Jay Kapoor
Jan 4, 2017 · 8 min read

This is a re-post of an article I wrote earlier this summer as part of the upcoming launch of a new VCB focused newsletter. Stay tuned for more information!

A Brief History of Bears

A little over three years ago, Andy Dunn (CEO and Founder of Bonobos) wrote “E-Commerce is a Bear” highlighting some key problems with existing e-commerce models that up until that point had produced only two meaningful companies (by enterprise value): Amazon and eBay. Dunn argued:

…if your business is standalone e-commerce selling third-party brands, good luck. You can’t generate enough operating profit to scale beyond getting noticed, counter-attacked, and at best acquired. You are forced into stay right where you are.

In his analogy, Amazon is the bear. Sooner or later, if you get big enough, the bear will wander into your neck of the woods and what little you have will now be hers. In the three years since Andy Dunn wrote that seminal think piece, the once promising e-commerce boom has actually left more than a few carcasses in its wake.

Dunn, to his credit, foresaw that one of the four ways to stay competitive against the bear was “Proprietary Merchandise… offering goods which are not available any where else, customers have to buy them directly from the brand”. It was the core strategy of the early players like Dunn’s Bonobos as well as Warby Parker, Dollar Shave Club (more on this below), Harry’s, and newer brands like the Black Tux (more on this too), Casper, Jack Erwin, Mack Weldon, MeUndies and so on.

Three years after christening the bear, Andy has returned with a funky acronym and a wake up call.

WTF is a VCB?

Vertical Commerce Brands (V-Commerce or VCBs) — also known as Digitally Native Vertical Brands or DNVBs — are all around us and in fact include many of those Proprietary Merchandise companies mentioned above — with some slight adjustments.

In the interest of not stealing Andy Dunn’s thunder, I won’t rehash all his points here but will highly recommend you go read his latest write-upwhich came out a few months before Dollar Shave Club’s $1Bn acquisition by Unilever — the first notable acquisition for VCBs and the first successful exit of such scale for an eCommerce brand in recent memory.

Per Andy, a Vertical Commerce Brand meets four criteria

  1. Primary means of customer interaction is digital
  2. It’s a brand, the brand is vertical and the commercialization of the brand via an e-commerce channel is not the core asset. The brand is.
  3. Maniacally focused on customer experience and customer intimacy
  4. While it doesn’t have to stay digital-only forever, in all cases of offline partnerships, the brand controls its external distributions

They may look like e-commerce companies but in Dunn’s own words:

Creating a [VCB] gives you an opportunity to combine the growth of being an e-commerce company with the margins of being a brand, and with a proprietary selection of merchandise where you control distribution and your own destiny.

Farhad Manjoo’s recent New York Times article helpfully adds:

For you and me, this is a boon…. We will get a wider range of products — if companies don’t have to market a single brand to everyone on TV, they can create a variety of items aimed at blocs of consumers who were previously left behind. And because these companies were born online, where reputations live and die on word of mouth, they are likely to offer friendlier, more responsive customer service than their faceless offline counterparts.

Unlike third-party e-commerce startups which have to fight larger companies with more diversified offerings and better pricing, VCB’s focus on creating long-term loyalty to their product that stands in stark contrast with the transaction-driven nature of an incumbent like Amazon.

Likewise, the easiest distinction to draw between Amazon’s customer experience and that of an VCB’s is that the Amazon experience is there to provide all the options and incentivize purchases with lower prices and near immediate delivery regardless of the actual product being bought. VCBs, meanwhile see their product design, web/mobile experience and customer service as an extension of the brand itself.

By that definition, Dell was maybe the first VCB. Yes, that Dell. In the early days of personal computing, Dell sold through direct sales channels, built customized PCs only after cash was received, aimed to reduce the headache of traditional in-person retail, and offered relentless customer support throughout the purchase process. Eventually, Dell began to rely less on the direct sales model and now their tech is available in most big box retailers, but for a while buying a Dell PC offered a unique value proposition:

Dude you’re getting a Dell!

That value is derived from how you feel when you buy from VCBs, be it Bonobos or Harry’s or Casper or The Black Tux — and their customer success teams know it. Here’s an example:

The Best Tux I Never Bought

Seven days before my friend’s wedding last Saturday, I realized I didn’t have a formal suit or tux to wear to his reception. So, of course the first thing I did was Google “Rent a Tux” and under some paid ads for local brick and mortar on the first page of results was The Black Tux (kudos on the AdWords campaign)

I gave them a try despite my initial hesitation to rent such an item on such short notice before ever trying it on. In that way, the first thing that won me over was the last thing I hoped to have to use: the Fit Guarantee.

