3. Vertically Integrated E-Commerce
Vertically Integrated E-Commerce companies sell their own branded products directly to customers, exclusively through their own
websites. These companies also tend to control a significant portion of their product’s supply chain, such as
design, development, production, warehousing, distribution, fulfillment, and customer service. Examples of Vertically Integrated
E-Commerce companies include Warby Parker, Harry’s, and Beachmint.
The more general E-Commerce business model emerged in the 1990’s as Internet adoption accelerated and trust of online
payment methods led to broader acceptance of bringing commerce and the transaction process online. As E-Commerce has
matured, it has followed the trend of brick-and-mortar retail sales, with large “warehouse-style” retailers using their purchasing
power to largely control the market. These include online-only retailers, like Amazon and eBay, as well as the online counterparts
of brick-and-mortar retailers like Target and Walmart.
The holy grail for emerging consumer product companies has long been winning the interest of buyers at large retailers, who in
turn buy their product in bulk and distribute it through both online or offline channels. This approach is attractive because having
their product sold by a popular retailer gives widespread distribution, instant credibility among potential customers, and the
advantage of scale. Scale is particularly important, as it enables the consumer product companies to produce more units at a
lower cost, positioning the company to more effectively compete against rivals. However, the downside of selling through large
retailers involves extended payment terms, charge-backs for unsold merchandise, and onerous vendor agreements.
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4. Vertically Integrated E-Commerce
Vertically Integrated E-Commerce companies have a number of features that suggest the business model is more appealing than
selling through other retailers. These include more attractive cash flow characteristics, as they sell directly to the end customer
and receive payment prior to shipping the product. They also have better control over product pricing and discounting, as their
website is the only avenue for a transaction to take place. Lastly, and perhaps most importantly, these companies have
substantially more control over their brand and customer purchase experience. As a result, these brands are able to engage with
their customers on a much deeper level than those who rely on resellers.
Due to the reasons discussed above, the attractiveness of Vertically Integrated E-Commerce relative to both offline retail sales and
horizontally integrated e-commerce is expected to persist over time. Winners in this industry will have expertise in 1)
branding/customer experience, 2) supply chain management, and 3) creative online marketing. As a result, Vertically Integrated ECommerce companies represent an attractive growth area for entrepreneurs to monetize as well as a compelling trend in which
venture capitalists should selectively consider investing.
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5. Human Instrumentation
Human Instrumentation (aka Wearable Computers) represents a very broad category of technological development that has
accelerated in the last several years. For our purposes here at FuturistVC, we are going to focus solely on the consumerization and
mass adoption trends of a subset of Human Instrumentation known as Activity Trackers. Activity Trackers are effectively a bundle
of miniature sensors, a processor, and a battery that are all integrated into various types of wearable devices, including
wristbands, watches, and pendants. Importantly, these devices are connected to software applications that automatically
record, analyze, and display the data collected from the various sensors. Examples of popular Activity Trackers today are
Fitbit, Nike+ FuelBand, Jawbone UP, Misfit Wearables, and Pebble.
The growing popularity of Activity Trackers is largely a function of 1) the commoditization and declining costs of the necessary
components and 2) advances in device energy optimization. We can attribute the declining costs of Activity Tracker components
to the widespread adoption of smartphones. Smartphones entered the market around 2005, and now account for more than 50%
of mobile phone sales globally (SOURCE). Smartphones incorporate a number of micro-electromechanical systems (MEMS) such
as accelerometers, pressure sensors, gyroscopes, and GPS componentry that are common in today’s Activity Trackers. As a
result, the growth of smartphones has increased the production volume of MEMS and attracted numerous competitors, driving
down the cost of this componentry. Now that these components are cheaper, they can be combined to produce technologically
advanced sensors at a price point that is accessible to consumers. Additionally, improvements have been made in device energy
consumption through better architecture, sleep modes, low energy Bluetooth, and better display technologies. These
developments are important for Activity Trackers because they need to be always on to function as intended, and battery
technology has not kept up with the power demands of these devices.
