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Why Lightspeed invested in Living Social April 29, 2010

Posted by jeremyliew in Ecommerce, growth, local.
Tags: , ,

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: , ,

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.

Business model innovation is making Silicon Valley less important as a startup center April 19, 2010

Posted by jeremyliew in growth.

Last week I noted some companies that have quickly grown revenues to over $1M/mth, including Zynga, Playdom, Playfish, Gilt, Hautelook, RueLaLa, Groupon, Living Social, Lifelock and Zoosk. Later I and others added Crowdstar, Cash4Gold, Shoedazzle, Second Life and TheLadders to this list.

It’s interesting to break this list down geographically, especially if you seperate the gaming/virtual world companies from the rest.

  • Gaming Companies in the Bay Area: Zynga, Playdom, Crowdstar, Second Life
  • Gaming Companies outside the Bay Area: Playfish (London)
  • Other Companies in the Bay Area: Zoosk
  • Other Companies outside the Bay Area: Gilt (NY), HauteLook (LA), RueLaLa (Boston), Groupon (Chicago), Living Social (DC), Lifelock (AZ), Cash4Gold (FL), Shoedazzle (LA), TheLadders (NY)

Given that the the Bay Area attracts the most VC funding (a proxy for startup activity), the fact that most of the gaming/virtual world companies are based here isn’t too surprising. But what is pretty surprising is that the vast majority of other fast growth companies are from outside the bay area.

One notable thing about many of these companies is that they innovated more on business model than on technology or product. While there is some core technology to each of these companies,  most of them have more people in functions like marketing,  sales, customer care, merchandizing etc than in technology. This is in marked contrast to the gaming and virtual world companies where the bulk of the headcount is in technology since the product is the game.

Many other “hot” companies in the bay area also show a bias towards product and technology in their employee mix; youtube, facebook, digg, etc.

When product and technology are core to the success of a company, Silicon Valley still dominates the startup scene, but when the innovation is in other functions, and technology is more an enabler than core to the product, other regions can be as competitive, if not more so.

What do readers think?

Average Zappos return rate: 35%. Best customer return rate: 50% April 12, 2010

Posted by jeremyliew in Ecommerce, returns.

Interesting article about e-commerce return rates at Internet Retailer:

Customers on average return 35% of the items they order from Zappos.com Inc., a web-only retailer of footwear, apparel and other merchandise. But there’s a certain group that returns 50% of what they buy.

Zappos loves those customers.

That’s because those consumers tend to purchase from among Zappos’ most expensive lines of footwear, then happily take advantage of the e-retailer’s generous and well-publicized returns policy: Zappos not only will take back any item within 365 days of delivery, but also pays for the return shipping.

And since it costs the same to ship a $300 pair of pumps as it does to ship a $30 pair of sandals, the Zappos policy of winning over shoppers with its returns policy has helped to bring in high profit margins on many of its orders, says Craig Adkins, vice president of services and operations at Zappos, which was acquired last year by Amazon.com Inc.

“Our best customers have the highest return rates, but they are also the ones that spend the most money with us and are our most profitable customers,” Adkins says.

Interview with CEO of Zoosk April 8, 2010

Posted by jeremyliew in personals, subscription, virtual goods.

Atul Bagga, the gaming analyst at the investment bank ThinkEquity, published an interesting research report today where he interviewed the CEO of Zoosk. I am republishing it here with his permission:


THINK SUMMARY: We had a chance to speak with Shayan Zadeh, the co-founder and co-CEO of Zoosk, a multi-channel dating service with presence on social networks, online, iPhone, mobile Web, and a desktop application, revenue growing at 20% M/M, and with revenue at more than $2.5 million per month. Zoosk differentiates itself from the traditional dating sites by focusing on relatively younger audience and monetizing users through subscription and virtual currency. The company expects to maintain growth momentum in 2010 through more-aggressive user acquisition, international expansion, and a couple new products. KEY POINTS:

