of where they occur.
I believe this model has to change. Consumers have a myriad of choices on how and where to transact today. Online ordering with the very liberal return policies have made it far easier to buy something, try it, and send back than potentially taking a few hours to physically go somewhere. Buying has bifurcated into two buckets: routine transactions and inspired transactions. Routine transactions are things that we know we need, don’t require a lot of thinking, get replenished on a regular or reasonably regular basis, etc. We either know what we want (new jeans) or we’re indifferent across a broad enough range and need to solve a functional task (toothbrush). Inspired transactions are things that I’m not sure about, that I’d love to learn to fall in love with, that I am trying to discover. I want a new look instead of just jeans; I want to understand the philosophy of the brand that I am going to wear as I view it as an expression who I am.
I’d argue that the entire domain of routine transactions is designed to go online. It’s far more efficient and the best use of a consumers time. Educate me online and let me transact. Don’t make me spend hours to do a chore. The second category is where offline shines. I walk into the Apple store to engage with product. I’ll go into the Apple store to experience an iPad or the MacBook Air to see if I really care about how thin it is. I’ll subconsciously feel how “smart” the brand is in servicing me and differentiating. If I go to the showrooms on 5th Avenue, it’s to feel the luxury and curation of what Cartier or Saks represents. And it is about entertainment as much as anything else.
What does this all mean? Well, I see huge reductions in the number of points of presence for many retailers (not including same-day consumables like coffee or food). Retailers have to align with consumers, liberate their time and allow them to transact in whatever manner provides the greatest utility. Retailers should be in the business of selling things wherever that most efficiently occurs. My partner Larry told me about one innovative retailer that uses their physical store to crowd source and showcase new products only – as soon as something sells in meaningful volume (indicative of a repetitive buyer in a “routine transaction”), it is moved to the online store and that shelf space is freed for a new product to experience.
Over time, I see stores being “owned” by marketing and viewed as a brand expense instead of the revenue bearing, full P&L today. Should I penalize the store if you came in, had a great experience, and then bought online for convenience? Or more likely believe that it served its purpose? Controversial, maybe. But 10 years from now I think the retailers that survive the transition to digital will look at it more that way than how they do today. I also wouldn’t be surprised if 10 years from now, we see a flagship Gilt store on 5th Avenue and major cities around the world. It sounds crazy now, but that might be the most “efficient” way on a blended marketing basis to create mass awareness (like TV today).
The bottom line is that the role of the stores has to change. It cannot be about the purchase. Too much of buying is moving online. It has to be about experience, education, and inspired serendipity!Read Full Post | Make a Comment ( 4 so far )
It’s been a busy 2011 for FirstMark. We’ve had some big exits, some great new investments, and seed companies blossoming into market leaders. On that last theme, I’m excited to congratulate the Lot18 team for closing their $10MM Series B round of capital, led by NEA with substantial participation by FirstMark.
Lot18 is a next generation wine e-commerce company, initially leveraging a membership driven engagement model. What excited us in October 2010 when we first seeded the company was how Lot18 took an incredibly complicated category, and created a beautiful site where wineries’ products were showcased to consumers. Though it leverages a membership driven model, this is not about distressed goods or deep discounting as is commonly confused with the space.
Wine has a complex distribution chain of wholesalers and distributors before getting to the retail store. Lot18 allows wineries to bypass that distribution, while protecting their brand and introducing them to a much broader audience. Value gets passed directly to the end customer, enabling outstanding prices on great wines. Frankly, as a “non-wine” person, I find the discovery and education that Lot18 offers to be far superior to any in store retail experience. I can buy a great wine at a great price (because it’s direct) and know that it’s a wonderful product to bring out while having guests over, give as a housewarming gift, or enjoy on a special occasion. For people who love wine, you’ll find product that has never been released from cellars, or offers from wineries that have 3 year long wait lists, and benefit from their Select service, which calls our top buyers with offers that could make anything in their cellars blush.
The company has grown more rapidly than anything we could have predicted. It helps that it is led by serial entrepreneurs Kevin Fortuna and Philip James, who have built some very large businesses in their past (and have a few unique experiences to boot). They have executed extremely well.
We’ve had a long standing thesis in E-commerce, from Stubhub to Shopify to Lot18 to AHAlife and many more. Retail is changing faster than we can imagine. We’re delighted to invest behind this team, and look forward to working with our new partners in NEA.
If you’d like to become a member of Lot18, simply click here to get an invitation.Read Full Post | Make a Comment ( 1 so far )
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.Read Full Post | Make a Comment ( 2 so far )
One of the most exciting areas where the impact of technology and the Internet will be felt is in education. In a world where many students will leverage the Web for content consumption, where textbooks will become rich interactive experiences, and where the iPad or Kindle will become a standard part of the learning platform, education will begin its inevitable march from being an imprecise art optimized for the “averages” to a highly measured science designed for the individual. Concepts such as “Assessment for Learning” are advancing the notion of regular feedback as a critical element of curriculum for both teachers and students. There is no better platform than the Web to transform the student experience. And many would suggest it couldn’t come at a better time.
