Venture Capitalist Roundtable: Money Matters

In the fourth quarter of last year, I sent a list of questions to four leading venture capitalists — J. Skyler Fernandes, managing director of Simon Venture Group; Ellie Wheeler, partner, Greycroft Partners; Ken Seiff, managing partner, Beanstalk Ventures; and Josh Goldman, general partner, Norwest Venture Partners — to get their thoughts on where the retail startup and technology community is headed in 2016. Here’s a sampling of their answers.

What are some of the trends you’re seeing in the world of retail/e-commerce technology right now?
Ellie Wheeler: Customization and an overall trend around personalization in terms of the site experience, true in-store experience and mobile experience. Retailers and e-commerce companies are servicing each customer in the best way they can. They’re understanding all the previous interactions they’ve had with a customer, making sure they’re showing that customer the right things, in the right way, in the right order, at the right time on the right device. There’s been a lot of technology, solutions and people putting a lot of time and effort into nailing that personalization part.

We’re also seeing customization creep into products themselves. Mass customization has been around for a while, but you’re starting to see creative ways that people are going to market and allowing companies to put their own spin on things within a framework that makes sense for the producer. For example, we just invested in a company called Shoes of Prey [a startup that enables shoppers to design their own shoes online]. There are lots of examples of companies doing interesting things with customization. It’s a big undertaking on the supply chain side to be able to do that, but it’s an area to watch and something we’re seeing a lot of.

Ken Seiff: In general, we don’t focus on investing in the hot investing trends. We’re very focused on investing in companies that are solving the big problems that retailers are facing right now, such as low conversion rates on mobile sites; making the purchase and sale of excess inventory less manual and more efficient for both buyer and seller; and helping retailers get more traffic into their stores.

J. Skyler Fernandes: The rise of new brands starting with e-commerce and expanding to physical retail once they reach scale is a trend that will continue as pure-play e-commerce has shown to be quite difficult, and the benefits of being omnichannel are the drivers towards becoming profitable. The line between physical and online retail is blurring, and future generations will just consider it to be commerce, not two separate businesses.

Companies that have shown they can achieve high multiples of revenue compared to capital raised are very attractive. Another attractive aspect is if a company can demonstrate it’s honing in on its lifetime value (LTV) and cost to acquire a customer (CAC), and show it can continue to increase LTV and decrease CAC or create other efficiencies to get to cash flow positive. Every company is an attempt to build a machine where you put in money on one side and more money comes out on the other. 

Josh Goldman: The two most interesting trends in retail/e-commerce right now are vertically integrated market disruptors and in-store retail analytics. For the former, it’s companies like Warby Parker and Casper that enter existing high-margin retail segments with their own lower-cost, high-quality product. The successful companies in this space not only know how to make a better product while cutting out traditional distribution channel middlemen, but they know how to sell a better product to millennials via social promotion, edgy marketing and “designed by our generation, for our generation” messaging. They also succeed by selecting markets that are dominated by oligopolistic (read: tired, lazy, slow), older-world competitors that are burdened with existing distribution infrastructure that keeps them from responding quickly to internet-born, nimble entrants.

For in-store retail analytics, companies like Nomi/Brickstream, RetailNext, ShopperTrak and Euclid are bringing actionable data on consumers to brick-and-mortar retailers. Online retailers have long had a huge advantage over sales personnel in a traditional store: the systems know purchase and browse history, clickstream data, and even dwell time on a page for a large percentage of shoppers.

New companies are bringing this omnichannel history and preferences to traditional retailers in ways that let them instantly target shoppers in-store in similar ways to online retailers.

What questions should entrepreneurs be able to answer about their companies before meeting with you?
EW: The good thing is there have never been more resources for entrepreneurs and startups to access to understand what investors want to see and the best way to do things. They should start by looking at VCs that have blogs. There’s also the AngelList Guide [a website for startups, angel investors and job-seekers who want to work at startups], and the Y Combinator [a group that provides seed funding for startups] puts out really great content as well.

The things that are going to matter all the time but especially at the early stage — because you can’t see all that much more — is the team and why it’s particularly well-suited to attack this particular problem at this particular time. Being able to tell your story with that frame of reference in mind is an effective way to break through the noise and give a concise overview.

And there are other basic boxes that need to be checked: that the market is large or has the potential to be large in the near term; understanding the dynamics of the market; and understanding who their customer is and how they’re going to reach them, hopefully in somewhat of a differentiated manner. Having thought through these questions as well as of course the business model are important. But a business model isn’t always going to be perfectly fleshed out. In fact, of course it’s not going to be. But showing that they’re thinking about these things and being thoughtful about these questions is very important.

JSF: I’ve created an investment evaluation sheet that I use for meeting with each company, and it covers 12 core criteria: target market, problem/need, solution, team, traction, competition/advantage, revenue model, strategy/expenses, financials, exit opportunity, capital raise/investors, strategic value to Simon and/or retailers and the retail industry. This evaluation sheet is based on “The Best Startup Pitch Deck” that I created a number of years ago and has become the No. 1 pitch deck template online, and is used by many accelerators and business schools.

JG: Here are some questions I ask entrepreneurs to think about:

• What problem are you trying to solve?
• Why can you uniquely solve it?
• How big is the market for what you’re going to offer?
• How do you plan to successfully enter that market?
• What’s the specific point of value creation and how will you get paid for it?
• Why is your team the best team in the space?
• Describe each of the competitors in the space (current and past efforts) in detail, and tell me why what you’re doing is going to let you compete effectively or avoid past mistakes in the sector.

And these questions are specific to retail-based companies:

• How can you compete with Amazon?
• Tell me how your gross margins are large enough that you can build a big company.

