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When new media technologies start out, their programming tends to be aimed at the mass market. It’s only when these technologies mature and their audiences grow that it becomes feasible to go beyond general interests and target segments of the audience with specialized content or commerce.

This evolution happened in the magazine industry, which exploded in the 1920s with new general-interest magazines like Reader’s Digest and Time but later targeted more specific interests with magazines like Jet, Sports Illustrated, and WIRED. This evolution also happened in television: As new technologies like UHF, cable, and then satellite emerged, programmers responded by developing channels like BET, Nickelodeon, and Zee TV targeted at specific segments of the population. Similarly, on the Internet, the early winners were “portals” that carried a broad range of programming. Next came e-commerce companies like Amazon and eBay that could address a long tail of interests—and now we’re seeing ever-more-targeted e-commerce companies such as Zulily, Warby Parker, and Julep.

What’s happening throughout all of these examples is a shift from broadcasting to “narrowcasting”, a term first coined by computing pioneer J.C.R. Licklider in 1967 about the “multiplicity of television networks aimed at serving the needs of smaller, specialized audiences”. Today, the Internet (and social media) enables us to target these segments more precisely. There’s an important nuance here, however: This targeting is not about narrowing per se, but about reaching and including segments that weren’t addressed before.

That’s why our newest investment is e-commerce company Walker & Company, which was founded by Tristan Walker to build a modern personal care brand for people of color. Globally, this is not a narrow audience given that a giant percentage of the world’s populations are people of color. But we believe Tristan is on to a big idea, because in the U.S., this segment appears woefully underserved—even though it is growing.

Brands catering to this segment are badly dated, and customer needs aren’t being met

clyde1
I’m a huge basketball fan, and one of my favorite players when I was a kid was Walter “Clyde” Frazier in spite of the fact that he played for the hated Knicks (I grew up in Philadelphia and Washington, D.C.). Clyde epitomized cool, and he helped lead the Knicks to NBA championships in 1970 and 1973.

No offense to Clyde, but I think it’s a symbol of how neglected these markets are that one of the leading selling brands in the category hasn’t updated its spokesperson or its packaging in multiple decades…

People of color also have specialized personal care needs that are often not served by the global CPG (consumer packaged goods) brands.

For example, 80% of black and Afro-Latino men—and 30% of other races—suffer from Pseudofolliculitis Barbae (PFB) or “barber’s itch” due to curly hair follicles. The resulting razor bumps are not only annoying, but also can be unsightly and painful. Current leading selling shaving products tend to exacerbate this condition.

The market is large and growing

The population of people of color is growing in the U.S. and “over-indexes” significantly on beauty and personal care CPG products. For example, black consumers spend 2x the general population on cosmetics and 1.8x on skincare (Essence Communications, Inc.). And black women represent approximately 7% of the population but 30% of hair care spend.

We believe Walker & Company is extremely well positioned to build a big business catering to this market:

• Their first product, the Bevel shaving system for men (which they designed and manufactured), is impressively designed and executed — but more importantly it works. Clinical tests show that shaving with Bevel reduces razor bumps among men of color. More importantly, customers perceive that difference too: “Last razor I used had my face looking like nestle crunch. Been using @Bevel for some days now and my face still feels like a baby’s bottom”. “You guys did it! The first shaving system I’ve used that actually works as advertised. I will be a life long customer… Thank you…”

• The Internet enables efficient marketing to previously difficult-to-reach segments, and Tristan is quite adept at social marketing. He was the first business development person at Foursquare, and personally has 280,000 Twitter followers. Walker & Company takes customer satisfaction and feedback so seriously that he and his employees personally reply to and engage with every customer on Twitter.

• Results are early, but Bevel is off to a great start. They have gone to market with a five-part shaving system sold through a subscription format—and sales as well as customer retention have been strong out of the gate.

• There are numerous other huge segments in this market with under-served needs, and Tristan already has an extensive product roadmap for adjacent markets.

Yet it’s important to note that Tristan’s mission goes beyond profits. For the consumer, it’s hard to feel like a first-class citizen when you’re only able to buy second-class products. That’s why Walker & Company focuses on developing brands that solve acute physical problems (beginning with PFB) in the community—they won’t be making shampoo just to make shampoo.

Tristan feels he has found his life’s work at Walker & Company, and he is hell-bent on building the modern health and beauty brand for people of color. We’ve known Tristan for years, and consider him to be a charismatic, talented, and passionate leader. We look forward to joining him on this journey.

Photo: Getjustin

 

E-commerce has disrupted a number of large categories, including media, electronics, apparel, and home furnishings. If you’re shopping in these categories, there’s a strong and rapidly growing chance that you’re going to buy them online. But that’s not the case for the largest retail category: grocery. For the vast majority of people, filling the fridge still means rolling a cart down the aisles at the local grocery store.

