Hey there. Jason Goldberg, CEO of Fab here.

I thought I'd be brave enough to wade in here.

As you can imagine given the company I'm running, I'm in the bullish camp. I mean, come on, we scaled Fab to $100M+ run-rate in less than a year and we're tracking to do close to 150M for 2012. Low acquisition costs (social + mobile) have resulted in 6M+ members in 14 months and we just added 1M in July. July was also a killer month for us thanks to mobile + social. We were braced for a seasonally bad month but mobile especially led to a record setting month for us. I can tell you this with certainty, Fab's iPad members are off the charts in terms of LTV and people who join Fab via iPad are more than 10 times more valuable to us right now than someone who joins via web. Likewise, users who engage in our social features have 3 to 4x LTV vs. those who do not. So, we're at the beginning of some very powerful trends with mobile and social.

Yet, despite all that, I also agree that it's an Amazon world we play in. They hold most the cards in e-commerce. If you know exactly what you want, Amazon is typically the best place to buy it because they're not so much a store as they're the world's best supply chain and logistics company.

But, we (and others) can compete in an Amazon world and build a really big and interesting business.

Here's some of how:

1. Selling stuff they don't. >90% of the products we sell on Fab are not on Amazon. How do I know? We used Amazon's own mechanical turk to find out. :)

2. Better product discovery and browsing. Amazon is a catalogue. Fab is a discovery engine. As I said above, Amazon is the best place in the world to buy the stuff you know that you need; Fab is the best place to discover the stuff you don't know you need.

3. Mobile. Fab gets 30 to 40% of our daily visits from mobile. We're building towards a world where mobile dominates. No one has yet solved for that.

4. Social. We're still in the early days of shopping with friends.

5. Just making it fun, colorful, emotional. That's how offline shopping is. Who says online shopping has to be so drab and transactional? We're inventing entire new experiences.

6. Making markets. Fab is still in the early stages of making a market for design goods. We've already created a platform that previously didn't exist for tens of thousands of people who make stuff - designers - to promote their products to an eager audience.

7. Building a platform. We're hard at work on that. Early stages. But it's quite possible.

8. Building a brand. Brands are emotional experiences not transactions. There are still many great opportunities to build long lasting e-commerce brands.

and more...

Jason, Fab is awesome but I think the question of scale is at the heart of this post. To be a top 15 retailer means that you have to be doing $2bn+ in GMV. Amazon does $50bn. While $150m is no mean feat, Fab still has a way to go. I don't believe you can get there as a discovery engine or a design marketplace/platform.

Every one of those top 15 retailers has either built their brands off the back of other more famous mass market brands or vertically integrated to make and sell their own products. Fab will have to do the same to join the Top 15 club.

There's no question Fab is in a position to become a sexier IKEA for the digital age but you'll need to get into the dirty business of retail to make that transition.

$150M in year 1 is a nice start towards your $2B. I'll note also that we're already generating 25% of our sales outside of the U.S. which is a lot given the relative early stage of our business.

Our ambition is to be an IKEA scale business. IKEA does $30B GMV/year, of which only 11% is in the U.S., 13% in Germany. IKEA was not built in a year either.

I'll note also that IKEA got where it is today because it reinvented the entire supply chain. We're starting to do that by working with many designers and manufacturers to make products exclusively for Fab. Like today we are launching a line of Blu Dot furniture that was made exclusively for Fab. We're also sourcing thousands of products just for Fab.

Down and dirty retail? We're up for that. I'll put it to you this way: Last year at this time Fab bout 0% of the inventory we sold up front and 5% shipped through our warehouse. Today we are purchasing the majority of our inventory and >75% goes through our warehouse.

And, we just getting started...

GMV shouldn't matter that much if fab can command higher gross margins which I believe it can.

I am ex-Amazon.

Thanks Jason. You guys have obviously done a remarkable job.

I reposted above.

Hi Jason,

Congrats on your company's success. I work for the Managed Marketplace's team @ eBay working on various Shipping initiatives (formerly worked for PayPal Global Finance).

I am ashamed to say I knew nothing of Fab before you posted. So I decided to visit the site and make a purchase to understand the flow. When it came to "check-out" this disappointed me (see pic attached). 14 - 23 days for Shipping time.... Is this typical or was this a one-off problem?

Thanks,
Tyler

This is part of our transition from "sell first" to taking inventory. Unfortunately the product you selected was still part of our older sell first model in which first we sell it, then we buy it from the designer, and then they ship it to us, and then we send it to you. We're in the middle of a huge shift in our model to "buy first" where we purchase the majority of our inventory and have it sitting in our warehouse before we sell it. By November 70% of the products we sell on Fab will be in inventory before we sell it and will ship anywhere in the U.S. in 1 to 4 days.

