Thinking About Thinking

Investment Opportunities In E-Commerce Despite Amazon’s Dominance

Posted in Uncategorized by larrycheng on May 13, 2015

Many venture capitalists shy away from e-commerce due to Amazon’s dominant, market leading position. The concern is that Amazon can kill any upstart e-commerce company and doesn’t always operate in economically rational ways when they want to win. While there is truth to being concerned about Amazon in this market, the reality is there are some segments of e-commerce that have characteristics which make it more defensible versus Amazon. Given the size, scale and growth of e-commerce more broadly, the winners in these other segments can still be billion dollar companies in their own right. That’s why Volition has made a number of e-commerce investments and will continue to look for strong growth companies in this market.

Here are some of the segments that have better embedded defensibility from Amazon’s competitive threat:

  • Vertical Commerce: Sometimes product knowledge and merchandising is key. It’s true in offline retail and is true in online retail.  Companies like (pet food), Wayfair (home goods), Fanatics (branded sports) are following in the footsteps of Zappos (shoes) by building dominant vertical e-commerce companies.
  • Full-Service: E-commerce to date has been a self-directed experience. You know what you want, and you go buy it. But, not all consumers are self-directed – some need advice, especially in the apparel segment. Hence, stylist-enabled e-commerce is growing aggressively. Stitchfix is leading women’s mid-market and may be the next $1B e-commerce company. Bombfell is leading the men’s mid-market segment. And Trunk Club led men’s luxury prior to being acquired by Nordstrom from $350M.
  • Rental: Not everyone wants to buy, some want to rent. That’s a very different fulfillment back-end and user interface than traditional e-commerce. Rent the Runway is one of the leaders in women’s luxury, but others like TurningArt are doing well in art.
  • Subscription: While Amazon is trying to make more inroads into subscription e-commerce, they are still more likely to be viewed by customers as transactional. But, the consumables category is made for subscription and has spawned some leaders like Dollar Shave Club (shavers), Honest Company (soaps, etc.), (pet food), Blue Apron (meals), and many others.
  • Custom Products: While Amazon sells off the shelf products, there’s a large market for custom made products. Billions are spent each year on custom products from t-shirts, mugs, photos, etc. Companies like CustomInk and CustomMade are building promising businesses in this segment.
  • Clubs: Different business models can lead to different market leaders. In the offline world, there’s Wal-Mart as a traditional retailer, and there’s Costco as the membership-based retailer. In the online world, there’s Amazon as the traditional e-commerce player, and there’s potentially Jet (and others) leading the membership-based model.
  • Perishable: Does Amazon want to store and fulfill perishable food?  Maybe, maybe not. That’s led to an opening for the home delivery of ready to cook meals. Blue Apron started out fast in this segment, but many others like Plated, HomeChef are coming on strong in this market which will not be winner take all.
  • Full Stack Commerce: Amazon generally resells other manufacturers products. But, these companies vertically integrate in their product category to be able to offer customers a fundamentally different price to value experience. Warby Parker is well known in glasses, TheBouqs (flowers) and others have emerged.
  • Flash Sale: A new model is hard for an incumbent to react to – such as the flash sale model marked by deep discounts of limited inventory products. Zulily, RueLaLa, Gilt Groupe and others have built valuable businesses leveraging this model which has largely eluded the traditional e-commerce companies.

The channel shift from traditional retail to e-commerce continues to be one of the largest, most predictable secular shifts in the technology industry. Amazon has been and will continue to be the dominant leader in e-commerce, but there will be valuable leaders created in other segments of e-commerce as well.

The Chapter In The Bible That Appears Twice

Posted in Uncategorized by larrycheng on February 4, 2010

This qualifies in the camp of – you learn something new every day.  I learned yesterday that there are two chapters in the Bible that are nearly identical.  Not sure if this is common knowledge, but it was news to me.  It’s Psalm 14 and 53.  Here they are in the NIV version:

Psalm 14

 1 The fool says in his heart,
       “There is no God.”
       They are corrupt, their deeds are vile;
       there is no one who does good.

 2 The LORD looks down from heaven
       on the sons of men
       to see if there are any who understand,
       any who seek God.

