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Sindhya Valloppillil Sindhya Valloppillil (5 Posts)

Sindhya is the founder & CEO of HELIX MEN, a new, soon-to-be launched ecommerce men’s grooming & lifestyle brand. Prior to HELIX, Sindhya was the Global Brand Manager at ZIRH Skincare, where she helped lead its successful exit to P&G in 2009. She was credited with creating and launching 3 brands and creating award-winning products and best-selling products. She has won many industry awards for her work including receiving the coveted Allure Beauty Award and CEW Beauty Award in 2009. Prior to ZIRH, she worked at L'Oreal USA, Limited Brands & Neutrogena Cosmetics in various roles including Marketing, Global Brand Image, Product Development and Innovations. Sindhya graduated with honors from the Global Fashion Management Masters program, a joint program with Fashion Institute of Technology in New York, Institut Francais de la Mode in Paris and Hong Kong Polytechnical Institute. Sindhya is an Adjunct Marketing Professor and Guest Lecturer at Fashion Institute of Technology and Berkeley College. Her writing about the consumer startup world has been published in Business Insider, Business of Fashion, Yahoo Finance and Pando Daily.


Startup Bias & The Culture of Money

Startup Bias & The Culture of Money

How American Consumer Product Innovation & Exports Are Being Hindered

“Running a start-up is like being punched in the face repeatedly, but working for a large company is like being waterboarded.”

- Paul Graham, co-founder of Y Combinator

Just as product managers leave Facebook, Apple, Google and Microsoft to start innovative startups like Instagram, the same phenomenon happens at behemoth consumer companies such as L’Oreal, Starbucks, and Kraft. The only difference is that the domain expertise of these entrepreneurs with a strong consumer background isn’t valued or understood by VCs and angels, and entrepreneurship isn’t encouraged in the incumbent consumer world. Although New York is the beauty, fashion and consumer goods capital of the world, industry support networks incubators, and Y Combinator-style accelerators don’t really exist at the seed stage here for entrepreneurs.

The Inclusive Culture of Money
The advent of ecommerce and social media leveled the playing field for entrepreneurs by enabling startups to bypass Goliath retailers and sell directly to consumers without spending hundreds of millions of dollars in traditional TV and print ads. Although ecommerce leveled the playing field for entrepreneurs, seed stage VCs and angels upset that balance with their obvious funding biases. Without question, there is a startup bias that favors founders from tech companies even when they don’t have a solid tech background. Apparently, someone with business development experience from Foursquare can get venture funding to launch a consumer products brand easier than a former marketing executive from Starbucks. This bias for tech founders makes sense since many investors come from the tech world, and know and respect its leaders. However, this bias doesn’t make sense for a consumer-facing ecommerce company especially one with physical products since domain understanding, specifically understanding of brand, product and retail, as well as industry relationships are necessary for the proper execution of this type of business.

The access to money is skewed. A former VC from Bain Capital or Entrepreneur-in-Residence from Andreessen Horowitz with no traction, no domain expertise – or even understanding – of consumer brand building and product creation have carte blanche. Funding is the least of their worries – pre-revenue, pre-launch, pre-business plan even. They can easily launch a bra company with a senseless algorithm or try to launch a CPG brand without a single product prototype or an iota of real traction.

The initial barrier to entry in a consumer product startup is relatively cost-prohibitive. Costs for building prototypes, production runs, stability testing, insurance, trademarks and legal fees quickly add up. Unless a founder has: significant savings from a former career in banking, a network of rich friends (perhaps from a former career in banking or Summit Series), a trust fund, a wealthy spouse, or a “Daddy” Warbucks, it’s really hard to bootstrap a consumer products company.

Some Great New American Consumer Brands – A Rare Breed
Historically, the U.S. has been great at creating iconic, global consumer brands across categories. People all over the world have fond memories of their first pair of NIKE shoes, or their first Apple product. These brands deliver more than just great products, they mean something. In the last 7 years, I’ve noticed a fewer number of successful American brands emerge despite the increased volume of venture-backed ones launched online.

Among new consumer brands that have launched recently, there are only a few that are primed to be global leaders and even U. S. market leaders: Julep, Nasty Gal, Spanx and Happy Family. Happy Family, an organic baby, toddler and children’s food, is poised to be the next Gerber. Happy Family’s Founder Shazi Visram won the Ernst & Young Entrepreneur of the Year award and the American Dream Award in 2012. Happy Family is distributed in 17,000 stores and 30 countries and it is the leading, premium organic kids food brand in the US.

