AOXUE TANG

As any Netflix user or Disneyland visitor can attest, all-you-can-eat subscription models are nothing new. With a monthly subscription, Netflix users can browse a seemingly endless archive of movies. Similarly, after paying an entrance fee, Disneyland visitors can access lots of rides.

However, this business model has its limits. Streaming a movie or visiting a ride impose low marginal costs, which allows a subscription model to work (more thorough explanation provided in a previous blog post). In contrast, an all-you-can-eat subscription model wouldn’t make sense for inventory that has high variable costs per unit (imagine paying a monthly subscription to Target: for $X a month, you can get anything you want). 

Lately, lots of companies have emerged in the tech scene touting the all-you-can-eat subscription model. The only problem? They’re offering users products that have deep variable costs. Once the user uses the service enough, the company will start to lose money.

For example, ClassPass offers a fantastic service for consumers, but a problem inevitably emerges. They charge subscribers ~$100/month to access unlimited fitness classes. For every CP member that takes a class, CP has to pay the studio ~$10. So if any member uses CP >10X a month (or 2.5X a week), CP will start to lose money. Therefore, CP’s revenues are maximized if subscribers attend no classes, quite an inconsistency for a fitness company. The problem is exacerbated as CP scales. As more studios sign-on to CP, users will enjoy the convenience of having more studios that are closer to them, incentivizing them to use CP more frequently. But this, as we know, cuts into CP’s revenue.

On the flip side, there also exist companies that have successfully utilized the all-you-can-eat subscription model despite carrying inventory with deep marginal costs. One such example? Amazon, where users pay an annual subscription fee. A Prime membership is many things, one of which is a fee that allows you to spend more money buying the individual items. Prime subscription works because more scale means lower shipping and fulfillment costs.

Marketplaces are fascinating. They serve a deceptively simple purpose — the transaction of goods or services from one hand to another — but are hard to scale due to geographical limitations. Nowadays, technology has enabled marketplaces to scale faster, unconstrained by space or time.

However, tech-enabled marketplaces still face many roadblocks, especially those allowing consumers to book services like cleaning, haircuts, and even dining. Some well-known companies come to mind: TaskRabbit, Handy, and OpenTable.

More examples of these types of service marketplaces, courtesy of Huffington Post: 

Transportation: black cars, rideshares, buses, parking, private jets, bikesand rental cars Home Services: veterinarians, cleaners, baby sitters, handymen, movers,auto mechanics, locksmiths, laundry, errands, dog walkers Delivery & Logistics: package delivery, messengers Hospitality: hotel rooms, bed and breakfasts, and quiet spaces Food & Beverage: groceries, fast food, and booze Dining & Drinks: reservations, payments Health & Beauty: massages, beauty services Goods & Services: creative goods and creative services

(Source)

Platforms offering un-commoditized services face a unique challenge that’s less of a concern for logistics companies like Uber or Doordash that are offering commoditized services. Un-commoditized services mean that quality is highly differentiated among providers. With Uber or DoorDash, drivers are not professionals; the service that you get is fairly standard. The platform sets the price on behalf of the provider. The priority then is on the speed and ease with which you can get a car or delivery, and that’s what technology can optimize. Logistics and technology go hand in hand.

When you have a marketplace for professional services, however, the convenience of the service pales in comparison to quality. Suppliers of the service set their own prices on the platform because the quality of the service is highly differentiated. It’s not a pure logistics play anymore.

How does Sephora come into the picture? A multi-channel beauty retailer, it bears little resemblance to a company like TaskRabbit at first glance. Upon further inspection, however, they are both marketplaces offering un-commiditized products at various price points. A specialty marketplace has much to learn from a successful enterprise like Sephora that holds a 20% stake in the ~$20B cosmetics retailing market.

The First Step: Owning Discovery

This is what technology-enabled marketplaces excel at. They can hold unlimited inventory in the form of listings for professional services. A customer using the marketplace can search for a cleaner, hairdresser, or handyman anywhere around the world, for any time of appointment.

It comes as no surprise that an important use case for such platforms, then, is discovery. That’s the easy part. Retention is much harder. Once a consumer has found her favorite yoga studio after making a reservation through MindBody, what’s the incentive for her to make a future appointment through MindBody, instead of directly contacting the yoga studio?

Similarly, Sephora carries few exclusive products. It shares much of the same inventory as other retailers. How’s Sephora preventing customers from buying the same product on Amazon or even the own product brand’s website?

Differentiation

There are 3 ways to increase platform stickiness and retain the first-time customer so they book through your platform again and again.

1. Network Effects

Some marketplaces lend themselves to network effects better than others, but with a core base of like-minded customers, it’d be foolish to not leverage the network of users to create more value.