As I outlined in a previous post, groceries are among the last huge e-commerce opportunities. Online penetration of groceries is extremely low. It’s not that innovators haven’t tried—it’s that they haven’t enjoyed significant success. To date, virtually all of the digital efforts to attack the grocery vertical—i.e., the brick and mortar franchises—have followed a very similar model: by building out e-commerce grocery businesses end-to-end, including warehouses, inventory, and trucks. They’ve essentially replicated the grocery store supply chain at great cost and complexity. During the first wave of Internet startups, we saw this centralized approach most famously with Webvan, but also at Peapod, FreshDirect, and more recently Amazon Fresh.

But now a new wave of digital companies is going after the grocery business with a very different approach. That’s why we’re thrilled to announce we’re backing Instacart.

The proliferation of mobile devices is enabling what I call “People Marketplaces”: two-sided marketplaces that connect consumers with people providing specific services.From finding a ride with Lyft, to getting your house cleaned with HomeJoy, home-delivered restaurant meals from DoorDash and Caviar, and instant pet-sitting from DogVacay, the variety and usage of People Marketplaces are exploding. It’s really becoming a thing!

People Marketplaces couldn’t really exist before the smartphone; the efforts of all these people couldn’t be efficiently managed or optimized without that supercomputer-with-GPS that’s now in everyone’s pocket. Today these devices can run sophisticated software that orchestrates tasks like order placement, driver location and logistics, delivery timing, and payment.

Instacart offers same-day delivery from your favorite grocery store via an army of local contractors, often within the hour. The service is expanding rapidly and is already available in the San Francisco Bay Area, New York City, Chicago, Boston, Washington D.C., Philadelphia, Los Angeles, Seattle, and Austin. Instacart is doing this by taking what I’d term a “virtual” approach that requires negligible infrastructure investment relative to other more centralized models; they leverage the existing grocery store infrastructure with a workforce enabled by digital tools.

I know what you’re thinking; I’ve written extensively on how brick-and-mortar retailers will be disrupted by e-commerce companies, and how they’re at risk of becoming dinosaurs in many retail categories. Yet Instacart is partnering with these same brick-and-mortar grocery stores in the delivery of their service. Have we cast our lot with the dinosaurs?

Not. Traditional brick-and-mortar retailers have a large advantage relative to e-commerce companies (if they can figure out how to harness it): Each of their stores is essentially a mini-warehouse with inventory widely distributed throughout the country. So we’re making a bet that Instacart’s partnerships with brick-and-mortar grocery stores will be the winning play in grocery delivery to the home, with the ability to fend off competition from e-commerce companies that build out their own infrastructure.

Here’s why we think the virtual model wins in this case:

  • It’s capital efficient – Instacart’s virtual approach to delivering groceries is extremely capital efficient relative to the approach of e-commerce grocery players like Amazon Fresh, Fresh Direct, and Pea Pod. Instacart’s leveraging of existing infrastructure obviates the need for physical capital investment. To put a point on it, Webvan raised $1.2 BILLION  largely for cap ex in their unsuccessful attempt to build a centralized grocery e-commerce business back in the day.
  • Faster to market – Instacart’s virtual model lets them expand to new cities quickly; their market entry strategy requires them to digitize local grocers’ inventory, hire drivers, and acquire consumers. Contrast this with the centralized e-commerce players and their need to build warehouses, buy trucks, buy and receive inventory, hire both warehouse workers and drivers… For these same reasons, Instacart should also be able to service smaller cities more efficiently.
  • Offers potentially superior operations – Instacart’s model is much more simple operationally; an order on Instacart results in a shopper going to the grocery store you selected, picking the items on your list, and delivering them immediately to your door. This should enable them to provide service that’s both high quality and FAST (remember that Instacart is often able to deliver groceries within an hour). By contrast, centralized e-commerce approaches have significant operational complexity. They need to buy, store, and pick inventory that’s often fragile and/or perishable (e.g., fruits, vegetables, meat, dairy) and keep it fresh and undamaged inside their trucks that run around the city all day making multiple deliveries.
  • Capitalizes on well-known brands – Instacart leverages the brands of the physical grocery chains, which typically are well known to the neighborhoods they serve. These chains know and carry the SKUs that people in their community want to buy. In the Bay Area, this already includes national chains like Whole Foods and Safeway as well as iconic local brands like Rainbow Foods and Berkeley Bowl. Centralized e-commerce businesses, on the other hand, need to build a brand from scratch and optimize for the tastes of an entire city.