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6. Human Instrumentation
We expect prices of these components to continue to decline, encouraging further consumer adoption as well as the entrance of
new competitors. This trend is common in hardware and has been seen previously in PCs, digital cameras, and printers. As this
occurs, and the differentiation among Activity Tracker hardware blurs, the software layer of Activity Trackers will be increasingly
important. It will be imperative for Activity Tracker companies to develop robust, proprietary software as well as an application
ecosystem (similar to what Apple has done with the App Store) to layer into the user experience. For instance, the Pebble
smartwatch has done a phenomenal job of providing developers with an open platform, a software development kit (SDK), and
access to application programming interfaces (APIs). Developers have in turn created thousands of unique apps to enhance the
Pebble experience. These applications increase the Pebble’s functionality for users and will help differentiate Pebble from other
smartwatches and Activity Trackers. However, it remains to be seen whether this is enough to combat other smartwatch creators
such as Sony and Samsung as well as the rumored Apple iWatch.
Due to the reasons discussed above, the attractiveness of Activity Tracker companies is mixed. Winners in this category will be
companies with 1) purchasing scale, 2) distribution capabilities, 3) robust software, 4) an extensive third-party application
ecosystem, and 5) proprietary sensors. Large device manufacturers such as Apple and Samsung are well positioned to compete
against startups such as Misfit Wearables due to their purchasing scale of components that are also used in smartphones as well
as due to their extensive distribution relationships. However, certain early entrants that have begun to scale, such as Pebble and
Fitbit, have combined their modest purchasing power with a robust software platform and third-party application ecosystem to
support their devices. These companies will also likely continue to do well. Also, companies with proprietary sensors (i.e.
ingestible sensors for digital health tracking) will continue to have a unique edge. Overall, Activity Trackers represent a fairly
competitive and difficult market for entrepreneurs to successfully break into today. Venture capitalists should only selectively
consider investing in new Activity Tracking businesses - focusing on identifying companies with a unique software edge or
proprietary sensor technology.
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7. Subscription Commerce
Subscription Commerce has gained significant traction in the last several years. These E-Commerce companies follow a variety of
models. Some offer subscription plans to conveniently deliver disposable goods to consumers at their home, freeing them from
frequent trips to the store. These can either be popular, branded products such as those distributed by BarkBox, or private label
products that have been rebranded such as those distributed by Dollar Shave Club or The Honest Company. Other Subscription
Commerce companies offer a subscription plan to deliver a professionally curated assortment of durable goods such as clothes
(BeachMint), stationery (Nicely Noted), or beauty products (BirchBox). These also can be either branded (Svbscription) or private
label (JustFab) products. The competitive landscape outlining the positioning of each of these Subscription Commerce companies
can be seen in the diagram below.
This diagram is a simplification of the competitive landscape, but it can be broadly used to project the success and sustainability
of Subscription Commerce companies. Here at FuturistVC, we believe the most attractive companies with this business model
offer disposable, private label goods. And of course, this implies that the least attractive companies with this business model offer
durable, branded goods. As noted by Kent Bennett (Bessemer Venture Partners) in a recent post on All Things Digital, the value
proposition for subscribers revolves around 1) Entertainment, 2) Enrichment, 3) Curation, 4) Cost, and 5) Convenience. He
believes that the sustainability of the Subscription Commerce value proposition over time is largely dependent on the Cost and
Convenience components.
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8. Subscription Commerce
Perhaps the best example to demonstrate this view is by comparing the success of Dollar Shave Club to the demise of 12 Society.
Dollar Shave Club purchases bulk, private label men’s grooming products (razors, shaving cream, and wipes), and rebrands them communicating a degree of uniqueness to subscribers. Additionally, Dollar Shave Club’s monthly delivery of disposable men’s
products is an obvious convenience to men who are not frequent visitors of Walmart, Target, or other retailers of competing
products. The bulk purchasing of private label razors and direct to consumer distribution model enables Dollar Shave Club to
undercut the pricing of Gillette and Schick razors, offering subscribers a convenient, cost efficient offering all wrapped up in a
compelling, approachable brand.
