Tag - e-commerce

How J.Jill’s IPO Could Help Define E-Commerce Valuations
[Internal Memo] Thoughts on Commerce
Dude, no one will ever buy that online. AKA how incumbents get pwned in tech.

How J.Jill’s IPO Could Help Define E-Commerce Valuations

You’d be forgiven for missing a small cap retail IPO last week in the midst of the global Snapchat mania. Last Thursday, without much fanfare, J.Jill, a nearly sixty year old former mail order catalog company selling women’s apparel, quietly went public at a nearly $900M enterprise value. And surprisingly, for the complex world of digital commerce, J.Jill’s public market reception might actually be an indicator of what all these next gen direct-to-consumer commerce businesses are actually worth.

How a Small Cap IPO Could Help Define2

In past pieces for BreakingVC during 2016, I’ve discussed Amazon’s impact on both e-commerce and retail at length, as well as the three areas I’ve observed for opportunity to penetrate Amazon’s digital commerce force-field: (1+2) In Why Amazon Has Consumer Investors Bemused and Confused I wrote at length about both off-price retail (Marshalls and T.J. Maxx, for example) as well as mid to upper tier brand opportunities that Amazon fundamentally can’t capture and (3) in The Middleman Strikes Back, I described how Amazon’s anemic commerce margins prohibit it from a service heavy assisted/concierge-commerce provider.

But for everyone else – from Warby Parker to Harry’s to Bonobos to Everlane – what are these weird, sorta digital, sorta omni-channel, sorta personalization brands actually worth? And why is a sixty year old women’s apparel business that was previously spun out of a legacy retailer, Talbots, a leading indicator of value?

As usual, the Company’s S1 is a store of insight and surprises:

Personalization and Loyal Customers

If I were reading an untitled prospectus, I would’ve bet my money that the following block of text from the Company’s S1 “Overview” described a millennial-first next gen commerce brand, with a small but growing retail footprint:

We believe we have strong customer and transaction data capabilities, but it is our use of the data that distinguishes us from our competitors. We have developed industry-leading data capture capabilities that allow us to match approximately 97% of transactions to an identifiable customer, which we believe is significantly ahead of the industry standard. We maintain an extensive customer database that tracks customer details from personal identifiers and demographic overlay (e.g. name, address, age, household income) and transaction history (e.g. orders, returns, order value.) We continually leverage this database and apply our insights to operate our business as well as to acquire new customers and then create, build and maintain a relationship with each customer to drive optimum value.

Believe it or not, that is a sixty year old company talking.

The truth is that most retail businesses are really merchandising and logistics businesses more than personalization businesses. Most big box retailers – or at least the many that I speak with – admit that closing the loop between online-to-offline transactions is amongst their largest struggles.

This is a flaw that digital first businesses – even those with a retail footprint – claim they can solve. And all the moreso, a business such as Stitchfix, which is truly a data business at its core, led by Eric Colson, Chief Algorithms Officer. Case in point, a recent Stitchfix blog entitled “Ruminations on Data Driven Fashion Design,” which noted:

For example, can statistical modeling identify when a successful blouse has an attribute that is holding it back? If so, can we suggest a mutation that replaces the underperforming attribute? To illustrate, can we identify when a parent blouse is successful despite its leopard print, and then change it to the floral print that everyone loves this season? We are also examining how we can leverage less structured types of data. For example, can we extract features from images of blouses or the text feedback that clients provide in response to a blouse?

[To be blown away, visit the Stitchfix Algorithms Tour, built by Colson. It is a wow.]

Data is powerful. But it’s goal is to yield a more engaged customer; in J.Jill’s case existing active customers [within the past five years] represent 70% of annual revenues – an awfully consistent customer who sounds pretty darn comparable to all those subscription commerce businesses that have proliferated the market. And very similar to the vision today’s D2C brands are claiming: own a customer’s wardrobe/apparel/bathroom/etc with a non-commoditizing product and they will come back to you year after year.

J.Jill also looks a lot more like a direct to consumer business than your traditional retailer, with 42% of 2016 sales (growing to 50% in 2017) coming from direct channels.

How a Small Cap IPO Could Help Define E

What about its retail footprint? As discussed in the past, many of the next gen millennial brands are launching brick and mortar stores to prove a new customer acquisition channel against an overly saturated (and unprofitable) digital marketing environment. But with a footprint of only 275 retail stores, its brick and mortar presence is at least relatively comparable to the type of presence today’s next gen retailers are aiming for (as of today Warby has 44 B&M locations, Bonobos has 11, etc.) And these stores, like the millennial brands are conceptually customer acquisition drivers, as the S1 notes: While 64% of new to brand customers first engage with J.Jill through our retail stores, we have a strong track record of migrating customers from a single-channel customer to a more valuable, omni-channel customer.”