  • Zoosk is a multi-channel global online dating service with presence on major social networks, online, mobile Web, iPhone application, and desktop client with 50 million registered users/14 million monthly unique users, a $2.5 million monthly revenue run-rate (as of October 2009) and a 20% month/month revenue growth. The company expects its revenue to be more than $200 million by 2011.
  • Since Zoosk uses social media and online as user acquisition channels, it has been able to establish a more-global footprint compared to other dating service sites. Zoosk’s user breakup is equally split between the United States, Western Europe, and rest of the world, and the top six or seven countries make up the majority of revenue.
  • Since Zoosk doesn’t focus on traditional success metrics for its dating service (i.e., marriage), its service appeals to younger audience, and 90% of its audience is younger than 40 years old and 60% is younger than 30 years versus the 38-50 years sweet spot for most other dating sites, according to Zadeh.
  • Zoosk uses virtual currency and subscription model to monetize its users, with subscription contributing a major portion of revenue. Conversion rates are in double digits for subscription and higher for virtual currency.
  • While social networks used to be the largest channel for customer acquisition, Zoosk sees a much-bigger audience outside social networks and is now getting more users directly on its destination site via search, display advertising.
  • Since 2007, the company has acquired a chunk of its user base from social networks at nominal cost, and the window for this acquisition channel is now closed, according to Zadeh. He said that creating this size of user base could be very expensive for an incumbent and represents a major entry barrier.


Atul Bagga, ThinkEquity (AB): Please explain your business and why should investors care about Zoosk?

Shayan Zadeh, Co-CEO, Zoosk (SZ): Zoosk is an online dating service that serves users through numerous channels. We are present on all of the major social networks; we have our destination site on Zoosk.com; we have our mobile Web property, and an iPhone application, and we have a desktop client. From an investor’s perspective, Zoosk is interesting in a few ways. First, Zoosk is the only global online dating company at this scale. The dating business has traditionally been a very local business because user acquisition was usually through old media, which required a lot of expertise in offline advertising conditions in each geographic market. So you have companies like Match.com and eHarmony that are very strong in the United States, Meetic in Europe, RSVP in Australia, and so on. For the first time, we have leveraged social media to get a global reach without having an office in each country that we are presently active in. We are monetizing in 52 countries right now with the service localized in 20 languages.

The second thing that sets us apart is that we approach dating from a different perspective. Usually the success metric for the industry is the quantity of marriages, and how fast your users get married, which ironically results in losing those customers. At Zoosk, we want to give you the choice. If you want to just date that’s absolutely fine with us, and the product doesn’t force you to think about marriage. Because of this positioning, we appeal to younger audiences. We see a lot of users coming back to the site, subscribing, and using the service again.

Finally, our business model is very innovative in the online dating space. While the gaming industry has adopted a hybrid virtual currency slash subscription model for a long time, this is the first time that we are doing it in a dating context, which helps us to maximize customer value by offering services in a la carte fashion, with coins in addition to subscription.

Zoosk was founded in Jan. 2007, and we launched the product in December 2007, and so far we have raised $40 million from investors like ATA Ventures, Canaan Partners, Bessemer, and Amidzad Ventures.

AB: What is the target audience for Zoosk?

SZ: Ninety percent of our users are younger than 40 years old, 65% are younger than 30 years old. This is very different from the normal 38-50 years sweet spot for most traditional sites in the dating industry. And that is a function of two things (a) our positioning, and (b) our acquisition channels. Not a lot of 20-somethings are glued to their TVs, which makes it hard for Match.com, as an example, to reach a 28-year-old living in San Francisco, whereas through Facebook and MySpace, it’s a lot easier for us to do that.

In terms of geographic distribution, a third of our users come from the United States, another third come from Western Europe, and then the remaining countries make up the last third.

AB: Is the revenue distribution in line with the traffic distribution or is that more lopsided towards the U.S. and Western Europe?

SZ: The top six or seven countries make up the lion share of the revenue. Our pricing is localized, so it’s GDP-adjusted. So a user in Mexico doesn’t contribute as much as a user paying in the United States or Canada. We see a lot of opportunity in emerging markets where we are basically laying the seeds.

AB: You mentioned that you monetize your audience through virtual goods and subscription. Do you also do any advertising?

SZ: We used to do advertising, but we pulled it off during the downturn in the advertising market over the past couple of years. We are looking at this again this year to see if we can add to the monetization without disturbing the user experience.

AB: What’s the breakup of revenue between virtual currency and subscription revenue now?

SZ: Subscription is the lion’s share of the revenue. Virtual currency just fills up the gaps. We had virtual currency from day one, but it was only in the form of virtual gifting. Since the summer of 2009, we started adding a lot more product features for users who want to use the virtual currency and that’s when the virtual currency became a more-meaningful part of our revenue. Even our subscribers use virtual currency, so it’s not a mutually exclusive universe.

AB: What is conversion rate from free users to paying subscribers and those paying for virtual currency?

SZ: We’re in double digits, percentage-wise for subscription and obviously the volume on the virtual currency transactions are much higher than subscription because of repeat purchases.

AB: How does the conversion compare on different platforms? Can you help us understand the users propensity to spend on Zoosk.com versus on Facebook application, versus iPhone application?