We’re not alone in thinking that grocery will develop differently than other e-commerce verticals.  Fred Smith ,the founder of FedEx — which re-invented the delivery business — had this to say about the delivery of groceries (as part of a 1999 InternetWeek interview):

 “A lot of retailers are coming to the conclusion that well, maybe the best thing is not a total inventory-less environment but maybe what we do is use the Internet in concert with our bricks and mortars. And that’s what I think will happen, because you have a lot of things that have very low value, and they don’t lend themselves to e-commerce and fast-cycle distribution.

Groceries are the best example of that. Now, maybe there’s an example where you have an e-commerce interface and home delivery of groceries, but those groceries are not going to be delivered from across the country, and they’re not going to be built on demand for your order.”

FedEx was the pioneer of the centralized approach to delivery,jet planes and all. And even back in 1999, he thought the virtual approach in partnership with brick-and-mortar grocery stores was the future of online grocery distribution. Fast-forward 15 years and throw in the smartphone — and we think he just might be right.

I see lots of analogies between Instacart and OpenTable, the business I ran for four years before joining a16z. They are both local, requiring city-by-city rollouts. They both provide convenience to consumers. They both drive incremental business for their retail partners, providing those retail partners with an incentive to promote the service. They both have the potential for network effects. And FWIW, they both involve food!

In addition to these strategic advantages, we as always are making a bet on the founder. In this case, it’s Apoorva Mehta, a former Amazon programmer who is the founder and CEO of Instacart. Apoorva and the team have made extremely impressive progress, leading Instacart to strong early results on very modest resources. This round will give them a deeper war chest to rapidly bring the convenience of Instacart to cities across the country. We look forward to supporting their efforts to revolutionize grocery shopping. Your fridge awaits!

I’ve had Amazon on my mind lately, part of which is due to my reading Brad Stone’s very interesting book, The Everything Store: Jeff Bezos and the Age of Amazon.

I’ve described in earlier blog posts how Amazon is a brutal competitor for brick and mortar merchants due to their large and growing cost advantages and a maniacal commitment (at least most of the time) to having the lowest prices anywhere.  (You can read more about it here.)  These same drivers also make Amazon a heavyweight competitor for e-commerce companies as well.

Much attention has been paid to the concept of “show-rooming” in the context of brick and mortar stores, where customers use their smart phones to compare the cost of a product on a physical store’s shelf against online competitors—typically Amazon.  But show-rooming is also a fact of life for e-tailers due to the ease of comparing online prices.  As a result, Amazon is a monster competitor for online merchants as well.

Amazon enjoys scale economies far beyond that of their online competition that they can use to support hyper-aggressive prices and fast, cheap shipping.  Here is a simple illustration of their scale, using data from Internet Retailer:

top 50 e-retailers

Amazon is larger than the next dozen largest e-tailers—COMBINED!  Its resulting scale advantages are staggering.  And they aggressively re-invest the benefits of this scale into even lower prices and faster, cheaper shipping that in turn lead to growth and further scale advantages.  When we consider an e-commerce investment at a16z, we always strive to carefully evaluate the risk of competition from Amazon.  They’re not just a heavyweight—they’re the heavyweight champion of the world!

So how do you compete with Amazon?  Here are some strategies that we’re seeing in the market from both offline and online retailers.  Not all are mutually exclusive—i.e., many companies deploy multiple strategies:

Sell differentiated product:

Amazon’s sales skew very heavily towards “hard-lines”, things like media, electronics, home & garden, and toys.  Most best-selling hard-line products are produced by large manufacturers who market them heavily and distribute them broadly through multiple retail channels.  They are essentially commodities, identified by a standardized Universal Product Code (aka, U.P.C.).  An example is a Canon digital camera; once Canon’s ads convince you that you might want a Canon camera, you know you can shop for it pretty much anywhere.  And for most commodities, price is the key differentiator.  Consumers know that Amazon almost always has the lowest prices, along with free and fast shipping.

Many retailers try to “hit ‘em where they ain’t” and sell in categories where Amazon is less dominant.  Soft-lines is an obvious one; while Amazon is trying to build up this business, they have not achieved anywhere near the dominance that they have on the hard-line side.  Online companies like NastyGal and Zappos (before their acquisition by Amazon) and offline companies like Nordstrom and Neiman Marcus have successfully pursued soft-line strategies and have managed to weather competition from Amazon relatively well.  Another example is home improvement retailers, where a combination of products that “I need today” and/or bulky or heavy items are less suited to online distribution.

A related strategy is to feature products from companies that typically are not distributed or searched for on Amazon.  a16z has two investments in companies that primarily sell goods from a long tail of designers that lack extensive national distribution.  zulily does this in kids’ and moms’ apparel, and Fab does this in design.  These designers’ unique products are typically not found through Amazon’s search engine as they lack broad awareness.