In a series of very candid articles titled “Fundraising Saga of a Desperate Entrepreneur” in Inc. Magazine, Shazi said, “Of course, the process would have gone a lot faster if we had been able to leverage a VC relationship. Even as our business started to boom, there was an evening when I got to the subway with nothing in my wallet but maxed out credit cards and no way to pay for my ride home.” Most entrepreneurs would have given up at that point.  Shazi didn’t. Happy Family’s revenue nearly quadrupled in 2 years to $64M as of February 2013, and it was recently acquired by Danone because of its rapid growth and innovative products.

These great new American brands are rare breed, and they didn’t have VC funding early on. Nasty Gal’s Founder Sophia Amoruso also struggled for a long time before finally being courted by VCs. How can seed stage investors learn to recognize true talent of founders like Sophia Amoroso, Shazi and Julep’s Jane Park sooner? These founders are true innovators, not opportunists. They didn’t start their companies because they knew that they could raise money.

The Current System of Funding is Hampering American Innovation
While some older existing brands struggle to understand how to adapt and are late to adopt ecommerce and social media, many new brands that launch online think that they can build a brand and product after launching and just spend money to acquire customers. Many outsource branding and product development because they don’t know how to do it. (Dollar Shave Club resells Dorco blades and Harry’s was sued by Gillette for patent infringement. The case was dismissed but that doesn’t mean it won’t resurface or that Harry’s didn’t settle out of court.) The net effect is that these startups are nothing more than VC-funded customer acquisition vehicles with no special brand or products. In the same way you cannot fly a plane that has not been built first, you cannot launch a brand without building it and products first – even with massive amounts of VC funding.

There’s a difference between a real brand, a label and a mere business name. With the exception of BarkBox, which is generating $1M per month with a plan to become a $5B company in 5 years, and a few others, most of the brands launched online these days may have VC funding at very healthy pre-money valuations, but they lack soul, great design and product; often the founders lack business sense too. Many of the VC-funded ecommerce startups are not even cash-flow positive after multiple rounds of funding. Earlier this month, Totsy shut down after burning thru $34M in VC funding. Not only is consumer-facing ecommerce broken, American innovation is being hindered.

Crowdfunding & AngelList Aren’t A Solution For All
Crowdfunding and AngelList aren’t really an option for all startups. Kickstarter, the most popular crowdfunding site, bans personal care goods and beauty. With Kickstarter, Indigogo and AngelList, you cannot control confidentiality either. On the Indigogo website, it even suggests that people “browse the site and look for inspiration.” Who wants their creative blood, sweat and tears appropriated by other people before they’ve even launched? In the case of Pebble (one of Kickstarter’s most successful campaigns), their crowdfunding campaign immediately resulted in many imitators including: Apple, Samsung and Microsoft. Meanwhile, many companies funded via AngelList share one common trait: social proof with the same founder biases seen among VCs.

Shady Angels, “Feign”-gels & Senile Angels – Finding Good Angels Is Tough
Early in my fundraising journey, I met some shady angels, “feign”-gels, who feigned having money, and even a senile angel. One shady angel I met was involved in the Galleon insider trading case. Another who happened to be a professional NBA athlete was busted in a shady gold deal. The third shady angel, who was a VP of Operations at one of largest global shoe manufacturing companies, tried to pull a bait and switch on me and demanded double the amount of equity we had agreed upon at the last minute. No thanks. I also met a few “feign-gels” who never had the amount of money available that they discussed investing. After a few of the exact same meetings with a senile angel who happened to be a retired beauty industry executive, I gave up on him. I’ve met some world-renowned beauty entrepreneurs who are barred by non-competes from investing in my startup and even advising me officially. Consequently, I switched gears and then tried to focus on VCs.

 The Focus Should Be Product & Brand First– Not Customer Acquisition
Investors are used to valuing companies with traditional metrics like Customer Acquisition Cost and Lifetime Value, but do VC’s know how to really measure and value a brand? Bonobos’s Nordstrom partnership deal has “helped with the biggest problem modern ecommerce companies are having: Customer acquisition costs. Nordstrom has effectively given Bonobos an acquisition channel that it also gets paid for. “ Despite that, getting a purchase order or an exclusive in-store national distribution deal, which would help scale a business, may not be enough “traction” for a new brand seeking funding from VCs.