Agree with Jason. My company, Catalog Spree, is seeing significant opportunity in e-commerce simply buy not playing along the traditional lines of "search-find-buy" but instead in delivering a fun, social, mobile/web, discover experience. Jason's points 2-5 hit home with me.

Excellent post and discussion. Agree in general with offline steady state premise.
My bullish pov on how non-transactional shopping sites can add customer value and can rise above the noise... I think there is a significant gap with respect to shopping/product discovery (Pinterest addressing) and decision making (our aim at Decide.com). Most online retail experiences (including Amazon) do very little to help consumers intelligently decide what to buy. Shopping, like core/general search, will move from tired, 10 blue product links to curated listings (expert or data-driven - based on knowledge extraction across signals, such as reviews and prices).

An additional important factor I think is that Amazon's commitment to service and customer experience over short term profitability have trained consumers to expect more than most startups can really deliver. Free shipping + returns + fast response times are hard to compete against. Much harder than in the offline world for the new entrant or boutique to win against the scale player on service. Also just raises the costs to compete for everyone.

Yes, but the one thing Amazon won't give you is any sort of expertise. This is where start-up's and boutiques can win. There's tons of value in deep domain expertise and helping customer save time by not buying the wrong thing.

Agree. Also the ease of use / credit cards on file, lock in of Prime etc.

Another hurdle for me as a VC in ecommerce investments is that the operational complexity as you scale is a step-function. There are HUGE differences in handling 100 packages/day vs. 1,000 vs 10,000. In thin gross-margin verticals, this can lead to fatal missteps.

I've heard that too. E.g. switching from drop shipping to holding inventory is supposed to be extremely operationally difficult.

From experience, it's incredibly difficult. Even more difficult is when you have to manage both dropshipping and inventory.

that's where a reliable and experienced 3rd party fulfillment partner can help tremendously. Don't invest in additional (wrhse) space, technology, and personnel. Keep that as variable cost(s)

Here is my conundrum.
I don’t have a good sense of exit value here. Both Diapers.com and Zappos traded around or slightly above
1X revenues (which is right where BlueNile is). Will any of these companies see a superior multiple to that?
Did the VCs that invested in these companies use 1X as their planned exit
value? (maybe they did, I don’t know).

I understand there is an old VC investment adage: “don’t go
in the entrance unless you know what the exit looks like.”

The only interesting angles I can see from a VC/founder perspective to get venture scale returns or as you say build a moat are: 1) refactoring supply chains in fairly large verticals (e.g. Warby Parker), 2) marketplaces (ebay, etsy etc) which as you know are super hard to build but very valuable, 3) technology providers for the long tail (shopify, stripe), 4) perhaps something to do with new platforms like mobile.

you know the way we think about it - if there aren't some form of network effects, it's hard to break out of that multiple band

Traditional ecommerce models (i.e. c2c marketplaces, b2c storefronts) in
emerging markets may be a fifth angle. Look at the success of Alibaba
Group, Mercado Libre, Rakuten, perhaps 360Buy. Those companies all have or will generate venture scale returns for investors.

still not to all people like to buy online

They may not be VC size returns, but I think there is an opportunity for founders, who can pioneer the sale of products that appear hard to sell online, and show the Amazon, Walmart, Targets, etc. of the world how to do it.

This to me was the story with Zappos and Diapers. Amazon, in those cases, has shown it is a buyer of retail ideas where the retailers created deep connections with their customers, selling products that traditionally are sold easier offline, which was the case with Zappos (customers like to try on shoes and there are a lot of returns) and Diapers.com (low margins, bulky shipping, and diapers being loss leaders for Walmart and Target).

When these brands succeeded in creating the customer connection, this created an opportunity for Amazon or other acquirers (I know in at least one of the situations above there was deep interest by the other big retailers in acquiring the target) who potentially can turn these niche companies (I don’t mean niche in a condescending but in a relative way as all the named companies are in huge markets) who have concentrated on gaining a customer following by offering “WOW service” into more profitable companies by offering a broader portfolio of products to stick more goods into customers’ packages, a key to profitability in online retail.

This can be great for entrepreneurs, as business plans built on “customer connection” rather than “IPO profitability” may be easier to execute in many niche areas.

Amazon trades at 1.5X trailing revenue , but that's a leader premium. Now I'm curious to see if there are any recent examples at scale that disprove your theory.

