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Category Killers Disrupting your local brick and mortar since 2010
Summer 2015
Alex Malorodov amalorodov16@gsb.columbia.edu
Table of Contents
• Executive Summary • Introduction • Ecommerce Industry Breakdown • Category Killer Best Practices • Case Study 1: Warby Parker • Case Study 2: Harry’s Shaving • Case Study 3: Casper • Failure Case Study • Potential New Categories
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Executive Summary
• Market Trends – Category killers are on the rise in Direct-to-Consumer ecommerce with companies
producing physical goods under their own brand – Within ecommerce, in 2014, Apparel & Accessories, and Home Furnishings saw 333
investments totaling $3.3B (up 64% from 2013)
• Common Trends Exist Across Category Killers – To-be disrupted markets are oligopoly with total addressable market >$2B in U.S. – High percentage of founding teams have consulting, private equity, prior founding, and
industry experience – NPS >60%, especially important for early-stage investors; Ex. Warby Parker was able to
achieve NPS of >90% before its Series B raise – Companies focus on customer experience as much as the product to help customers
recommend company as a whole regardless of liking the product
• “Under-exploited” Categories Ripe for Disruption – End-of-Life (e.g., coffins), children/baby (e.g., baby strollers/car seats), cosmetics
3 of 20 Sources: CB Insights, Net Promoter Benchmarks, Mashable
Ecommerce Preamble
• Ecommerce History – Amazon has emerged as the dominant online player for distribution of third-party brands
and has made it difficult for distributors – Walmart and startups alike – to compete; opportunities exist for companies that pursue proprietary branding and merchandising
– For an excellent overview on ecommerce challenges and evolution, see post on Medium by Andy Dunn (Founder & CEO of Bonobos)
• Thesis Disclaimer
– This thesis is a snapshot in time - none of the discussed “successes” have exited yet, and it’s possible they will run into challenges down the line
– The best practices identified are not necessarily the same that will help companies exit, but are instead helpful for navigating early-stage growth (Seed to Series C/D)
– There may be additional attributes helpful for early growth, and we invite your perspective/feedback to identify more best practices
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Market Definition
• What is a “category killer”? – We are focusing on categories within consumer retail; for our purposes, a category killer is
a startup that disrupts an established consumer physical goods ecosystem through direct to consumer ecommerce by developing its own branded product
– Examples:
• The “Opportunity” – Entrepreneur: proliferation of the internet has drastically lowered the costs for starting a
business and democratized the ability to reach consumers; developments include: • Payments/infrastructure (e.g., Stripe, Venmo, Braintree) • Marketing channels (Facebook, Google) • Increased mobile use • Logistics improvements to help with free returns, try-before-you-buy • Customer comfort with online purchasing
– Investor: common trends exist in category killers that successfully navigated early-stage growth; can be extrapolated to evaluate future category killers
• Active Early-Stage Investors
– Lerer Hippeau Ventures (E.g., Warby), Forerunner Ventures (E.g., Dollar Shave Club), Accel Partners (E.g., Bonobos), Thrive Capital (E.g., Harry’s), Tiger Global Management (E.g, Warby)
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Eyewear Bedroom Men’s Wear Men’s Grooming
CKs are amongst ecommerce leaders
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Apparel/Accessories and Beauty/Hygiene tend to spawn category killers due to products in these sectors often being necessities
Favorable Market Conditions
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• Market is heavily concentrated with behemoth incumbents – > 50% of market is controlled by 3-4 incumbents; poor customer experience
• E.g., Luxottica owned 80% of eyewear manufacturing prior to Warby
– Incumbent offerings typically distributed primarily through 3rd-party brick & mortar locations (e.g., Sleepy’s, Sunglass Hut)
– Average of > 60,000 employees at incumbents makes innovation and quick response to category killers less likely
• Price point is at the top range of consumers’ willingness to pay
– Margins tend to be high – Numerous middlemen may exist
• Total addressable market (TAM) should be >$2B in U.S.
