Category Archives: Ecommerce

Success and rejection

Jack Ma is the founder of China’s largest e-commerce group Alibaba. Although Alibaba started off as an e-commerce company, it has since expanded to offer other services like payments and cloud computing.

In the video below, Jack speaks about his personal story, how he built Alibaba, and Alibaba’s future plans. What particularly caught my attention was Jack’s perspective on being rejected. He was rejected by Harvard 10 times, Kentucky Fried Chicken in an application process where 23 of 24 candidates were accepted, and his local police department which accepted the 4 other applicants while rejecting only Jack.

He mentions that even at its current large size and negotiating power, Alibaba is still often rejected. This is a strong reminder that you need to want something to be successful, but the more you want, the more likely you are to be rejected. So success and rejection come hand in hand.

The full interview is below.

E-commerce brands and consumer review sites

Differentiating yourself as an e-commerce company is very challenging. The founder of Bonobos, Andy Dunn, which sold to Wal Mart for $310M, wrote as much here.

In that post, Andy identified four ways in which e-commerce sites can potentially compete with the largest horizontal players like Amazon:

  1. Proprietary pricing
  2. Proprietary selection
  3. Proprietary experience
  4. Proprietary merchandise

Bonobos is an example of the fourth.

However, even creating your own direct to consumer e-commerce brand, enabled by proprietary merchandise, isn’t necessarily defensible from competition. The reason is that, in the absence of intellectual property protection along an important product dimension, which most product categories do not have, your product features and resulting quality are likely to be replicated by competitors who discover and begin to work with your supply chain.

When the product features offered by different e-commerce brands begin to commoditize, branding becomes the key differentiator. And consumer review sites, which were initially designed to assess product features, become the target of e-commerce brands’ branding efforts.

This is a fascinating story of how mattress e-commerce brands used consumer review sites for their branding activities.

Horizontal service marketplaces

As Josh Breinlinger explains in his marketplace framework, in service marketplaces with a high purchase frequency like food and car ordering, or large transaction values like real estate and car buying, it makes sense to have a vertical offering. The high repeat rates in the former and the large transaction values in the latter make the unit economics work.

However, in many service marketplaces, the transaction values are less than those of purchasing a home or a car and the purchase frequency is less than that of food and taxi ordering. In order to make the unit economics work, such marketplaces needs to augment the standalone value of the first transaction which likely won’t be repeated until several months later. This requires a horizontal approach where the marketplace offers many services that meet the demands of its target customer profile.

For example, a home services marketplace benefits from offering not only cleaning but also handyman, home improvement, and moving services.

Similarly, a car services marketplace benefits from offering not only car maintenance but also repair and roadside assistance services.

Sustainable success as an e-commerce company

E-commerce sites across verticals use informational content as a way to differentiate themselves from their competitors. The reasoning is that if they attract visitors by providing informational content about the third party products they’re selling, once informed, these visitors will also purchase the products they were looking for on the same site.

At the margin, this is likely true. Providing a visitor with extensive informational content prior to making a purchase helps build trust which makes the visitor more likely to transact on the same e-commerce site. However, very often this earned trust isn’t enough to overcome differences in the price of the product on different sites. If the product is cheaper elsewhere, the visitor simply learns about the product at your site before transacting at the site with the lowest price.

This is especially true for commoditized product categories and verticals with strong third party brand names. For such product categories, the marketplace approach of aggregating and showcasing the third party products available from different suppliers, thereby letting the customer compare the prices of these products to buy from the supplier offering the product at the lowest price, is more defensible in the long term than the e-commerce approach.

This leaves the creation of a new proprietary brand as the remaining approach to achieving sustainable success as an e-commerce company.

Toys R Us’ bankruptcy

I remember how I used to always look forward to going to the local Toys R Us store when I was a child. I was therefore suprised, and disappointed, to read the news that Toys R Us is filing for bankruptcy earlier this week. I imagine that many adults who relied on the retailer for their childhood toys felt the same way.

Most of the stories covering the bankruptcy have focused on Toys R Us’ inability to pay off its debts as the source of the bankruptcy. While that is indeed the final manisfestation of the problem which led to the company’s bankruptcy filing, this final manifestation of the problem is actually the result of the company’s profits not being large enough to cover its debts.