Develop your own products:

Many retailers seek to compete with Amazon by developing their own products.  These products can be largely insulated from direct price comparison as they are proprietary and the producing company can elect not to have them sold by other online retailers.  A number of the best performing offline chains pursue this strategy including Lululemon and Victoria’s Secret.  It is also being pursued by a new breed of online retailers such as Chloe & Isabel in jewelry, Julep in cosmetics, ShoeDazzle in women’s shoes and Poppin in office goods (note: Andreessen Horowitz is an investor in Julep and ShoeDazzle).  While it’s clearly much more work to design and source your own product, retailers who do are often rewarded with higher gross margins as they both cut out expensive middlemen and avoid head-to-head price competition.

Merchandise product differently:

Amazon.com at its core is a search engine for products.  They are strongest where consumers know pretty much exactly what they are looking for, and the predominant way to find that on Amazon is the ubiquitous search box.  Merchandising on Amazon is almost completely algorithmic—things like others searching for ‘x’ also looked at ‘y’ and ‘z’.  I know of very few folks who browse Amazon in the traditional merchandising sense of the word.

One tactic a number of companies are employing to compete with Amazon is to build a great browse experience, showing consumers a targeted assortment of attractively displayed products. Offline retailers historically have done this through beautiful window displays and their in-store end caps.  And a new breed of online merchants is doing this, too, although it’s often referred to as “curation”.  And price is not typically top of mind during these impulse purchases.

Deploy alternative distribution strategies:

A number of online retailers are trying to put themselves directly in front of consumers before they think to consider searching for that product on Amazon. “Flash sales” companies like One Kings Lane and The Clymb send a daily email that merchandises a compelling assortment of goods at attractive prices.  Other companies like Birch Box or Trunk Club are employing a subscription model that sends you a highly curated selection of product, typically on a monthly basis.

Leverage unique advantages:

Brick and mortar retailers are disadvantaged with respect to costs relative to Amazon due to higher real estate, labor and inventory costs.  But a number of merchants are trying to flip this disadvantage on its head and leverage their network of local stores.  Wal-Mart for a while has enabled consumers to pick up online orders at their local store on the day it was ordered.  Last holiday season, they launched a test of same-day delivery for online orders from their stores in a number of cities.  Both take advantage of Wal-Mart having inventory in geographically dispersed stores.  And in a creative twist, they are considering crowdsourcing their local, same-day delivery to their customers, who would receive discounts on their shopping bill in exchange for their efforts.  Alternatively, Williams-Sonoma has used both their store locations and their catalogs to aggressively build their online business.  They have been willing to cannibalize themselves, believing rightly that someone else will do it if they don’t.  Over 40% of their revenue now comes through the online channel.

It’s clear that e-commerce is highly advantaged vis-à-vis offline retail and will continue to gain share.  The more interesting question to me is how e-commerce companies will compete with the heavyweight champ Amazon.  Amazon will always be able to pummel other e-tailers on price and probably on shipping as their scale advantages are virtually unassailable.  Companies that hope to compete with them successfully have to adopt different tactics.  Similar to when Cassius Clay (now Muhammad Ali) prepared to fight the then reigning heavyweight champion Sonny Liston, they’re going to need to “float like a butterfly, sting like a bee”!

I recently blogged about the “Series A Crunch” and recommended ways for entrepreneurs to try to avoid its ugly clutches.

But I soon discovered a glaring omission in my recommendations.  I had addressed strategies like raising more money, structuring the round to include more institutional money and investors, cultivating these investors after the raise and resisting the temptation to raise prematurely.  But one strategy that I failed to detail was to make the money last as long as possible, affording the entrepreneurs the maximum amount of runway on which to demonstrate results.  And no company demonstrates the effectiveness of this strategy more than our most recent investment, 500px.

Oleg Gutsol and Evgeny Tchebotarev started 500px in late 2009.  They bootstrapped the business for almost two years and finally raised their first outside money in 2011—a very modest half a million dollars.  They added additional capital in 2012, bringing total outside capital in the company to a just a couple million dollars.

500px is a site for photographers to display their work, enabling it to be viewed, engaged with and even sold.  Oleg and Evgeny have been hard at work on 500px for about four years.  What did they accomplish during this time with only a couple million dollars?  Check this out:

  • 500px is one of the most visually stunning sites I’ve ever encountered.  I love photography, and I find browsing through the highest rated pictures on 500px to be a mesmerizing experience.  No more need to trek to museums; 500px brings some of the world’s best photography to you online.
  • They have experienced very rapid user growth.  The site currently has 2.5 million registered users and over 10 million monthly active users.  And these users are global.  It turns out that gorgeous, world-class photography speaks a universal language.
  • The 500px community is passionate about and phenomenally engaged with the site.  The site currently gets over a billion page views each month.  This photo of the Milky Way over the Himalayas, for example, received over 3.6 million views.  And looking at it, I think you can understand why.
  • They have started to build products that drive monetization but are highly complementary to the user experience.

