This week I completed an investment in Rebagg – a company based out of New York that buys and resells luxury handbags.
I see increasingly more investment opportunities and consistently I find the way that sits with me the best in terms of evaluating them is along three very simple heuristics. I truly believe that in consumer internet today (other tech sectors like Enterprise or Bio, Cleantech etc are a different game altogether) you can only compete in one of three ways fundamentally. That’s it – by the process of elimination almost.
You can compete on
- Fulfilment, or
- Customer Acquisition
Most startup founders knee-jerk reaction is to say ‘we are good at all 3’ but the reality – and the evidence out there – is that you can onloy really win in one, at least at the start,
Put simpler, you either
- have a way to produce or curate products that others don’t have access to or at least as readily as you do (Airbnb, Warby Parker, Uber and eBay at its start fell in this category)…. OR
- you get them delivered faster or cheaper than others (Amazon being the master at this of course) or with better customer experience service (e.g. Zappos, which is now Amazon too not surprisingly)…OR
- you have homogenous inventory (just the same SKUs as the others in other words like Amazon), you are NO better than the rest on fulfilment (you may be using Amazon’s fulfilment in fact or another third party) BUT you somehow are (for a window of time at least) better at customer acquisition. I would put gaming in this category as they live and die over their ability to generate powerful viral loops that become their acquisition channels, although as we’ve seen, rarely sustainable or predictable for that matter.
Of these the third is my least favourable or investable. People who believe they have a sustainable advantage in acquiring traffic over others are like fund managers who delusion themselves that they can bid the index in the long term. They can’t. Trading – be it in stocks or keywords – is an arbitrage play, and like any arbitrage play, the margin trends to zero in the long term.
Of course if you’re Oprah or Kim Kardashian maybe you have a scalable unique customer acquisition channel. But otherwise you’re just kidding yourself that you can buy keywords or Instagram/ Facebook likes better – consistently – than anyone else. You can’t. One could argue that SEO is more defensible if you just happened to be one of those brands that got in early and got indexed well by Google with a stronghold that’s harder to break, but even then you run the risk of your business being shattered one day because of a change in Googles algorithm as we’ve seen happen many a time.
To the second heuristic, i believe that fulfilment i.e. speedy, reliable delivery of whatever it is your buying (be it a tangible product or a service), with great customer support at your fingertips, is important. However, with e-commerce at least, its now near impossible to compete with Amazon on that front. If you’re selling a non-differentiated homogenous SKU and think you can deliver better fulfilment than Amazon you’re deluding yourself. Amazon has been investing billions in building the most sophisticated logistics distribution infrastructure in the world for over two decades. The best you can do is be on it.
Of course not all consumer internet businesses are e-commerce businesses; arguably Uber transitioned from being a prime ‘Inventory fit’ in the above to now being both an Inventory AND Fulfilment play … but only after amassing unique inventory that no one else did (at least as efficiently as them) and put it a click away from the consumer. Now, of course, it also boasts a huge distribution network that its smartly using to go into other inventory categories like food with UberEats (although there the inventory is homogeneous.. the food you get on Uber Eats is not differentiated, it’s the same stuff you can get yourself in the high street or by calling the restaurant themselves so clearly it’s a fulfilment play)