VCs often fail to consider the power and soul of a well-built brand. When Steve Jobs died, many people all over the world who didn’t know him, including me, cried. I normally don’t care about celebrities, but Steve Jobs inspired me. I admired him as a marketer, brand builder and an entrepreneur. He built one of the greatest American global brands of the decade. An iconic global brand that inspires us to Think Different. Sure, Apple sells great tech products, but it is a brand that has brilliant marketing and design. It’s an edgy brand with global appeal. There aren’t a lot of great new American brands like that anymore. Before helping create Apple commercials, he helped build and market products – great products. Steve Jobs was a brilliant marketer and innovator, not a customer acquisition guy.

Time for a Paradigm Shift
Most first-time, non-crony founders are climbing up a very steep slope. Every once in a while, however, a new, talented entrepreneur breaks out of this very closed, inbred startup ecosystem. As John Maynard Keyes once said:

“The difficulty lies not so much in developing new ideas as in escaping from the old ones.”

Isn’t time for a paradigm shift?

Original image created by the Images of Money flickr photostream.

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The Money Dump: Why Consumer-Facing Ecommerce is Broken

The Money Dump: Why Consumer-Facing Ecommerce is Broken

Join a panel discussion with VCs and brand experts, like Sindhya, at OS Fashion’s next event: The Founders’ & Funders’ Dilemma which will discuss the current state of e-commerce: VCs, start-ups and all.

[Original article published by OSF contributor Sindhya on Business Insider.]

I finally found panties on True&Co., an ecommerce lingerie company. It took them nearly one year to start selling panties. They allegedly sold them when I mentioned them in a viral article titled VCs Think My Boobs Need An Algorithm in January, but the panties were impossible to find. Nobody could find them. Now you can find them after about 6 minutes of multiple choice questioning and some scrolling around online. But you still won’t get a “true” fit from their algorithm.

Another startup that I discussed in that article is Dollar Shave Club (DSC) which is now raising yet another round of funding even though they raised a total of $10.8M in venture funding last June. Earlier this month, DSC finally launched their 2nd product – Dr. Carver’s Easy Shave Butter. Who on earth is Dr. Carver and what does he have to with DSC, you ask?? Is Dr. Carver a new brand? Well, I bet your guess is as good as Dollar Shave Club’s. I’m not joking.

Consumer marketing is an art AND a science. It’s something that the founders of many consumer-facing ecommerce companies and their investors don’t understand. The Science Lab in LA, which launched DSC, and the DSC management team and their investors clearly don’t comprehend it. That’s why consumer-facing ecommerce is broken.

 

To date, all that DSC has done is create one funny video that went viral. DSC’s second video was a complete failure so they pulled it from YouTube. Interestingly, Grumpy Cat is a damn funny video that went even more viral, and it has more brand potential than DSC. Grumpy Cat could be branded similar to Angry Birds with games, lunchboxes, candy, etc. Naming a brand Dollar Shave Club is problematic since DSC’s intent was to build a global lifestyle brand. The name limits them to “dollar” and budget pricing and also to the shave category. Will they call their shower gel “Dollar Shave Club Shower Gel”? That doesn’t exactly make sense. On that note, Dr. Carver’s Easy Shave Butter, its newest product, doesn’t make sense. The management team doesn’t understand branding, positioning and pricing. The cost of the Easy Shave Butter product is $8 while the average shave cream or shave gel from leading brands like Edge or Gillette is $4 or less (even $2) – everywhere, even at the corner CVS or Duane Reade in Manhattan and on Amazon.com. If DSC’s goal is to disrupt the industry by offering cheaper products, they are certainly NOT doing that with Dr. Carver’s Shave Butter.