This level of progress on just a couple million dollars is extremely impressive.  We can’t wait to see that they can accomplish with the additional resources from this round.

And no blog post about gorgeous photography would be complete without a bit of eye candy.  Here’s a quick homage to San Francisco courtesy of the 500px community:

We are delighted to be partnering with my very good friend Michael Dearing of Harrison Metal on this investment.  Michael will be joining the board of directors.  I can’t think of anyone better to support the efforts of Oleg and Evgeny to build one of the world’s leading photography brands.

It seems like there has been a veritable explosion of companies that are leveraging technology to build “people marketplaces” that provision various services.  On one side of these marketplaces, consumers are afforded a new channel to procure needed services.  On the other side, individuals are empowered to earn money performing the services.

These marketplaces come in two general flavors.  There are horizontal platforms like Zaarly, TaskRabbit, Gigwalk and Fiverr that let consumers find providers of a wide variety of services.  And there are vertical platforms that focus exclusively on one service vertical, such as Lyft and SideCar for hopping a ride, Homejoy for house cleaning, Instacart for grocery deliveries and DogVacay for boarding your dog.

I am a huge fan of the concept of economically empowering a community of users.  eBay has done this for 15 years in goods (and that mission is what most attracted me to the company), and these new companies are now doing it in services.  And this economic empowerment is critically important: It’s becoming obvious that the concept of permanent employment is waning, and the resulting persistently high unemployment rate creates millions of people who need economic opportunity.

After meeting with scores of these companies, we’ve been drawing a few hypotheses in the space:

Vertical vs. Horizontal Plays

While many of the horizontal platforms are doing interesting things, we tend to think that the vertical approach is resonating more with consumers.  Most of the companies that are showing early signs of breaking out tend to target one vertical.  Our hypothesis is that the horizontal plays may suffer from a potential “paradox of choice”: Consumers could be getting overwhelmed by the seemingly infinite array of potential service options presented by horizontal platforms, but consumers can easily understand the highly specialized value proposition of a company offering services in one vertical.  When you use the Lyft app, for example, it’s immediately obvious that you can get a ride from where you are to where you want to be.

My partner Chris Dixon points out that vertical approaches have additional advantages.  From a product perspective, the vertical apps can tailor their workflow to the unique characteristics of that vertical—the best way to find someone to clean your house is different than the best way to find a ride.  And from a marketing perspective, a narrow focus on one vertical lets the company do things to potentially accelerate each side of the two-sided marketplace.  For example, some companies work to jumpstart their business in a new market by initially subsidizing their early service providers to ensure that the marketplace has liquidity for consumers when it launches.

Convenience vs. Value

There seem to be two high-level value propositions emerging for these services:

  • Some position themselves as primarily a convenience and typically charge a premium for it.  There have been mobile car wash services that will come to you to wash your car, but they would typically charge you more than a physical car wash would for that convenience.
  • Others position themselves as both a convenience and a value, typically by disrupting an inefficient legacy supply chain.  YourMechanic will come to wherever your car is to perform any of a wide variety of car maintenance and repair services, and will charge you less than you’d normally pay if you were to drop your car off at a garage.  It turns out that the service department at your car dealer has become their only segment that earns decent returns, and service typically subsidizes other less profitable auto segments.  Not surprisingly, these garages then pay mechanics a very small share of what they charge consumers.  Their bills get so bloated that YourMechanic can charge significantly less than garages for a service, pay their mechanics higher wages to perform it, and still earn attractive returns.

It appears that the early breakouts in the space are those that offer both convenience and value.  It’s clear that the market size of people who are willing and able to pay a premium for convenience is much, much smaller than those who are attracted to both convenience and value.  For example, a service that charges a premium to come to you to wash your car may work well on Sand Hill Road, but it’s unlikely to have broad national appeal and disrupt the physical car wash industry.

We believe that some very interesting companies are in the process of emerging in this space, and we plan to remain active in it.

(Note: a16z has a venture investment in Lyft and is a seed investor in DogVacay, Homejoy, and YourMechanic).

For those of you who don’t yet know this about me, I am a basketball fanatic.  Twice a week for the past 10 or so years, I’ve organized a basketball game at Stanford.  At the end of the year each year, I ask the participants to chip in so we can buy gifts for the Stanford folks who provide the logistics that enable us to play.  And truth be told, this has been a pain-in-the-butt every year: asking people to pay, keeping track of who paid, reminding folks who haven’t yet paid. Invariably, I end up covering the shortfall from people who neglect to pay (and to make myself feel better, I stop passing the ball to them for a while as a result!).  But a while back, I realized that the shortfall wasn’t because of the monetary cost—it was because the manual process is inconvenient for all parties involved.

