Industry Experts

A common practice for any VC doing diligence on a potential investment, is to engage an “industry expert” within their network to assist in the effort. While most investors are able to evaluate matters such as market size, competitive landscape, and founding team, it’s impossible to understand every industry nuance if you haven’t operated in the space. While valuable insight can be gleaned by engaging such a individual, one has to recognize the potential blind spots that a person who has been immersed in the industry status quo may have.

I vividly recall our diligence process on the Bouqs back in 2013. Our collective group had a number of connections to folks that had operated in the flower space. Man, these people are jaded by what has historically been a tough industry. When FTD acquired Pro Flowers in 2014 for $440 million, it was noted that Pro Flowers had top line revenue of $630 million and EBITDA of $34 million. Brutal. The challenge with the flower industry is the supply chain is a complete mess. There are at least four parties that take a cut along the way, making the margins for everyone in the system razor thin. This is exacerbated by the fact that there’s no brand loyalty due to the lack of product and user experience differentiation. The result is you have a few big brands competing on sticker price. Unfortunately for the consumer, you pay a minimum of 2x the advertised price once they lop on the obligatory fees. So, broken supply chain and terrible customer experience, hmm, sounds like an investors dream.

As I’m digging in, I ring a contact of mine who had worked at one of those indistinguishable large co’s with a bunch of numbers in its name. As I’m enthusiastically describing this great company I met, he stops me mid sentence and asks — and I quote, “why the fuck would you invest in flowers?” Broken supply chain and terrible customer experience — didn’t I already say this? Once he realized I was serious, he went on to lambast every aspect of the industry. Between the incoherent rants, there were some golden insights that gave me a perspective and understanding that I would not otherwise glean. He signed off of the call by saying, “do your career and investors a favor, stay away from this one.” It would have been easy to conclude my diligence at that point and pass on the investment. After all, it was the most negative call I’ve probably ever had on a company/sector we were doing diligence on. To the contrary, it got me more excited about the opportunity as it was obvious the industry was even more broken than I had thought. In the end, we made the investment and couldn’t be happier about what the company has accomplished to date.

Engaging an industry expert is a valuable step in an investors diligence process and we will continue the practice on an as needed basis. But disruption generally can’t be identified until it’s already happening and the people at the company about to be the victim of disruption are most often the least likely to see it coming. It’s important that the investor who’s paid to see around the corner not lose sight of this and fall victim to conventional wisdom.