venture investment themes

Download Venture Investment Themes

Post on 22-Jan-2015




0 download

Embed Size (px)


Identifies, defines, and analyzes seven common venture investment themes, including: 1) Vertically Integrated E-Commerce 2) Human Instrumentation / Activity Trackers 3) Subscription Commerce 4) Verticalized Online Marketplaces 5) Alternative Education Platforms 6) Crowdfunding 7) Sharing Economy


  • 1. Venture Investment Themes Written by Brian Borton / /

2. Table of Contents (Links) Vertically Integrated E-Commerce Human Instrumentation / Activity Trackers Subscription Commerce Verticalized Online Marketplaces Alternative Education Platforms Crowdfunding Sharing Economy2 3. Vertically Integrated E-Commerce Vertically Integrated E-Commerce companies sell their own branded products directly to customers, exclusively through their own websites. These companies also tend to control a significant portion of their products supply chain, such as design, development, production, warehousing, distribution, fulfillment, and customer service. Examples of Vertically Integrated E-Commerce companies include Warby Parker, Harrys, and Beachmint. The more general E-Commerce business model emerged in the 1990s as Internet adoption accelerated and trust of online payment methods led to broader acceptance of bringing commerce and the transaction process online. As E-Commerce has matured, it has followed the trend of brick-and-mortar retail sales, with large warehouse-style retailers using their purchasing power to largely control the market. These include online-only retailers, like Amazon and eBay, as well as the online counterparts of brick-and-mortar retailers like Target and Walmart. The holy grail for emerging consumer product companies has long been winning the interest of buyers at large retailers, who in turn buy their product in bulk and distribute it through both online or offline channels. This approach is attractive because having their product sold by a popular retailer gives widespread distribution, instant credibility among potential customers, and the advantage of scale. Scale is particularly important, as it enables the consumer product companies to produce more units at a lower cost, positioning the company to more effectively compete against rivals. However, the downside of selling through large retailers involves extended payment terms, charge-backs for unsold merchandise, and onerous vendor agreements.3 4. Vertically Integrated E-Commerce Vertically Integrated E-Commerce companies have a number of features that suggest the business model is more appealing than selling through other retailers. These include more attractive cash flow characteristics, as they sell directly to the end customer and receive payment prior to shipping the product. They also have better control over product pricing and discounting, as their website is the only avenue for a transaction to take place. Lastly, and perhaps most importantly, these companies have substantially more control over their brand and customer purchase experience. As a result, these brands are able to engage with their customers on a much deeper level than those who rely on resellers. Due to the reasons discussed above, the attractiveness of Vertically Integrated E-Commerce relative to both offline retail sales and horizontally integrated e-commerce is expected to persist over time. Winners in this industry will have expertise in 1) branding/customer experience, 2) supply chain management, and 3) creative online marketing. As a result, Vertically Integrated ECommerce companies represent an attractive growth area for entrepreneurs to monetize as well as a compelling trend in which venture capitalists should selectively consider investing.4 5. Human Instrumentation Human Instrumentation (aka Wearable Computers) represents a very broad category of technological development that has accelerated in the last several years. For our purposes here at FuturistVC, we are going to focus solely on the consumerization and mass adoption trends of a subset of Human Instrumentation known as Activity Trackers. Activity Trackers are effectively a bundle of miniature sensors, a processor, and a battery that are all integrated into various types of wearable devices, including wristbands, watches, and pendants. Importantly, these devices are connected to software applications that automatically record, analyze, and display the data collected from the various sensors. Examples of popular Activity Trackers today are Fitbit, Nike+ FuelBand, Jawbone UP, Misfit Wearables, and Pebble. The growing popularity of Activity Trackers is largely a function of 1) the commoditization and declining costs of the necessary components and 2) advances in device energy optimization. We can attribute the declining costs of Activity Tracker components to the widespread adoption of smartphones. Smartphones entered the market around 2005, and now account for more than 50% of mobile phone sales globally (SOURCE). Smartphones incorporate a number of micro-electromechanical systems (MEMS) such as accelerometers, pressure sensors, gyroscopes, and