At the end of the day, J.Jill, this under the radar retailer looks surprisingly similar to today’s D2C commerce businesses:

  • Data-first approach (97% of transactions properly attributed to customer profile)
  • Heavy direct sales focus, with stores used merely as customer acqusion tool (42%, growing to 50%).
  • Not overbearing retail footprint
  • Brand quality margins (65.9% gross margins), as compared to 42% for Macy’s, 35% for Nordstrom or 40% for Gap – effectively double the margin basis as a traditional retailer.

What’s It Worth

I like J.Jill as a comp for many of today’s e-commerce companies for two reasons. First, as proven in the prior section, I think it looks much more similar than a casual observer might guess to those businesses. But secondly, at ~$500M in annual revenues, J.Jill is surprisingly small for a public retailer. Gap posted nearly $16B in revenue in 2015, Williams Sonoma is on the small side with $4B in revenues – even Lululemon has trailing revenues greater than $2B. This looks similar to emerging commerce brands which are typically much smaller than their relative press coverage would imply: Dollar Shave Club was on a $250M revenue run rate when acquired by Unilever, Warby Parker booked an estimated ~$200M revenue in 2016, and Trunk Club was on a reported $100M revenue run rate when acquired by Nordstrom. Most of today’s emerging brands, even at triple their current size, would look substantially similar to a small cap IPO.

The first piece of very good news for emerging brands is that there was a market appetite for a small cap offering of this nature whatsoever. Although the Company ultimately priced at $13/share, just below its suggested range of $14-16/share, the good news – again – is that market interest was strong enough not to justify pulling the offering entirely.

But that’s mostly where the good news stops. J.Jill’s IPO (even based on an estimated $15/share offering) would have it placed towards the bottom of a peer set on a valuation basis. The following graphs on valuation comps were initially published on Seeking Alpha:

How a Small Cap IPO Could Help Define 4 How a Small Cap IPO Could Help Define 3

Those are sobering multiples (and, the company actually priced 10% below these estimated multiples) for a company that stacks up extremely well on most operational metrics – for example, they boast higher product gross margin that brands such as Tiffany’s, Michael Kors, Ralph Lauren or even Abercrombie. They boast a higher direct to consumer sales percentage than most of their peers. They have an exceedingly loyal customer.

The biggest knock on the company is their growth rate: 10-15%/year – and one of their biggest divergences against today’s emerging brands who are mostly growing at 50-200% annually.

Given these multiples, e-commerce brands need to bank on the following two factors to earn a premium valuation in the market: maintain strong growth rates and maintain high visibility, momentum brands. J.Jill is a fundamentally strong company – and it has stolen much of the playbook from the online brands – but it lacks both velocity of growth nor excitement around its brand proposition.

[Internal Memo] Thoughts on Commerce

A couple of weeks ago, after an active conversation around one of our investments, I threw together the below e-mail to my team here at Chicago Ventures. I’ve never done this before but I thought it would be interesting to put it out there on the blog. It’s important to note that my team definitely did not agree with everything I wrote which is fine (the most pushback I got was around “digital marketing is dead.”) I wrote it quickly and mostly shooting from the hip, but I think that’s reflective of a lot of offhand internal dialogue within venture firms.

I think both for founders looking to pitch investors and junior investors at firms, it’s important to ask the right questions to understand their internal fund biases and thoughts. One of the reasons I write notes like this – even if it’s a pain to read/respond to all my tl;dr stuff – is so that if any partner at our firm meets an entrepreneur touching on one of the bullets below, they’ll quickly reference our note & know where we stand.


Hi All,

Monday’s conversation around [portco] made me realize that it’s been a while since I’ve typed out some of my thinking around commerce & I thought it would be helpful to have a set of principles we’re thinking abt when looking at these businesses. I’ve broken this into three sections, each builds on the other.

I think it’s impt to have this conversation. Especially with [venture partner] attached to our fund, our deal flow & knowledge should enable us to punch beyond our weight class here. But we want to make smart bets.

Part 1: Paid Digital Marketing is a Dead End.