 3 All have turned aside,
       they have together become corrupt;
       there is no one who does good,
       not even one.

 4 Will evildoers never learn—
       those who devour my people as men eat bread
       and who do not call on the LORD?

 5 There they are, overwhelmed with dread,
       for God is present in the company of the righteous.

 6 You evildoers frustrate the plans of the poor,
       but the LORD is their refuge.

 7 Oh, that salvation for Israel would come out of Zion!
       When the LORD restores the fortunes of his people,
       let Jacob rejoice and Israel be glad!

Psalm 53

 1 The fool says in his heart,
       “There is no God.”
       They are corrupt, and their ways are vile;
       there is no one who does good.

 2 God looks down from heaven
       on the sons of men
       to see if there are any who understand,
       any who seek God.

 3 Everyone has turned away,
       they have together become corrupt;
       there is no one who does good,
       not even one.

 4 Will the evildoers never learn—
       those who devour my people as men eat bread
       and who do not call on God?

 5 There they were, overwhelmed with dread,
       where there was nothing to dread.
       God scattered the bones of those who attacked you;
       you put them to shame, for God despised them.

 6 Oh, that salvation for Israel would come out of Zion!
       When God restores the fortunes of his people,
       let Jacob rejoice and Israel be glad!

Thinking About Thinking: Most Popular Blog Posts – November 2009

Posted in Uncategorized by larrycheng on November 4, 2009

I’m coming up on the six month anniversary of this blog, Thinking About Thinking.  I’ve written 54 posts in that time, so about 2 per week.  This blog was named after my favorite class in college – which was a multidisciplinary class on philosophy, science, and law.  In that vein, I wanted this blog to be “one serving VC, one serving technology, and 3 servings of other stuff of varying degrees of randomness and interest”.  Out of sheer curiosity (which is the genesis of most everything on this blog), I decided to look at my top 15 posts (by # of views) to see whether that ratio had held true.  Here it goes:

  1. Global VC Blog Directory (16,349)
  2. Where In the World Is Eduardo Saverin? (7,362)
  3. The Most Expensive Commercial Real Estate In The World Is A Place For Computers, Not People (4,667)
  4. Missionary CEOs v. Mercenary CEOs (2,096)
  5. How Can We Double Down? (1,345)
  6. It’s Hard To Get The News From The News (1,181)
  7. Relative Value v. Absolute Value (958)
  8. Harvard Business School Is Taking Over Boston VCs – For Better or Worse? (954)
  9. College Optional (945)
  10. What If The Federal Government Was An Average Household (798)
  11. Cortera: Turning The Business Credit Rating Industry Upside Down (725)
  12. The Learning Test (709)
  13. 4 Questions and 4 Pressure Tests To Decipher A VC’s Interest In Your Company (673)
  14. The Categories of Risk In the VC Brain (660)
  15. How To Easily Subscribe to VC Blogs (548)

It looks like the real ratio is more like 3 servings VC/tech and 2 servings other stuff.  Still enough variety to keep things interesting.  Thanks for reading everyone. 

The 10 Worst Moves By Red Sox GM Theo Epstein

Posted in Uncategorized by larrycheng on August 17, 2009

Since it’s the dog days of summer and the Red Sox are wilting, I need to drown my baseball sorrows by evaluating Theo Epstein’s 10 worst moves as Red Sox general manager.  VCs are often defined by their winners, rather than their losers.  Unfortunately, life isn’t so easy for baseball GMs.  Without further ado:

  1. Freddy Sanchez (.300 career batting avg, all-star), traded with Mike Gonzalez for Jeff Suppan, Brandon Lyon, and Anastacio Martinez. 
  2. Matt Clement, free agent pick-up.  4 years, $40M.
  3. J.D. Drew, free agent pick-up.  5 years, $70M.  He’d be #1 or #2 except he actually plays once in awhile. 
  4. Julio Lugo, free agent pick-up.  4 years, $36M. 
  5. Edgar Renteria, free agent pick-up.  4 years, $40M.
  6. Doug Mirabelli, traded away Cla Meredith (3.57 career ERA) and Josh Bard (.261 career batting avg). 
  7. Eric Gagne, traded away David Murphy (.280 career batting avg) and Kason Gabbard. 
  8. Bronson Arroyo (4.35 career ERA), trade for Wily Mo Pena. 
  9. Jeremy Giambi, traded away Josh Hancock (4.20 career ERA). 
  10. Daisuke Matsuzaka, 6 years, $52M plus $51.11M posting fee.  Tough call, but not looking good.