What I don’t understand is what exactly is DSC doing with $10.8M? What took them so long to launch the shave butter product? It is stock packaging (which means it’s off-the-shelf without distinct custom design). It’s also a stock formula that they sourced from lab in Dallas, Texas. Just like the non-proprietary blades that they source from Dorco, a Korean company, DSC’s Dr. Carver’s Shave Butter is not a proprietary formula. The packaging is a knockoff of Kiehl’s with its apothecary-esque branding which is a very inconsistent departure from DSC’s budget branding. Product lead time for their stock packaging and stock formulas is NOT 1 year. They also don’t need $10.8M in funding to sell non-proprietary products with stock packaging. Here are the facts: For a product with stock formula and packaging, it should cost: less than $25K for a small production run of 7,000 units with a lead time of 2 months. The cost of goods per unit should be no more than $3.57. With a COG of $3.57 and retail price of $8, their markup is 55%. That should yield about $56,000 in sales. Keep in mind that this inventory is seasonless, trendless and sizeless too. It’s a very lucrative business for those who truly understand it.

The fact that DSC waited one year to launch a shave butter/cream demonstrates that they: 1) don’t spend their cash wisely, and 2) they don’t understand consumer psychology. When products are used in tandem, marketers should pair these products together and so that the consumer can buy them together. When most people buy a cup of coffee at a coffee shop, they will go somewhere where they can also get milk and sugar. The only exception to this pairing rule is when a product has superior performance and distinction. That’s not the case with DSC’s razors.

The biggest question I have is: why on earth is DSC raising yet another round of funding? Word on the street is that they are now hoping to close a Series B of $45M in June. I’m still unclear on what they did with $10.8M which they raised at a hilariously healthy $30M pre-money valuation – they’re hemorrhaging their investors’ money! In addition to STILL offering free razors for a month to new customers, they are now also doing radio ads and TV commercials during the NBA Playoffs! The going rate for a 30-second spot during the NBA Playoffs is $500,ooo. At this rate, I predict that DSC is going to follow in the footsteps of hyper-inflated, struggling companies like Groupon and BeachMint. It makes no sense to keep pouring money into a brand that isn’t really a brand, doesn’t have special products and doesn’t understand its industry. Without great branding and experience, you’re just another product.

 

Harry’s, a new grooming brand that launched online last month with upwards of $4M in VC funding, isn’t much better than DSC. Marketing and branding aren’t their forte either. The funniest comment I saw on their Facebook page was: “Is this razor only for white people who all look the same?”

They are definitely too niche if people are saying things like that. Their logo is quite possibly the ugliest logo that I’ve ever seen. You cannot just reapply the same formula that worked at Warby Parker and move it to Harry’s and expect success. You cannot just shift one executive/founder from a successful company to another company and category and expect success. We already learned this lesson with Ron Johnson and J.C. Penney. The minute more compelling grooming brands launch DSC and Harry’s will be in serious trouble.

 

Here’s another shocking startup story: A NY-based luxury goods and fashion curation startup which closed $2M in venture funding in October 2012 and was slated to launch in November/December 2012 delayed its launch by one whole year. The only reason for the delay is poor planning. Unlike many other startups, this startup isn’t stuck due to lack of funds. The founder of this startup, who does not have a background or understanding of fashion, luxury goods, buying, or ecommerce, did not understand the buying cycles for purchasing products from third party brands. Her prior work history included being a Co-Founder at a food-focused picture sharing app and doing digital partnerships for a leading media company. In my opinion, this founder should have never gotten funding. There is no excuse for a one-year delay when this startup has cash and resources. More importantly, this founder failed to establish an iota of traction since her company was pre-launch and even pre-business plan and branding. She clearly lacked domain expertise or even a basic understanding of the luxury goods and fashion industry. She should have established all of that before getting funding. Her investors from leading VC firms failed to do proper diligence and gave her $2M in VC funding at a $5M pre-money valuation.

Clearly, many VCs don’t really understand which founders to fund, and they don’t really understand consumer-facing ecommerce. Entrepreneurs shouldn’t look to these VCs for validation especially if these VCs are funding founders without plans. Some common threads with these flawed startups include having founders who do not understand:

1) basic business, understanding of retail, how to scale a company, pair and group products to drive more sales
2) branding and marketing
3) consumer psychology, purchasing habits

It seems that a lot of founders and VCs think that marketing and branding aren’t that important and can be outsourced. That’s clearly apparent in all the aforementioned startups. Without a great brand experience, you’re just another product. Marketing and branding are conceived in the heart and mind first, then applied to product and finally applied online. Marketing is an art, a science and also a spectator sport – online it’s become a shit show that’s providing me a lot of laughs.