Today, on the heels of that notion, I am excited to announce our investment in Knewton. On the surface, Knewton is the leading online provider of test preparation services such as the GMAT, SAT, and LSAT. Underneath the hood, the Company’s service is powered by a groundbreaking adaptive learning engine that takes the myriad of data a Web-based platform generates and optimizes curricula down to the concept level for an individual. It allows the Company to make performance improvement guarantees no one else is willing to offer, and leads to its customers giving as high a net promoter score as respected brands such as Apple and Google receive.
To accomplish their ambition is very technically complex, which is why the team at Knewton includes some of the foremost researchers and creators of computer adaptive testing. Knewton has taken this engine powering their own direct to consumer service and is now opening it up for third parties to instantly bring adaptivity to their content. “Just add Knewton”. Over the coming twelve months, Knewton will begin partnering with leading content providers in the market to supercharge their offerings.
While test prep alone is a multi-billion market, education is a multi-trillion dollar market. At FirstMark Capital, we look for ideas that can transform large marketplaces and there are few as gigantic and meaningful as this. NYC is the home of the largest school system in the US and the base of the education industry’s leading content providers. As we have seen across other vertical industries being disrupted, it’s no surprise that this startup was born here. We are delighted to partner with the founder, visionary, and CEO Jose Ferreira and the rest of the NYC-based Knewton team as they seek to change the world!Read Full Post | Make a Comment ( 4 so far )
Been listening to a lot of the chatter about the group buying bonanza that is going on these days. The latest news is a rumored large round for Groupon at a reported $1.2B valuation, close on the heels of a $25MM round announced by LivingSocial, which was shortly after Buywithme.com completed their $5.5MM round. The count is now more than 70+ group buying companies that have launched, with more coming each day. In addition, many content publishers are now beginning to think about entering the space. Is this insanity?
My simple answer: No.
I think the dynamics of group buying are very different than people think. In fact, I don’t like to call it group buying. I also think it has very little to do with retail merchandising. Instead, I put it in the category of perfected local performance advertising.
People have talked for many years that the local market is the holy grail for the next stage of online ad spend. The problem is how to convince the corner pizza shop or spa to value a “click” and spend money on this thing called “Google”. These merchants are way too busy in their day to day and have none of the time we have to study TechCrunch or Read/Write/Web to follow all the twisted ways we have come up with to advertise online. The companies that have become successful in local advertising have had to solve that problem in some form or fashion. ReachLocal kicked this off by creating a large overlay sales force to go in, talk to these local merchants, and deliver “in person” translation. Companies like Yext have skyrocketed by translating online advertising into the currency of the local merchant. “Have a gym? We’ll book you appointments.” Monetization at Yelp and OpenTable are related to things restaurants have done for decades – reviews & reservations. One clear takeaway – make something simple and transaction oriented, and local merchants will pay attention.
Coming back to “group buying”. What is group buying? Well, it’s a way for a merchant to give up some margin (aka, advertising dollars) to secure a purchase and hopefully build some incidental brand goodwill. In this case, activation by sufficient buyers and selling out are simply the game mechanic. If you’ve used any one of these sites, the offer almost always gets activated and many times sells out. The group buying craze is really a merchant paying some money for the best possible performance advertising you can have – A CLOSED SALE! (Not to mention some “in person CPM” thrown in for side benefit).
And now back to Groupon, et al? Well, their model is optimized around a tight, high volume operation versus a costly field sales approach. Over time, Groupon is building a database of every local merchant out there, and also a database of who has bought what in a local area. They’ve proven their ability to execute in 30+ markets and now will just manufacture the same city widgets 100 times over. As they are more successful, they can automate greater pieces of the system. Word of mouth begins to kick in. Data synergies such as re-marketing and recommendations become possible. Is that worth $1.2B today? I have no idea. But I do know local is big. Hundreds of billions of dollars big.
What happens to all the other companies out there? The big venture outcome game is probably over with the leaders already staking out their position. Other large local content players will get into the mix. But local has a few dynamics other segments don’t have. First, scale is less relevant than in other industries – a merchant can only service so many of the offers, and the offers are inherently relevant to the people in a neighborhood. Particularly since most offers are services like a massage or spa. Second, to create good ‘rotation’, the Groupons of the world limit how many times a merchant can run a deal and the number of deals shown. If this perfected local performance advertising works for a merchant, they will gladly go to the next guy and see if it works on LivingSocial‘s members, and after them, to the next person, and so on. Most scale businesses invite more of an activity, not restrict it. Third, relationships can matter. Small players can get to their local merchants and use charm to rope them in. So while many are highly skeptical, I believe there will be a slew of companies that exist in this market and can grow profitably for the next few years. Many should never take venture capital. But there is a long way to go to activate this market!