KS: I usually like to start by trying to understand the problem they’re solving, the scale of the opportunity, how their solution is defensible, and why their team is the best team in the world to take on that problem.

What are the challenges for a retail startup once it receives funding? And on the flip side, the opportunities?
JSF: Like every startup, it’s using capital most efficiently to grow and reach the next key milestones and validate the business model further so you can more easily raise the next round of capital or align for an acquisition. Make sure to raise 12 months to 18-plus months of a runway so you can use most of it to grow, and a portion of it to bake in extra time needed to hit your milestones and raise your next round.

KS: Having a great vision and executing on it take different skills. The first big challenge after an early investment is converting the idea into an executable business plan and then effectively acting on it. The biggest and often most overlooked opportunity after raising capital is to focus on getting the experience perfect for a small set of customers before aggressively spending the money on growing team and company.

EW: Like all early-stage companies, execution is ultimately the name of the game. That involves a lot of hard work, making the right decisions, iterating quickly and not waiting too long to get product out to the market. Instead, it’s kind of testing and making sure to cut off things that aren’t working and double down on those that are, and doing that early.

Additional challenges that retail startups face that others don’t are if it’s an inventory-based business, it’s going to have working capital challenges that a software business isn’t necessarily going to have. But the biggest challenges facing these direct-to-consumer retail businesses are finding their supporters, finding their early adopters and the ones who really love their brands. That will teach them a lot about what resonates, and then hopefully they can learn some lessons that they can then apply on a broader scale as they attempt to really grow their user base in a cost-effective manner.

JG: The biggest post-funding challenges are attracting and retaining a stellar team, with strong knowledge of the sector, in a highly competitive job market; finding a go-to-market strategy that’s realistic and provides real advantages; and ensuring at least three of the following four things: unique product or supply chain access, gross margins above 40 percent to 50 percent, defensible distribution advantages, and compelling marketing strategies to reach your target demographic. Great retail startups can have all four before, or shortly after, their first funding round. Casper is an example, which is why we invested in its seed round despite us doing very few seed-stage investments.

What can traditional retailers learn from the startup and tech companies you’re funding?
JG: There are three main points I would focus on:

• Be willing to cannibalize your own products or markets with lower-cost, higher-value offerings, or someone else will do it to you.
• Forget traditional concepts of “channel conflict”; it doesn’t exist anymore. You may have to compete with your existing channels, cut out low value-add middlemen, and sell direct to consumers. If you’re not willing to do this, despite pressure from partners or retailers (or your own internal teams), you’ll lose out to innovators.
• Rethink store concepts and break down walls between online and offline teams, or between platform teams. Retail is no longer segmented into online and offline, desktop or mobile, Android or iOS, or even wholesale vs. retail. Perpetuating those divisions of responsibility can be fatal to incumbent retailers today.

EW: More traditional retailers are reaching out to startups to partner and build relationships with. They’re embracing these companies’ innovative concepts, whether it’s giving them actual space on the retail floor, running a trial or partnering with a retail tech startup. Traditional retailers get access to quick-moving teams that in some ways can be like outsourced R&D for them — they’re nimble and able to collaborate. And the startups are of course hungry for the knowledge, resources and scale that the traditional retailers have. There’s a lot of value to more collaboration there.

KS: Most of the companies we fund are designed to help traditional retailers. We actually learn from them and then invest in solutions to the most vocal problems they have.

JSF: Traditional retailers can learn how to solve their biggest challenges and increase revenue with the help of our portfolio companies’ solutions. At our firm, we play a very hands on role with our retailers to figure out where their specific problems are and what solutions they’re looking for. We use this industry insight to help direct our investments, as we know there’s a common market demand and it’s solving a big pain point. 

What trends should retailers be looking out for in 2016?
EW: We’re going to see more technology in the retail environment and more of an interactive experience, which we’ve already begun starting to see. We’re also seeing a lot of just-in-time inventory, which is kind of like 3-D printing, where you can do things on-demand or just in time and it enables you to be more nimble and fluid. A lot of those technologies are still nascent, but we’ll continue to see more of them.

JSF: Well, everyone says omnichannel, which is likely true as a general near-term trend. However, as a VC I’m more interested in what’s after omnichannel. If you look at the history of commerce, we’ve evolved from physical products sold via physical channels to nonphysical products (e.g., insurance, stock certificates) via physical channels to the rise of e-commerce where physical products are sold via digital channels to the rise of SaaS with digital products sold via digital channels. Omnichannel and even the Internet of Things is a combination of all of these. I believe the future beyond this will be represented by what I’ve coined as “the fourth dimension of retail,” where space and time are used differently. Retail both online and offline will create a unique and personalized experience, logistics will become more localized, inventory will be on-demand, and retail will become something less transactional than how we think about it today.

KS: Mobile commerce is really challenged. Traffic is off the charts, but conversion is abysmal. Solving this gap is essential to this industry. The social networks have found a really creative solution to this problem by putting buy buttons on products featured on their sites. These buttons deliver a super-fast experience without cumbersome checkouts. This is an ingenious solution because the social networks already have a lot of app downloads and already influence consumer purchase decisions. I believe that social commerce and buy buttons will drive the biggest shift in e-commerce that we’ve seen in the last 20 years. This logic was the basis for our three-time investment in PredictSpring [a mobile platform that helps merchants build iOS and Android applications]. Social commerce in 2016 is analogous to what e-commerce looked like in 1998 — a foregone conclusion waiting to happen. The rise of new brands starting with e-commerce and expanding to physical retail once they reach scale is a trend that will continue.