Original header image created by Steve Mueller.

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The Naked Truth About Subscription Start-Ups: The Good, The Bad & The Scams

The Naked Truth About Subscription Start-Ups: The Good, The Bad & The Scams

[Opinions held by the contributor do not necessarily reflect the opinions of OS Fashion and its members.]

Is there a fundamental flaw in the application of the subscription model to consumer commerce start-ups with physical goods like fashion and CPG (consumer packaged goods) companies? There are some terrific consumer companies like Netflix and Spotify that have proved the viability of subscription models. They have innovative ideas. They create something that people want like streaming movies and music. They disrupt old-fashioned ways of doing things like having to physically go into Blockbuster to rent movies. They created markets and trends, instead of chasing the trend. But when start-ups apply this model without innovative products and branding, they sometimes rely on scams to lure customers and smoke and mirrors style PR to lead people to believe that their company is successful. In fact, you can even argue that most (with a few exceptions) consumer subscription models with physical products are flawed and unnecessary.

Initially subscriptions became popular among VCs because a subscription implied predictable, recurring revenue. Recurring revenue software businesses tend to have better valuation multiples. However, consumer commerce subscriptions with physical products generally should not. The problem is that many of these well funded subscription start-ups engage in deceptive customer acquisition, lack focus on retention and branding, and partake in poor business practices.

 

Just last week, the Science incubator in Los Angeles launched yet another subscription start-up, a company called ELLIE. It offers workout clothes for women with a monthly subscription service. Seriously, who buys workout clothes every month?  I wonder what the people at Science do with their clothes every month. Throw them away? Don’t they do laundry like the rest of us?

Science start-ups have one thing in common: an aggressive emphasis on paid and socially-driven customer acquisition. To build a customer base quickly, ELLIE reportedly engaged in deceptive bait and switch tactics that are downright shocking and unprofessional. Prior to launching ELLIE, the founders launched a company called PvBody which offered customers two pieces of designer fitness apparel from brands like Lululemon, Nike and Under Armour for $39.99 a month. PvBody even offered a 40% promotion via popular fitness blogs like SarahFit.com to lure customers. Over 70 of Sarah Fit’s readers who signed up for the promotion complained about their less than stellar experience: everyone got a notification that PvBody was not going to be sending out the designer brands they promised , but their own brand named ELLIE.

Now, PvBody has been rebranded as ELLIE. ELLIE used the clout of leading brands like Lululemon and Nike to deceptively acquire subscribers while promising those brands instead of its own. These alleged bait and switch tactics – sometimes known as  fraudulent conveyance — were used to create “traction” for ELLIE prior to the brand’s launch. Ironically, ELLIE’s scam was rewarded with $2M from three venture capital  funds. (For more information about ELLIE’s bait and switch scam, read posts at: Complaint ListThe Purple Giraffe and Marathon Lar.)

According to a recent Venture Beat article, “the lack of highly sophisticated tech is becoming part of the Science blueprint.”  Well, Science start-ups don’t have sophisticated branding or product either. Their strategy has been to focus on unnecessary subscription start-ups with vanity customer acquisition proof points. This does not work since a subscription model isn’t a guarantee for long-term recurring revenue or customer retention.  In the case of the Science portfolio company Dollar Shave Club, which raised $9.8M on an exceptionally healthy $30M pre-money valuation in their most recent round, it experienced impressive but very fleeting traction after their extensive paid customer acquisition efforts. Paid customer acquisition is useless if your brand and products cannot retain the customer. Customers will not engage or purchase after being acquired. Good brands and products are capable of organic growth with monthly churn under 4%. Good content and branding make a brand sticky. Retargeting makes a brand stickier. When you have exceptional branding, product and content, customers will discover you.  Then the focus shifts to customer retention.

 

Just as Science’s Dollar Shave Club and Wittlebee don’t solve any problems or offer anything new, Ellie does not either. If someone is merely looking for Lululemon- style activewear at a lower price point, there are plenty of online retailers that offer lower priced workout-wear such as H&M, Gap, Athleta, even Target. Unless new start-ups are offering great products, prices and experiences, they shouldn’t even bother to try to compete with established big brands or e-tailers. What problem are they solving? What is their point of difference? Are they making the process easier? Plenty of online retailers are offering lower prices.