And the shortfall in profit is the result of the primarily offline toy retailer losing sales to two alternatives. The first is online toy retailers and the second is smartphone and tablet apps that offer children an alternative source of entertainment to toys. These are the core problems, and both of these core problems are examples of technological progress.

As tough as it is to see Toys R Us go, the fact that technology is responsible both for the company’s departure and as an alternative to the products it sold, is a small consolation.

Amazon entering Turkey

There have been rumors that Amazon will enter Turkey for quite some time. Although Amazon currently delivers to Turkey from abroad, it doesn’t have a local operation.

Based on the rumors, Amazon’s planned entry date into Turkey ranged from late 2017 to mid 2018. And the closer you asked to the source, the earlier the planned entry date became.

Now that Amazon has established a company in Turkey, which is owned by Amazon Europe, it’s likely that the late 2017 entry date communicated by sources close to the company will turn out to be correct.

Given the proximity of the date, it seems likely that the entrance will be done organically rather than through acquisition. However, given the large value at stake, the strength of local competitors, and the tendency of important negotiations to be settled at the last minute, there could be a surprise.

Amazon’s know-how in 3 areas, including how to ensure the quality of the supply side of a marketplace, IT, and logistics, will be important contributors to improving the e-commerce customer experience and growing e-commerce penetration in Turkey.

Welcome to Turkey Amazon.

Rinse in Chicago

Rinse, a tech-enabled laundry and dry cleaning managed marketplace where we’re investors, announced its Series B funding round in June of this year. At the time of the announcement, Rinse shared that most of the round would go towards expanding into new cities.

The first of these post-round new city expansions is now taking place with Rinse beginning to serve customers in Chicago. This is the fourth city that Rinse is operational in, following San Francisco, Los Angeles, and Washington DC.

If you live in Chicago and want to check out Rinse, you can do so here.

The commoditization of AI algorithms

Butterfleye, where we’re investors, is the producer of the Nero 1, a wireless security camera which comes equipped with facial recognition technology.

Once you start using the Nero 1, it captures and prompts you to tag the faces it identifies. This lets the Nero 1 remain passive in the event that it sees a known face while alerting you to new faces who could represent potential intruders.

What’s interesting about the facial recognition feature is that Butterfleye developed it using the Amazon Rekognition API. In other words, Amazon built the general image recognition algorithm, and Butterfleye is now using it for the specific case of facial recognition by applying the algorithm to the facial data that it collects.

This is a great example of the commoditization of AI algorithms. As more people have access to these algorithms, the source of value increasingly shifts from the algorithm itself to the data to which the algorithm is applied.

It’s not the category

Most investors state that a startup’s team is the most important determinant of its success.

Simultaneously, when a few companies in a category run into trouble and/or fail and the category therefore falls out of favor, we are quick to dismiss new companies which emerge in that category.

This happened for mobile gaming companies several years back when Zynga, the at the time leader of the pack, started facing difficulties.

More recently, it’s happening in e-commerce as all but a horizontal approach is falling out of favor.

The first two statements of this post are contradictory. Specifically, if a startup’s team is indeed the most important determinant of its success, it isn’t correct to explain failure by pointing to the category.

And the reality is exactly that. Most startups that don’t succeed are faced with this outcome because of the team’s approach to and decisions within a category, not the category itself.

Outsiders don’t see the inside of a company. As a result, they assign responsibility for the outcome to the category. When, in most cases, insiders know that responsibility lies with the team.

This creates opportunities for great teams in out of favor categories.

Virtual reality applied to furniture browsing

Product categories with a high degree of product differentiation and high order values are challenging to sell purely online. For example, buying hard or modular furniture often benefits from a complementary visit to an offline showroom.

But what if you could perform the offline visit from the comfort of your home using virtual reality technology that lets you walk through the furniture showroom? This replicates the offline experience with one exception. It doesn’t offer the sense of touch. However, it’s enough to convert many customers. And the sense of touch is also likely to be baked into virtual reality in the future.

Here’s an example of the technology, developed by Matterport, applied to an Ikea showroom.