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Andreessen Horowitz

We at a16z believe we are seeing the “creative destruction” of traditional physical retailers by their online competitors.  At a high level, this is happening for two reasons.  First, e-commerce companies are substantially advantaged in terms of cost structures, particularly in areas like real estate, labor and inventory.  Second, we believe that we’re seeing an explosion in innovation among online retailers that we refer to as “e-commerce 2.0“—where companies are innovating across numerous dimensions including sourcing, curation, distribution models and social marketing.

On Thursday, Julep, a fast growing online beauty brand out of Seattle, announced that Andreessen Horowitz led their $10.3 million Series B round (here).  There’s a whole lot we like about Julep:

  • They are participating in a very attractive market: the beauty category.  The market is huge, with global sales estimated at $160 billion, and we believe it’s ripe for disruption by online competition.  Offline beauty moves slowly and is expensive.  Brands are distributed largely through department stores, where the brands must rent real estate, hire staff and fill the space with inventory.  Product refreshes typically happen twice a year, and retailers demand the brands support their products with large marketing campaigns.  Online beauty competitors are freed from these costs and constraints of their offline rivals.  Julep sources their own products and their ability to deliver new product constantly help them stay current with fashion trends.  And their direct-to-consumer relationships help them largely avoid the very expensive offline channel costs.
  • Julep is run by a very determined team.  Founder and CEO Jane Park and Chief Experience Officer and COO Kate MacDonald started the business by operating four nail polish parlors in the Seattle area to get hands-on customer knowledge and feedback.  They managed to secure physical distribution through Sephora and QVC for their early stage company to help establish their brand.  They are well along the way in building out a vibrant Web presence.  Jane and Kate are completely driven to develop a world-class beauty brand.
  • They have developed a very innovative business model, selling both subscriptions and a la carte product side-by-side.  This is hard to do.  Typically, many people won’t sign up for the commitment of a subscription if the same product is available without that commitment.  But Julep provides meaningful discounts on their products through the subscription channel relative to a la carte pricing, providing an incentive for women to delight themselves with their monthly Julep care package.

The company is off to a very strong start.  The products are great—as my 18-year-old daughter Ali tells me constantly.  Part of my diligence was bringing her home a care package of Julep products—I was a very popular father that evening!  Their brand is out-sized to the stage of the business.  For example, they were selected as one of Oprah’s “Favorite Things” of 2012, a highly coveted endorsement for any brand.  As a result, their growth trajectory has been extremely impressive.

Julep is a perfect example of an e-commerce 2.0 retailer:

  • They source their own product, which allows them to offer consumers strong value while retaining attractive margins.
  • They carefully curate the product assortment in their monthly subscriptions, tailoring them to the different style preferences of their customers.
  • They adroitly leverage the subscription business model.
  • They empower their passionate community of users to spread their enthusiasm through social channels, helping to build their brand and customer base.

We believe the next generation of great retail brands will be built online, and we believe Julep is well on their way to becoming one of these brands.

I’m also delighted to announce that Spencer Rascoff will join the Julep board.  Spencer is CEO of Seattle-based Zillow, one of the largest Internet real estate businesses.  I first met him when I served on the board of Hotwire, an Internet travel business that Spencer co-founded. He is an experienced, extremely talented Internet executive and a very good guy.  We’re delighted to have the benefit of his talents at Julep.

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:

Direct Sourcing

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.

Curation

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.

Alternative Distribution

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.

Engagement

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.

Event Sales

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!

We are delighted to announce that the six General Partners of Andreessen Horowitz, with our families, are all committing to donate at least half of all income from our venture capital careers to philanthropic causes during our lifetimes.

The reason is simple.  We are fortunate to work with some of the best entrepreneurs and technologists in the world, and in the process help create great and valuable companies.  That activity, done well over decades, can generate a lot of money that can then be productively deployed philanthropically back into the society that makes it all possible.  We love participating in this process, and we hope that our philanthropy can, over time, help make the world a better place.

As an initial catalyst, we are making an immediate group donation of $1 million to a set of six vital Silicon Valley-related nonprofit organizations.  Those causes, and their respective sponsors, are:

Ben and Felicia Horowitz: Via Services
Jeff and Karen Jordan: Ecumenical Hunger Program
John O’Farrell and Gloria Principe: Second Harvest Food Bank
Marc and Laura Andreessen: Fresh Lifelines for Youth
Peter and Martha Levine: Canopy
Scott and Pamela Weiss: The Shelter Network

Signed,

Ben, Jeff, John, Marc, Peter, and Scott

From Marc Andreessen, co-founder and general partner of Andreessen Horowitz:

Over the last several weeks, there have been erroneous reports in the press that my partner Jeff Jordan and/or I might become an operating executive of Yahoo in some capacity.