Subscriptions only work when the price, product, quality and user experience are great. If there is a product mix, it must be personalized or expertly curated, not random. Beauty subscription companies have a hard time satisfying customers with their one-size-fits all (non-personalized) boxes of sample products due to different skin types, customer preferences in color cosmetics and fragrance. Following the success of New Beauty & Beautylish, companies like Birchbox are now focused on content and eCommerce. New Beauty’s Test Tube,  the original beauty sample subscription company which launched in 2005 (well before Birchbox’s launch in 2010), works because of its targeted focus on high performance and efficacious luxury skincare and haircare products; every month you get some of the hottest new products coupled with the latest issue of New Beauty magazine, an industry authority. Since they aren’t offering random color cosmetics or fragrances, color and scent preferences aren’t an issue and there’s a higher probability of satisfying the customer.

Birchbox’s beauty and greatest vice is that they don’t pay for products from brands. Although Birchbox, which received $11.9M in venture funding, clearly has the cash to pay for the products, it engages in dangerous business practices which jeopardize the long-term viability of their core business model.  I recently interviewed Suk Chan the founder and CEO of Soukenberi, an eco-friendly home fragrance and bodycare brand.  Ms. Chan said, “Birchbox requested 300,000 units of a product for free; in return, they said that could offer a conservative purchase order of 400 units for that product if it was received well by their sampling audience.” Birchbox also requested a special sample size, which Ms. Chan would need to create, that would yield at least 3 uses of the product. After Ms. Chan negotiated with them, they lowered the amount of requested free product to 75,000 and then to 50,000 units (for a more targeted customer base). Birchbox only wanted to pay for a purchase order of 400 units after receiving 50,000 units for free. Ms. Chan decided not to do business with them since it was clear she wouldn’t get even a 1% return. Beyond a very conservative purchase order, Birchbox cannot quantify a significant return to brands despite their huge subscriber base. This is a flawed, inequitable method of doing business with brands since it puts many brands in financial jeopardy. Having a large subscriber base doesn’t necessarily yield a successful business. A successful business invests in its supplier ecosystem, it doesn’t destroy it.

 

The sad truth is most subscription companies are NOT doing anything special and are just adding unnecessary clutter to the ecosystem and our mailboxes.  That’s not to say that I don’t like any subscription models.  Three fabulous consumer commerce companies with subscriptions that make sense are Barkbox, NatureBox and Lacquerous whose visions go far beyond their initial consumer-facing product.

Lacquerous is the Netflix for luxury nail polish. It offers a 3 nail luxury polishes that are on trend for $18/month which is less than the cost of 1 bottle of luxury nail polish. It’s an affordable option for women who want to experience trendy new colors from luxury brands while spending a fraction of the cost. There is no other way to do this; Lacquerous is definitely innovative and disruptive. Although they just launched a month and a half ago, they are overwhelmed with customers; at the moment, there are 5,000 people on their waiting list to become new Lacquerous members. Why does it work? Nail polish is one of the hottest consumer commerce categories right now. Customers want to discover the trendiest luxury nail polishes at a discount. Lacquerous offers nail polishes from the most premium brands like Tom Ford, Chanel and NARS.  The products are on trend (focused curation), and, more importantly, its customers can choose the colors they want (personalization). It’s a business model that is a WIN for the Lacquerous team, the brands that they work with and its customers.

It’s trickier to apply the subscription model to fashion and consumer packaged goods start-ups. While many tech start-ups end up sacrificing their EBITDA to pursue future growth, future growth is often less obvious with some consumer commerce start-ups.  Where can you go next if you’re Dollar Shave? For a consumer commerce subscription to work: 1) the business model must be viable, and 2) the brand, product and price must be really compelling and perhaps even addictive. It should make life easier, solve a problem or create a new market. In the case of superstar subscription companies like Spotify, they initially earned their subscribers via freemium offerings and then turned many of them into paid subscribers. They succeed because they keep evolving and creating new markets and trends. That should be the goal of every start-up!

NOTE: All l the information in this article was compiled from public information and articles online which are hyperlinked except for one interview I had with Suk Chan, Founder of Soukenberi.

Previously by Sindhya:
My Break Up Letter to (Some) VCs
VCs Think My Boobs Need An Algorithm

Original header image provided by Lacquerous.

