What on earth is Jet.com and why is it worth $600 million?
For a company that doesn’t even have a website, Jet.com is generating a lot of news, making the cover of BusinessWeek, as well as being covered detail in Forbes, The Wall Street Journal, Inc., Re/code, and many other publications.
Reading the stories, we can see that in July of last year, investors pumped 55 million dollars into the company, followed by 25 million more in September, along with 40 million in February… investments that have pushed the company’s worth up to a staggering 600 million dollars, and this a company that has yet to specify what exactly it is that it does.
What makes Jet.com such an interesting case study is that entrepreneurs usually start out with a minimum viable product that they put to the test, waiting to see how the market reacts, and failing this, they come up with an idea or concept. A company’s first steps tend to be difficult, its path cluttered with obstacles and problems, among them the challenge of attracting investment, and that often requires a rethink or overhaul of strategies. But Jet.com has encountered no such problems: it asks for money and gets it, no questions asked, however strange it might seem to us that somebody would be prepared to hand over 220 million dollars to an outfit whose viability remains pretty much a mystery.
All investors in Jet.com have to go on is an announcement of the launch of the not-exactly innovative idea of a shopping club, a place to buy lots of stuff at low prices, and that requires paying a certain amount of money up front for membership. That said, perhaps we should remember that Marc Lore, former CEO of Quidsi, Inc., the parent company of Diapers.com, Soap.com or Wag.com is behind this.
Between 2005 and 2011, Marc Lore and his childhood friend Vinit Bharara managed to position these companies among the leading e-commerce outfits in the United States, specializing in the online sale of diapers, personal hygiene products, pet goods, etc, creating a loyal customer base in the process. Looking to improve operations and logistics, the company set up a network of warehouses on the outskirts of major cities to speed up delivery and reduce costs, and even used Kiva Systems robots (bought by Amazon later, in 2012) in their storage centers. In 2011, Marc Lore’s company was bought by Amazon for 545 million dollars.
Jet.com is a traditional shopping club: you pay around 50 dollars a year, which gives you discounts of up to 15 percent compared to other e-commerce sites. The company is able to do this because its margins are near zero, and doesn’t make its money from sales, but simply from membership fees. Basically, the hook is that having paid that membership, users feel that to get their money back they need to keep buying.
Aside from this, we also know that Jet.com uses very aggressive customer acquisition tactics using so-called insiders, and that it has set up an affiliate scheme that regularly hands over big-brand gift vouchers. It currently has around 100 employees and has regrouped many of the directors from Quidsi, and that it intends to spend most of the money it has attracted on marketing, and that it intends to go head to head with Amazon.
Buying Diapers.com cost Amazon dear. Seeing that the company was on the up and up, Amazon cut the price of its diapers by up to a third, losing more than 100 million dollars in the process, but forcing Lore to sell the company when he was unable to get financing. After two-and-a-half years with Amazon, Lore left, took a break by moving to California’s wine-growing region, and then set about creating what some have dubbed his revenge.
So what we have here is an impressive track record, an entrepreneur with a proven ability to put these kinds of projects together, and a concept, the shopping club, that although far from new, has for the moment been limited to ideas to do with the development of secondary channels, and with price discounting. Applying this to horizontal or general e-commerce required huge turnover, on a gigantic scale in order to take on a monster like Amazon.
Marc Lore has managed to convince a considerable number of investors that his plan can work. And here we are, talking about a company that has yet to begin trading, but that has already managed something very important: to generate a huge amount of interest. And if everything goes as planned, then we really ain’t seen nothing yet.
(En español, aquí)
