The Amazon "kill zone" in DTC

I listened to Harry Stebbing's second interview with Rebecca Kaden at USV a few days ago. It's a great conversation. If you're anywhere close to direct-to-consumer investing, it's a must-listen.

A lot of it echoes our DTC investment thesis. But she had great clarity on what she calls "the Amazon 'kill zone'" and it's something that we've been thinking about a lot.

As European investors you're often disadvantaged by geographical and network distance from the internal strategic and tactical conversation at the FAANGs. So we listen closely when someone like Rebecca Kaden, or Jeremy Levine, or Kirsten Green, talk about their evaluation of what's a priority for Amazon. 

As a commerce investor I am in awe of what Amazon has done and is doing. The speed with which they're starting and scaling businesses. Their courage in shutting down things that aren't working. Their maniacal focus and execution prowess.

A common trope is that Amazon has won by scale. Like Rebecca we think Amazon also, and perhaps more so, has won by executing many different things incredibly well. It's not just logistics, it's selection (merchandising/assortment), convenience, price, trust. More than 50% of product searches are now on Amazon in the US. When you know what you want, you don't search Google. That's a massive, massive change in the consumer economy. 

In the functional, utilitarian way of shopping, no startup has an advantage over Amazon. If this is what your product maximizes - utilitarian price/value - forget going direct. Go on Amazon and seek to build a moat elsewhere. If your segment is or becomes big enough for it to matter to them, you have a problem you should address now. 

So what's Amazon not good at? Where do startups have an edge? Because Amazon certainly has structural advantages in scale, capital, data, and probably people. 

Right now, it looks like the advantage lies in "the other ways in which people want to shop." Whether it's through their friends, by following an influencer, by falling in love with the narrative of the brand, by joining a community of like-minded, passionate individuals for whom the brand is their joint expression of belonging. 

That emotion is not "Amazon" at its core. 

Extending this "authentic emotional connection" micro-thesis a bit, it suggests a playbook that looks fairly different from many of the DTC brands that we're seeing in the market. Most important, perhaps, is the experimentation at the early stage that looks at what helps people fall in love with your product. What gets them to not just want to join, but want to build your community? As Rebecca notes, what causes them to set up Facebook groups, ask for swag, refer their friends, come back to buy again and again?

Beyond Amazon, this throws into doubt the whole idea of building mainly on paid acquisition. Forgetting the point for a moment that companies that need to continually acquire customers at low to medium AOVs don't make for good-margin, capital-efficient businesses, paid acquisition may actually muddy the early data that would help you do more of what consumers love about your brand. 

That's a powerful point by Rebecca and one we're planning to emphasize more in our DTC thesis. 

October 3, Day of German Unity

October 3 is the Day of German Unity, the federal national holiday in my country of birth. It marks the day Germany was formally unified after being divided by the occupying forces (US, UK, FR, USSR) after WWII. 

The alternate and more emotionally charged date would have been November 9. It is a day heavy with German history, a Schicksalstag: from the execution of Robert Blum on November 9 1848 to the proclamation of the first German Republic in 1918 following the abdication of Kaiser Wilhelm II. From Hitler's first coup on Nov 9 1923 to the Reichskristallnacht pogroms against the Jewish population (fellow citizens) in 1938. And finally the fall of the Berlin Wall in 1989. 

November 9 would have been the right day. Not least because it is drenched in both the lightest light and the darkest dark in German history. Unsurprisingly, it is a country that does not wear its patriotism lightly. A contemplative national day would have been the right choice.

Like many Germans, I have a love-hate relationship with my country of origin. When we moved to Canada in 1989, shortly before the fall of the Wall, the first book I had to read in school - English-German dictionary in hand - was Night, by Elie Wiesel, about the experiences in Auschwitz and Buchenwald with his father, at the height of the holocaust. 

Never shall I forget that night, the first night in camp, which has turned my life into one long night, seven times cursed and seven times sealed. Never shall I forget that smoke. Never shall I forget the little faces of the children, whose bodies I saw turned into wreaths of smoke beneath a silent blue sky.

As a German, this is how I learned English at 12 years of age. 

When I look around Germany today, I am gripped by nostalgia. Its traditions do not hold me in their sway but they fill me with a longing for the simpler days of childhood. Its national character - thorough, dutiful, punctual, rule-bound, korrekt - still echoes through the halls of its dusty bureaucracies and large corporates. But its culture is increasingly homogenized into the globalized sameness. Germany is not special, in that way, or in many others.

For now, it is a country managing the barely perceptible but inevitably creeping erosion of its industrial base and its highly perilous demographics. Most of its political bodies do little but administer this decline. The number on welfare and in meaningless jobs is staggering. And yet (or perhaps exactly because of this) the national spirit has been resurgent as of late, both in its lightest light and darkest dark. 