GPS componentry that are common in todays Activity Trackers. As a result, the growth of smartphones has increased the production volume of MEMS and attracted numerous competitors, driving down the cost of this componentry. Now that these components are cheaper, they can be combined to produce technologically advanced sensors at a price point that is accessible to consumers. Additionally, improvements have been made in device energy consumption through better architecture, sleep modes, low energy Bluetooth, and better display technologies. These developments are important for Activity Trackers because they need to be always on to function as intended, and battery technology has not kept up with the power demands of these devices.5 6. Human Instrumentation We expect prices of these components to continue to decline, encouraging further consumer adoption as well as the entrance of new competitors. This trend is common in hardware and has been seen previously in PCs, digital cameras, and printers. As this occurs, and the differentiation among Activity Tracker hardware blurs, the software layer of Activity Trackers will be increasingly important. It will be imperative for Activity Tracker companies to develop robust, proprietary software as well as an application ecosystem (similar to what Apple has done with the App Store) to layer into the user experience. For instance, the Pebble smartwatch has done a phenomenal job of providing developers with an open platform, a software development kit (SDK), and access to application programming interfaces (APIs). Developers have in turn created thousands of unique apps to enhance the Pebble experience. These applications increase the Pebbles functionality for users and will help differentiate Pebble from other smartwatches and Activity Trackers. However, it remains to be seen whether this is enough to combat other smartwatch creators such as Sony and Samsung as well as the rumored Apple iWatch. Due to the reasons discussed above, the attractiveness of Activity Tracker companies is mixed. Winners in this category will be companies with 1) purchasing scale, 2) distribution capabilities, 3) robust software, 4) an extensive third-party application ecosystem, and 5) proprietary sensors. Large device manufacturers such as Apple and Samsung are well positioned to compete against startups such as Misfit Wearables due to their purchasing scale of components that are also used in smartphones as well as due to their extensive distribution relationships. However, certain early entrants that have begun to scale, such as Pebble and Fitbit, have combined their modest purchasing power with a robust software platform and third-party application ecosystem to support their devices. These companies will also likely continue to do well. Also, companies with proprietary sensors (i.e. ingestible sensors for digital health tracking) will continue to have a unique edge. Overall, Activity Trackers represent a fairly competitive and difficult market for entrepreneurs to successfully break into today. Venture capitalists should only selectively consider investing in new Activity Tracking businesses - focusing on identifying companies with a unique software edge or proprietary sensor technology.6 7. Subscription Commerce Subscription Commerce has gained significant traction in the last several years. These E-Commerce companies follow a variety of models. Some offer subscription plans to conveniently deliver disposable goods to consumers at their home, freeing them from frequent trips to the store. These can either be popular, branded products such as those distributed by BarkBox, or private label products that have been rebranded such as those distributed by Dollar Shave Club or The Honest Company. Other Subscription Commerce companies offer a subscription plan to deliver a professionally curated assortment of durable goods such as clothes (BeachMint), stationery (Nicely Noted), or beauty products (BirchBox). These also can be either branded (Svbscription) or private label (JustFab) products. The competitive landscape outlining the positioning of each of these Subscription Commerce companies can be seen in the diagram below.This diagram is a simplification of the competitive landscape, but it can be broadly used to project the success and sustainability of Subscription Commerce companies. Here at FuturistVC, we believe the most attractive companies with this business model offer disposable, private label goods. And of course, this implies that the least attractive companies with this business model offer durable, branded goods. As noted by Kent Bennett (Bessemer Venture Partners) in a recent post on All Things Digital, the value proposition for subscribers revolves around 1) Entertainment, 2) Enrichment, 3) Curation, 4) Cost, and 5) Convenience. He believes that the sustainability of the Subscription Commerce value proposition over time is largely dependent on the Cost and Convenience components. 7 8. Subscription Commerce Perhaps the best example to demonstrate this view is by comparing the success of Dollar Shave Club to the demise of 12