This experience is one of the reasons why Crowdtilt resonates so strongly with me.  It’s a simple concept, with powerful potential.

Now crowdfunding is not a unique idea, but we found Crowdtilt to have a unique approach: They are building a horizontal platform that can be used by groups for virtually any kind of fundraising.  The type of campaigns ranges widely and include day-to-day things like funding a tailgate before the football game, chipping in to buy a wedding gift, collecting for a fantasy football league or paying for concerts tickets.  But the company is also hosting campaigns that strongly reinforce the potential breadth and impact of the uniquely simple and effective Crowdtilt platform:

  • Residents of the town of Edwardsville, Illinois, helped keep the Once-Upon-A-Toy toy store open by raising $82,450—more than the $75,000 the business needed to stave off liquidation—in only two days.
  • Parents at the Weilenmann School of Discovery in Park City, Utah, raised $36,478.56 to keep the science program at the Lower School in just about a week.
  • Students at Vanderbilt University in Nashville, Tennessee, along with a few good Samaritans, raised $10,331.30 in less than 24 hours to enable their classmate Ayodele Sonupe to make a $10,000 tuition payment and continue his education in the States instead of having to return to his native Nigeria.

At a16z, there are a couple of key characteristics that we love to see in a founding team.  One is what we call “product/founder fit”—where the business is the obvious calling of the founder, so much so that we have a hard time imagining anyone else doing it.  We found James to be a poster child for this.  James studied development economics at Wake Forest due to his passion for the role that microfinance and micro-insurance could play in alleviating poverty in the developing world.  While in school, he received a research grant from Wake Forest and the Atlantic Coast Conference that enabled him to get on-the-ground experience in this area in post-conflict regions of Africa.  Upon graduation, he opted to move to South Africa and took a job as a loan officer at the Kuyasa Fund, where his job literally was knocking on doors to collect microloan repayments.  While there, he started a microfinancing blog and news aggregator called MiFi Report, which over time became the number one result for microfinance news on Google.  He eventually got the idea to apply his love of technology to his love of international development and morphed his blog into a poverty alleviation-focused, crowdfunding platform called Dvelo.org.  Unfortunately, regulatory changes following the banking crisis of 2009-2010 made that original business untenable and he had to shut it down.  He quickly returned to the States and started another crowdfunding platform with co-founder Khaled Hussein, this one with an eye towards helping any group collect money for anything.

Another key founder characteristic that we value very highly is determination, and Khaled is a poster child for this.  He grew up in Alexandria, Egypt, and first saw a computer in his senior year of high school when he was 18 years old—and he went nuts!  He started an offshore development company in Egypt before coming to the United States.  Within just five years, he earned a M.S. degree from Virginia Tech in Computer Science and Human Computer Interaction and entered their Ph.D. program.  He then put his education on hold to join a startup called Webmail.us that was sold to Rackspace—where he would later help lead their corporate strategy at the age of 26.  After Khaled was introduced to James, he joined him quickly to found Crowdtilt (James can be very convincing).

A third characteristic we hold dear is a big vision.  And the Crowdtilt that James and Khaled envision is massive.  Better yet, they can make you believers within just a few minutes!

We have come to share their belief that Crowdtilt has almost unlimited potential.  There are tons of places where groups and money interact in a fragmented and disconnected mix of both online and offline ways.  The Crowdtilt team recognized this, and earlier than most startups, built and released an API that allows other online services to take advantage of their collaborative payments engine.  And their small team has only scratched the surface of extending the Crowdtilt experience.  Imagine that you’re on a site where you’re planning a trip, and you’re able to to book your vacation rental with the four other friends going on the trip.  Or imagine that you’re viewing a wedding registry, and you and other guests can collaborate on purchasing an expensive item for the bride and groom.  It’s collaborative payments for an increasingly collaborative Web and world.

The company is off to a great start.  They are growing rapidly and building a killer team.  Their metrics are “way up-and-to-the right”, they are in the process of working with a number of online businesses to debut collaborative payments to their sites, and TechCrunch named them one of the five best startups of 2012.

We are thrilled to be supporting the efforts of James, Khaled and the team.  And I personally look forward to deploying Crowdtilt to collect the gift money for my hoops games.  Hey, maybe I could even use it to collaboratively fund the combined tuition payments of my twins as they enter college!  I wouldn’t be the first to use the young service in this way.

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!