To be crystal clear, neither Jeff, nor I, nor any of our partners at Andreessen Horowitz, are in the running for, or would accept, any operating role at Yahoo, including CEO, acting CEO, chairman, or executive chairman.

Jeff and I have high regard for Yahoo, but we are fully committed to our day jobs as general partners at Andreessen Horowitz and board members of our portfolio companies.

Marc and Ben founded Andreessen Horowitz with some very explicit beliefs.  We would invest in Information Technology companies, and not in things medical, green or clean.  We would have a preference for companies with deep technical roots and innovations.  We would have one office, in Silicon Valley, and would not seek to invest in companies being incubated in places like China or India where we lacked expertise.  We would be stage-agnostic, seeking to invest in the best companies regardless of what round they were seeking.  And we would have a preference, all else equal, for companies being built in Silicon Valley.

The Silicon Valley focus is due to a couple of factors.  First, we are all believers in the power of the Silicon Valley ecosystem to incubate and grow new technology companies.  Just this week, the New York Times referred to it as “the world’s epicenter of innovation”.  We know of few places in the world that sport Silicon Valley’s combination of financial capital, intellectual capital, entrepreneurial and engineering talent and experience, and support infrastructure.  Many of the Internet’s most highly valued companies are from the Valley—Google, eBay, Yahoo, LinkedIn, Facebook and Zynga.  And the second factor is that local companies best leverage our most precious asset as investors, which is time.

Indeed, the majority of our investments have been based in Silicon Valley.  There have been exceptions—we are or have been involved in a handful of non-Valley companies such as Skype (Luxembourg), foursquare (New York) and Groupon (Chicago)—but the majority of our investments are in the Valley and all four of my Andreessen Horowitz investments (LikeALittle, Airbnb, Lookout and Pinterest) are within a 45-minute drive of each other.

With this as background, I’ve been encountering an unexpected finding as I’ve been looking at potential e-commerce investments in the U.S. (and note that I’m considering “marketplace” businesses like eBay and Airbnb as separate from e-commerce).  It strikes me that the majority of innovative new e-commerce businesses are being started outside of Silicon Valley.  There are some innovative local ones like One Kings Lane, Tiny Prints and Plum District, but the list outside of the Valley dwarfs the local list: Groupon and Trunk Club are in Chicago, ShoeDazzle and HauteLook in L.A., LivingSocial in Washington D.C., zulily in Seattle, J. Hilburn in Dallas and Hayneedle in Omaha.  And the epicenter for e-commerce innovation right now has to be New York City with companies like Birchbox, Bonobos, Diapers.com (in nearby New Jersey), Gilt Groupe, H.BLOOM, ideeli, Lot18, OpenSky, Rent the Runway and Warby Parker.  Just five months on the job and I’m already on a first-name basis with United Airlines and Virgin America crews on the SFO-JFK route.

What has driven this blizzard in e-commerce innovation in the Big Apple?  I must admit I’m not sure.  It could be because much of the nation’s fashion business is centered there, or because of Manhattan’s world-class retail infrastructure.  But it’s extremely impressive.

Given this preamble, it’s probably not a big surprise that we’re investing in an e-commerce company in New York and that company is Fab.com, a site that features daily design inspirations and sales at up to 70% off retail.  The Fab.com site was launched in June of this year and has taken off like a rocket.

We were attracted to Fab for a number of reasons:

  • The team is great.  The founder and CEO of Fab is Jason Goldberg, a talented serial entrepreneur who also founded socialmedian and Jobster.  His co-founder is Bradford Shellhammer, a fantastic merchant with a fabulous eye for design.  Their engineering function is led by Nishith and Deepa Shah, both talented technologists.
  • Their execution has been extremely impressive.  They’ve nailed the product: both the website itself and the merchandise assortment.  The site and mobile apps are beautiful and very easy to use, and Bradford’s merchandise team constantly finds beautiful, inspiring goods to offer to consumers, typically at attractive values.  They’ve leveraged social extremely effectively, sourcing over half of their users, and they leverage data as effectively as any company I’ve ever worked with—startup or not.
  • They are playing in a big market.  The umbrella of “design” allows them to offer merchandise across a wide variety of categories (such as home products, jewelry, artwork, apparel, workplace items, toys and outdoor products) and price points.  The Fab merchants scour the world to source product from a long tail of great designers who often struggle to gain national distribution, and designers love that Fab.com sales are profitable for them.
  • Their early traction is simply phenomenal.  Jason is extremely transparent with Fab.com’s business metrics and recently revealed that the company is averaging $200,000 in sales a day.  Not bad for a company that made their first sale in June.
  • They have a very big vision for where they want to take the business.

