April 4, 2020 –
Before the COVID-19 pandemic changed everything, there was plenty of debate in my world about the right way to build a consumer commerce brand. Outcomes had been all over the place. High-profile IPOs of Blue Apron and Casper were busts, and Hollar and Brandless had closed up shop. Yet Warby Parker and Chewy were doing fine, and upstarts like Allbirds, Rothy’s and Yeti had come out of nowhere to build multi-billion dollar valuations.
Look closely at these examples and a pattern emerges. Most of the companies that have struggled raised a lot of capital to fund big customer acquisition efforts, but struggled to maintain margins and revenue growth. Those that are faring better waited to raise big rounds until they’d built a community of loyal, passionate consumers. They took their time to build novel products and experiences that are beautifully aligned with their customers’ desires and values. To my mind, they made “trust” their primary product, at a time when that particular commodity is in short supply.
Going forward, these companies–I call them “trusted commerce platforms”–will be even more successful and transformative. Before COVID-19, they were already beginning to redefine categories such as clothing, outdoor gear and erectile dysfunction treatments. Today, in a world where the right masks and hand sanitizer can save lives, the need for trusted institutions to provide guidance for consumers has never been more pointed. Indeed, regardless of how long the lockdowns remain, people are becoming more conditioned to relying on digital brands for their most critical needs, from food to social interaction. The companies that step up to this unique opportunity and establish them as TCPs in large consumer markets will certainly be among the multi-billion dollar brands of tomorrow.
The key word in TCP is “trusted.” People have been losing faith in the consumer industrial complex for years now. They listen to influencers far more than ad campaigns. They resent buying toilet paper made from old-growth hardwood trees, cosmetics tested on monkeys, and foods filled with high fructose corn syrup. They’re hungry for companies that take values such as sustainability and inclusivity seriously–both because they truly care about these things, and to serve the social media gods. These days, what we buy is very much a reflection of who we are. I refuse to believe all those Impossible Whopper fans prefer the taste over good old hamburger.
The opportunity for TCPs is to fill this trust gap, and be a guide and advocate for consumers trying to make sense of an increasingly complicated commerce landscape. There are plenty of high-quality new brands out there to serve almost every need. Here, for instance, is a link to 28 ethical shampoo brands. But how to find them? With the exception of Warby Parker and Glossier and a few others that can afford their own store-fronts, few of these brands are easily found in the brick-and-mortar world. Big box stores, pharmacies and other chains only give shelf space to brands that can quickly earn it, and not every worthy brand finds its way into a West Village boutique.
In the digital realm, consumers face the opposite problem: too much choice. SEM has made the internet great for fulfillment, but terrible for curation. Really terrible. Try asking Expedia to help you figure out whether to go to Hokkaido. Even with all the recommendations and reviews on Amazon, try picking a big-screen 4K TV from this page.
So what are the keys to becoming a TCP? Here are a few:
- Do without outside capital as long as possible. As this cogent post from Maveron explains, raising a lot of venture capital is often the wrong way to go when building a D2C company from scratch. Sure, some TCP’s will grow large enough to justify big investments, but most will not. It’s wrong to expect venture-scale returns for this class of companies.
- Think pet parent, not bones and leashes. TCP’s don’t focus on dominating product categories. They focus on finding and solving deeply-felt problems that many people share. Not only does this align with the strategic goal–earning the customer’s trust–but it creates headroom and leverage to expand into new markets.
Chewy, as of this writing a $12 billion public company with a loyal following of almost 13 million pet owners, excelled on this one. It chose a category that’s huge—Americans will spend $75 billion on their animals this year—and involves lots of products that must be repurchased on a frequent, consistent cadence. And because people care so deeply about their pets, they’re able to establish a relationship with customers that goes far beyond products. Its live support and video tutorials support this positioning, and put Chewy squarely in the “I’m doing a good job as a pet parent” business.
- Make trust the primary product, regardless of what you sell. To break into large, crowded markets, most D2C startups should establish themselves by becoming trusted, impartial suppliers of third party products. As they grow, they should look for opportunities to create products that push the state-of-the-art and are clearly superior to existing products. Grove Collaborative (a Mayfield portfolio company) started out in 2012 selling a wide range of sustainable home essentials, from environmentally-safe diapers to trash bags. In 2018, it introduced its Seedling paper line, which uses only fast-growing bamboo that pandas don’t eat. Now, its products are just as good as anything made from beautiful old-growth Canadian hardwoods. This will undoubtedly deepen customers’ loyalty, and help as the company targets new segments such as clean beauty.
- Leverage software to build personalized user experiences that result in deep ongoing relationships. Most D2C brands leverage software primarily to build a high-quality online shopping experience, but this scarcely counts as a long-term advantage in our Shopify-dominated world. The best companies use software as a core part of their differentiation. StitchFix, for example, employs 85 data scientists who use machine learning to generate customized apparel recommendations. Customers love it, and it gives superpowers to the company’s stylist network.
- Incorporate real people as everyday brand ambassadors. When empowered with rich CRM platforms and text-based communication tools, your people can be your best way to build trust, one customer at a time. That’s why StitchFix, Chewy, and Grove all have “customer happiness” teams, whose job is to reinforce the “problem solving” dimension of their offerings. While young D2C medical brands such as Hims & Hers, Roman, and Lemonade are legally obligated to use real doctors to write prescriptions, this opens the door to human interactions that will be key as they look to expand beyond hair loss and ED.
With those tips in mind, I’ll leave you with a few large categories that are ripe for change:
- Leisure travel. When it comes to deciding where to go on vacation, most consumers end up bookmarking 40 tabs in Chrome and checking out friends’ Google Docs of suggestions. And given the increasing focus on authentic, unique experiences, hunger for a trusted platform that can own the decision-making process higher in the travel funnel is only going to grow.
- Furnishing and interior design. Most professionals and families would love to have beautiful spaces in their homes, filled with good quality things that are delivered quickly and at a reasonable cost. But many people also need a way to know they’re making the right decisions before pulling the trigger. Today’s furniture industry is organized to provide exactly the opposite experience. Shopping is dominated by low-cost disposable retailers like Ikea and Wayfair. That’s no way to build consumer’s confidence. Our portfolio company Oliver Space is attacking exactly this problem.
- Early childhood parenting. There’s nothing more emotional than having children, and the list of new products to sort through for your little ones is endless. Lucie’s List should not be the only solution. The world needs another commerce platform for the 0-5 year-old set.
- Specialty diets. Everyone seems to be on a specialty diet these days, but try figuring out how to stock your fridge or pantry to meet your vegan, keto or paleo needs. With many busy consumers struggling to find time to get to the local grocery, there’s a big opportunity for a platform that can help them attain their goals. Companies like The Mylk Guys, Factor, and Keyto have compelling early solutions to some problems, and we think a big company could be built here.
There are plenty of opportunities to build multi-billion dollar companies that fill the trust gap so many consumers feel, and we’re seeing more and more founders who are determined to build the new platforms and businesses to make it happen. If you’re one of them, we’d love to hear from you!