E-commerce was an innovation wasteland for most of the past decade. While social media companies such as YouTube, LinkedIn, Facebook and Twitter were growing exponentially, breakthrough new commerce start-ups have been few and far between. As our friends at First Round Capital noted in this blog post, 7 out of the top 15 sites on the Web were started in the past decade but only 1 of the top 15 e-commerce sites was started during this same period. Who was that new, major e-commerce entrant? Umm, NewEgg.
There haven’t been many exciting financial outcomes, either. I’m not talking about pioneers such as Amazon or eBay but the start-ups that came later. Sure, there are a few, such as Zappos, Diapers.com and Stubhub, but not many.
Classic e-commerce businesses were mostly saddled with high customer acquisition costs (loads of Google Adwords spend), low customer retention (one-off transactions), and operating models that consumed cash (due to warehouses full of inventory).
But the e-commerce market is big and ripe for innovation. E-commerce is now more than four times the size of the annual online advertising market. Yet it’s only four percent penetrated.
Better Models Emerge
The same trends that have driven innovation elsewhere on the Web – social, local and mobile – are now driving an emerging class of opportunities in e-commerce. A few years ago, a wave of entrepreneurs started engineering new social commerce models and this innovation is paying off in the form of rapidly growing businesses.
This emerging class of companies features Groupon in local commerce, Gilt in private sales and also earlier-stage start-ups in areas including subscription commerce (Shoedazzle), mobile commerce (Shopkick) and next generation marketplaces (Airbnb). Social commerce entrepreneurs have architected fundamentally better models. They’ve replaced consumer experiences that were uninspiring and overwhelming with experiences that are curated, exciting and addictive. They’ve reduced customer acquisition costs through word-of-mouth promotion and improved lifetime customer value by re-engaging customers on a regular basis. They’ve also produced more efficient operating models by holding little-to-no inventory and getting paid by customers before they have to pay vendors.
Now there are hundreds of start-ups racing around the social commerce track. When evaluating new investments at Greylock, we ask ourselves what will be the defining characteristics of the few companies that make it to the winner’s circle?
One company we’re excited about is One Kings Lane, a promising start-up founded in late 2008 and based in San Francisco. We just announced an investment in the company this morning. One Kings Lane is focused on helping people find high-quality products at great values for home and living, such as furniture, accessories, art, kitchenware, food and wine. We think the company illustrates a few characteristics that will be common among successful social commerce start-ups.
Left Brain, Right Brain
The most successful social commerce teams will combine highly-developed right and left brains. The right brain is essential from the earliest days of a company’s life. By right brain I mean the instincts and passion to recognize and deliver an experience that will resonate in a deep, authentic way with the customer. Most v 1.0 e-commerce sites didn’t seem to use much of the right brain. In social commerce the experience starts with identifying great merchandise that’s unique and hard to find—you can’t just get it anywhere. The experience extends to story-telling so that the company describes the merchandise in a compelling way. In the end, it is wrapped up in a brand and experience that customers are excited to identify with and participate in.
In e-commerce operations there are never-ending opportunities for the left brain to test, iterate and improve. The best companies relentlessly crunch data generated from initial customer contacts through to transactions.
The One Kings Lane launch team nailed the initial customer experience. They provided access to “accessible luxury” through a curated selection of unique, high quality products for the home refreshed on a daily basis and sold at reasonable prices. One Kings Lane arrived like a trusted, knowledgeable, stylish friend to help shoppers (mostly women) on their never-ending quest to find great products to decorate their homes and entertain. It was the team’s highly-functioning right brain that recognized and tastefully marketed the truly great finds.
But the One Kings Lane team, including CEO Doug Mack, founders Alison Pincus and Susan Feldman and a management team drawn from Walmart.com, eBay, Amazon, Zappos and Netflix, also represents some of the more highly-tuned left brains in online retail today.
Some teams’ brains are strong on the right or the left, but the magic comes when they’re strong on both sides.
Addicts and Evangelists
In the past, even the best known e-commerce companies grew at a linear pace and acquired the vast majority of their traffic through a combination of paid marketing and SEO. Commerce didn’t take off right away through Facebook and Twitter because the products and the experiences most people engage with on classic e-commerce sites were engineered for simplicity, speed, and comprehensiveness. They just weren’t exciting, fun or interesting enough to warrant sharing with friends.
What makes a social commerce business work at the core is an experience that is fundamentally worth sharing. The act of sharing involves social capital – you’re withdrawing a deposit from the social capital account with a friend when you share something lame with him, and you’re earning social capital when you share something cool.
Most social commerce companies do spend money on marketing (in some cases lots of it) but the key difference is that their ROI on paid marketing is amplified by high lifetime value customers (addicts) and viral spread (evangelists). This amplification is what’s driving the near exponential growth and increasing defensibility of breakout social commerce companies. When customers are addicted and willingly infect their friends, strong companies get stronger and become ever more difficult to beat.
I first discovered One Kings Lane through my wife and her friends. The women in our neighborhood were showing signs of One King’s Lane addiction. Online products that inspire this kind of daily habit are unusual. One King’s Lane customers are their greatest champions and the company is acquiring the majority of their customers through word of mouth.
Markets, Not Just Mechanics
Social commerce companies are adopting a range of mechanics that have proven successful in driving user behavior in other kinds of existing social products – including invitation-based access, time-limited sales, daily emails, offers tied to friend referrals and achievements. Over time, I think we will see more e-commerce companies attempt to replicate the mechanics of existing players. Some will execute well on these features, most will not.
But the ultimate driver of new valuable social commerce businesses will be based on the potential of the underlying market the company is addressing. Is it a big enough market? Is it poorly served by existing players?
We were attracted to One Kings Lane’s vertical focus. There are very few consumer verticals that aren’t already dominated by an existing online brand. The market for home décor products is under served and massive: $150 billion. Think about this question: Who is the defining Web-native e-commerce brand today for home décor products? It doesn’t exist. Williams Sonoma generates billions in annual revenue but lacks unique selection. There’s a huge amount of vendor fragmentation in the space, which makes it hard for consumers to discover new brands.
One Kings Lane is emerging as the leading e-commerce player in the home décor vertical and the business opportunity is about more than just daily emails or events – it’s about successfully addressing a massive, underserved market.
A new generation of breakout social commerce companies is emerging. It’s an exciting time to shop!
*Disclosure: Greylock Partners is invested in some of the companies mentioned in this post: Airbnb, Facebook, Groupon, LinkedIn, One Kings Lane and Shopkick.
This article was also posted on the Greylock Partners blog here.
James Slavet is a partner at Greylock. His primary areas of investment focus are e-commerce, online advertising, and Web-enabled consumer services. James’ investments include Cardspring, Coupons.com, Groupon, High Gear Media, One Kings Lane, Redfin, and TellApart. He previously represented Greylock in its investments in Revision3 (acquired by Discovery Communications), Auditude (acquired by Adobe), Farecast (acquired by Microsoft) and Kongregate (acquired by Gamestop). James was named to the 2012 Forbes Midas List which recognizes top VC tech investors. His complete...