If there’s a lesson learned from Theo’s free agent mistakes that in its own way applies to the venture business – it is to be willing to pay up for the sure thing.  Now you could say there is no sure thing, which is fair.  But the closest thing is someone like Mark Texeira who had 30–40 home runs and .380 OBP in his bad years prior to being signed by the Yankees (away from the Red Sox).  Alex Rodriguez in his bad years still hit 30 home runs with a .400 OBP prior to once again being signed by the Yankees (away from the Red Sox).  Theo seems to like to pay $10M-$15M/year for above average historical performance (J.D. Drew, Julio Lugo, Matt Clement, Daisuke Matsuzaka, etc.), but not $20M for spectacular historical performance.  Ironically, a great example of the latter category is Manny Ramirez, not a Theo signing, but also an example of a sure thing (when mixed with PEDs). 

That all being said, the Boston Red Sox have have won two World Series championships during the Theo Epstein era.  So, I am still a Theo Epstein fan.  Maybe like VCs, baseball GMs are defined by their winners after all. 

Friday Tidbits: June 5, 2009

Posted in Uncategorized by larrycheng on June 5, 2009

Some tidbits to end the week:

  • Sometimes I think if you want to know what to invest in now – think about what was the rage 7–10 years ago.  We tend to get things way too early in this business (mobile?, nano?, storage?, etc.).
  • On the flipside, a friend once told me that the best investment strategy is to build whatever IBM is advertising because they’re usually spot on about what the market wants – but it will take them 7–10 years to get the product right.
  • This blog is now available on Kindle.  I decided to try it on a lark and it took <30 seconds to get up.  I wish I could charge $0, but Amazon controls pricing.  The world of digital information still amazes me.  Three weeks ago, I had written zero blog posts.  Now, there are thousands of folks coming to the blog, aided by my twitter followers (thanks!), a distribution channel through Kindle, and healthy organic traffic through Google.  Total cost?  $0.  Old line publishers beware.
  • Long live enterprise IT.  With Solarwinds’ IPO (it’s a network management co that has nothing to do with solar or wind), the bidding war for Data Domain (de-duper in the storage space), it’s just a great reminder that while the press likes Web 2.0, there’s tons of money in enterprise IT.  Always has been and always will be.
  • I worry that I spend way too much of my waking hours looking at a screen.  From morning until night, I am either looking at a computer screen, Kindle, TV, Blackberry, or iTouch.   Even my meetings with people are often looking at a projection screen.  Some days I think 80%+ of my waking hours are looking at a screen.  And the screens are getting smaller and more luminous.  It can’t be good for me.
  • Which makes me wonder whether some time way in the future, property values will soar in regions where there is no broadband, no wireless, no fiber, no cable, etc.  Will the disconnected real estate suddenly become “pristine” because of scarcity?
  • What made me happy this week from this blog?  I noticed that folks in the Global VC Blog Directory with only 1 subscriber at the time of the publishing now have 40+ and growing.  If only 40x in the VC business was always that easy.

Have a great weekend!

Building the Fastest Team in Baseball

Posted in Uncategorized by larrycheng on May 17, 2009

Since the Celtics Game 7 finale with Orlando is too painful to actually pay attention to, I decided to answer one of the random questions floating around in my head (trying to pretend like I don’t care that the Celtics are losing badly).  The random question of the day is if I were the general manager of a low budget major league baseball team (think Florida Marlins), and simply decided to pull together the fastest, most cost efficient team in baseball – what would it look like, how much would it cost, would it be competitive?  In pulling together this dream team of speed, I decided to make all outfield positions interchangeable, and I made all infield positions interchangeable except catcher.  Here’s what the team would look like with their new positions and existing teams (# of 2008 stolen bases):