– Provides opportunity to gain traction and build brand prior to incumbent taking action
Best Practices – Team/Culture
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• Have the right experience – Research focused on seven category killers (mostly chosen from CB Insights’ periodic
table of ecommerce): Bonobos, Casper, Dollar Shave Club, Frank & Oak, Harry’s, Mack Weldon, and Warby Parker
– Their founding team experience broke down as follows: • Strategy consulting or business development: 5 • Previous founder: 4 • Relevant category experience: 4 • Private equity: 3
• Hire someone to analyze customer data if no consulting founders – Consulting skillset lends itself to analyzing and improving long-standing industries, such
as retail, that are data-rich and have logistics and supply chain considerations • Casper had no consultants on founding team, first hire spent years leading strategy
efforts for major companies
• Establish a flexible culture focusing on iteration – Many companies described an iterative culture as key enabler of successful strategies
• Warby Parker’s foray into B&M began as experiment offering glasses to walk-ins at their corporate HQ; eventually evolved to stand-alone B&M (20 locations today)
• Casper’s New York showroom helped company understand what customers value in an in-store experience; now, upon scaling markets, one of the first tasks is to establish a local showroom
Best Practices - Product
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Phase I – Pre Seed Phase II – Seed/Series A Phase III – Series B/C+
Lay the foundation Build Customer Experience Establish Retail Presence
• Initial product selection: Companies tended to offer products that were necessities; allows focus on selling experience rather than generating demand
• Price point: Examined companies offered products at a price point 30-40% lower than incumbents’
• Broad brand: Companies established brands broad enough to accommodate future product expansion (e.g., Casper wants to own everything touching sleep)
• Minimize middlemen: Strive to establish multi-source contracts with low-cost suppliers or own supply chain (e.g., Harry’s owns their German factory)
• Brand consistency: Brand and company values are consistent at every customer touch point - messaging on website, product, packaging
• Magical unboxing: Unboxing experience is important; create magic moment (no accident that Casper has thousands of unboxing videos on Youtube)
• Experience: Want customers to recommend company rather than product (e.g., one Youtube reviewer didn’t like mattress but recommend Casper anyway because of customer experience)
• Cool factor: helps customers feel they’re getting insider access to a scarce product (e.g., Casper’s speakeasy-esque showroom)
• Trial period: For products with a >$100 price point, free trials go a long way to alleviate concerns about purchasing unknown product
• If?: Based on interviews with investors, some consensus that these days all ecommerce startups have to eventually enter B&M
• When:? First location tends to follow Series B/C raise due to capital requirements
• How?: Common growth hack is to use existing workspace as initial retail presence (e.g., Casper’s NYC showroom was in their loft space)
• Really?: Companies in lower-price point categories could elect to distribute through brand-aligned 3rd party channels (e.g., Harry’s distributes through Nordstrom and Birchbox)
Best Practices - Brand
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• Target millennials – First generation to have grown up with internet; mental barriers to buying online are lower
• Continuously update your understanding of the market – Net Promoter Score (NPS) often used to gauge brand health; 60% or higher is helpful for
attracting investor attention; segment NPS for additional insights – geography, age, etc. • Established online retail companies like Amazon and Zappos have NPS of ~60
– Customer surveys and focus groups should happen continuously, not solely at onset to gauge market attractiveness
• What first 1,000 customers may want may not be same for next 10M customers
• Create a brand that makes people feel like insiders – Millennials seek experiences – creating aura of discovery of something not widely
available helps appeal to audience – Having a social good component can bolster brand affinity (e.g., Warby Parker’s “Buy a
Pair, Give a Pair”) – Creating a lifestyle brand around your products through content marketing is a way to
soft-sell the product • Casper hired five independent journalists to write articles about sleep • Harry’s has a “Five O’clock” magazine
Sources: Net Promoter Benchmarks
Investor Cheat Sheet for Seed Deals
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Mar
ket q TAM in US >$2B
q >50% Market is owned by 1-4 players q Customers today feel price point is too high; price falls in upper 10% of customers’ WTP
Team
/C
ultu
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Prod
uct
Bran
d q NPS is >60% q Customers feel like “insiders” purchasing the product; unique/cool experience q Has a social good component
q Founding team has prior consulting or strategy/business development experience q Prior founding experience
q Product is a necessity, not a nice-to-have q Vision and brand are tied to a segment, not a specific product q Free trials or similar to help minimize ecommerce friction
Case Study: Warby Parker
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Founded in 2010 and HQ in NYC, Warby Parker sells vintage-inspired eyeglasses and sunglasses
Financing Series Seed, Jul ’11 $1.9M
Series A, Sep ’11 $12.5M
Series B, Feb ’13 $41.5M
Series C, Dec ’13 $60M
Series D, Apr ’15 $100M
Valuation ? $120M $200-$250M $500M $1.2bn
Investors First Round, Lerer, Thrive, SV Angel, Trisiras Group
First Round, Forerunner, Lerer, Thrive, Menlo Ventures, Tiger Global
AmEx, Felicis, General Catalyst, Menlo, Red Swan Ventures, Thrive, Spark, Tiger Global
BoxGroup, First Round, General Catalyst, Spark, Thrive, Tiger Global
General Catalyst, T. Rowe Price, Tiger Global, Wellington Management
Sources: CB Insights, Crunchbase, Wayback Machine, Warby Website
• Demographic: millennial men and women
• Brand: describes social good component
• Price: ¼ of alternative • Convenience: free
shipping/try on/returns
Nov 2010
• Product: close-up shots • Brand: + blog • Convenience: + B&M
Inve
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Emphasis Shift Over Time • More: product, B&M, lifestyle (through
blog) • No Change: social good, demographic • Less: price Takeaways • Alleviating concerns about “trying”
usually associated with B&M shopping is critical to ecommerce
• Showing the product up close leaves no ambiguity about what you’re selling
• Content marketing through blog helps promote lifestyle in addition to product
Case Study: Warby Parker
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Mar
ket
Investor Cheat Sheet Score : 9 out of 11
• Concentrated: Luxottica owned 80% of eyewear manufacturing and distribution market, making glasses for Prada, D&G, etc. and selling through LensCrafters, Sunglass Hut, etc.
