Tag Archives: Amazon

The Mom ‘n Popification of E-Commerce

3 Sep

The e-commerce market in the US has grown at double digit percentages for the last several years despite the general economic slowdown.  This growth is expected to continue as e-commerce continues to take share from traditional retail.  Forrester estimates that  e-commerce will continue to grow at over 10% annually for the next few years and will hit 10% of total retail sales in 2015:

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This growth and other factors like new business models (subscription commerce, direct-to-consumer, etc.) has led to an explosion in new venture-backed startups over the last 5 years.  As some have said, it’s “E-commerce 2.0.”  Birchbox, OpenSky, ShoeDazzle,  ModCloth, NastyGal, Warby Parker, Chloe + Isabel, etc. – just to name a few.  

One trend that I think is overlooked in this mix of new e-commerce startups is what I call the “mom ‘n popification” of e-commerce.  You now have thousands upon thousands of online retailers and small manufacturers-cum-online retailers that are trying to build businesses online.  And unlike their venture-backed counterparts, they are bootstrapped or have taken non-institutional friends and family capital.  

These are the online equivalents to the small, local physical retailers we see all over the country.  Some will perhaps grow into much larger businesses, but the vast majority will either stay small or in some cases grow to medium size through slow but steady growth.  Like their physical retail cousins, they need to contend with their big box WalMart equivalents – Amazon, eBay, Blue Nile, etc.  

In the physical world, retail started as small, highly local businesses.  Even though organized retail concepts like the department store had been around for quite some time, it was only really in the last half of the 20th century where you saw the establishment of big, national chains in American retail.  

The online world seems to be operating a bit in reverse.  Amazon, eBay, Overstock, etc. were the early pioneers starting in the mid 1990s and grew quite rapidly in sales and market cap.  

What’s happened now though is that the barriers for small, “mom n pop” entrants to start selling online have really lowered.  It’s easier than ever for someone without an existing brand and very little capital to start selling online.  I think this is due to many factors:

  1. The growth of cloud services means that there’s now e-commerce infrastructure delivered as a service.  And it’s affordable.  Anyone, for instance, can create their own e-commerce store using Shopify and be up and running with a professional looking storefront in a matter of hours.  There’s affordable SaaS products for dropshipping, managing social referrals campaigns, and so on and so forth.   
  2. Payments – a subset of the above services – has been a particular pain point for people looking to sell online.  Mundane issues like accepting multiple currencies have historically been a nightmare for storefront developers.  These problems are being solved today by Braintree, Stripe, Google Checkout, etc.  
  3. The mainstreaming of using your credit card online.  Everyone transacts online now in the US and levels of trust when buying online are much higher than they were 10-15 years ago.  Simply put, it’s easier for a small, no-name seller to credibly hawk their products online.  
  4. The growth of Google since the early 2000s and the growth in Facebook/Twitter has created huge new channels for online marketing.  There are more opportunities than ever for sellers to get discovered organically or through advertising.  
  5. Finally, I wouldn’t underestimate the importance of free shipping, which was pioneered by Amazon Prime and has become table stakes in many e-commerce categories.  

I expect this trend to continue.  Aggregate e-commerce volume will continue to be concentrated heavily between Amazon, eBay, Walmart.com, and a few other large players.  But I think the long tail of sellers will keep growing.  Also, new categories of e-commerce will open up to smaller players as services like same-day delivery 3PL gain traction.  Most of these companies will occupy small niches, but they can be profitable businesses for their owners and good employers.  

Finally, I’m very bullish on prospects for horizontal players who are providing software or services to the mom ‘n pop e-commerce market.  Shopify, for instance, has a very bright future as a public company, assuming they don’t let an Amazon or eBay buy them beforehand. 

Wall St’s too short term? Look in the mirror.

11 Aug

A friend sent me a link today to Jeff Bezos’ letter to shareholders from Amazon’s 1997 Annual Report.  It’s a great read.  Bezos lays out his long-term operating principles and basically cautions investors that Amazon will (a) focus on long-term strategy and dominance; and (b) this will mean that it will sacrifice short-term profitability.  Amazon continues to follow this strategy today as it invests heavily in long-term bets (AWS, Kindle, logistics infrastructure, etc.) and runs a low-margin business.  And investors continue to reward the company.  The stock is at an all-time high and it’s market cap is approaching that of traditional software giants like Oracle.  The latter fact is pretty astounding when you realize that Oracle had $5b of operating income quarter, whereas Amazon had <$100m.