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My Breakup Letter To (Some) VCs

My Breakup Letter To (Some) VCs

[Opinions held by the contributor do not necessarily reflect the opinions of OS Fashion and its members.]

“The game taught me the game. And it didn’t spare the rod while teaching.”  - Jesse Livermore

There’s a new bully in town. And I guess that’s me at least according to a VC who emailed me last week to complain about my blog post. He wrote that it was unfair of me to write such an article. He even told me that I should delete it and all the tweets related to it. I can’t do that. There are just way too many tweets about it that aren’t even mine. The post trended on Hacker News, got over 50,000 uniques and blew away the peak of the domain. A few publications even asked if they could republish it or do a story on me. When I wrote it, I wasn’t worried about it creating polarity because the article wasn’t about VCs in an absolute context. Not all VCs engage in cronyism, invest in stupid startups or perform shallow assessments of start-ups. Moreover, I doubt that smart VCs with balls – the ones I want to partner with – would be even mildly bothered by my last blog post; they are smart enough to use this as an opportunity to really stand out during this Series A Crunch while most other VCs are running away from consumer investments.

At the risk of sounding like a bitchy girlfriend during a breakup, I’d like to tell you that the problem is you, not me. It really is you. In fact, I’d like to propose my issues and solutions for you VCs who are screwing up the start-up ecosystem. There are five primary issues:

  1. Your treatment of non-crony founders
  2. Your obvious lack of guidance
  3. Your herd mentality
  4. Your lack of domain expertise (and)
  5. Your flawed method of assessing consumer start-ups.

VCs who rely on old school-hustle and instinct cannot deliver sufficient returns anymore. Today’s VCs need to grow a pair, gain vision, get domain expertise and adapt their methodologies.

Treatment of Non-Crony Founders
Often non-crony founders are treated like desperate street beggars. Not all non-crony founders are crazy for seeking a Seed or Series A investment from VCs. Founders with compelling business models and domain expertise should be treated with respect and viewed as potential partnership opportunities to build a business and make money. Often VCs pass on these founders without even seeing or hearing a pitch. Check to see if there is a link between the founder’s start-up and his or her background and education. Is the founder an industry superstar? Does the founder have domain expertise relevant to her start-up? If so, it is probably worthwhile to explore the opportunity. Even if you don’t end up investing in his or her start-up, you can connect with an industry superstar or someone with a lot of domain expertise.

Lack of Guidance
Start-up funding shouldn’t be a charitable donation for cronies. It should be about making an investment with returns. When I asked some of the VCs who invested in the start-ups mentioned in my last post, they immediately mentioned that the founders were friends of theirs – no other reason. When a business model isn’t compelling, should friendship be a safety net? Being a crony and having a compelling business model are not mutually exclusive. Can’t VCs find real charities to donate to? How can you let start-ups with flawed business models launch? It’s like letting a friend drive drunk. At least sober him up. At least VCs could help these crony founders come up with a proper business model or help them create a better team. If they are real friends with the founder, they should properly guide him or her and give honest, constructive feedback. At least that way they wouldn’t be wasting their LP’s money.

Isn’t the professional relationship between two co-founders important too? In my last post, one of the start-ups that I mentioned is suffering because the founders broke up after working together less than 6 months. I’m not surprised since they barely knew each other when their company launched.

Herd Mentality
The start-up ecosystem is like junior high. There are a few cool cliques that everyone wants to follow, trends are created by them, and the net effect is a herd mentality. A few VC funds are deemed cool and when they lead a first round of funding, they attract a herd of others. Meanwhile, some VCs will follow and fund any start-up that already that has a committed VC. Often it’s a case of the blind leading the blind, particularly when the leading VC doesn’t go over the business model. Regardless, other VCs follow like flies buzzing around curdled milk in a bowl of Series A Crunch Cereal. Except they are VCs, and there’s no upside to investing in a crappy start-up. If they want to give to a charity, try Charity Water.

A lot of VCs don’t have balls. Just as big balls are an absolute must for a successful entrepreneur, they are absolutely necessary for VCs. Having balls is more than aggression and risk taking, it is the ability to dare to “THINK DIFFERENT,” the desire to build something from scratch, not listen to the peanut gallery and develop independent thoughts. It takes effort and vision, let’s face it-– it’s hard. Maybe the reason why many VCs don’t bother is because they are lazy and blind.