Compare this to 12 Society, a celebrity-endorsed box that regularly delivered durable, branded goods to subscribers. Since these
were durable products, they were inherently not products that were previously purchased on a monthly, replacement
basis, effectively removing the convenience value proposition. These were also branded products, meaning the exact same
products could be purchased directly by the subscribers on an as-needed basis. As a result, 12 Society needed to convince brands
to give products to them for free (or heavily discounted) to actually generate a decent margin. This could work on a small
scale, but as the subscriber base grew, it became more difficult to source branded products for free, forcing 12 Society to start
purchasing them wholesale. The celebrity endorsement and curation was not a compelling enough reason for customers to
continue paying, and the high cost of purchasing branded goods kept 12 Society from operating profitably. This led to their
eventual demise and “sale” to Quarterly, a similarly poorly positioned competitor.
Due to the reasons discussed above, the attractiveness of Subscription Commerce companies is mixed. Winners in this category
will be rare, and those that do succeed will be focused on selling private label, disposable goods and offer a clear value
proposition in terms of lower costs and greater convenience to consumers. The curation strategy of durable, branded products is
not compelling enough to be sustained as the business scales. As a result, Subscription Commerce represents a highly competitive
and difficult strategy for entrepreneurs to monetize. Venture capitalists should only selectively consider investing in these
businesses.
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9. Verticalized Online Marketplaces
Marketplaces facilitate the exchange of goods or services between buyers and sellers, users and producers, and renters and
owners. Marketplaces operate as intermediaries; therefore, they tend to be capital efficient businesses with no inventory to
purchase or manage. Verticalized Online Marketplaces leverage information technology to create large, online platforms serving
very specific markets such as music lessons (TakeLessons), flower delivery (BloomNation), artisan-made goods (Etsy), or dog
sitting (DogVacay). A simplistic chronological history of marketplaces can be broken down into three stages: offline classifieds
(newspapers) → online horizontal marketplaces (eBay/Craigslist) → Verticalized Online Marketplaces. By taking a verticalized
approach to building a marketplace, these businesses can 1) achieve meaningful scale and market leadership with fewer overall
participants, 2) provide a more focused and unique user experience, and 3) disrupt more complex or regulated industries.
Together, these three advantages enable them to compete effectively against offline transactions and horizontal online
marketplaces.
Craigslist represents one of the most popular horizontal online marketplaces today, but its appeal and relevance in certain areas is
declining amidst new competition from specialist competitors. Craigslist is not verticalized - it operates as a one-size-fits-all
platform that largely applies the same user experience (i.e. posting, searching, and viewing) regardless of the product or service
being offered. Of course, Craigslist is still a fierce competitor of many emerging Verticalized Online Marketplaces due to its largely
free listings and simple user interface, which together have resulted in broad adoption rates and enormous network effects.
However, these network effects are not impenetrable as Craiglist’s traffic appears to have been steadily declining since traffic
peaked at 50 million monthly unique visitors in 2011. As of September 2013, Quantcast reports traffic had declined to 37 million
monthly unique visitors (-26%). Andrew Parker, a general partner at Spark Capital, designed an interesting graphic back in 2010
which illustrates Craigslist’s myriad new competitors targeting a number of its individual marketplaces (see next page).
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10. Verticalized Online Marketplaces
Source: http://thegongshow.tumblr.com/image/345941486
Due to the reasons discussed above, the attractiveness of Verticalized Online Marketplaces relative to offline transactions and
horizontal online marketplaces is expected to persist over time. However, not all Verticalized Online Marketplaces are created
equal. Those with a focus on more complex, regulated industries such as financial services (i.e. Dealstruck, Funding Circle, and
Covestor) will enjoy higher barriers to entry once established and are less likely to face competition from large horizontal
marketplaces. Additionally, those with a focus on local services (i.e. DogVacay) may struggle to generate recurring revenue as
marketplace participants can more easily transact outside of the marketplace once the introduction has been made. With these
differences in mind, certain Verticalized Online Marketplaces represent an attractive growth area for entrepreneurs to monetize
as well as a compelling trend in which venture capitalists should consider investing.