Sephora, for example, has smartly leveraged the social aspects of the beauty community to create product reviews on its website. It has launched BeautyTalk, a place where customers can share product reviews, engage in Q&A, and offer advice to each other. Getting customers engaged with each other is the key.

This community makes the marketplace extremely sticky. Online marketplaces, especially those selling niche products, should take advantage of its customer base to create value from this critical mass of users.

2. Loyalty Rewards

Rewarding loyal users can minimize platform churn. Giving rewards for purchases, therefore, is a worthwhile investment. Sephora, for example, invests in customer rewards to keep purchases going. Consumers enrolled in the Beauty Insider Program rack up points with each dollar of purchase and unlock exclusive levels (“VIB” by spending >$350/year and “VIB Rouge” by spending >$1,000/year).

Although unlocking VIB status seems like a meaningless achievement placed on an arbitrary amount of spend, it serves to “gamify” the experience. Consumers are addicted to purchasing through the platform and racking up points. With loyalty rewards, the opportunity costs of abandoning the platform are higher.

3. Branding

Branding alone does not a good business make, but since a company directly monopolizes its brand, it’s important to take advantage of this opportunity.

It’s no surprise to beauty fanatics that Sephora cultivates a strong brand not just through its highly selective inventory but also by investing in a refined in-store experience. The assortment of upscale brands and trendy store design give stores a more exclusive luster than drugstores. And yet Sephora feels more accessible than a department store counter because shoppers can test out every single product by themselves. Customers approach buying beauty products as a treasure hunt, and trips to Sephora fulfill their appetites.

Because a company has complete control over its own brand, it’s a powerful way to differentiate the platform or marketplace from competitors. A marketplace offering thousands of listings for professional services shouldn’t get lost in thousands of distinct brands. Instead, as a unified platform, it’s responsible for creating a single image that will integrate and represent the providers listed.

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Until recently, good design has primarily been found in consumer-facing platforms. But now, enterprise apps that prioritize UX have received plenty of love from both users and investors alike. Barely two years old, Slack has raised an astounding $340M at a $2.8B valuation. It’s also used by more than a million people every day (its user base includes student groups like BASES). DocuSign boasts over 50 million users and a valuation of $3B. Surpassing 10K paying customers in two years, ZenPayroll is cracking the SMB market. The success of these companies revolves around a common premise: that employees don’t cease to be humans when they go to work. 

There’s been lots of talk about delivering B2C experience to B2B apps. But I think something that’s equally interesting is the application of consumer-first platforms to enterprise. 

Many consumer platforms hold great potential for enterprise applications.  And many such companies are well underway in signing corporate contracts. Uber launched Uber for Business in 2014 with the claim that it can save businesses up to $1,500 per travelling employee a year. It certainly helps that Certify found that, for the first time, business travelers hailed more Ubers than taxis in the second quarter of 2015. Airbnb for Business Travel and Luxe for Business are consumer-first apps touting the same idea. But I think we’re just at the tip of the iceberg. 

It’s worth mentioning that many corporate customers of these platforms are tech titans themselves, like Google, Salesforce, and Soundcloud. It’s unclear where things fall on the adoption curve, but much untapped potential exists. 

Uber sells undifferentiated services. Sure, some drivers are better than others, but people who take you from point A to B via Uber, for the most part, aren't professional drivers. The experiences that they offer to riders will be very similar. What differentiates each driver, then, is his/her proximity to your current location, which is why a technology platform like Uber is necessary to connect the two parties.

Cleaning, on the other hand, is a more specialized service that involves professionals, which means that the experience you get from one cleaner to the other may have large degrees of difference. This begs the question: when you’ve received an exceptional experience from a cleaner, what's stopping you from bypassing Homejoy to directly contact the cleaner next time?

Suppliers of goods or services make the most money from frictionless marketplaces, where they can directly connect to a buyer. When there’s an intermediary like Uber or TaskRabbit that profits by taking a cut of the transactions, the existence of this platform better bring the you greater (or at least equal) benefits compared to the losses you incurred in giving the platform a cut of the sale.

Many successful companies have figured out ways to provide value to suppliers. MindBody, for example, lets consumers find and book appointments with yoga studios, health spas, and other wellness providers. What's keeping them on the platform? Mindbody provides a staff management software that also comes with payment services, consulting, and conferences.  Same with OpenTable. My friends use it to make restaurant reservations, but it also sells restaurants powerful tools to manage reservations.

Many marketplaces, like Groupon or ClassPass, attempt to win consumers by competing on price, but this is an unsustainable strategy that hurts suppliers. The high-value suppliers who can provide the most high-quality services will abandon the platform, leaving you with inferior suppliers that provide subpar experiences to the consumer.  

The rich subsidize the rest of us - were it not for the suckers who spent more than $10,000 on early versions of the Mac, Apple might not have survived to build the iPhone, in turn begetting an era of affordable pocket supercomputers.