SZ: One of the cool things about Zoosk is that for a user, all of their accounts are connected in this ecosystem and they can log into their account from Facebook or from Zoosk.com; or from the iPhone. What we have found is that the monetization usually happens on Zoosk.com. That doesn’t mean that users who sign up on Facebook don’t monetize. It means that users who sign up on Facebook also use Zoosk.com and usually when they have intent to pay they come directly to Zoosk.com for that experience.

AB: You mentioned that the social networks have helped you a lot in terms of distribution. Is that the primary user acquisition channel or do you also use other online or offline campaigns for user acquisition?

SZ: We haven’t done offline campaigns yet, so the user acquisition is a combination of online advertising and viral growth on social networks. Social networks used to be our largest channel of customer acquisition. That has changed significantly over the past year or so. We have put a lot more emphasis on the destination site and it’s working great for us. Now, instead of coming from Facebook and going to Zoosk.com, users go to Zoosk.com and then they add their Facebook account to their Zoosk.com account. We are looking at offline channels for user acquisition in 2010.

AB: Can you talk about the reasons? What changed last year that your acquisition shifted from Facebook to your site? Is this a reflection on the saturation on Facebook?

SZ: We are still acquiring very aggressively on Facebook and other social networks, but what we have realized is that the universe outside of social networks is orders of magnitude larger. Our goal is to become a global online dating company, and we look at social networks as one of the distribution channels. We want to be on search, on display advertising, on offline channels. So it was a strategic shift for us to start focusing more on our destination site.

AB: Outside of Facebook, what other social networks are generating traction for Zoosk?

SZ: I will say MySpace, Hi5, Friendster, and Bebo. We recently started a partnership with IMVU, and we are looking to get on some other properties.

AB: How big do you think the market for dating applications could be?

SZ: I think analysts peg the industry size at $1.0-1.5 billion for the U.S. market and $4 billion worldwide. We think that we can expand that market significantly by targeting a younger audience that are potentially going to being dating for 10 years before they choose to settle down.

AB: What is the average lifetime value of a user on your platform? How long does a user remain with Zoosk after the initial sign up?

SZ: That’s one of the interesting things about Zoosk and how it’s different from traditional online dating sites like Match.com. In our company’s life, we have had about 50 million people sign up for Zoosk, and last month alone we had about 14 million unique visitors, which suggests an uncharacteristic stickiness compared to traditional online dating sites. The reason for it (a) our audience is a lot younger and so they date for longer, and (b) the positioning of Zoosk as a social network for singles.

AB: I was just doing some mental math. You said 14 million active last month, and you mentioned that your conversion is more than 10%. Does that mean you have more than 1.5 million paying subs?

SZ: Given the design of the product and tight integration with social networks, we have a very wide funnel. Fourteen million users were at the top of this funnel last month. We measure the conversion rate further down the funnel once the user shows more engagement with the service in order to make our metrics comparable with the industry standards.

AB: Who do you see as potential competitors? What makes it difficult for someone to replicate what Zoosk has done so far?

SZ: I think that a major barrier to entry in this business is the size of our user base. In 2007, we rode the wave of social network platforms to grab a huge market share with low acquisition costs. That window doesn’t open every day and now that window has closed down again. The barrier to entry for online dating is to get to a critical mass without spending millions of dollars in marketing. In terms of competition, we recently crossed Match.com in traffic in the United States according to comScore. Next up is to catch up with them in terms of revenue numbers.

AB: What are your major growth drivers in 2010?

SZ: There is a lot of product innovation happening right now that will help us hit our goals. We’re also accelerating our acquisition through online and offline advertising, which will be a brand new territory for us in 2010. There is a lot of room for us to grab more market share in existing markets, and also places like Germany where we are starting; and Asia could be another big opportunity for us.

AB: What is your product roadmap that you talked about?

SZ: Our desktop client will play a big role and also rich mobile applications, with iPhone being the starting point. We see a lot of traction in those areas to be able to expand on what we have.

AB: Are you offering any location-based dating service on iPhone or other smart phones?

SZ: We are not doing location-based dating right now. We have seen it fail multiple times. It has a lot of privacy issues attached to it. For us, rich mobile applications such as the iPhone application are an extension of our service, and we have found a lot of users who use Zoosk.com also use it on their iPhone when they’re on the go, so it’s additional value to them. So the draw has been mobility more than location awareness.

AB: How big might Zoosk be, and how fast is it growing?

SZ: We are about 50 people. In October 2009, we announced that we were at $30 million on a run rate basis, and we have grown quite significantly since then. In 2009, we had a consistent 20% month-over-month revenue growth and we’ve been able to continue and even surpass that growth rate since then, so the sky is the limit right now.