I say all of this because one of the big debates in Silicon Valley over the last 4 years has been over the merits of going public versus staying private.  And one of the most often cited reasons for staying private is the ability to “innovate” outside the quarterly earnings pressure of public markets (other reasons are the distraction of the IPO process itself, cost of filings and ongoing SOX compliance, etc.)  In most cases, I don’t think the idea that Wall St is too short-term is a valid reason to stay private, though there may be other reasons.

wall st bull

There are two related arguments people make.  One is that the market is too focused on short-term earnings.  The other is that public companies can’t innovate because of this.  So I ask: what’s the evidence for this?  Some of the most innovative companies in tech – Google, Apple, Amazon, VMWare, eBay, Tesla, Netflix, Linkedin – are public.  These companies don’t have any trouble pursuing new initiatives, speculative ventures, interesting M&A, high R&D spend, etc. under the glare of the public market.  And every company on this list has been richly rewarded by the market.

In fact, some of these companies actively shun Wall St’s supposedly myopic focus on short-term earnings.  Amazon continues to be an incredibly low margin business and continues to invest heavily in growth and new businesses.  Similarly, Google doesn’t even provide quarterly guidance to investors.

The reality is that the public companies that face supposed Wall St “short termism” are the ones that have flawed business models.  Would Zynga and Dell (to name two troubled companies) rather be private right now?  Of course, well at least we know for sure in the latter company’s case.  It would take the heat off.  But the reason there’s heat to begin with is they’re flawed companies.  People don’t want to play expense-to-produce Zynga style social games on their desktop, and PCs are rapidly losing favor to the tablet revolution.  Public markets are very efficient at recognizing this.

If Dell and Zynga laid out a credible, long-term story to investors then I public markets could be receptive.  But they haven’t.  Dell has been trying to transform itself in to an IBM style enterprise software and services company for years.  It has spent billions of dollars in the process, which incidentally it may not have had access to as a private company.  Similarly, Zynga hasn’t laid out a credible story for where it goes from here, for example backtracking on earlier talk of exploring the online gambling market.  Zynga might even be in a worse position right now if private because they wouldn’t have access to the $1.1b of cash they currently have on their balance sheet.  Ditto all of this for other companies like RIM, which is also reportedly thinking of going private to “refocus with less scrutiny.”

Maybe the point of all of this is that a few exceptions withstanding, the best companies go public and they have no problem doing so.  They’re able to think about the long-term and invest in innovation without difficulty.

If you can’t compete effectively under the lights of the public market, don’t blame Wall St.  Look in the mirror instead.

Innovation Debate: Take Two

7 May

Yesterday I posted the video of a recent debate between Marc Andresseen and Peter Thiel regarding the state of “innovation.”  One of Thiel’s contentions is that breakout innovation leads to big ideas which in turn ends up creating huge companies.  To support his thesis that levels of innovation have declined, he points to the fact that the total market cap of tech companies founded in the 1990s is significantly larger than the combined market cap of companies created in the 2000s.

A couple thoughts and questions on this:

  1. There is a time effect here that needs to be adjusted for.  There’s natural market/GDP growth that older companies will have benefited from.  Salesforce has a $25b market cap today, it’s completely plausible it will be 2-4x that in a decade. Ditto for Facebook, Workday, etc. etc.  This effect, however, probably isn’t large enough  to explain the variance on its own.
  2. How much of this effect is one company – Google?   Google’s market cap today stands at around $285b, dwarfing the next largest company in the analysis set (Amazon at $116b).  Google is a special company that’s going to skew any comparison like this.  Google was also incorporated in September 1998.  Move that forward 16 months and suddenly Thiel’s comparison reverses.
  3. While the aggregate public market cap dollars created might have declined between the 1990s and the 2000s, my sense is the the absolute number of tech companies reaching a $1b valuation has definitely increased (anyone have the analysis to back this up?).  It certainly wouldn’t be any surprise given the lowering of startup capital requirements, huge increase in internet users and IT spend, etc.
  4. Fewer companies are going public today, which Andresseen noted in his comments.  A proper analysis would need to adjust for M&A transactions and valuations of well-established private companies like SurveyMonkey.

My point here isn’t to argue that Thiel’s comments are necessarily wrong.  I just don’t know that looking at public company market caps leads to the easy conclusion he’s trying to make.

His overall question still stands though.  Are the big, low hanging opportunities in tech already taken?  Are there still $100, 200, 300 billion opportunities available?

Note: spoke to a friend after this.  He made a great point, which is that it would be interesting to do Thiel’s analysis for other sectors.  Which sectors show the opposite effect?  My guess would be Healthcare, Biomed, and maybe Energy/Commodities?

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