[Update: Space is really moving. BuyWithMe Inc. announced that Cheryl Rosner, former president and chief executive of Ticketmaster company TicketsNow, is its new CEO.]Read Full Post | Make a Comment ( 8 so far )
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.]Read Full Post | Make a Comment ( None so far )
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.Read Full Post | Make a Comment ( None so far )
I attended the Wired: Disruptive by Design Conference earlier today at the Morgan Library in NYC. One of the best sessions was of course with Jeff Bezos, CEO of Amazon.com. I have an incredible amount of respect for Jeff, not only because he stayed true to his strategy in spite of an incredible amount of pressure during the bubble bust, but also because of the spectular innovations that have come out of Amazon over the years. The Kindle has revolutionized the e-reader market and launched Amazon into a consumer electronics company. Amazon Web Services of course has transformed Internet economics from fixed costs to variable ones, and unleashed a wave of new companies to boot. Jeff did not disappoint, and I thought I would share some of his thoughts below. My favorite from below – “The trick as an entrepreneur is to be stubborn on the big things and be very flexible on the details.” Enjoy, and feel free to post any other good ones you have from Jeff.
On the economics of e-books and the Kindle:
- A text book is re-sold 5 times over it’s life, which is why they cost so much. With digital books, publishers have the opportunity to sell that 5 times to consumers. The price can now come way down.
- Historically, we have never made money on bestsellers. We make money on the mix.
- For books where we have both physical and e-book inventory (300,000 books), Kindle unit sales are 35% of the physical book sales.
- “We humans do more of what is made easy”. You do more when you reduce the friction. Making buying books so easy makes people buy more.
- Reading is an important enough activity to have it’s own device.
- On multi-function devices versus signle function: “I like my phone… I like my swiss army knife, but I also like my steak knives too.”
- “The physical book has had a great 500 year run, but it’s time to change”
- “Our vision is to have every book ever printed, in any language, available within 60 seconds.”
- On Google’s pending deal with the US book industry: “It doesn’t seem right to get a prize for violating a large series of copyrights”
On staying true to the path and entrepreneurship:
- “We always noticed some of our harshest critics were our best customers. Told us we must be doing something right.”
- Regarding the run up in the bubble: “I always told our employees not to feel 30% smarter when the stock went up by that amount because one day it will go down by the same.”
- “One of the differences with founders and professional managers is that the founders care about the detail of the vision.”
- Regarding vision and strategy: “The trick as an entrepreneur is to be stubborn on the big things and be very flexible on the details.”
- “If you disrupt something, you have to be willing to be misunderstood for long periods of time.”
- Regarding products that seem very different: “A question people at large companies don’t ask enough is “Why not?”"
- “I wouldnt know how to respond to someone if they said, “We cant do this because it’s not in our knitting.’”
- “The two things we do is work backwards from customer needs and work forward from our set of skills. AWS is an example of us working forward from our skills, while the Kindle is an example of us working backwards from customer needs.”
- “Many companies believe learning a new skill is akin to leaving your core competency.”
- “Errors of comission are over focused on versus errors of omission. People over dramatize how expensive failure is. You never hear of a company getting criticized for failing to try something.”
- On trying different ideas: “If you are in the investment phase and you stop doing it, the only thing that happens is your profits go up. How hard can that be?”
- On mistakes: “We launched Auctions, no one came. We licensed Google’s search and launced A9 and no one came. A year after we shut it down it was still my mom’s homepage.”
- Citing another quote in response to why they didn’t better service and if it was deliberate or not: “Never attribute to conspiracy what can be explained by incompetence.”
It was a great session and Jeff had some great lessons.Read Full Post | Make a Comment ( 4 so far )
I just read an initial report out of ComScore indicating this year’s Friday retail e-commerce numbers were up slightly over last year. Online, nontravel e-tailer sales grew 1% for the day to $534MM from $531MM last year. For the month of November, retail e-commerce sales were down 4% from last year’s numbers. The National Retail Federation, on the other hand, is forecasting an increase of 2.2% for the full Thanksgiving weekend (with only Sunday being an estimate), on total spend of $41 billion and average customer spend up 7% from $372.57 to $347.55.
All in all, I’d consider the data to be encouraging (relatively speaking). It seems to me all retailers were very concerned about spend and pushed heavy discounts to the forefront to ensure the holiday season got off to a good start. It may not bode well for retailer margins, or for the overall health of the industry for that matter, but at least a strategy of heavy discounting did create elasticity and spend with consumers. It would have been far worse to heavily discount and feel like one was simply pushing on a rope. People could have easily refused to put any money out this holiday season, and frankly I would have guessed we would see declines in spend. I’m still not sure I believe the increase in average purchase size.
Walking around, things seemed to be pretty busy. I put a couple of pictures from Macy’s and the Apple Store in NYC this weekend below. They were jammed.
The next step is to see whether people have “forward bought” and all retailers have done is rob from tomorrow to get paid today. I noticed several retailers offering discounts for future period purchases. For example, at Banana Republic, upon completing a purchase, they offered a card for 20% off any item between December 2 and 22nd. The goal is clearly to get me back into the shop. It will be interesting to hear the data come in over the next month. If anyone has other good anecdotal data, would certainly love to hear it!Read Full Post | Make a Comment ( None so far )