Google/FB are just a dead end. Every retailer just hits a wall on these channels. Zulily hit a wall at scale. Wayfair hit a wall at scale. But with increased competition in every vector, the wall is happening a lot earlier now. Traditional, brainless digital marketing is an expensive dead end = as we know, distribution is so so key. Two primers are:

– My article on VB: Moving Beyond Spam where I outline “Connected” commerce & the content commerce playbook.

– Josh Hannah’s article on Pando: That’s a Nice $40M Biz You Have There

Part 2: Next Gen Commerce Companies Will Boast Unprecedented Leverage

A little under a month ago, an under the radar subscription cosmetics co called Ipsy raised $100M at a $900M valuation. Whatever, it’s 2015, crazy times, right? Except that Ipsy had only raised $3M to date. And had built from a $300k/mo run rate to $13M/mo RECURRING run rate in <3 years.

How the hell did they do that? Fortune profiles it here.

The answer: They leveraged Youtube & influencer networks better than anyone in the history of e-commerce.

I reached out to one of their backers. Here’s what that person told me –

“a few very clear cut things, and this is not a fluffy bubble valuation this is very real based on revenue.

(1) Few markets naturally support the QVC-on-youtube model, but cosmetics is one of them. CAC is low and LTV very high because Michelle Phan has a built-in and very engaged following.  Compare to Birchbox which has to rely on more traditional digital advertising channels.

(2) Ipsy’s CEO Marcelo is a content savant and didn’t just rely on Michelle’s clout, but also was able to create new cosmetics celebrities for various demographics and styles.  True talent in the team gained additional reach and consistency.

(3) The company was able to leverage negative working capital since they get paid up front.  This enables very fast growth fueled by internal cash flow, and clearer inventory planning.

(4) Ancillary revenues for Birchbox include upselling to full-size items, shifting into men’s products, etc.  Ipsy can flash sale, white label at 70% margins, etc. so has more attractive future potential as well.”

Imo, as the markets correct themselves, we need to be looking for opportunities with extraordinary operating leverage. Growth stage investors have seen the payback on late stage commerce rounds and the returns are flat because customer acquisition is high friction at that scale. When Birchbox has raised $75M and Ipsy $3M to get to the same run rate, the smart money will race to the higher leverage model.

Part 3: How We Identify Next Gen High Growth, Minimal Cash Businesses 

Here’s the checklist I’m using to identify these businesses. This is a work in progress & hopefully is always a living, breathing checklist that ebbs & flows with the times. I don’t know that our investments need to check every box, but it’s our rubric to judge against:

  1. Hacking New Platforms – Airbnb’s “hack” of Craigslist is fairly well known at this point & it’s what enabled them to build their early supply side liquidity. Ever since then, for the past 5 years, everyone has focused on similar Craigslist hacks. I don’t mind that, but CL is a lot diff now than it used to be. Youtube is also played out at this pt. We should be looking for companies that are hacking less targeted platforms. One of the things I like about [portco] is that they’re effectively hacking eBay enabling them to acquire customers for less than 1/5th the cost of their competitors. Other platforms I’m actively looking at to rip customers from are Nextdoor, Thumbtack, Airbnb/Homeaway, Massdrop, Alibaba, Kickstarter, etc etc. The platforms we want to look for must have (a) Transactional focus & (b) Some private messaging or e-mail scraping function. As the messengers (Line, Kik, Whatsapp, Messenger) also build out transactions these may develop into great opps for ripping customers.
  2. Negative Working Capital – I think this is more impt than 24 months ago as it’s a hedge both against capital markets tightening & drawn out fundraising processes. Of course it needs to be utilized with caution, but it can be an immense source of leverage.
  3. Scale Buster: This is one of those intangibles that is sort of hard to define. Brian has it at TrunkClub with his stylist model driving growth. The problem is: traditional customer acquisition is counterintuitive in that it actually gets MORE expensive with scale & you buy WORSE customers with lower LTVs. So how do you build a creative growth model that can predictably manufacture growth (like a marketing spend) without defaulting to traditional marketing channels. Honestly, I don’t know what this will look like. Maybe it’s some sort of brilliant referral model. Or some smart play on social selling. I don’t know, but this is one where we need to keep our eyes and ears open.
  4. Content Savvy – The more we see, the more I realize that a deep understanding of content marketing needs to be in the DNA of a team & not just bought. Even [portco] is really starting to hum because they’ve nailed a really good Facebook video content strategy that is really scaling. Here’s why we like it: (a) Very low cost because salaried (b) Scales without friction beyond traditional paid marketing spend. (c) Is shared heavily – a far more authentic play on social networks than traditional ad spend.
  5. Influencers – In the past 2 months, I have probably seen half a dozen businesses do $50k in GMV in Month 1 out of the gate. HOW? Just leveraging a core team member with established distribution/network. W/O this built in distribution, a startup can burn through $500k-1M+ EASY just trying to hit that $100k GMV month mark. We do NOT want to pay for that infrastructure & growth. We need it to be built in, especially if so many others have that advantage. My benchmark would be $20k+ in Month 1. [Edit: This can also come through a good PR strategy.]
  6. Margins – We need to be hawkish on gross margins. Greg Bettenelli at Upfront recommends 40% and I’m fine with that number. I think we should be comfortable at 20% with a clear path to 40%, with the understanding that we lose some capital leverage (but not a ton at the early stage). We also want the business to have an opportunity down the line to build a private label brand that can create blended margins in excess of 50%.

