As we step into 2018 one of the many things I am excited about is the ability to start investing more into the ecommerce community. Now I should clarify, this is not an announcement for another Hayseed Ventures funding round; though it is worth mentioning how proud I am of both Meguin as well as Apptegy and the success they are having. What I mean is the investment we are making into serving this community, starting with our commitment to putting out the most actionable content possible through our new show, Engine Insights.
Coming out of the gate one of the first questions asked revolved around the topic of seeking funding for ecommerce companies, a minefield I have navigated multiple times throughout my career. I’ve written about the love-hate-love-hate-love relationship between ecommerce and venture capitalists before, but I’m excited to expand on this topic.
As I collected my thoughts, Tristan Walker immediately came to mind. I had the pleasure of sharing the stage with Tristan at an event last year where he shared stories on how he has grown Walker & Company through the build out of their signature brands; Bevel and Form. It is often said that the road to success is paved with struggles, and in a recent interview Tristan shed light on the mounting struggles of raising capital in the current ecommerce landscape. At the time of this interview, Walker & Co had raised $33 Million. Tristan credits that success to their strategic positioning as a Tech company, not a CPG brand. As he goes on to say in his interview with Recode, the road to funding is difficult when building an ecommerce company.
You must be differentiated.
After raising over $100 million dollars, investing in 16 startups, as well as hearing 300+ ecommerce pitches; I have come up with the three questions you must be able to answer when asking for a check from an investor. Think of these not as check boxes, but as a litmus test for your business when seeking investment.
1. How are You Going to Compete in an Amazon-ruled World?
If you cannot answer this question with confidence, it will likely be impossible to raise capital. It’s becoming more and more difficult to sell other people’s products at any level of scale, especially while making a profit. This is coming from someone who bootstrapped his first few businesses doing exactly that, arbitraging adwords to scaling 8 figure companies overnight was my bread in butter. Just like you I was not happy to see this arbitrage fade, but the key to success is to never stop innovating. Having a strategy to survive in the same waters as Amazon is critical if you want to have any shot of raising capital from any investor worth his or her salt.
Now, if you are like me you are not discouraged by this. Quite frankly, if this doesn’t excite you it might be time to explore other avenues of business. For those who are hungry to build a large ecommerce company, the opportunities are there. When thinking of ways to differentiate, I think to the simple equation we developed while building Country Outfitter. You have to create customer loyalty & repeat purchase behavior. What makes your brand or product stand out from the rest, and how do you communicate that effectively to your target demographic? The ability to create a relationship between your consumer and brand is vital to grow a ecommerce company. An example of creating customer loyalty can be found just up the road by looking at Lauren James. If you go to youtube and type “Lauren James Haul” you will see 29,000 women who are loyal to that company. By creating a unboxing experience alike to Apple, Lauren James invites each customer to experience their brand, and leaves the consumer itching for that next package to come in the mail.
2. How Will You Build Strong Margins and Repeat Purchase Behavior?
You know, how will you build your business? A lot of what will set you apart from Amazon falls into this question as well, so we will cover it briefly through 3 examples.
Strong margins; everybody wants them, but few have them. The promise of building a brand is typically having the ability to command a higher price point for your product, which translates into higher margins for your business. These margins can make up for a low repeat purchase percentage, as long as the serviceable market is large. I can’t think of a more relevant example of a high margin business than Casper mattress company. Casper gets a lot of things right. From their amazing consumer experience to their unique positioning in the marketplace, it is no wonder Casper has been able to secure $239 Million dollars in funding. A large part of their appeal is the margins they carry on their flagship mattresses. While we don’t know their exact numbers, I would imagine their costs to produce a mattress rest (pun intended) around $100-$120 dollars. Throw in shipping and you have a cost of $150-$200 dollars all in. Casper’s most popular model is the Queen, which sells for $950, an ~80% margin. This margin allows Casper to be aggressive in their selling proposition, as well as affords them the opportunity to invest in horizontal integration sales of pillows, sheets, and other bed related products.
Repeat purchase opportunity is the next item on the list, and it starts with simply putting out a great product. In my video response to this question I spoke about one of my favorite companies, Stance socks. Stance offers multiple avenues for repeat purchase behavior. They have a subscription service that is highlighted throughout their messaging, and by nature being in the sock business they can expect the average consumer to need more than a single pair of socks. What I spoke about in the video response is the unique way Stance was able to leave a lasting impression on me with their unique packaging. To hear that story, click on the link above.
Last but not least is horizontal integration. If you are unfamiliar with this term I will point you to Ajeet Khurana’s wonderful article on the comparison between vertical and horizontal integration. Essentially, horizontal integration is selling everything you can to your target demographic, also known as being Amazon. Although few companies have been able to get this right, the ones that have been able to turn the corner have reaped the rewards. Zappos is one of those companies. Zappos started out as a shoe company, then quickly became one of the most important companies to men and women due to their simple slogan “Delivering Happiness”. Zappos was so good at horizontal integration as well as creating customer loyalty, Amazon stopped trying to beat them and instead, acquired them at the tune of $850 million dollars. This was due in large to Zappos ability to cross sell and upsell based on each customers unique purchasing behavior. If you purchased shoes, they would curate a dress, necklace, and earrings to match. This increased not only the average order value, but also deepen the context and relationship Zappos has with its consumer base. A relationship that leads to 3x more purchases than would otherwise occur.
3. Do You Play Golf?
This may sound counterintuitive but stick with me here. To earn an investment for your startup, you should play golf; or do anything else that allows you to connect with investors or those who have relationships within a 50 to 100 mile radius of your location. It’s a well known phenomenon that seed investors rarely make early stage investments outside their geographical area. Outside of Silicon Valley most investments begin through a real-life relationship.
Unless you’re in Silicon Valley, it’s impossible to line up dozens of pitches to local seed funds. In other parts of the country, early stage investment is usually done by high net worth individuals, and is highly unorganized.
For instance, Dillard’s investment into Country Outfitter came from the tee box of the 8th hole of Pinnacle Golf Club. I was playing with a guy by the name of Nick White, an early Wal-Mart executive who also sat on the board of the Fortune 500 retailer, Dillard’s. During our round he asked me what I did, so I began telling him about the robots we just installed in our fulfillment centers. After my next shot I was handed a phone with Mr. Dillard on the other end wanting to come up and tour our facility. What I didn’t know is that Mr. Dillard was looking to install the same system we had just put in, and during our tour I decided to ask him for an investment.
Now, I do realize not everyone has the fortune to live close to Bentonville, Arkansas; the headquarters of Walmart. But, you do have LinkedIn, Facebook, and Google. I will write another article soon on how to network up, but for the sake of this article I will simply tell you to find those who have accomplished what you want to do and work to build a relationship with them. Just like starting a business, find a need they have, and fill that need. Be patient, and always give more than you take.
Granted, you’ll have to be able to answer a lot more than these three questions while pitching your ecommerce startup. At every first pitch, you are your brand and having these answers down will go a long way with potential investors. Help them to see the vision you have for the future of your company.