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Why Lightspeed invested in Living Social April 29, 2010

Posted by jeremyliew in Ecommerce, growth, local.
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17 comments

Well, I’ve been busy since the beginning of the year! Earlier this week Lightspeed’s investment in ShoeDazzle was announced, and today our investment in Living Social was announced.

Both companies reflect our belief in entertainment commerce, or push commerce.  The traditional model of ecommerce treated buying things like a chore, crossing things off of a list. Some of the newer commerce models, the ones that are quickly growing to millions in monthly revenue, help users discover great deals and great items that they were not explicitly looking for. By manufacturing serendipity, they help create demand, rather than just fulfilling demand. Living Social falls into this category.

Living Social sends a local deal each day via email (see some examples here) to residents in 18 cities across the US. The deals are usually 50-80% off on a local restaurant, spa, bakery or similar merchant. If the deal appeals to you, you buy it directly from Living Social. Living Social makes money by keeping a cut of the revenue, and sends the rest on to the merchant.

The leader in this category by far is Groupon. Groupon has seen tremendous growth, from $100k in revenue in January 2009 to $10M in revenue in January 2010. Living Social got started 6-9 months after Groupon, but is seeing similar growth. According to Hitwise, traffic in the group buying category is up 72x since last year, with Groupon and Living Social neck and neck for traffic at around 49% each (click through to see the full graph):

Sadly they are not neck and neck for revenue, at least not yet!

There are many entrants into the local deal space, with Techcrunch reporting earlier this month:

When Yipit launched a little over a month and a half ago (!), the startup could already identify 30 daily-deal Web services. Today, the company tracks deals from no less than 66 Groupon-like websites across the United States, more than double the number it counted less than two months ago.

As you can see from the chart above (click through to see the full graph), the 66 companies are delivering 176 daily deals. Since 50+ of these deals are from Groupon, the other companies are averaging 2 cities each. This is an easy category to enter, but I believe that it will be a difficult category in which to scale. Success will depend on building the email subscriber base, which is challenging on a single city basis. The more targeted you want to be, the harder it is, whether you are relying on viral growth or buying advertising. National growth is easier, but requires a national footprint of deals to take advantage of it. That is hard to do, and expensive to do. It is an execution game which will require great management and significant capital.

I suspect some of the other 64 companies will be able to reach viable scale to join Groupon and Living Social. Both companies are well funded, and with very impressive management teams. Anyone hoping to make it to scale will need to bring the same assets to the table.

We’re excited to help Living Social continue in its growth.

Why Lightspeed invested in ShoeDazzle April 28, 2010

Posted by jeremyliew in Ecommerce, growth, subscription.
Tags: , ,
12 comments

Lightspeed led a $13m investment in Shoedazzle, announced yesterday. We are very excited to help Shoedazzle grow.

Shoedazzle is one of the companies that I was thinking of when I wrote about startups that can quickly get to millions in monthly revenue:

… are all taking advantage of one of Lightspeeds consumer internet predictions for 2010,  that direct direct response advertising is getting more efficient. A bad time to sell ads is a good time to buy ads. All these companies are taking advantage of relatively low customer acquisition costs.

If you understand your customer lifetime value, and you can acquire customers for 20-30% of the lifetime value, you are going to make money. Understanding lifetime value is hard for media companies, but it’s easier for gaming companies, ecommerce companies and subscription businesses. They have predictable customer behavior cohorts that can be extrapolated from a few months of data from a representative sample.  Running an aggressive positive arbitrage while online media is cheap has allowed all of these companies to grow revenue very fast once they get the micro-economics right.

The company is based outside of Silicon Valley (LA) and is definitely built on the back of business model innovation, as are many of the current crop of fast growth companies.

Shoedazzle has a terrific user value proposition. A member first takes a style quiz to assess her taste. Then, on the first of each month, she receives an email with five pairs of shoes that have been specially selected for her. If she likes one of the pairs, she buys it. If none of them grab her, she can either skip that month, or request a re-selection and give specific guidance as to what she is looking for (e.g. boots, or higher heels, bolder colors). Women get personal stylist advice and recommendations brought directly to them, helping them to keep abreast of the latest fashion trends.

Thematically, I am very excited about the move towards entertainment shopping, and Shoedazzle falls squarely into this category:

One of the most exciting trends in e-commerce over the last couple of years has been the trend towards “shopping as entertainment”. Traditionally e-commerce has been a chore type activity. Customers know what they are looking for (a digital camera, a new laptop) and are looking for the best product and best price with a very “research” based mindset.

This is quite unlike the real world, where a customer might walk around a mall without any particular purchases in mind, and perhaps opportunistically buy something that caught their eye in their wanderings. There is no real “intent to buy” in a trip to the mall.  It is more like entertainment time which may, or may not, lead to a purchase.

SheoDazzle captures the wonderful serendipity of finding something great as you wander the mall, and brings it into your inbox.

Kim Kardashian is one of  the co-founders of Shoedazzle, and has been instrumental to the success of the company, both through her promotion of the site, and through her fashion input into the shoe selection. But this company is about much more than Kim alone. The company prides itself on delivering terrific experiences to its members, and this has resulted in an incredibly strong and positive community, as reflected by the vibrant wall on its facebook page, the constant tweeting on twitter, and even the unboxing videos on youtube.

Notwithstanding Kim and the community, Shoedazzle is about the shoes.  And that is what has let the company grow through word of mouth. This isn’t the manufactured virality that works so well for facebook apps and early social networks, riding the transports of notifications, invites, wall posts or email importation. This is the real thing, with one happy member telling another about where they got their great shoes.

On the flip side, online commerce is an operationally intensive business. With physical goods, you get lower gross margins then you see in online media. In shoes, return rates can be high (Zappos’s average return rate is 35%). If you care as much about member satisfaction as Shoedazzle does, client care needs a lot of resources. And breaking through the noise and clutter on the consumer web is always difficult. Building a business like shoedazzle is not as easy as simply hacking all night for a few days and standing up a website. It requires deep knowledge of merchandising, logistics, customer care, marketing and promotion.

Shoedazzle has a terrific team of experienced, passionate people (with great shoes!) who are tackling this challenge, and at the end of the day, that is why we invested in ShoeDazzle.

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