The Net has unleashed unprecedented price transparency across both online and offline worlds.  Comparison shopping engines offer convenient price comparison for goods across online retailers, helping consumers easily discover who has the lowest prices online.  People are “show-rooming” (i.e., visiting real-world stores to physically evaluate products), but then using their smartphones to research the lowest price and often buying the item online.  And daily deal sites bring transparency to deep discounts offered by local offline retailers, helping to lure bargain-conscious shoppers attracted to bargain basement prices.

Competing simply on price is a really tough road for the vast majority of merchants.  There can only be one low cost provider in any market, and price competition can result in Darwinian struggles for survival.  A few decades ago, big box merchants like Walmart used their cost and selection advantage to severely undercut mom and pop merchants and forever change Main Street.  Some of you may remember the movie “You’ve Got Mail”, where Tom Hanks’ big box bookstore put Meg Ryan’s quaint bookshop out of business.  Well, a sequel must be brewing because Internet retailers like Amazon are using their cost and price advantage to crush those same big box bookstores…and music stores…and computer and electronic stores.  Most of the once highly competitive physical chains in these verticals are history, and the few remaining holdouts like Barnes & Noble and Best Buy are desperately fighting a pretty inevitable extinction.

Merchants are desperate to find ways to compete outside of direct price competition.  Enter the loyalty program.  All sorts of retailers have loyalty programs, be they the nearly ubiquitous punch card from your local sandwich shop or more elaborate programs from large offline and online retailers.  Some of you may recall the famous Seinfeld episode about George’s enormous wallet, which was filled with loyalty cards from half the retailers in Manhattan.

A set of new companies is seeking to bring digital efficiency to the loyalty programs of offline merchants, leveraging a combination of the Net, mobile devices and data analytics.  Instead of carrying a wad of cards from individual retailers, people carry one card or one smartphone app that can be used at multiple participating merchants.  Instead of manually tracking visits, merchants rely on smartphones and tablets to digitally record the visits.  And instead of merely redeeming paper cards, merchants tap this digital information to really understand their customer behavior and the identity of their best customers.

Andreessen Horowitz is proud to announce our most recent investment in one of the market leaders in the emerging loyalty space: Belly.  We elected to invest in Belly for the following reasons:

  • They have a talented and committed management team, led by Founder and CEO Logan LaHive.
  • Belly has built an elegant product that fully leverages emerging trends in mobility.  Every merchant has a consumer-facing iPad at their cash wrap that actively promotes their rewards through Belly, and in the mechanism through which consumers check in.  And consumers can check in at Belly using either a smartphone app or a physical card. Belly also brings an approach to loyalty that goes well beyond simple “buy x times and get y”.  They work closely with every merchant to develop rewards tailored to that merchant’s unique attributes, integrating many non-financial rewards that bring out the personality of the business.  A couple of my favorites include “name your own Slurpee” at 7-Eleven in Chicago, “cut the line” at Southport Grocery, and ”win an ice cream date with Jerry (yes, that Jerry!) from Ben & Jerry’s in Washington, D.C.”.
  • Belly is attacking the market aggressively and has already signed up over 1,400 merchants and 200,000 consumers since launching last August.  This is not particularly surprising as their original funding came from Brad Keywell and Eric Lefkofsky at Lightbank, whose investment Groupon acquired merchants at a blistering pace.  We are psyched to work with Brad and Eric on Belly.
  • We believe having a large, connected network of merchants and consumers affords interesting opportunities beyond loyalty programs down the road.

I’m proud to join Belly’s board and will be actively working with the Belly team on a rewards program for achieving their key milestones.  My current favorite: The team gets to pie our own Mr. Andreessen after adding their 10,000th merchant (an option I have yet to share with Marc—we’ll soon see if he reads my blog posts!).

[popover_trigger handle=”Right-Above-It”]Facts are simple and facts are straight
Facts are lazy and facts are late
Facts all come with points of view
Facts don’t do what I want them to
—Crosseyed and Painless, Talking Heads (written by Brian Eno and David Byrne)

[/popover_trigger]

[popover_content handle=”Right-Above-It”]Artist: Talking Heads
Track: Crosseyed and Painless
Album: Remain in Light
Released: 1980
Label: Sire[/popover_content]

[single_grooveshark code=”hostname=cowbell.grooveshark.com&songIDs=247900&style=metal&p=0″ width=”150″]

Business growth at established companies tends to fall relentlessly over time in the absence of inspired innovation, an impact I affectionately refer to as “gravity”. If a CEO wants to fight this gravity and improve the long-term growth trajectory of his or her business, he or she needs to take proactive, concrete steps to make it happen.

