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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.

Posted in: Vision & Opinion

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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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