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11. Alternative Education Platforms
Alternative Education Platforms exist to promote the democratization of education through free or low-cost technology-enabled
courses. Types of Alternative Education Platforms range from Massive Open Online Courses (“MOOCs”) such as
Coursera, Udacity, and Udemy to other unaccredited platforms for skill development such as Codecademy, General Assembly, and
Khan Academy. The recent popularity of Alternative Education Platforms is a function of the perceived declining value proposition
and relevance of traditional, accredited college and advanced degrees. Myriad data support this perceived decline, though the
current value proposition is arguably still compelling in terms of higher employment rates and earnings. However, tuition costs
have been rising rapidly while earnings of college graduates have been flat to declining, a persistent trend that will inevitably lead
to further deterioration of the value proposition.
From 2002 to 2012, the nominal, annual cost of attending a 4-year college rose from $13,639 to $23,066, an increase of 69%.
Adjusting for inflation, the annual cost of attending a 4-year college rose from $17,418 to $23,066, an increase of 32%. This trend
of rapidly rising college tuition has been persistent since at least 1977, the beginning of the Bureau of Labor Statistics data series.
Over the last 36 years, the nominal cost of college tuition and fees has grown at an annual rate of 7.4%, almost double the rate of
inflation at 3.8%.
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12. Alternative Education Platforms
Although the data continues to show that higher levels of education are linked to lower unemployment rates, the value
proposition of these college degrees has begun to be called into question due to unsettling trends in post-college earnings. As
seen in the chart below, the median, inflation adjusted earnings of college graduates have been in steady decline since 2000.
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13. Alternative Education Platforms
Additionally, from 2007 to 2011, the unemployment rate of recent college graduates exceeded the unemployment rate of the
total population of those who just have high school-level educations.
Information technology has also contributed to lowering the cost of distribution of courses and increasing the effectiveness of
online delivery of these Alternative Education Platforms. The nearly ubiquitous nature of broadband internet access
(mobile+fixed), new collaboration tools, and innovative methods of media delivery have narrowed the quality gap between a
brick-and-mortar classroom and an online classroom.
The catalysts underlying the growth of Alternative Education Platforms are largely structural in nature and are expected to persist
over time. The prohibitive nature of rising college tuition costs, coupled with declining earnings of recent college
graduates, suggest that alternative, lower-cost forms of education will continue to be adopted rapidly. As a result of these
trends, Alternative Education Platforms represent an attractive growth area for entrepreneurs to monetize as well as a compelling
trend in which venture capitalists should consider investing.
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14. Crowdfunding
The concept of Crowdfunding, effectively the application of Crowdsourcing to fundraising, is rooted in connecting entrepreneurs
and other creators with alternative sources of capital, namely individuals, by leveraging information technology and networks.
Crowdfunding can effectively disintermediate traditional external funding sources such as banks and venture capital firms by
sourcing capital directly from interested individuals. Capital raisers benefit from Crowdfunding by typically paying a lower cost of
funds than is required by traditional external funding sources due largely to the irrational or uneconomic motivations of
individuals. The lowered cost of funds can present itself in a number of ways, including lowered interest rates on loans, lowered
ownership requirements on equity investments, or lowered or eliminated underwriting hurdles such as FICO
scores, collateral, and documentation. Two examples of this trend include Funding Circle, an online peer-to-peer lending platform
connecting individuals to small business borrowers, and Kickstarter, the largest online platform for funding creative projects.
The use of Crowdfunding to capitalize projects or companies has accelerated in recent years due to growth of social networks, the
Maker Movement, and changes in government regulation. The growth of social networks has empowered individuals by providing
them with access to a low-cost/high-reach communication channel to the masses. In addition to this, the Maker Movement has
become popularized due to rapidly declining production costs (i.e. 3D printing) and increased access to large distribution channels
(i.e. Etsy, eBay, Amazon). Changing government regulation has also supported Crowdfunding by legitimizing and clarifying
Crowdfunding rules through the JOBS Act while placing additional regulation and restrictions on banks (i.e. Dodd-Frank). As a
result of this heightened regulation for banks, underwriting standards for small business lending have not yet shown any sign of
easing since they were tightened amidst the US recession.