  1. Willy Taveras, CF, Reds (68)
  2. Jose Reyes, 1B, Mets (56)
  3. Jacoby Ellsbury, LF, Red Sox (50)
  4. B.J. Upton, RF, Rays (44)
  5. Michael Bourn, DH, Astros (41)
  6. Hanley Ramirez, SS, Marlins (35)
  7. Chone Figgins, 3B, Angels (33)
  8. Ian Kinsler, 2B, Rangers (26)
  9. Ivan Rodriguez, C, Astros (10)

This team, based on 2008 statistics would steal 363 bases and average 40 steals per player.  Tell me that wouldn’t put fans in the seats?  Even the change-up in a few positions would make things more interesting.

Now how much would this team cost based on their 2009 salary?

  1. Willy Taveras, $2.25M
  2. Jose Reyes, $6.13M
  3. Jacoby Ellsbury, $0.45M
  4. Michael Bourn, $0.43M
  5. B.J. Upton, $0.43M
  6. Hanley Ramirez, $5.5M
  7. Chone Figgins, $5.8M
  8. Ian Kinsler $3.25M
  9. Ivan Rodriguez, $1.5M

This team would cost $25.74M for the starting 9 players and average a $2.86M annual salary per player (the average salary of the 9 highest paid players for the Florida Marlins this year is $2.85M).  You could recruit some track stars for $400k minimum to round out the team.

Of course, it’s somewhat unrealistic to think you could pull these players together on one team, get them to swap positions, etc.  But, nonetheless, this does make me think that speed/stolen bases is an undervalued capability in baseball.  If you tried to pull together a team with the best in baseball at any other statistic that represents productivity: HR’s, batting average, on base percentage, even walks, it’d be a much more costly team.  Not to mention, a team with this make-up would be pound for pound the most exciting team to watch in baseball.

Time to go root for an improbable Celtics comeback… (Update: which did not happen)

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What’s In A Name?

Posted in Uncategorized by larrycheng on May 11, 2009

I decided after much deliberation (about 30 seconds) to name this blog after my favorite class in college – Thinking About Thinking.  Those of you who know me know that I am hardly the scholarly/intellectual type that such a name would suggest.  If I were to name the blog after my college experience, it would probably be named “Trying to find money to buy something called domain names” or “Too tired to wake up for 11:00am classes”.  Nonetheless, I do have fond memories of this class – and what it represents is what I hope will shape the direction of this blog.

First of all, as the name suggests, Thinking About Thinking was about all sorts of topics that deserved thought.  It was about everything from religion to philosophy, science to ethics, law to politics, and much more.  Every week was a new meaty topic.  In thinking about writing a blog, I hesitated because I wasn’t that motivated to write a blog just about my life as a venture capitalist and things that I see in the technology world.  There are many wonderful bloggers that cover that pretty well.  While I do think I have some thoughts and experiences worthy to add to that discussion, I enjoy engaging on all sorts of other topics as well.  So, consider this blog to be about a myriad of topics – one serving VC, one serving technology, and 3 servings of other stuff of varying degrees of randomness and interest.

Another aspect of the course that I remember fondly was its format.  It was a course taught by three professors from three distinctly different disciplines: Alan Dershowitz (infamously one of O.J.’s lawyers), the late Stephen Gould (the preeminent evolutionary biologist of his time), and Robert Nozick (a renowned philosopher).  Each week, each of them would dissect the given topic from their areas of discipline and help us to try and see a topic from all angles.  Anyone in the lecture hall, if they dared, could stand up and try to poke holes in their arguments and perspectives usually to no avail.  But, it was the dialogue that I always remembered, and hope to replicate in some form through this blog with the help of its community of readers.

Finally, as appropriate as I think it is to name this blog “Thinking About Thinking”, it’s equally appropriate that the first title of the first post is in question form.  I’m not sure I have a lot of answers, but I do have a lot of questions – and this blog will be the venue for airing them.  So, here’s to lots of questions, some half-baked answers, and hopefully an interesting discussion all mixed together.

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