The Alternative Commerce Recipe

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Editor’s note: Neil Sequeira is a general partner and managing director at General Catalyst Partners. He invests in alternative commerce, SaaS, online/mobile marketplaces and digital media.  He previously was with TimeWarner, AOL, CMGI, GoldmanSachs, Accenture and Goldenvoice. Follow him on Twitter @neil_sequeira.

Alternative Commerce is a piece of cake, right? After all, while big box retailers are suffering, fun things like “the Internet” and “mobile phones” make it easier to sell stuff to customers without the expense of stores and make a bunch of money. Just ask WebVan, Kozmo, eToys.com, or Pets.com. Okay maybe it isn’t that easy.

At the end of the day, even in the alternative commerce world, you still have to create, market, sell and deliver an actual product to consumers and make money in the process. That’s the rub. If you build a product, make sure your customers come and make sure it makes money.

Don’t fret and refocus your attention on the next “app” or creating the next “SaaS business.” Follow your alternative commerce dream, but also follow a few simple rules — many of which come down to business fundamentals — and you, too, can create a great company that doesn’t just ship products but focuses on creative business models, alternative distribution channels, brand and loving your customer. With the right recipe, it can indeed be a piece of cake.

1) Preheat the oven 

Bottom line, it’s all about the team. Our firm has been early investors in RueLaLa (GSI/eBay), Kayak (Priceline), Warby ParkerTheFancy and many other great companies. I am an early investor in The Honest Company (next-generation consumer products for babies/kids/families), NatureBox (subscription healthy snack product delivered to your door), Listia (the largest barter marketplace), StyleSaint (an online fashion brand that creates product based on social interaction/input) and Plum District (deals for moms).

The reason we invested in these companies is simple: the teams. The basic tenet of a successful alternative commerce company (or any early-stage business) is to start with great people. Get your key chefs in place before you preheat your oven and get cooking.

2) Mix Together Your Product and Customer

This is the part of the recipe where you can really get your creative juices flowing. Here are a few of the key ingredients.

Net Promoter Score. First introduced by Fred Reichheld in a 2003 Harvard Business Review piece, this can’t be more simple. The basic idea is to ask, How likely are you to recommend this product, company or service to your friends or colleagues? That’s it. This basic and fundamental idea is all that really matters. When this became clear to our firm a few years ago, it made clear why we believed in companies like Honest, Warby Parker, etc. – people loved what they were doing. When it comes to product, nothing else matters. Nothing.

Solving a Problem. Are you solving a problem or making something easier, e.g. not having to go to a store? Google Express, eBay Now and Amazon are making logistics and visits to the store easier (and getting a lot of information in the process!). You can compete with them and get blown out of the water or actually solve a problem they can’t. Create healthier products, deliver a differentiated service, build something special, delight your customers. If you don’t, they win.

Brand. Building a brand is hard. There are folks like Michael Kors and LuLulemon who have built amazing brands in the last few years (Kors has been a fashion icon for 20+ years) in the public markets. If you don’t want to build a brand, don’t try alternative commerce. Don’t. Walk away. People need to know you, need to love you, need to want you and have a personal connection to the brand. The only way to increase margins and grow a business is to own a brand. If you are selling someone else’s brand, you are dead.

3) Bake in business model and financials

No matter how delicious the ingredients are, the cake will not come out right unless you have the right temperature, cooking time, etc. Some key metrics to consider:

Business Model. The reason I call this alternative commerce and not e-commerce is that if you sell things online that exist in the offline/online world, you are dead. The margins will continue to drop until you can’t be profitable. Sure, you can try to get a better deal with UPS or FedEx but it won’t matter. You can try to get more margin from the manufacturer but someone will do better. If you’re not Amazon, you will lose. We all learned this with Pets.com in the first version of the web but people don’t remember. If you keep selling widgets that are available at Target or on Amazon you will lose.

Margins. When it comes to new alternative commerce ventures, if you sell product that has low margins, you will fail. Over time, other entrants will enter and your margins will drop even lower. Sell high-margin products (build a brand, have unique channels, offer high margin product). It’s that simple.

Customer acquisition. If you need Google and Facebook to acquire customers you are in a heap of trouble. The “crack” seems really great for a while because of the economics but over time those economics will change. In fact, we have seen they usually flip. If you pay for your traffic, other people will fast follow and that’s a problem.

Customer acquisition cost/lifetime value. When we started investing in alternative commerce 14 years ago, we thought it was a metrics-driven business. It is not – you need a team, killer product and brand. The numbers change the longer you stay in the business. That said, the cost to acquire a customer and the lifetime value of a customer are important.

If your CAC to LTV is 2-4X (i.e. it costs $10 to acquire and it pays back 20-40 before folks churn) don’t keep going. One issue is you need to acquire. The other issue is that you are too close to the sun when acquisition increases. We tend to focus on 5X+ businesses. We may be wrong but I would rather be wrong here.

These are the basic building blocks of my favorite recipe – no secret sauce here. In fact, all of the ingredients for success in alternative commerce are really the same fundamentals that have held true for years when building a business. The good news for new entrants is that the big box retailers are dead or dying. If you want to disrupt them, build an amazing product and brand that solves a real problem for your consumers and reaches them in a creative way. It’s a piece of cake, right?

[Image via Shutterstock]