Just one way to reduce the friction that comes with online rental

The next thing I noticed was how simple and beautiful the experience on the site was. Perhaps most importantly, I saw just enough options on each page to feel like I had ample choice but not so many that I felt paralyzed by the decision.

Immediately after checkout, I received a nice (though automated) email welcoming me to The Black Tux followed by my order confirmation.

What came next was the “human” touch: a fit specialist reached out and said that given my measurements, she felt I would be between sizes and recommended a different size for the best overall fit. She reminded me again of the Fit Guarantee and even left me a number to call if I wanted to discuss.

A few days later when the tux arrived, and the jacket was a size too big. I immediately responded to the specialist and within an hour got a note back that she was sending over a new jacket in time for the reception. She even asked if I’d be traveling at the time and if they should send directly to the address for my hotel. It showed up at my door less than 36 hours later (well in advance of the event). That was the Fit Guarantee in action. That was the level of customer service you don’t get from a local tux rental and I never had to leave my house to get it. Loved it.

The interesting omission you’ll notice in all of my fawning above is the actual product. Of the three things Dunn mentioned in his points on VCBs (Product, Web/Mobile Experience and Customer Service) the product i.e. the tux, itself was just… fine. The material kind of reminded me of suits I had seen at Express or in a Macy’s. Nothing wrong with it but I wasn’t wow’d either. I’ve rented from local tux shops before so maybe my frame of reference was skewed by the act of seeing, touching and picking an outfit in real time. The product experience for my first The Black Tux rental was phenomenal but the actual product itself somehow left me wanting more.

Said another way — a fine tux to rent, but one I wouldn’t buy for myself.

So which VCBs are really the future?

You might be thinking from that example that good customer service (covering for an okay product) is steering my judgement in favor of VCBs on the whole and I actually agree with you. Good customer service alone however cannot make success, but what it does do is create important touch points that foster brand affinity. My example happened to be that of a rental but speak to anyone that has purchased razors from Harry’s or loafers from Jack Erwin and they’ll tell you of these key touch points with customer service people (Bonobos calls them Ninjas) extend from the first time you sign on to the site to your first purchase and beyond.

Looking at the unit economics, it is also easy to see why some VCBs make for appealing businesses and investments, the most appealing of which use their brand to dominate certain strategic categories completely.

By that, I mean, buying from Dollar Shave Club means that I won’t be buying from Gillette. Similarly buying a mattress from Casper means I won’t be buying from Leesa, Helix, Tuft and Needles, or god forbid, Sleepy’s. Though their revenue models are vastly different (recurring low-margin subscriptions vs. a singular high-margin purchase), if you win my business you know with reasonable certainty that I’m only buying from you.

That is a game changer.

One area where this hasn’t been solved is Apparel, perhaps the most crowded category for VCBs. The problem is most people don’t buy from just one clothing brand and buying from Bonobos doesn’t preclude me from buying from Chubbies (although my actual dress sense and taste might). As a seller, I cannot know with absolute certainty that you are only using my product. Try as they might, these VCBs won’t win 100% share of that category’s respective wallet spend.

Apparel VCBs likewise have not solved the problem that traditional retailers still have of driving reliable re-purchase of their brand (in lieu of the more ideal recurring subscription revenue). And don’t even get me started on the re-purchase challenges faced by rental startups like The Black Tux or Rent The Runway (which is not a VCB by the strictest definition)

Not every one of these companies can win an individual’s business so completely as Dollar Shave Club and that creates pressure (especially in apparel) for continued marketing spend to build and keep customer loyalty.That marketing spend eats into margin and theoretically requires capital to be raised. Consequently more fundraising requires bigger exits down the line to pay for said capital. A company like Five Four Club is approaching this in an interesting way but they’re still faced with the challenges I mentioned in the previous paragraph. Apparel VCBs, therefore, will have to find their own unique ways to dominate.

All this to say, despite my reservations, I still agree with Andy Dunn’s claims that next 20 years will be huge for VCBs and their continued disruption of traditional retail. But more and more it is becoming clear that while VCBs should certainly be valued higher than traditional third-party e-commerce, not all VCBs aren’t created equal.


Thanks to Michael Coetzee and Samir Chainani indulging my incessant discussions on this over the last week and to Kashif Rayani for reading early drafts of this post.

ReadUnboxed

Newsletter for Vertical Commerce Brands

Jay Kapoor

Written by

VC investor at LaunchCapital | I read and write about Tech, Media, SaaS, & Investing | Don’t be afraid of failure. Be afraid of being ordinary.

ReadUnboxed

Newsletter for Vertical Commerce Brands

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