Tailoring investments to the new reality of retail

In 1990, if I wanted a pair of Calvin Klein jeans I had seen in a magazine, I’d head to the mall, sift through piles of inventory to find my size, try them on, ask the opinion of the often inexperienced sales associate, wait in line to check out, pay, and head home. The process was linear and ripe for improvement.

Now, with the pursuit of data-driven customer service working in partnership with tech, marketing, and shifting consumer mindsets, the complete process (from logistics to manufacturing to distribution) is being reimagined. With the recent acquisitions of Dollar Shave Club and Jet.com, this thesis we follow at Forerunner is coming to fruition, and we are seeing louder signals that a new era is upon us. The old guard is being left behind as it struggles to adjust to rapidly changing consumer expectations; a window of opportunity is blown open, and now every category of consumption is up for interruption.

Inside of five years, Dollar Shave Club amassed 3m plus active subscribers. The less than five year old startup with the memorable video was recently bought by Unilever for $1 billion. Jet.com, which launched just a year ago with the lofty goal of offering a competitive, if not better experience, to Amazon, was recently bought by Walmart in a $3.3 billion deal. We saw Nordstrom acquire Trunk Club for $350M, and more recently, Fossil scooped up Misfit Wearables for $260M to breathe some life and differentiation into its watches. Relevance is everything, and these brands have been able to achieve that through tech, talent and direct access to consumers.

These transactions mark a significant shift in how previously conservative brands are approaching commerce. As traditional players fumble, we’ve observed three common traits that, when combined, afford next-generation brands formidable advantages over incumbents in today’s market; these brands are digitally savvy, they’re building data and experience driven relationships with their customers, and they’re willing to adapt. These are the brands worth investing in.

As for M&A, incumbents are becoming weighty acquirers as existential threats disrupt not only their growth prospects but their existing business. For players like these, next generation brands offer relevance in a compelling combination of brand, technology, talent, and direct access to consumers. Beyond obvious pairings we are excited to see multiple exit paths emerging and presenting a range of attractive M&A outcomes as broad market trends converge around commerce and ultimately chart new territory with progressive thinking.

We anticipate that IPOs will follow scaling M&A and a critical number of companies to demonstrate the power of these advanced retailing models. The existing class of publicly-traded retailers lack growth to engage investors and face meaningful headwinds, while this new generation of retailers benefit from agile approaches and evolved consumer preferences. At their best, these new models benefit from the power of capturing data gained through direct consumer interactions offering more insight, levers and ultimately greater predictability.

In 2010 — after raising capital to launch Forerunner Ventures — we aimed to invest in companies targeting digitally savvy customers looking to be delighted by experiences and founded by visionary leaders committed to leveraging data and quantifying the results. Since then we’ve pursued this focus of marrying innovation and data, and deployed resources for scale. Forerunner Ventures has been known to employ an atypical investing style, and we’re going to stick with the approach.