As CEO, I was always trying to develop and test a portfolio of potential new initiatives to support business growth, targeted at both optimizing the core business as well as adding new layers of growth (see my last post on this topic about Adding Layers to the Cake). I wanted to identify completely new initiatives that would boost business growth—things we weren’t already doing. Things you are already doing are largely yesterday’s news, and their impact on future growth tends to wane over time. Implementing completely new innovations can help your business fight gravity.

At OpenTable, one of the most highly leveraged examples of an innovation to optimize our core business was developing a rigorous methodology to pursue and assess potential site improvements. A while after I became CEO of OpenTable, my predecessor Thomas Layton (who did a spectacular job positioning OpenTable for long-term success) sent me a fascinating video of a guy named Ron Kohavi talking about Amazon’s approach to something he called data-driven product development. Here’s an old link to one of his presentations (FYI, it only works sporadically): http://videolectures.net/kdd07_kohavi_pctce/.

The video details how Amazon rigorously deployed A/B testing to optimize website efficiency. Kohavi starts the presentation by showing a number of different executions of the same feature that they had tested over time, and he asks viewers to vote on which they thought had performed better. The results suggest that the folks in the audience—all website geeks—were not able to consistently pick the winning execution. That was mildly surprising. But what was astonishing was the delta between the results driven by different executions of the same feature: what often appeared to be subtle changes could drive huge improvements in performance!

In the video, Kohavi also talks about the impact of the “HiPPO” (Highest Paid Person’s Opinion) in the product development process. Not surprisingly, most HiPPOs believe that they know intuitively what will work best (spoken by the former HiPPO at OpenTable). But pretty much none of us have the product instincts of a Steve Jobs, and Kohavi makes a very compelling case for letting the data and not the HiPPO make the decision.

So we resolved to test data-driven product development as one of OpenTable’s potential core business optimization initiatives. We tasked a talented product manager, Julie Hall, to lead the effort and we procured tools to inform the effort. For the art side of the effort, we found the low-cost and highly efficacious usertesting.com service that enabled us to get qualitative user feedback literally overnight to inform what we planned to test. And for the science side, we bought the overpriced but also highly efficacious “Test & Target” system from Omniture (developed by Offermatica, now owned by Adobe) that enabled robust quantitative measurement of a number of simultaneous A/B tests.

These two tools worked together marvelously. One time, we literally stumbled upon a big “improvement opportunity” (a.k.a. a nasty usability problem on the site). We used usertesting.com to task a handful of unregistered users with making a reservation. But we watched in horror as a significant minority of the test users got trapped in our “Sign-In” functionality and couldn’t complete their online reservation. In the real world, they would probably get pissed off and simply pick up the phone (OpenTable’s biggest competitor for consumers) and call the restaurant, a disaster for our user acquisition, brand affinity and OpenTable economics.

Here is the offending page:

The problem we encountered was that non-registered users would set the radio button that said “I am a new OpenTable customer” and then fill in their email address and select a password….which sat under the “I am an OpenTable member” section. This combination caused the page to return an error message.

In response, we developed alternative treatments of our Sign-In functionality and tested them via Test & Target. The winning executions presented non-cookied users with a form tailored directly to new users, with clear visibility of a link for existing members to “Sign In”:

After the user hit the “Complete Free Registration” button, we then presented them with a popup that prompted them to register to become an OpenTable member:

These simple changes boosted our reservation success rate by 10% over the prior implementation. And a 10% improvement in the revenue stream that comprised well over half of the company’s total business due to one simple change was a monster win for the business.

Over time, the data-driven product development methodology at OpenTable matured into a highly disciplined testing regimen. Hundreds of tests have been run in the past few years. Not all were homeruns like the change above, but lots of singles and doubles supplemented the occasional home run to have a highly material impact on the business. I can’t recommend a rigorous data-driven product development process enough to managers of website businesses—it’s extremely low-hanging fruit in the pursuit of growth.

Other examples of core business optimization initiatives that helped OpenTable boost growth included:

  • Developing a new version of our enterprise software used by restaurants that improved search-to-reservation conversion by having the software better mimic the decision-making process of the person at the host stand
  • Redesigning key pages of the site to improve their efficiency, such as a complete overhaul of our search results pages (tested thoroughly through A/B testing)
  • Focusing dedicated resources on optimizing the percentage of OpenTable restaurant customers who had “make an online reservation” links on their own websites, as well as improving the visibility of those links
  • Applying concerted product and engineering efforts to boost our ranking in search engine results
  • Hiring a lot more sales people to accelerate the acquisition of restaurants using OpenTable (not product, but highly effective)

The key takeaway here is that all of the above were new, concrete initiatives that were not yet part of the company’s arsenal. Their successful deployment helped fight off the impact of gravity and led to accelerating growth for the company.