• High Price Point/Margin: prices for glasses with prescription lenses were often $400+ • Large: $30B eyewear market in United States in 2014 (up from $26B in 2010)
• Selection: initial offerings targeted millennials interested in fashion but who desire lower cost; site helps consumer understand sizing parameters; close-up shots upon scrolling over product help see product up-close remotely
• Price: $95 price point undercuts existing options by a wide margin • Experience: Try at Home program – minimizes resistance to online purchases
• Position: rebelling against significant markups by incumbents • Social Good: for every pair of glasses you buy, Warby gives a pair to someone in need; helps relate
to target millennial audience
Sources: LinkedIn, Euromonitor, Crunchbase, Wayback Machine, Warby Website
• Relevant background: three out of the four founders had banking/consulting/PE experience – helpful for segmenting/analyzing customers, customer surveys, focus groups; one founder worked for five years in vision industry at non-profit – helpful for partnerships and industry knowledge
• Strategy: experimented with mini-store to understand retail dynamics prior to opening brick & mortar
Team
/C
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Case Study: Harry’s Shaving
14 of 20 Sources: LinkedIn, CB Insights, IBISWorld, Crunchbase, Wayback Machine, Harry’s Website
Founded in 2011 and HQ in NYC, Harry’s sells shaving blades and related accessories/products through a monthly subscription model
Financing Series Seed, Aug ’12 $4.0M
Series A, Jan-May ’14 $75M
Series B, Dec ’14 $75M
Series C, Jul ’15 $75.6M
Valuation ? ? $350M $750M
Investors BoxGroup, Harrison Metal, Red Swan Ventures, Thrive
Warby founders, Harrison Metal, Highland Capital, Lakestar, SV Angel, Thrive, Tiger Global
Harrison Metal, Thrive, Tiger Global
Wellington Management
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Oct 2012 Today
• Product: men’s razor (4 links to packages)
• Brand: referral program
• Demographic: fashionable men
• Product: streamlined selection, own factory, subscription plans, better images
• Brand: magazine • Convenience: + B&M
Emphasis Shift • More: German factory, B&M, lifestyle
(through magazine), photography, subscription
• No Change: price • Less: referral program, social good Takeaways • Referral program may not be as
important after initial traction • Free trial less applicable due to low price
point • Owning factory helps control costs • Content marketing through magazine
helps promote lifestyle in addition to product
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Mar
ket • Concentrated: P&G owned 70% of market; Dollar Shave Club launched earlier but had not yet
gained market share • High Price Point/Margin: each blade from Gillette cost $3-4, reported 60% margin prior to
acquisition by P&G in 2004 • Large: $2.6B market in United States in 2014
• Selection: targeting millennial males with German-engineered blades at 30% of Gillette’s price; no subscription plan initially (added later), focused on selling a set, which differed from DSC’s plan focus
• Experience: comedic language (more than DSC) throughout website and packaging • Price: ~$1.50/blade price point is 50%+ cheaper than incumbents
• Position: less focus on Gillette-like features, more focus on ease of experience, comfort, more focus on quality than DSC (focus on price)
• Customer Acquisition: ran referral campaign for week before launch, obtained 100k emails
• Relevant background: both founders had consulting/PE experience – helpful for segmenting/analyzing customers, customer surveys, focus groups; one founder was one of the founders of Warby Parker – successful entrepreneur Te
am /
Cul
ture
Pr
oduc
t Br
and
Case Study: Harry’s Shaving
Sources: LinkedIn, NY Times, IBISWorld, Crunchbase, Wayback Machine, Harry’s Website
Investor Cheat Sheet Score : 10 out of 11
Case Study: Casper
16 of 20 Sources: LinkedIn, CB Insights, Crunchbase, Wayback Machine, Casper Website
Founded in 2013 and HQ in NYC, Casper sells mattresses directly to the consumer through its ecommerce site
Financing Series Seed, Feb ’14 $1.6M
Series A, Aug ’14 $13.1M
Series B, Jun ’15 $55M
Valuation ? ? $500M
Investors Correlation Ventures, Crosslink Capital, Lerer Hippeau Ventures (LHV), Norwest, Vaizra
A-Grade, Cendana Capital, Consigliere Brand Capital, Crosslink, LHV, NEA, Norwest, Silas Capital, Slow Ventures, SV Angel
