Build community first - a startup strategy neglected to Europe's detriment

I've previously written about how customer experience is the #1 dimension of differentiation for digitally native vertically integrated brands (DNVBs). Which is why it's baffling to me that the "community first" strategy seems to be largely neglected in companies we see in Europe.

Starting with building an engaged audience first can be a huge boon:

- It helps you truly get to know your customers. DNVBs depend massively on this intimacy. Over time you can use data to monitor every interaction, but in the beginning you need to learn qualitatively. Talking to hundreds of potential customers means building the intuition you need to nail product and voice over time. And this is really your moat - no traditional brand that is disconnected from its customers by the channel is able to do this. 

- Building a community first means having built-in distribution later. A lot of the DNVBs we see in Europe are too dependent on paid acquisition. Margins may be high and lifetime values much higher than in retail ecommerce, but continuously paying 30% of your LTV in CAC makes your business much less profitable than it could be. Building community focuses you on organic or even viral acquisition. 

- Hiring outstanding talent is really what turns a great founding team with a great market opportunity into a category-defining, multi-billion dollar company. Recruiting from inside a community that is already passionate about your vertical means people will come to work for you with a spring in their step every morning. Your dreams are their dreams. That's how magic happens, especially at the early stages.

- A community passionate about a vertical will forgive many, many missteps as founders try to build a business. The engagement is emotional - this is true connection and support. It's hard to overstate how helpful this can be as founders invariably screw up along the journey. 

- The authenticity of a community with the founders as leaders at its center will drive enterprise value: both when you're raising from angels and VCs, but also when you're considering an exit. Community is a moat from a finance pov as well. 

- And beyond all that - it's truly scrappy: much cheaper to start with just content than trying to make a product and sell it right away. 

Building a community can work across all social platforms: Instagram is the most obvious one for DNVBs, but it can work on Facebook, Pinterest, Twitter, Snap or even through good old email and text. 

I currently recommend trying this path rather than relying on desk research or cloning a US competitor perceived to be doing well. 

The fastest growing verticals in direct-to-consumer brands - aka fantastic new companies and where to build them

Annual consumer packaged goods (CPG) online sales in key categories are up ~30-40% year-on-year (in the last year where I've been able to find data, 2016), growing around 2x faster than total ecommerce sales. 

While supplements are the category leader online by value, pet care, cosmetics, and facial care all surpassed $1 billion in ecommerce sales in 2016 in the US. 

The fastest growing categories were pet care, laundry & dish, and cleaners, all growing at >50% yoy. 

Among the fastest growing retailers are folks like (subscription) and Drs. Foster & Smith, a testament to the attractiveness of the pet vertical. 

Here's the full report by 1010data.  

Brb, looking for new brands that make pets happy. 

Retail goes full circle

As we approach full hybridization of brands and retail, and a concordant hyperfragmentation of the marketplace (good read by @namratalpatel), I'm fascinated by the apparent "full circle" of retail.

If you go back to the very beginning, retail was about relationships and communication. At first it was bartering, then it was town markets. Both of those were primarily about the relationship and communication between people, rather than what was being traded. It is only with the onset of industrialization that retail stopped being about this relationship and started being primarily about the product. With chain retail - malls, department stores, big box stores, and finally Amazon - the product took center stage. Mass production and mass marketing moved the relationship of retail into the background. 

And thus we ended up being shouted at. Brands became shorthand for trying to replace the meaningful relationship of commerce. Communication was top-down, one-way, one-size-fits-all. And they tried to make identity about ownership. 

No longer. Technology is enabling a move back towards relationships and communication, but in a scalable way. Part of that is the way we speak to consumers when we're being "authentic." And part of it is looking at data and trying to anticipate what people want on an individual basis and then providing that to them. A happy coincidence is that people are starting to care more about experience than ownership. 

