The downside of being a Shopify-armed rebel
DTC and exit strategy are foreign things. There’s no point investing venture capital into DTC brands and you explained perfectly why. DTC is either for established brands with real advantages in supply chain etc., or for lifestyle businesses. It’s like traditional retail now - anyone can open a store next to yours. You’re supposed to start small and grow with demand. If you’re not established and not in it for the long run, don’t start
As we all learned in The Last Jedi, there's a much better business in arming the rebels (or, for that matter, the empire) than being a rebel.
While I agree with your overall conclusions, I didn't get a SERP anything like yours, the eight sleep mattress SERP is covered in competitor listings. Not sure how you got such a clean one. I linked mine here: https://twitter.com/bwhalley/status/1292863169367617536
Great piece, Packy! It’s easier than ever to start something, but it’s harder than ever to cut through the noise and grow. For brands, differentiation needs to come from an orthogonal vector to whatever has become commoditized — whether that's the shopping cart or the logistics. You highlighted some of those more resilient moats, like community and tech/IP. This is the essential path to define if you're building something new.
This is a really fun read. I do want to point out, however, that just like your competitor will make mistakes in how they buy ads, they're just as likely to make mistakes in sourcing and logistics, which improves the potential for your hypothetical success. Moreover, at the "lifestyle" business level, I've been surprised by how many "success" stories I have seen. They're just not the type of scale VC's are remotely interested in. You didn't address much about Amazon in this one and I would say that if I agree with your premise 85% on offerings OFF Amazon, I agree 95% ON Amazon. The time it takes to build enough reviews to impress Amazon's algorithm is the only differentiator you have against a competitor that can't be replicated overnight. Moreover, it's really easy for would-be competitors to go on Amazon and see how well they can do if they go to war with you.
The Red Queen Effect is another framing for this phenomenon. And there's a similar dynamic at play in consumer facing fintechs . Lots of the money going to processors and community banks, consumer brands paying huge $ for acquisition backed by VC money, and a massive ecosystem of vendors that will sell you an API for any part of the financial services bundle all fighting for the same 150 basis points of interchange. Banks get rich, processors get rich, ecosystem expands, but unclear what bundle of features leads to profitability long term. More on the red queen effect here: https://fs.blog/the-red-queen-effect/
Very good elaboration and analysis but I disagree with the core point.
Low barriers to entry don't mean that the battleground is in marketing, but it's in the product. And that's what a lot of these brands that you are mentioning are struggling, in the fact that they don't have good enough product to fight copycat competition - Exactly as you mentioned in the Eight sleep example - the product makes it tough to copy.
The same thing applies to user acquisition. While the ad costs will only go up, a completely unique product that doesn't exist in the market will make the acquisition costs go down.
One more thing that stuck out to me is that the DTC should be the end goal for businesses to succeed.
I would probably go with DNVB - Digitally native vertical brands - as a better way to frame it.
What Shopify is enabling is for the founders that have an idea and awesome prouduct to get early traction and start selling the products directly to customers to prove out the demand. But if you want to scale the business, you really need to look at DTC as only one of the distribution channels to grow the business. (especially if your product is highly capital intensive).
And then when you start the scale phase, you really need to look at retail distribution to grow the business further (this includes Amazon, Walmart but also traditional retailers).
I would look at Snow teeth whitening kit as an example of this approach.
Is there any curation startup that's worth following in the retailing business?
Btw, not sure if you have been looking into Tsutaya, the biggest book selling chain in Japan. It grew to over 1400 stores and captures 60% of Japanese population in the face of Amazon & e-commerce. That might be a fascinating topic to use your deep analytics and illuminating writing.
In the context of DTC brand what would "Curation becomes important." look like?
The other area of differentiation is around the Marketing Creative...the best creative team will be able to lower cost of customer acquisition (though they need to stay ahead of the copycats to your point) and win the Marketing game. Only part of the value chain that can't easily be automated?
Wow. Finally got around to reading this in full and it's phenomenal analysis - not to mention well written. Very impressive. I work for a DTC that's seen some moderate success, and this will 100% impact how i think about the business.
This is a piece I will keep coming back. Super-interesting!
10/10 shopify is just selling shovels... but I mean, that's always been THE strategy
Agree w/ this tremendously. Great writeup. My thesis on DTC investing is outlined here:
i think is good to have everyone to be armed, startup is difficult and many more troubles to deal with like your staff your supply chain and etc. Competitors sometimes helps utilize the market and make the cake bigger, so why not? U loss the game most of the time not only because of competition.
By curation innovation, are you referring to metasearch companies like TripAdvisor and Kayak for the travel industry but for all other industries?