Monthly Archives: July 2012

Personalization is the next frontier in e-commerce

The growth of e-commerce has impacted bricks and mortar retailers across verticals. Originally launched for the electronics industry, e-commerce has since expanded to clothing, furniture, household appliances, consumer goods, and many other sectors. The rapid growth of e-commerce is the result of two key factors: cost and convenience. By removing the offline store as an intermediary, online retailers are able to sell their products to customers at a lower cost. And since the products are sold online, customers don’t need to visit the shopping mall to get what they want.

Despite its fast growth, e-commerce still accounts for less than 10% of all retail sales in the US. The figure is even lower for other countries. There is still a lot of upside to be captured and this requires innovation. Many of the incremental improvements have already been made in the form of better marketing campaigns, wider brand selection, improved user interfaces, one-click checkout options, faster delivery services, and flexible return policies. In order to get a leg up on competition, online retailers need to shoot for something bigger.

A prime candidate for the next frontier in e-commerce is personalization. Instead of going to an online retailer and randomly browsing their catalogue item by item, or reviewing their highest rated items, imagine if you could see only those brands, styles, and products that are recommended specifically for you based on your stated preferences and prior shopping habits. Led by retail as a service and private sales sites, this is exactly what many online retailers are beginning to offer.

By choosing the types of products that you know you naturally gravitate to, you make it easier for the online retailer to take those products as an input into their algorithm to produce personalized recommendations. In verticals like clothing and furniture, a stylist’s input can complement the algorithm’s baseline recommendation to add a personal touch to the offer. Depending on the satisfaction of customers with different offers, the algorithm learns to make better recommendations as time goes on.

What ultimately emerges is a new and improved Pinterest. Instead of being the prime online destination for window shoppers, online retailers have the opportunity to become the prime destination for those with an intent to purchase. This intent to purchase is complemented by higher conversion rates due to the greater likelihood of customers buying a product that is aligned with their personal tastes and prior shopping behavior.

The next frontier in e-commerce promises to be both profitable and exciting to follow.

Don’t give away more than 30% of your startup in a single funding round

There’s a core difference between investing in a startup and buying the stock of an established company. When you invest in a startup there’s very little existing value. The investor helps build the company together with the entrepreneur. If the investor or the entrepreneur don’t work, the company won’t grow. On the other hand, when you invest in an established company you’re a passive investor. The engines are running and they’ll continue to run without you. The company is already creating value and will continue to do so as long as it’s properly managed.

This key difference between a startup and an established company has strong implications for how to invest in each. When you’re investing in an established company, you’re better off arguing for the lowest valuation possible because the size of the pie is unlikely to change much and you want to capture as much of it as you can. In private markets this involves a negotiation and in public markets you simply have to wait until there’s unjustified selling which lowers the price.

Investing in a startup is very different. You’re faced with a donut hole, not the actual donut. There’s the potential of a donut, but you have to work together with the entrepreneur to create it. Ideally this would mean that you add strategic value as an investor while the entrepreneur is responsible for the operational execution. Even if you’re simply a financial investor, you need to make sure that the entrepreneur has the proper incentives to grow the startup. This includes a sufficient equity stake to produce a personal gain in the event that the business succeeds. This means that it’s not in an investor’s interest to minimize the startup’s valuation because this will leave too little on the table for the entrepreneur. The valuation needs to reasonably balance the investor’s potential financial return with the entrepeneur’s motivation to build a successful business.

So it was to my big surprise when an entrepeneur recently offered me a 40% stake in his startup’s first funding round. Let’s ignore the fact that this was his initial offer, which means that he would have likely accepted a counteroffer of 50-60%. At the rate of 40% dilution per round, he’d be left with 20% of the company after 3 rounds of funding which is at the lower end of the number of funding rounds most successful startups experience. Since he can’t build the business alone, let’s say he shares 15% with his other team members including any co-founders and employees. That leaves the entrepeneur, the most important predictor of a startup’s success, with 5% of the business by the time the company matures.

If this example doesn’t get you off your feet, consider my conversation with another entrepreneur who recently told me that he gave away 75% of his company in the first funding round.

Based on my experiences with successful startups, you shouldn’t give away more than 30% of your business in any funding round. If you’re doing well this figure will likely be 10-15%. You should only need to give away 25-30% if things aren’t going well and you need outside funding fast to stay afloat. The great VC’s who you want to be your partners won’t request more, and you don’t want to be working with the others.

The one quality every entrepreneur must have

A friend of mine recently entered the VC industry. Given my experiences as a seed stage investor, he reached out to get some tips on how to succeed as a VC. Since as VC’s we’re only as good as the entrepreneurs we back, I told him that he needed to work with the best entrepreneurs. Our discussion naturally evolved into a reflection on the qualities which make a successful entrepreneur. As I soon reached the point where I had exhausted all available positive adjectives to describe the founders of our most successful startups, it hit me. There was a common thread across the attributes like passion, an ability to motivate, and not taking no for an answer, which I had just mentioned. The best entrepreneurs that I had backed did not care what others thought about them.

When you don’t care what others think about you, you’re able to follow your passion. The only light that guides you is your internal belief in the value of what you’re doing, not external expectations. As a result of living in sync with your passion, you’re a source of positive energy who motivates others. Your team is comfortable following the direction that you’ve laid out for them because they know that you’re passionate about your vision and will do whatever it takes to see your team succeed. You will succeed if your team succeeds and you’ll fail if your team fails, so your incentives are aligned. And if you don’t care what others think about you, you certainly won’t be discouraged by the series of no’s that you’ll inevitably receive while pursuing a game-changing idea. Any idea worth its salt will have as many detractors as promoters because it is novel and as humans we have a tendency to fear the unknown.

So there you have it my friend. As a VC you should work with entrepreneurs who don’t care what others think about them. And as a general principle, if you have the good fortune to be the entrepreneur in charge of the startup of your life, you should work in a role where you don’t care what others think about you. Only by following your internal expectations of yourself will you be able to fulfil your true potential.