Feel free to add more, thanks.

Dude, no one will ever buy that online. AKA how incumbents get pwned in tech.

I’m blessed to work at Chicago Ventures with some extraordinary people who are continually pushing me to evaluate whether I’m too accepting of the status quo, challenging me to re-imagine the future, and, ultimately, the types of investments we make.

Most recently my colleague Pat Ryan Jr. pointed me to a recent Fred Wilson blog, Don’t Automate, Obliterate, and the corresponding Harvard Business Review article. Tl;dr? Cliff notes are that it’s far more valuable to re-imagine an industry from the ground up rather than trying to build an efficiency focused, automated piece of software on top of it. Two examples: Instead of building call routing and dispatch software for the taxicab industry, re-imagine the taxi industry as P2P ride sharing, a la Uber. Or, instead of building document management software for the legal industry, fundamentally re-consider what the legal world might look like under a crowd-sourced model, for example UpCounsel.

The whole discussion reminded me of a conversation I had with a well known VC about three years ago in NYC. In it, he reminded me that in the early days of e-commerce, shoes were considered an untouchable category – “who would ever buy shoes online? You need to try to them on!” And they remained elusive until Zappos came along and offered a seemingly implausible value prop: what if we were to ship you unlimited shoes for free? Let you keep them for a year to try them out? And then let you return them for free? We all know how that story turned on.

Similarly, he noted at the time, furniture – sofas, mattresses, tables, etc – were one of those categories that hadn’t been cracked by e-commerce. The unit economics made delivery expensive. And, like shoes, consumers wanted to try them on. Is it comfortable? Do the colors match up with room palette? What if, he proposed at the time, a furniture company offered the following value prop: We’ll show up at your home, for free, with ten different sofas of varying feels and colors, let you try them all out for free, and then just keep the one you want and send all the rest back for free?

Compelling. But entirely impractical, if not outright impossible. Right?

Enter Casper.

If you’re not aware of Casper, they’re a web-only millennial focused mattress company promising free delivery within 90 minutes in NYC, a 100-day try out policy, and free-returns (for any reason) if you’re unhappy. Oh, and they’re a fraction of the cost of traditional Serta, Stearns&Foster, Tempurpedic mattresses. Oh, and they come with a 10-year warranty. Oh, and the reviews are off the charts. Oh, and it goes on and on.

Casper actually was an impossibility. Until very recently. Its success is a combination of the availability of low cost on-demand delivery (powered by Zipments no less! [Disclosure: Chicago Ventures is an investor in Zipments]), reduced costs via vertical integration, and innovative customer acquisition channels. Most importantly, Casper is evolving into a lifestyle brand.

Casper exists because its founders elected to challenge incumbent assumptions about what a mattress felt like, how it could be purchased and what it would cost. While their new assumptions were, even recently, implausible, they are now entirely actual.

It is similar to a refrain that famed angel investor Gil Penchina likes to use: “What has fundamentally changed about the world today that enables your business to succeed when all previous attempts have failed?”

As an investor, I am continually scouring the ecosystem for founders who are challenging incumbent assumptions and looking to reimagine industries. Just like it was once considered impossible to disrupt the floral wire services because of their mass marketing spend, David, Farbod & Gregg at Bloomnation challenged that belief by asserting that florists themselves, if empowered with proper tools, could side-step these incumbent middlemen. And they are winning. And florists love them.

Trying to accomplish the impossible can be dangerous – hell, often delusional. But if you’re challenging incumbents because you’ve noticed a shift in the axioms they depend on for success, I’d love to chat.


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