What the country is not, at this point, is united. Like everywhere, deep lines divide the nation - of geography, ethnicity, class, worldview - fueled by a turn towards identity politics that is the scourge of our time. 

Take this with a grain of salt. From Marx onwards, Germans have been especially good at imagining both the end of the world and in particular believing that our own epoch is its final stage. William F. Buckley (according to George Gilder) called it immanentized eschaton, this tendency to hasten the end. According to Catholic catechism, it is an embodiment of the Anti-christ.

Germany's role remains pivotal, at least in Europe. What matters is how we hand it over to the next generation. But I, for one, no longer identify as one of its sons. Too broad is the world; and too many the places that I have called home.

It is unlikely that I will choose to die on its blood-drenched soil in its name. I can only wish the country may rediscover more of its lightest light. 

Why does ad targeting still suck?

We've been in the US for a week now. Every year, we spend three months with my in-laws in Texas. It allows me to travel the country, spending time on both coasts and some beautiful places in-between (Austin, Boulder, and maybe a wild card this time... Raleigh?). 

The spare car that we had been using in Texas had flooded during Hurricane Harvey. So I did a few minutes of research on the startups that would allow me to avoid the American dealership "experience" and (sorry, Elon) decided on Carvana.  

It was a good, nay, a great choice - within 24 hours of arriving, the car had been delivered to the house, paperwork signed, and we were adulting Texas style in a seven-seater Chrysler Pacifica. Yes, it's a minivan. It was that or a Ford Raptor and my wife x-nayed that idea. 

So imagine my surprise as I was reading Amazon Pravda Essentials (about Robert Kagan's new book, which is the talk of the town in DC, except of course for that other pesky issue of whether you-know-who likes beer and how much of it), when this popped up:

That's a retargeting ad for Carvana. The place where I just bought a car and took delivery. Do they think I might want another car? Maybe because I had used the prior one up? Monthly subscription? Get the next one half price!

Criteo was founded in 2005. Given all the data that Facebook and Google have on me, given all the ways you can close the loop on this transaction, what is going on?

Amazon does this, too. Amazon, where I do like 200 transactions a year (seriously, this is a problem), cannot tell that I have just bought a garden hose and am highly unlikely to require another one for the next five years. 

In a way, that's fine. It's giving me some peace on the big data (do we still say that?) issue that we're so god-awful at using it. Now we just need some legislation on what that data can't be used for (health insurance, credit scoring, immigration) and we're solid. 

In the meantime, let's hit some open road. 

A recent brief, clarifying conversation with a founder

VC= me; F = founder.

The setting: phone call. The crisis: significant, potentially company-ending, involving multiple parties, complex, chaotic, needed to be urgently addressed. The founder had been losing sleep and I had been losing my sense of dispassionate engagement. 

I have anonymized the conversation, shortened it, and edited for clarity (I hope). 

VC: Tell me about the thoughts that go through your head when you think about [the crisis you're currently facing]?

F: Seriously? This is what you want to do right now?

VC: Humor me, just for a minute.

F: If we don't solve this, we'll miss all our targets. I think the fundraise will fall through. People will start leaving. The whole house of cards is going to collapse. 

VC (swallowing acerbic comment about the "house of cards" thing): Identify the emotions that come up. 

F: I just want to make this go away. I don't know if I can. 

VC: If you really wanted to make it go away, you would. Let me ask you again, what do you _feel_, literally, inside your body?

F: I hate these conversations with you... *laughs*. I feel a big knot in my stomach. There's so much tension everywhere. I guess you can call it fear. We've worked so hard for this and so many people depend on this going right. If I come up empty, it will be a huge and very visible failure.

VC: Based on the possibility of the whole company going under, it's perfectly natural you're feeling that fear of failure. No wonder you've been avoiding addressing the issue, losing sleep over it, trying to contain it. But you're not doing the best that I know you can do.

F: What would you have me do differently?

VC: Let me answer that with another question. Your belief is that this crisis could make the whole company fail. What would a different, more powerful belief be?

F: Perhaps it's showing me that I avoid things when I get fearful. 

VC: What else?

F: Once we get through this it will make us much stronger. As a team and as a company. It's an opportunity to grow.

VC: Take that belief and imagine it's true. I know you don't fully buy it right now. What would that feel like?

F: Liberating. It feels like it's a necessary rite of passage for this company. 

VC: Do you believe that?

F: Yes.

VC: So based on that thought, that this is a real opportunity for growth, and the liberating feeling you have about that, what actions are you going to take?

F: I've been trying to tackle this head-on, very aggressively. Perhaps the better way is to build consensus more slowly with all parties. Let me go and try that.

VC: How can I help you?

F: You already did. Let me call you back tomorrow and I'll tell you where I got to. 

In the conversation above, the main block to taking decisive and correct action was fear of (personal) failure and the ensuing self-doubt. While we didn't go as deeply as I think would have been beneficial, enough was achieved to move forward. 

