Why Lightspeed invested in ShoeDazzle

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.