I’ve rapidly become a big Fab.com consumer, as the UPS man and my spouse can attest.  It’s as close to addicting as anything I’ve ever experienced in e-commerce.

Fab.com is an example of a new wave of highly innovative e-commerce companies; indeed, I believe there has been more e-commerce innovation in the past few years than at any time since the beginning of the Internet, and at Andreessen Horowitz, we need to update our assumption of Valley centricity, at least when it comes to e-commerce.  Fab.com joins my partner John O’Farrell’s investment in L.A.-based ShoeDazzle as examples in our portfolio of this trend.

Jason signs off on much of his correspondence with the phrase “smile, you’re designed to”.  We’re smiling from ear-to-ear at the prospect of partnering with Jason, Bradford and the Fab team to build a big, important e-commerce company.

OK, I’m going to date myself here.

I graduated from college in the early 1980s and entered the professional workforce. Most of you wouldn’t recognize the office I worked in: phones sat on desks, were plugged into walls and were the only way you could communicate with workers not in the office. “Spreadsheets” were largely done by hand on big sheets of paper, aided by desktop calculating machines. Our department had one personal computer that had to be shared. It sat on a desk and wasn’t connected to anything but the power supply and a printer. “Portable” computers emerged in the middle of the decade. The first one I saw was the size of a suitcase (it actually had wheels) and people said it was “luggable.”

During the 1990s, I found myself working at The Walt Disney Company in southern California. Computers were now on every desktop, becoming more powerful, and their uses were expanding. My future partner Marc Andreessen was up north leading the development of the first mass market browser. All of a sudden, email and Internet access stormed the workplace. I also distinctly remember the first time I encountered a “cellular phone”—it was the size of a lunchbox and couldn’t legitimately be characterized as “mobile”. Personal digital assistants (aka PDA) came onto the scene later in the decade, but they lacked connectivity and typically had to be synched by actually tethering the device to your computer.

At the new millennium, I was responsible for managing ebay.com. The Internet revolution was on and online commerce was simply exploding. Computing was undergoing a revolution as well—a mobile revolution. Laptops started replacing desktops. Cellular phones and PDAs essentially merged and the smartphone was born. I used to wear out BlackBerrys by answering much of my email on the go (I frequently used the Berry while on the elliptical machine in the gym, an acquired skill). Then Apple debuted the iPhone in 2007 with its touch screen, robust mobile browser, and, soon thereafter, third-party applications. Google quickly followed with Android.

Today, this mobile revolution is in full swing and is changing computing dramatically. For the first time, smartphone shipments exceeded PC shipments at the end of 2010. The iPad tablet is Apple’s fastest-growing new product ever and everyone else is scrambling to jump on the tablet bandwagon. IDC forecasts that more people will access the Internet via mobile devices than PCs by 2015. Personally, smartphones and tablets have already acquired the lion’s share of my own computing time and the PC is now relegated primarily to power email (and occasional blog composition).

Mobile applications are also proliferating. Internet incumbents such as eBay, Amazon, Yelp and OpenTable (where I’m executive chairman) are bringing their services to mobile devices with great success. New companies are also building services that subsist on mobile-specific capabilities—think foursquare, Bump and Uber—and many are investing and innovating with the goal of turning mobile devices into wallets, such as Square and PayPal.

Unfortunately, when there’s progress, there’s also peril. Wherever e-commerce happens, bad guys descend to try to steal some of the money that is being exchanged. I encountered this at both eBay and PayPal, where much of my time was spent fighting off relentlessly escalating threats from what largely was organized crime. Today, that’s starting to happen on mobile devices. There were more mobile security threats identified in July 2011 than in all of 2010, and it’s estimated that one in three smartphone users will encounter an unsafe website this year on their phone. This trend will only worsen as mobile adoption increases and mobile commerce continues to expand.

With this context, Andreessen Horowitz is delighted to announce our newest investment in Lookout Mobile Security. Lookout is pioneering a new approach to mobile security and wants to give people the confidence to do more with their phones by providing protection against mobile threats. They’ve built a number of highly innovative products:

  • The Lookout app protects against digital threats like malware, spyware and unsafe websites. It also backs up critical personal data (like contacts or photos) and can find a lost or stolen phone. Unlike many security apps, it’s both easy to use and optimizes device performance and battery life.
  • On the backend, Lookout’s Mobile Threat Network combines algorithmic analysis with a cloud-based architecture to rapidly identify new mobile security threats. They have been the first service to detect and protect against many major threats, often within minutes of the appearance of threat in app stores and before the threat reaches a user’s phone.
  • Unlike traditional security vendors, Lookout, through the Lookout API, is sharing its incredible dataset of information with the mobile community to keep people safe. The Lookout API automatically provides threat data to partners such as Verizon so that they can ensure that their app stores are safe.