Part of our DTC thesis is thus that the strongest dimension of competition for the new connected brands ("DNVBs") is a transformational relationship with the consumer

As foot traffic is starting to fall even in traditional European markets where Amazon isn't as strong, I can foresee the death of the current form of physical retail. But I can also see how retail is changing for the positive. By being more about the person than the thing. Which is really at the heart of what we want to invest in.

Days like this - our algorithmic future - LOT2046

Bone-weary today - new-parent-tired.

There is a fatigue that is an unfamiliar place. It heightens awareness, fever skin consciousness. 

I have a deep empathy for Berlin, this place between worlds, but on days like this where I can't blend, the city rejects me. I am the gentrification. And I can see past the brave faces to the urban dystopian hellhole that is their socialist utopia.

On days like this I can see how close we are to the future.  How close we are to:

- WeWork giving you a job, not just an office

- Airbnb telling you where to go, not just listing places

- Facebook making friends for you

- Soylent feeding you your prescribed nutrient blend

- Amazon sending you what you need

Did you think we were going to stop at Netflix telling you what to watch?

On days like this, I am not that naive. So I subscribed to LOT. There's hope in surrender.

The rise of micromerch

Micromerch is an even bigger deal than this NYT article would have you think

In a world where supply chain access has become a non-issue, long tail merchandise will become ubiquitous. There's no reason why anyone of any influence, and be it simply the taste and time enough to curate, shouldn't launch their own line of merchandise. The only limiter is attention and discretionary spend. 

Note I'm not saying everyone _should_ have their own line of merchandise. That ship seems to have sailed. We stopped calling this "selling out" quite a while ago. The future will be monetized.

That said, the micromerch world is in need of quality suppliers. We need to vet for sweatshops, make supply chains transparent, limit the environmental harm of throwaway culture. Encourage reduce, reuse, repair, recycle. 

And then we need someone to aggregate the explosion of supply into consumable shops. A new kind of Farfetch, really. 

All of this was the original promise of Cafepress and Spreadshirt. We're coming full circle. 

P.S. Image from the rather wonderful Ayesha x Cult Days


Customer experience is the main dimension of competition in direct-to-consumer brands

There are limited dimensions you can compete on when it comes to new brands, especially since a great product is now table stakes. Yes, core product innovation can still win. But it isn't a guarantee by itself. 

The first dimension after product is price. A lot of commercial founders gravitate here. But price leadership is generally a bad business model. To win online, you have to be able to outcompete on acquisition cost ("the new rent"). Thin margins make it much, much harder to outspend your competitors. Even if you have good repeat purchase rates, that potentially means floating a long payback period. And the costs of capital, especially in the beginning, are high. A low price may also be bad for your brand.

The second dimension, which a lot of brand/design founders pick, is exclusivity. But limiting access to the product is fairly diametrically opposed to building a very large business. As I like to say to a friend who works in luxury business: the only good thing you do in the world is to make rich people slightly less rich. Which is a joke, but also not. We are about democratizing access. 

That brings us to the last and really the only dimension you should compete on, which is customer experience. Start with what's wrong with the shopping experience for your product or service vertical. And then rethink that experience completely. How can you make it an amazing experience? Think 7-star customer service. 

Lean Luxe had an interesting piece on defining modern luxury last year, which also stresses the overall experience of interacting with the brand. Traditional brands should take heed. 

The rules of the game are changing. 

On simple, true leadership as per Laozi

"True leaders 
are hardly known to their followers. 
Next after them are the leaders 
the people know and admire; 
after them, those they fear; 
after them, those they despise. 

To give no trust 
is to get no trust. 

 When the work's done right, 
with no fuss or boasting, 
ordinary people say, 
Oh, we did it." 

from: Acting simply in: Tao Te Ching by Laozi (translated by Ursula LeGuin). 

There is leadership without coercion, without violence, without manipulation. It is "doing without doing" - not competitive, not hurried, not worried, extending trust, devolving power. It is the truest voice in a group of singers, the captain of a team, its coach.