Institutional Venture Partners, LHV, NEA, Norwest, Pritzker Group, QueensBridge, Slow Ventures, SV Angel, Vaizra, Adam Levine, Leonardo DiCaprio, Scooter Braun, Tobey Maguire
Sep 2014
• Product: mattress, showroom
• Brand: showroom, customer testimonials
• Convenience: 100 night trial
Com
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vest
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Today
• Product: better product image; fewer other images
• Brand: + bigger testimonial section
• Convenience: + trial explanation, no “fine print”
Emphasis Shift • More: product image, 100-night trial,
one mattress for all, testimonials from known sources
• No Change: price • Less: sleep-related images Takeaways • Explain your free trial on the front page,
without links to learn more; alleviates thoughts of “fine print”
• Customers care about testimonials from sources they’ve heard of about products they haven’t
• Having a showroom more important for higher-price items where customers may be less likely to pull trigger online
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Mar
ket • Concentrated: Tempur Sealy, Serta, Select Comfort, Simmons own 50% of market; target older
generation with different health problems; focus on features rather than experience • High Price Point/Margin: comparable mattresses cost $2,000+ from incumbents • Large: $9.1B market in United States in 2014
• Selection: one mattress to minimize confusion; material/construction takes best of latex and memory foam
• Experience: Youtube filled with unboxing videos, speakeasy-esque showroom in Manhattan • Price: 60%+ cheaper than alternatives; 50k mattresses sold, $30M revenue in 2014, $100M
expected in 2015
• Position: focusing on sleep rather than mattress; allows to build lifestyle brand rather than be product-specific; targeting young working professionals with appealing messaging on site and well-done subway marketing
• Customer Acquisition: low single-digit return rate speaks to product/market fit
• Relevant background: all five founders had prior founding experience; one founder spent nine years at IDEO doing design
Team
/C
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d Case Study: Casper
Sources: LinkedIn, Entrepreneur, IBISWorld, Crunchbase, Wayback Machine, Casper Website
Investor Cheat Sheet Score : 9 out of 11
Case Study: Ecommerce Failure
• Boo.com – Background:
• London-based firm founded by experienced entrepreneurs who wanted to develop a fashion brand for 18-24 year olds
• Raised $135M in venture funding in 1998-99, went bankrupt in 2000 – Challenges:
• Sales and conversion rate were much lower than expected; demonstrates need to model and forecast customer acquisition, conversion rate, and other metrics
• Many customers at the time did not have broadband internet connections, making the user experience worse
• Ineffective hiring resulted in a large number of employees (300+) which drove payroll costs
– Investor Cheat Sheet Score: 4-6 out of 11
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Timing and technology advances are as important as best practices
Likely markets to be disrupted soon • End-of-Life market
– Concentrated: four players own 75% of the coffin/casket market – Hillenbrand, Matthews, Aurora, Thacker
– High Price Point/Margin: prices range $2000-$10,000+; markups range 300-500% – Moderately Large: $736M market for coffins/caskets but can expand into complementary
goods; overall funeral market is $15B (and is not concentrated) – Startups in the space: Genesis Casket, founded in 2010 but dissolved in 2014; could not
penetrate national funeral home chains to take on Hillenbrand
• Baby strollers and car seats – High Price Point/Margin: existing price points of $500-$5000+, room for eliminating
middlemen and margins – Large: $2.1B market in US – Startups in the space: 4moms, $60M raised to date, but limited product selection and
$850 price tag
• Cosmetics – Concentrated: L’Oreal and Estee Lauder own 45% of the market – Large: $12.3B market in US – Startups in the space: Stowaway Cosmetics, raised $1.5M
• Other: diamond rings (e.g., House of Eleonore), socks (e.g., Stance), flowers (e.g., UrbanStems), pet products (e.g., BarkBox), bras/lingerie (e.g., Adore Me)
19 of 20 Sources: IBISWorld, FTC, Funeral Consumers Alliance, Consumer Reports, Euromonitor
Questions
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