Tuesday this week was full of buzz about Casper’s latest round of funding and $550 million valuation. Just like Warby Parker, Casper has a great product and team, but what also justifies the massive round sizes of these vertically-integrated, direct-to-consumer startups are the markets they’re in.

This Priceonomics article from 2012 forecasted the success of Casper:

The mattress industry is rotten. It’s controlled by a handful of players that make Google-esque margins for no intrinsic reason. Through a combination of an oligopolistic market structure, heavy-handed sales techniques and opaque product naming conventions, mattress manufacturers profit far in excess of the value they provide consumers.

According to the article, these are the some features that make the mattress (and eyewear) industry ripe for disruption:

1)    Oligopoly market structure

2)    High gross margins

3)    Opaque product/Expensive distribution

These are industries with deep-seated incumbents who own significant market share, and huge mark-ups lead to prices that are higher than the value these companies were delivering to customers.

Enter vertically-integrated startups. Vertical-integration is nothing new. Household names like Apple and American Apparel, for example, have integrated manufacturing, distribution, and retail. However, the advent of the Internet and modern-age logistics networks lowered the costs for the distribution of products. Today, Casper, Warby Parker, Harry’s, Everlane and other direct-to-consumer brands are able to control the entire customer experience from production to delivery and, in the process, disrupt previously-untouched markets. 

I was inspired to research some industries that match the features of the eyeglass and mattress markets and may, therefore, be primed to produce the next big direct-to-consumer company.

Wedding Dresses

There are about 2 million weddings in the US each year. While women spent an average of $1,281 on wedding dresses in 2014 (according to The Knot), the median is significantly lower, which means that much of the opportunity exists in the low- and mid-end of the market. For the $600-and-under bridal gown market, David’s Bridal owns reportedly >50% of the market share, with 1 in 4 American brides outfitted by the retailer on their special day.

Even for the lower end of the market, the once-in-a-lifetime aura of weddings decreases engaged couples’ price sensitivity, allowing vendors to garner extremely high gross margins. Bridal boutiques enjoy extremely high sales margins – some dress manufacturers require that vendors sell their dresses with at least a 200% mark-up. With a net profit of ~50%, there exists much opportunity for a new entrant in the lower end of the market.

Greeting Cards

For decades, greeting card companies haven’t seen much downward pressure on prices due to the lack of competition. Today, IBISWorld estimates that the two largest greeting card companies, Hallmark and American Greetings, control more than 90% of a $6B market. Their deep relationships with major retailers and distributors (book stores, drug stores, etc.) ward off startups that might compete down the price.

The rise of e-cards has most negatively affected the middle of the market, leading card companies to add options at the low and high ends. Technology should enable customized, handmade greeting cards, which have huge profit margins. Startups can leverage the lower costs posed by technology to design, manufacture, and distribute a better user experience and turn greeting cards into a low-price but high-frequency purchase.

Cosmetics

Cosmetics is a high-margin business. Skincare and hair care companies, for example, typically have greater than 60% gross margins. The top 4 companies in the market (Proctor & Gamble, L’Oreal, Estee Lauder, and Unilever) own 43% of a $50B market.

There is no industry where brand matters more. Even during the deepest dip in the recession (2008-2010), sales of skincare products were up 21%, according to NPD. While the importance of brand names poses a significant barrier to entry for many startups, new entrants like Glossier show promise.

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Back in 2006, Amazon had the foresight to start renting out portions of its own, already-substantial cloud - the data centers on which it was running Amazon.com - to startups that wanted to pay for servers by the hour, instead of renting them individually, as was typical at the time.

Amazon, therefore, turned cloud services from a fixed cost to a variable cost, making computing power cheaper and lowering the barriers of entry for startups. As a result, the landscape for startups has never been more competitive.

And guess what? Amazon benefits immensely from this competitiveness. As an already-established, substantial company, competition from below will ensure that startups have very little chance to rise to Amazon's level, preserving Amazon's position as the no. 1 online retailer.

Something very similar is happening with Michelle Phan, a digital pioneer in fashion and beauty on Youtube. Ipsy, the beauty subscription company she started, recently announced the launch of Open Studios, a coworking space for beauty entrepreneurs. Members of Ipsy OS will get access to studio space, audio and lighting equipment and editing tools. Other perks include mentorship from Michelle and a whole host of Ipsy staff on hand, all offered at zero cost.

Co-chairing AASA this year has been one of my most challenging and rewarding experiences at Stanford. Anyone can find a plethora of inspirational quotes on effective leadership, but ideas are cheap and easy. Execution is much harder. Here are some of the most important lessons I’ve learned that are general enough to apply to many organizations!

Prioritize.  Have I received criticism for the things that I didn’t do? Hell yeah. But I’m proud of what I prioritized to accomplish. Solid execution starts with picking which goals are the most important to you and your team. 