AB: What’s your outlook for 2010? Do you expect the same growth throughout the rest of the year?

SZ: So far it looks like that. Revenue for the top three online dating companies hovers between $200-300 million, and our goal it to surpass that in 2011.

AB: What do you see as big challenges for Zoosk over the next two or three years?

SZ: The next three years is all about execution. 2008 and 2009 was about finding the right market fit, to position our product, to acquire users and to become profitable. 2010 and 2011 is going to be execution; scaling the business, scaling the revenue run rate, and continuing to be as efficient as we have been so far.

AB: Where do you see Zoosk three years from now? Do you see yourself as a public company, as a standalone private company or as a part of a bigger platform?

SZ: We are looking at building a billion-dollar business over the next couple of years and depending on the market conditions, a public company. Becoming a global leader in online dating is definitely in our sight, and that’s really the de facto plan for us right now.
AB: Thank you so much for speaking with us, Shayan.

How can startups quickly get to millions in monthly revenue? April 8, 2010

Posted by jeremyliew in Ecommerce, gaming, local, subscription.

The ’05/’06 vintage of web 2.0 startups took advantage of much lower development costs and faster iteration cycles to build compelling products and sizeable user bases without thinking too much about monetization right away. For companies like Youtube and Facebook, this approach worked incredibly well and led to very fast value creation, often in advance of revenue growth.

One of the hallmarks of some of the current generation of “hot companies” is an early focus on business model and revenue generation. This is a cross genre phenomona, including social gaming companies like Zynga, Playfish and Playdom (a Lightspeed portfolio company), flash sales companies like Gilt, Ruelala and HauteLook, local deals sites like Groupon and Living Social, and subscription businesses like LifeLock or Zoosk. All of these companies have seen revenues grow into the millions per month within 12-18 months of launch, which is a pace that has not been seen from previous generations of internet startups.

The success of Zynga, Playfish and Playdom has been well documented. Zynga is doing 10s of millions in monthly revenue, and Playfish and Playdom in the single digit millions per month, all within 24ish months of launch.

In the Flash Sales category, last July Business Insider said of Gilt:

Yesterday, we reported the impressive success of Gilt Groupe, a two-year old ecommerce company that expects to generate about $150 million in revenue this year…

First, growing from $0 to $150 million in revenue in two years is pretty fracking impressive, no matter how you look at it.  That’s way faster than Amazon grew in its first two years, for example.  (Yes, the Internet is much bigger now).

The fact that Gilt’s US business is reportedly cash-flow positive is also very impressive.  It’s one thing to generate a lot of revenue.  It’s another to generate a lot of revenue with enough margin to put the company in the black, which Gilt has reportedly done in the U.S.

Part of the company’s cash-flow generation is the magic of the online sales cash cycle: When you sell online, you often collect cash for your product sales long before you have to pay the vendor you bought the products from.  Amazon benefitted heavily from this dynamic in its early days, and was cash-flow positive long before it started to generate net income.  But part of the cash-flow success is also the power of the business model.

Gilt thinks it can get to $500 million in revenue next year, which seems plausible.  The company is expanding both horizontally into other product categories (it started with fashion, and is now moving into kids, travel, etc.) and other geographies (it already has 20 employees in Japan).

The Economist reported in September that RueLaLa wasn’t far behind:

Ben Fischman, the boss of Rue La La, which started in 2008 and expects to have revenues this year of around $130m, thinks the “theatrical environment” of his site keeps customers hooked. He says retailers became complacent during the boom years and failed to make the most of new technology.

Groupon is on a similar growth path. Since they put  the number of sales and price of each day’s groupon on their website, it is relatively simple to estimate their revenue by adding the implied daily revenue across each of their cities. They went from around $100K in revenue in January 2009 to around $10M in revenue in January 2010 – a 100X increase in just twelve months.

Atul Bagga, Internet Equity Analyst at ThinkEquity, recently published a report based on an interview with the CEO of Zoosk where he notes:

Zoosk is a multi-channel global online dating service with presence on major social networks, online, mobile Web, iPhone application, and desktop client with 50 million registered users/14 million monthly unique users, a $2.5 million monthly revenue run-rate (as of October 2009) and a 20% month/month revenue growth. The company expects its revenue to be more than $200 million by 2011.

Of course, not all the current “hot” companies have taken this approach. Some, like Twitter or FourSquare, have seen enormous growth in usage that has outpaced their revenue growth.

But the categories I outlined earlier 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 acquired 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.

I get really excited about these types of companies. If you’ve got microeconomics that work like this, email me!