Lack of Domain Expertise
VCs often act like bouncers. Their assessment time of whom to allow “in” is about the same (and as shallow) and lacks domain expertise. Domain expertise can take the form of some or all of the following: deep understanding of the industry, a track record of success in that industry, a history of building superstar products and creating innovations within the sector, and constant self-education. The acquisition of domain expertise is important for (business) survival and definitely for domination. It involves constant evolution and adaptation. Our greatest tool for survival is our ability to think, learn, connect dots and evolve – whether you’re a founder or VC, you have a responsibility to continue to do so. Domain expertise is what separates weak start-ups like Dollar Shave Club and True & Co. from great companies like Nasty Gal, Spanx, and Zappos.

Flawed Method of Assessment
I’ve noticed during my fundraising journey that I prefer VCs who were former bankers or former entrepreneurs. These VCs tend to have vision, balls and domain expertise. The VCs who were former entrepreneurs tend to be more sincere. What I like about bankers is that before making a move, they do research and perform comprehensive competitive analysis in addition to studying industry trends. If they are not experts in the industry, they source the most up-to-date data and research from analysts, pundits and expert networks. VC firms should take a cue from bankers. By contrast, VCs often barely skim a 15-page deck with the least amount of text and most pictures as possible. Heck, Cliff Notes summaries have more meat than the decks VCs like to look at. As a founder of a consumer start-up, I have 2 decks: one for people who understand my industry and one for the VCs who do not.

A new trend in the VC world is that firms are hiring PR firms. Instead of focusing on closing the best deals and making the most money, these VC funds are more preoccupied with their own image while most barely understand “brand” in the consumer world — even though some market themselves as VCs who invest in consumer. Ironic. Instead of worrying about creating their own brand, they should focus on what they are supposed to excel at. Or at least do both, and learn consumer better.

I don’t understand why many VCs hate bankers. Unlike bankers, too many VCs run around town with arrogance and attitude disproportionate to their success. Moreover, VCs often take credit for deals at their firm that they have nothing to do with. Many VCs are clowns, ahem… characters, in the Series A Crunch Clown Show that’s currently playing in Silicon Alley and Silicon Valley. Usually when bankers act arrogant, it’s backed up by a successful record since they are results driven. On the other hand, as Matt Oguz, a venture capitalist and Founding Partner of Palo Alto Venture Science, said, “Traditional VC takes way too much credit for successes, and doesn’t accept its failures.”  It’s time for VCs to grow some balls and take a cue from bankers (several of whom are now launching their own VC funds). If VCs don’t evolve on their own, the game will teach them without sparing the rod. Life is about kicking ass, not kissing ass.

xoxo

Previously by Sindhya:
VCs Think My Boobs Need An Algorithm
Next:
The Naked Truth about Subscription Startups

Original image created by fractured-fairytales.

Posted in: Vision & Opinion

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VCs Think My Boobs Need An Algorithm

VCs Think My Boobs Need An Algorithm

[Opinions held by the contributor do not necessarily reflect the opinions of OS Fashion and its members.]

VCs think my boobs need an algorithm. My boobs don’t need an algorithm. If that’s not enough, VCs also think that women need a bra subscription. They gave $2M in seed funding to True & Co., an e-commerce bra company with an algorithm and subscription model. Never mind that the clear majority of women don’t buy bras every month. This start-up’s algorithm involves answering questions online for about 3 minutes that’s not only boring and painful but also futile. The algorithm, like the brand’s name, is ridiculous. An algorithm cannot provide you with a better fit just as answering questions online cannot help you find the best pillow for your preferences. Some products need to be touched and tried on. An algorithm cannot account for technological advancements like soft stretch in bra straps, seamless fits, softer lace with stretch, and good quality padding that isn’t cheap and itchy. Finally, as a lingerie brand, this start-up lacks fun and sexy branding. There’s a place for an algorithm–it isn’t my bra. VCs simply don’t understand consumer psychology, consumer purchasing patterns and what it takes to build a great brand or product. It seems as if they think consumer tech is easy and that anyone can do it. This misunderstanding is a big problem, and VCs are screwing up the ecosystem.

Charlie O’Donnell (@ceonyc), a VC at Brooklyn Ventures, recently tweeted in reply to Sanjay Raman (@sanjayraman), a VC at Greylock Ventures:

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