We at a16z could not possibly be more bullish on the prospects for e-commerce, and we believe growth is poised to accelerate.
Part of the reason for this is due to competitive market dynamics. As I’ve blogged before, e-commerce players have substantial cost advantages over their physical competitors. They are massively more efficient in terms of real estate and labor costs in particular, and as a result hold a significant pricing advantage over physical retailers. Online is rapidly gaining share of retail spend across the majority of specialty retailing categories, shrinking the portion of the marketplace available to physical retailers. These physical retailers have very high operating leverage and their P&L’s cannot withstand shrinking revenue. The result has been physical stores dramatically downsizing or going bankrupt, which we believe will only increase going forward, clearing the playing field for their online rivals.
But another part of the reason is a renaissance in innovation among e-commerce players. At a16z, we often refer to the early development of e-commerce as either “e-commerce 1.0” or “e-commerce for nerds”. The typical shopping experience at both is that the user enters a keyword phrase into the search box, and the company tells you what they have that matches your query. This era ended up being dominated by two on-line behemoths, Amazon and eBay.
At a16z, we’ve been delighted of late to see a surge in e-commerce innovation that we refer to alternatively as “e-commerce 2.0” or “e-commerce for everyone else”. Talented entrepreneurs are trailblazing entirely new approaches to e-commerce, and many of these companies are being rewarded with explosive growth. Some examples:
E-commerce 1.0 consisted almost exclusively of retailers that distributed other companies’ goods. These days, more and more e-commerce companies are designing and sourcing their own goods. Often they are collapsing inefficient legacy supply chains by cutting out multiple intermediate layers. One of my favorite examples of this is prescription eyeglass retailer Warby Parker. They are bypassing a bloated, antiquated industry supply chain to offer high quality, high fashion eyeglasses that they design and source themselves at a fraction of the typical market cost (the mark-up on glasses sold at physical retailer in the U.S. can be 10-20x the cost of manufacturing). Other examples are Bonobos in men’s pants, Bauble Bar and Chloe & Isabel in women’s jewelry, and Ledbury in men’s shirts. We believe that new retail brands going forward will increasingly be built online, not in your local mall. It’s just so much more efficient financially.
E-commerce 1.0 players typically display their available product as a search result, typically depicted as page after page of small product snapshots. But many of their 2.0 counter-parts are re-inventing classic physical retail merchandising into the online space. One of the leaders in this is Fab.com, one of our portfolio companies. They do a phenomenal job of picking beautifully designed product and presenting it in a highly compelling way and in a consistent voice. I’m not a big shopper but I love receiving my daily Fab email, and the steady flow of boxes from them delivered to my home is a running joke among my family. Others who do a great job on this include NastyGal for young women’s apparel and AHALife for luxury lifestyle products.
Innovative companies are developing alternative ways of distributing their products. Selling physical product through subscriptions is becoming increasingly common and provides retailers with a fantastic way to keep consumer mindshare each month. Companies like Dollar Shave Club typically send you a monthly shipment of product that they design and manufacture. Others like Birchbox or Citrus Lane include products in their monthly shipments from companies that are interested in having you sample their wares. Alternatively, companies like Stella & Dot and J. Hilburn are distributing their product through a network of representatives, who they support with technology.
Many e-commerce 2.0 players strive to build very strong consumer loyalty and engagement, going above and beyond the specific commerce transaction. They seek to delight their best customers by offering free shipping and returns and doing things like providing unexpected gifts in shipments. Many consider their consumers as a “community”, and engage with them well beyond their orders, hosting meet-ups, providing supporting content, and doing real-world promotions and events. One of my favorite community executions is RentTheRunway’s new “Our Runway” feature. It allows their users to upload pictures of themselves wearing the dresses they rented onto the website, where they can be browsed by new users as part of the dress rental process. Their community members have become their models! And lastly, all of the 2.0 players seek to have contextually relevant integrations with today’s leading social platforms—Facebook, Pinterest and increasingly Instagram—taking their content into the daily lives of their users.
There’s been a proliferation of companies that offer online “flash sales” events, often offering significant savings on designer brands that have surplus inventory. French Retailer Vente-Privee is usually credited with pioneering the category about a decade ago, and aggressive retailers like Gilt Group and Rue La La quickly followed. A number of entrepreneurs took this concept and applied it to specific target markets, like One King’s Lane in home furnishings.
We believe that all of this innovation will only improve the competitive position of online players relative to their offline counterparts, contributing to accelerating e-commerce growth. Consistent with this belief, a16z has made a number of investments in these e-commerce 2.0 retailers, including Fab and ShoeDazzle. And today we’re proud to announce that we’re leading an $85 million round in zulily, an event sales site that offers daily deals for moms, babies and kids.
There are a number of things that attracted us to zulily:
- The very talented founding team of Mark Vadon and Darrell Cavens have pulled off a singular feat: They are in the process of building their second, large, highly successful e-commerce franchise. Mark was the founder and former CEO of Blue Nile, the largest online retailer of certified diamonds, engagement rings and fine jewelry, and Darrell was his head of technology and marketing (an intriguing combination of functions that I had never before encountered as an Internet executive). At their encore zulily, Mark is chairman and Darrell is the CEO.
- zulily is one of the fastest growing businesses we have ever encountered. What is even more impressive is how they have done this: The company spent minimal capital to achieve this result. But maybe that shouldn’t surprise us—they achieved similar results at Blue Nile.
- zulily participates in enormous markets. They started out offering kid’s apparel that moms bought. But as they grew, they also realized that moms were interested in women’s apparel and hardline goods (e.g. housewares), and they now sell large quantities within these categories as well.
- We are impressed with zulily’s strategic positioning. One reality in e-commerce today is that you want to avoid trying to compete directly with Amazon, who is hyper-aggressive in leveraging their enormous scale and cost advantage to offer the largest selection and lowest prices on the Internet. Like Fab, zulily does this by aggregating a long tail of talented designers who typically lack extensive national distribution. These designers offer consumers strong value, but almost always make money on their zulily sales and highly value the channel.
- We are also impressed with zulily’s execution. They are as data-driven as any company we’ve encountered, and use it to great advantage in both marketing and merchandising. They leverage technology adroitly to optimize the business. And they’ve rapidly developed operational capabilities that have enabled their hyper-growth.
We believe we’re in the early stages of a revolution in retail, where inefficient physical businesses are giving way to highly efficient, innovate online ones. We’re delighted to have the privilege of supporting the zulily team’s efforts to build (yet another!) iconic e-commerce franchise!