Help people realize their potential.   I have a problematic tendency to micro-manage, because it feels great to simply get tasks out of the way. But I’ve realized that it’s much more meaningful to give someone the chance to prove that they can do the work.  Trust that people will do their part, and give them the freedom to take initiatives.

Praise publicly, criticize privately.  I don’t believe in insincere flattery. But at the end of the day, all human beings want to be recognized for their work, and praise tends to be motivational for a lot of people. Public criticism, on the hand, is rarely effective, as it becomes a matter of public humiliation for many. Knowing how to give criticism effectively requires a lot of emotional intelligence and I’m still learning everyday. 

Check in with people one-on-one regularly.  It’s one thing to say “let me know if you have any feedback or concerns,” and it’s another to schedule a one-on-one meeting to hear someone’s feedback. It may seem difficult, especially with a larger team, but the returns are thousandfold. 

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BASES hosted a Startup Lunch with Jeff Hagins of SmartThings today, and I was fortunate to be able to sit in and learn about Jeff’s experience with the company since its very beginning.

5 things I learned/found interesting: 

1) SmartThings had 7 co-founders. Jeff noted that a larger team of people ensured that they were more committed to the idea and the company. It gave them the vision and will to make user-friendly products that were initially designed for use by professional installers. 

2) Tip for Kickstarter campaigners - do not let people customize kits! SmartThings, like a lot of hardware startups, initially raised money through Kickstarter by selling kits containing their Hubs + several consumer electronic devices + 3 apps (Apple, Android, Cloud) + developer tools. Letting people customize what they wanted caused some supply management issues.

3) In the long-term, there will be many big players in the home automation space. We have already seen the beginnings - Apple (HomeKit), Amazon (Echo), Google (Nest/Dropcam) and, of course, Samsung with SmartThings are just a few. 

4) M&A activity in home automation be heatin’ up! However, Jeff noted that it was possible for a startup to be a standalone company, as long as they are able to integrate smoothly with the platforms of the larger players. 

5) The hardest problem that SmartThings tackles lies in developing a consumer-friendly product that’s also a platform for developers. It’s not just about the consumer experience; it’s also about ensuring that developers can make use of the product. 

What do Disneyland and Netflix have in common?

(Sharing something I learned in class today.) 

Both have a fixed entry price that, once paid, allows the consumer to access a large bundle of services. In the case of Netflix, you pay a flat monthly rate to watch unlimited movies. In the case of Disneyland, you pay the entrance fee at the door and are able to go to any ride or attraction your heart desires. 

Learning about Moore’s Law in class last week completely changed my perspective of the Apple Watch. 

In October 2014, Jean-Claude Biver, president of LVMH’s watch division, made a comment about Apple’s newest member of the family:

A smartwatch is very difficult for us because it is contradictory...Luxury is supposed to be eternal … How do you justify a $2,000 smart watch whose technology will become obsolete in two years?” 

This past summer, I was extremely lucky to work for a VC firm that focuses on cross-border investments in the US and China. For someone who had just completed her sophomore year of college, this was a gem of an opportunity. I am humbled by the brilliant investors I worked with as well as the entrepreneurs I met. Here are some lessons I picked up along the way. 

VC revolves around relationships. 

Some VC firms brand themselves as "investors in people," as if it's something unique. Aside from exceptions like certain laissez-faire angels, I think the industry of venture capital itself is built on putting capital in people as much as in ideas. Many VCs actually pride themselves on the fact that they develop relationships with entrepreneurs months, sometimes years, before actually putting in any investment. And it makes absolute sense. At a time where pivot may be necessary for survival, smart and resilient entrepreneurs can adapt to evolving landscapes. The idea may not stay, but the people will.

Sometimes, deals simply can't be funded even if it's a great company.

Fred Wilson once noted that "venture capital is about capturing the value between the startup phase and the public company phase." The primary goal of VC is turn that value into returns for LPs. Even if it's a great company with a team that we've fallen in love with, if the price is not right, the round too big, the shares too diluted, and the returns too small, the deal will most likely fall through. Sounds so obvious, but I've only come to understand this over the summer. 

It's a competition for VCs too. 

As many as 99.95% of startups do not receive VC funding, but for the few who do, funding rounds can become extremely competitive between investors. Those companies who can afford to pick between VCs often look for value-add investors. Aside from a general trend toward such investors, the competition between VCs have also led to earlier and earlier rounds at massive valuations, which can be concerning. Mo money, mo problems. 

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Venture capital is all about making calculated risks with capital, and I loved every minute of it! Many thanks to Crystal, Hans, Glenn, Jeff, and the other members of the GGV investment team with whom I had the honor of working. I wouldn't trade those experiences and relationships for anything in the world.