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15. Crowdfunding
Another important driver of the Crowdfunding trend is the irrational or uneconomic motivations of individuals relative to rational
and economic motivations of traditional funding sources. Traditional funding sources (i.e. banks) are structured to operate
profitably into perpetuity, rationally providing loans based on their ability to accept risk and their extensive track record of
appropriately ascertaining borrower risk (in theory, at least). Individuals tend to be less rational funding sources, providing loans
or investments based on their willingness to accept risk which is determined personally through potentially irrelevant and
simplistic underwriting considerations (i.e. social influence, personal relationship, etc.). Additionally, individuals contributing to
crowdfunded projects are susceptible to mob psychology which is characterized by the loss of responsibility of the individual. This
inefficiency creates an opportunity for entrepreneurs and other creators to fund companies and projects based more on their
marketing tactics and social influence than on traditional means.
The catalysts underlying the acceleration of Crowdfunding are largely structural in nature. As startup costs and production costs
decline and access to online distribution channels grows, barriers to entry for entrepreneurs and other creators will also decline.
This will lead to continued proliferation of capital raisers who will tap into Crowdfunding to capitalize companies and projects.
However, a key potential obstacle in the future will be the persistence of irrationality among the individuals funding these
companies and projects. This irrationality will inevitably lead to poor returns as capital raisers take advantage of the inefficient
market, effectively making individuals more cautious and less willing to contribute to new ventures or projects. Despite this
expected increase in market efficiency, Crowdfunding currently represents an attractive growth area for entrepreneurs to
monetize as well as a compelling trend in which venture capitalists should consider investing.
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16. Sharing Economy
The concept of a Sharing Economy, closely tied to Collaborative Consumption, is rooted in turning underutilized assets and
resources into new jobs, income streams, and community networks. The Sharing Economy leverages information technology and
social networks to efficiently match potential users with non-commercial providers of goods or services. This process enables
owners to monetize their assets (physical goods or time) while simultaneously enabling users to “rent” those assets, effectively
avoiding the cost and complexity of ownership and/or transferring time intensive activities to those with excess availability of
time.
The growth and relevance of the Sharing Economy was accelerated by the US recession and its persistent aftermath, including
significant underemployment and declining US median incomes (real):
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17. Sharing Economy
As a result of these two factors (among others), job seekers and owners of assets have sought alternative forms of income to
supplement their smaller or non-existent paychecks. This has typically been accomplished through either renting their available
time to others or through renting underutilized assets to others. Two examples of this include TaskRabbit, a network of trusted
helpers available to do basic tasks for a price, and Sidecar, a ridesharing service for car owners enabling them to operate as
temporary taxi drivers.
Additionally, consumers (or users) have sought to use the Sharing Economy to obtain lower cost goods and services. These goods
and services can be rented to users at a lower cost than traditional commercial methods for two often intertwined reasons: 1) the
goods and services would otherwise be unused and 2) the owners’ main intention for the asset is personal use, therefore the
costs associated with owning the asset are mentally tied to the benefit received from having unlimited access to the asset. As a
result, renting the asset to others during periods of underutilization does not have to be a profitable in the sense that it fully
reflects the cost of ownership, plus profit. Instead, assets offered to users of the Sharing Economy tend to be irrationally priced on
a standalone basis, as owners are willing to rent their assets based on marginal cost, plus profit.
Though the catalysts underlying the acceleration of the Sharing Economy appear to be cyclical in nature, the existence of
underutilized assets by non-commercial owners will continue to be a persistent feature of the economy regardless of employment
and income levels. As a result, the rise of the Sharing Economy presents an attractive growth area for entrepreneurs to monetize
as well as a compelling trend in which venture capitalists should consider investing.
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