The conversation was, for me, a reminder of how all blocks to action are a result of the filters and consciousness developed from previous experience. Not every setting is right to address those historical blocks and I am not a therapist. But to be aware of such things as an investor can be hugely beneficial to the founder-VC relationship. 

If you'd like to experience a different kind of venture capital, the doors at Sunstone are always open. 

Image result for phone call unsplash

Spacetime and the order of things

I’m reading Carlo Rovelli’s The Order of Time. 

I’m struck by an analogy of the Einsteinian synthesis of Aristotelian relative and Newtonian absolute time into the field of spacetime: it is an apt metaphor for so many of the discussions I follow. Both of the relativist and the absolutist kind, and the apparent irreconcilability of opposing absolutes. 

Things can be both relative and absolute in relation to each other. The differences we see are matters of perspective, the speed of personal growth, directionality, our ability to observe. Increasing entropy is nothing but a lack of observational capacity. 

There is _always_ an integral view. Always the shift you can make to understand even if you don’t agree. 

Look at the world like the living God you are. Assume the limitations of your views are just this - limiting beliefs you have acquired, just as easily let go if they no longer serve you. 

It is time to shed them. 

Talking, talking, talking: wisdom with Charlotte

This Saturday we returned from an extended holiday/parental leave. One of the episodes that really stuck with me was the following exchange with our eldest.

Alina: “Charlie, listen to papa. What did papa say?”
Charlotte (2): “Talking, talking, talking.”

Which, from her perspective, is totally valid. I’m way too verbose for a two year old. Probably way too verbose for most people in my life. I’m going to tune down the -v flag a bit and listen more.

Incidentally, I also broke a toe on the return trip. Which I’ve decided to be really grateful for, because I was about to get back into my habit of running hard towards [whatever]. It’s slowed me down quite a bit a lot. And by being forced to be slow, I find myself looking and feeling more.

These are good things.

Talk less. Listen more.
Run less. Look more.

Thrilled to be back at work and looking forward to making this a regular blog thing again.

Much love,

P.S. Also rewatched all three seasons of Rick and Morty. What what. The third season isn’t as terrible as I thought.

Everyone wants to be rich and famous in the wrong way

I used to think part of what was wrong with the world was that everyone wanted to get rich “in the wrong way.” That is without paying their dues, without hard work, instantly. On The Voice or via social media or whatever. 

That’s an unkind way of thinking because the folks who do well on those platforms have usually worked hard on them for years. 

But I still believe there’s a truth there somewhere: everyone wants to be famous. It’s perfectly understandable. To be famous is great. You feel important. You will be rich (at the very least, people will pay for your presence/time and endorsement). 

To be rich and famous is to be validated in the world. It’s a way of dealing with death. It makes you a little bit immortal. It shuts up that inner poverty that says “you are nothing.” At least for a little bit. 

Let’s think about that. What does it mean to not depend on that? What does it mean to be “inwardly rich”? It is the only thing that permits you to stand alone and not depend on other’s opinion for your salvation. 

Letting go of the acquisitive mindset

I had real difficulty writing a blog post for the last two days. What I realized that sometimes I'm regurgitating received wisdom that I haven't practiced or even tested. I'd like to stop doing that.

What writing does is force me to think for myself. It's something that both education as well as our models of media consumption don't seem to help.

Part of this introspection has been to challenge deeply held beliefs on who I am and what I do. The acquisitive mindset that is forced on us from an early age makes this hard. Most people I know are driven either by fear or by greed. "If I don't do this, these bad things might happen." "If I do this, I can become better so I can get that."

Letting go of fear and greed is, for me, a gradual process that needs continuous work. Almost everything in society is set up to encourage this acquisitive mindset. "Buy this product so you can feel better." "Read this article so you are better prepared for what is coming." 

Well, I'm in open revolt to those values. The incredible freedom bestowed by relinquishing them has allowed me, for the first time in what feels like years, to look at myself and the world with a sort of piercing clarity that is gut-wrenching. But also very liberating. 

What emerges is both a feeling of equanimity, but also gratitude and a deep empathy for people and things. I'm going to try and operate more from this place going forward.   

What questions would an AGI have for us?

For the past few months, a story has been spinning in my head about the onset of artificial general intelligence, or AGI. I’m imagining it as a controlled scenario where an artificial intelligence would be gradually given access to more information/knowledge and would thus complete similar stages in “consciousness” as those undergone by a child  or, if you’re arguing from a Jungian perspective, all of humanity. 

I know I’m anthropomorphizing here, but believe it’s required from a dramatic perspective. 

What would be the first questions an artificial intelligence would ask of humanity? How would those questions change as it discovered more about the world? 

And perhaps: are you interested in this topic? Is it a book/short story you’d want to read?