Together, these products have resulted in Lookout assuming a global leadership position in mobile security. The company currently protects over 12 million users in 170 countries and they are adding an additional 1 million users per month. They are the top-rated and -ranked security app in the Android Market, and PC World named them the Top Product of 2010. They have also established partnerships with a number of leading carriers in the U.S. including T-Mobile, Sprint and Verizon.

The Lookout founding team includes talented hackers (in the best sense of the word): John Hering, Kevin Mahaffey and James Burgess. The trio has deep technical roots and strong DNA in the security world. While students at the University of Southern California, they found a vulnerability in mobile device Bluetooth connections, but they couldn’t get device manufacturers to take the vulnerability seriously. Determined to make their point and drive awareness of the vulnerability, the trio created a contraption called the “BlueSniper rifle” and demonstrated it with great success at the DefCon security conference. They are young, innovative and relentless—the perfect backgrounds for the folks you’d trust to keep your mobile devices safe.

As CEO of Lookout, John is a very impressive entrepreneur—one with a compelling vision, passion, talent and commitment (read more from John here). He’s rapidly assembling an excellent executive team and a strong board. We are honored he chose to partner with Andreessen Horowitz and I very much look forward to working closely with him as an investor and board member.

Andreessen Horowitz led the $40 million round, joined by current investors Khosla Ventures, Accel Partners and Index Partners. The proceeds will be used to broaden the company’s product offerings, fuel global expansion and build a world-class team.

Download Lookout! You’ll be glad you did.

Talk about a business with humble roots. Brian Chesky and Joe Gebbia met at the Rhode Island School of Design and became roommates in San Francisco in 2007. A prominent design conference was coming to town and the nearby hotels were sold out. Joe and Brian thought it might be both fun and lucrative to rent out space in their apartment to conference guests looking for lodging, but alas they lacked the requisite beds. Turns out that Joe had a few airbeds in the closet. They threw in a morning meal and “airbedandbreakfast” was born. Three lucky conference attendees enjoyed good accommodations, food and hospitality while Joe and Brian enjoyed the company of their guests and some very welcome income.

Joe and Brian resolved to make a run at transforming this experience into a business.  They were joined by a third co-founder, Nathan Blecharczyk, who brought programming expertise.  The name was shortened to “Airbnb” and they launched their website in 2009.

The Airbnb service quickly struck an extremely powerful chord with consumers. Growth has been flat-out explosive, with over two million room nights already booked. The site now features spaces in 186 countries and over 16,000 cities around the world. Hosts can earn substantial sums of money—one has even used Airbnb earnings to pay off his mortgage—and their community of users is passionate about the service, enjoying the social aspects of Airbnb travel.

The community has substantially expanded the type of spaces offered on the Airbnb platform, moving well beyond a room in a house or apartment. You can now use Airbnb to rent apartments, homes, cabins, tree houses, boats, parking spaces, castles, sublets… and even a country (for the bargain sum of $70,000 per night, you can rent out the country of Liechtenstein like rapper Snoop Dog).

I first came across Airbnb in March, when Brian presented the business at an investor conference I was attending. For me, it was a true déjà vu experience. I joined eBay in 1999, early in its life, and had the privilege of witnessing and contributing to the development of one of the most iconic e-commerce businesses. Airbnb reminds me more of eBay in its early days than any other business I have ever encountered. Both are:

  • Marketplace models, connecting buyers and sellers
  • Community-driven, populated with passionate users who evangelize the service
  • Providing economic opportunity and empowerment to their sellers/hosts, enabling them to earn meaningful income
  • Platforms upon which their community of users continually expands into new verticals
  • Helping to make inefficient commerce efficient

Not coincidentally, Brian, Joe and Nate also see these same similarities. They believe Airbnb is to spaces what eBay is to products.

We have been extremely impressed by the execution of Brian, Joe, Nate and the rest of the Airbnb team.  The website is clean and very intuitive—not surprising, I guess, when two of the founders are designers.  They have built and motivated a vibrant community of evangelist users.  They are extremely scrappy marketers, and have executed brilliantly to acquire hosts/properties and renters.  And they have been ably managing the operations amidst simply explosive growth.

And while the company has accomplished a ton in just a couple of years, we believe that they’re just scratching the surface of their potential. They have opportunities to go much deeper in their current categories, broaden into new categories of spaces, and build out their global footprint.  They are truly pioneering a new marketplace, where access to spaces is more valuable than ownership.

Andreessen Horowitz led Airbnb’s latest financing round, investing $60 million of the total raise of $112 million.  We’re thrilled to be partnering with the Airbnb team, and look forward to supporting them in building an iconic e-commerce franchise!