Great DTC branding is a spiritual exercise

I'm not the one to come up with that. That's original Gapingvoid aka Hugh MacLeod, in the Hughtrain, ca. 2004. But I've been revisiting a lot of brand literature lately as I'm hard at working becoming Europe's "VC for DTC Brands." Hugh's work, like Seth Godin's, is prescient. It's mind-blowing to me how it isn't evenly distributed yet. 

Here's the first secret from the branding work we're doing: features/benefits aren't even the start of the journey. They're a hygiene factor (maybe). Necessary to but far from sufficient. I'd wager I'll use a worse product any day if it's from a founder or a company that I can believe in. 

So here's secret number two: a great brand tells a story that restores your faith in the human experience, if only for brief moments. The bigger that belief, the longer it lasts, the deeper the faith, the more your brand will matter on our joint journey.

Which is why (secret three) I ask every founder I work with to start with purpose. And not the purpose of the company, but their own. What are you put here on earth to do? What does the universe ask of you?

To do X, you say? Why is that important to you? Go deeper until you can go no more. Until it's so real it hurts.

Here's the fourth secret: everyone's inner purpose is the same. It's evolutionary. It's what we are all here to do. Once you realize this, the fog lifts. The scales drop. Everything shifts into focus.

With that focus, you need to pursue your outer purpose. It's easy to lose the clarity. Make rituals to get back to you. It's why I encourage self-care so much. As founder you are the keeper of the vision. Keep it.

A company is just a collection of people having conversations. The quality of those conversations determines so much. What are they coming together over? What are they meant to achieve?

Now extend that outer purpose to your customer in a way that touches their soul, that appeals to our shared inner purpose. The future of brands is this interaction, this conversation. It's not something you buy, but something you participate in. Brands are places to come together over a conversation.

And now you understand how you slot into the universe (secret five). Brands are information - the molecules are secondary, says Hugh. Before you think about that Unique Selling Proposition, think about the Unique Being Proposition. That's where true differentiation lies. Not features/benefits but identity/ability. By being a customer, I can be more of an X that knows how to Y better. 

And that's the point you realize Brand is Culture. Brand is Ideology. Your customers are the Faithful who carry the Word into the world. 

The job is not to sell. The job is to let them Be who they are meant to be. That will blow their minds. To align them to the greater purpose of their lives and the universe.

You say you can't do that with a lipstick. I say you can do that with water. Marketing is just a tool. Just a way to start the conversation. But a great brand... a great brand is forever.

Much love,

Will GDPR kill small M&A in European TMT?

It can be cheaper, on a cost per acquisition basis, to buy a company that has customers who could also be interested in buying your product. That thesis has driven a lot of small M&A, not just in Europe but around the world.

With GDPR just around the corner, I'm sure like me you've been asked to renew your opt-ins for many email newsletters. I like it for the same reason I like when my credit card expires: it feels nice to be asked once in a while. And to be able to reset all that stuff.

But if that a new opt-in needs to happen when you buy a company, and the conversion rate of consumers opting in again is low (30%? 50%?), you won't be able to move a lot of the customers over. And consequently the math stops working for a lot of the smaller M&A transactions that work on the customer acquisition logic.

I'm sure there are lawyers working on this. Maybe it's not a real, real problem. Maybe there's a way to stay compliant (we're advising all our companies to err on the side of caution). But I've now heard it mentioned several times so thought I'd flag it here. 

Ivory Ella

I learned about Ivory Ella today (showing my age again), a three year-old Connecticut-based company that donates 10% of its net profits to Save The Elephants. And since I'm a sucker for elephants, especially the baby ones, and this is one of my favourite charities, I thought I'd give the company a shout-out. Which they really don't need because they're amazing at Instagram

(Photo by Kiana Eyestad). 

Here's the backstory on Ivory Ella in Forbes. Now go buy some clothes and save some elephants. And then think about what else could be a good product x charity collab and be an entrepreneur who makes this world just a little bit better. 

P.S. My EWR-CPH flight was cancelled. I'm sitting in an airport hotel in Newark. Yay.