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)
The only real opportunities I believe under the fulfilment category in my three heuristics is customer service. In as far as that’s a big part of fulfilment in its extended sense, meaning, the customer experience end-to-end, I do believe that most business models can actually be turned on their head via excellence in customer service, even very basic ones, as Zappos has shown us and its copycat Zalando in Europe. Very hard businesses to get right, with huge capital and emotional expenditure in getting the right culture and customer fanaticism but they pay off big when they work. I would almost always switch providers of anything – banks, airlines, restaurants, phone carriers – for better service.
Which brings us to the third (or first rather heuristic on the list above): Inventory. For me having unique or differentiated inventory is the strongest position to be in today in consumer internet. Note: some may consider it the same as saying having a ‘better product’, which i do not agree with. For me a product is all of the above. Its the value you serve the customer end-to-end: you can’t separate the tangible (or intangible) from the delivery model, the price, the customer support.. all of those in one make up the customer experience.
Fulfilment businesses like Deliveroo, or Postmates have very questionable unit economics and need huge capital investments to achieve critical density in any given geography, and then once and if they do they have the challenge of scaling outside of that. They are typically therefore ‘winner takes all’ markets – if anyone makes it at all and will take a very long time for that capex to amortise and start yielding profits – this holds true even of Amazon, the king of fulfilment.
Inventory plays on the other hand can have many winners as the inventory itself is unique and differentiated, often caters to different customer segments, different price brackets, different tastes, and can evolve with fashion trends, giving the vendor the opportunity to evolve with them and reinvent themselves. So if you find access to a differentiated cluster of supply that has demand, and you are sheltered from others getting access to it as readily, you are off to a great start as a consumer internet business.
It’s also interesting that seeing pretty much every success story out there (I still haven’t found a counter example to this) you actually never see companies playing in a mix of the 3 heuristics. They are clearly in one of these three categories much more than any of the others. That doesn’t mean they don’t have ANY of the others but they clearly are much more of one than the others. In other words they are not ‘a little bit of this and a little bit of that’ strategies. They go all in on one. Sometimes by design and sometimes pure luck or serendipity. They may transition from one to the other as they become successful (Nike had a unique product and over time delivered unique customer acquisition strategies by becoming masters of celebrity endorsement, most famously the Michael Jordan shoe that’s now become a big hitting brand of it’s own within Nike) but at the start its very unlikely you can play in more than one of these categories as competitive strengths. So you need to pick, or pick a business that has a natural fit in one, and one that plays to yours strengths and core competencies as a team.
In my company PeoplePerHour it’s also –retrospectively – a clear case of playing on unique supply (better choice of words when referring to people 🙂 . But terminology aside we simply amassed a unique inventory, since 2007, of people and skills ready to work for you remotely for as little as an hour, and that were otherwise unreachable other than in a very disorganised and haphazard way (a little bit of black book, a little bit of asking around etc.) It was a pure inventory play. We only hired proper marketing in-house 9 almost 10 years in, so customer acquisition was never the heuristic we played to. That’s not to say we didn’t acquire customers – we now boast over 2m users on the site.. but it was a gradual acquisition based on having the right supply on our site that attracted them.
Today, almost ten years in, at PeoplePerHour we are investing heavily across all fronts to make that transition… as i keep telling my team we want to win on quality of community (what i call inventory above), customer service and great design (which in the above i put under fulfilment. Being a services platform instead of one selling tangible products, the equivalent – I believe – of the distribution power house that gets the item to your door the next day, is well designed – in the extended sense of the word- software that makes the workflow seamless, painless and just doesn’t make you think. It helps you just get the Job Done (as our tag line says) effortlessly.
We are not 100% there yet, but the areas we are investing in are entirely aligned with my theory above.
Rebagg I believe is an inventory play too, as is my other recent investment in VillageLuxe. The team has shows the ability to find unique ways to attract, evaluate and purchase second hand bags at a price and quality point that makes them desirable to customers and enough for them to make a healthy profit margin. The big question that remain I think is how scalable that inventory acquisition model can be and how defensible it is if others do the same en masse, especially considering that the underlying commodity (a branded bag) is homogenous. Its second hand use, the condition it’s in and the price points are what make it unique, and the efficiency of the team in executing all that which is quite impressive.
Of course having unique inventory doesn’t make you an instant success, so other criteria came into my investment decision like the team (I met Charles – the co-founder and CEO – a few years ago in Cabarette, Dominican Republic and instantly had good chemistry with him as a person and as an entrepreneur), the unit economics, and good execution. In other words – has the team managed to show some entrepreneurial grit by tweaking and hacking their way to early traction?
The answer for Rebagg, much like all my other investments, is yes. But early traction on its own is not enough if you’re USP doesn’t have a strong fit with at least one of these three categories. It may just be, as Sun Tzu put it, ‘the noise before defeat’ (Groupon?)