Don't forget that Amazon has AWS, Kindle, and similar forces which may be driving this up. IMO, Amazon has been collecting a lot of puzzle pieces that haven't quite come together yet, but when they do the company's value will jump significantly. This makes me want to buy today despite that premium.

I wish I'd seen this when it first came out. Hey Bill I think you have to focus on merchandising aimed at a specific customer.

Look at companies like companies like ASOS which trades at 3.9x earnings. They're vertical web retailers and have a mix of products they've curated and their own products. They've traditionally focused on 18-25 year old women. They've merchandised in such a way their audience will go back again and again to discover fashion.

Nastygal is another company that quietly went from eBay to 128 million run rate in 4 years. Again it's fashion & they focus on women 18-25.

These girls are not going to Amazon to discover anything. They're are not hunting down the best price. They're looking for ideas on how to dress and immediately buying whatever it is they want.

And that's just a few examples in fashion.

I think what we're going to see is that vertical web retailing +
merchandising aimed a specific customer and tailored to how they shop in a particular market is going to yield powerful results. These are going to be the kind of stores that chip away at Amazon in certain sectors.

Bill - I would venture to say that the trading multiples for Diapers and Zappos were in direction relation to them selling commodity products = low contribution margins. Scaling these businesses has to be on both the GMV and contribution model side, with CM being more important over time. Harder to do on commodity products, easier on value-add unique and hard to buy products.

Few ecom startups that I see have any idea of SEO or digital marketing. That kills them before they get going, as they fail to bake this into their products

Great post. If you're selling something utilitarian the lowest cost/easiest transaction will always win. However, creating an experience for customers goes a long way, whether that experience is online or offline. The brick and mortar stores with the highest sales per sq foot are all brands that create unmatched experiences that customers are willing to pay a premium for: Apple, Tiffany & Co., Coach, Lululemon.

The companies I find most interesting in the e-commerce space are combining online and offline experiences in disruptive ways. Chloe + Isabel, Warby Parker, Everlane, and Stylemint come to mind. After working for brick and mortar retailers we started our company, For the Makers, in order to create an actionable Pinterest. By combining online inspiration and tutorials with the supplies customers need to actually make something offline we're able to provide value through that experience in a way that neither big box stores nor Amazon can. I can only imagine we'll see new combinations of online/offline experiences in the future.

Funny.. Just met you in real life and now you're on my interwebz.

Or carry something what Amazon won't carry. Guns and ammo. A huge number of mom and pop shops are thriving online.

Yeah, there will always be regulatory/moral frontiers that incumbents won't enter.

p0rn is another example -- I don't know if there are just a few incumbents there, but could be an area to watch for inflections in ecommerce

Now we've come full circle. Shut it down Chris :)

Another factor that has historically inhibited e-commerce startups (says she with considerable feeling, having spent a disproportionately large amount of time dealing with this for
https://www.makelovenotporn... the difficulty and complexity of putting payments infrastructures in place when working with old-world-order financial institutions and processors. Which is why challengers like
https://stripe.com/ and
https://www.dwolla.com/ are so welcome when it comes to democratizing the ability to do business and take payments online.

I agree (note I'm biased as I invested in Stripe). In general I love the trend to make it easy for small companies to get online by providing payments, websites (shopify), marketplaces/marketing (ebay & etsy) etc.

Chris - one point worth mentioning here is whether or not being in the Top 15 is actually relevant to defining an e-commerce business as 'successful'? If you look at the financials of a few of those listed - Best Buy, JCPenney etc. - it's notable that they are dying business models regardless of their traffic volume or revenue.

Given you approach many of your thoughts from an investment perspective, I'd ask what a reasonable investment strategy is for those eyeing the e-commerce space. If I were a VC, I'd be adopting a portfolio approach and back a few piranhas rather than trying to go whale hunting. Vertically-focused retailers with lean operations and the potential for global scale are strong bets for the future. Anyone else is Amazon fodder.

Thanks Chris! Though the first wave was about commoditization (UPC comment) this wave online and offline is about being a "merchant" (point of view, authority, experience etc). See Fab, Warby, bonobos etc. love the excitement in commerce, just don't over fund so people end up doing crazy things (gerbils, sling shots, Super Bowl commercials)

The people I talk to make a sharp distinction between Warby/Bonobos where they make their own product and Fab+others who don't. Not sure I agree but that is the debate people are having.

I'm biased as well, (I work for Shapeways) but there is another group of commerce sites that are doing quite well. We call them 'creative commerce' sites, but you might look at them as customizeable commerce. These are companies that may or may not manufacture their own goods but actually allow you to create things on their site and then buy them. They escape the commoditization of ecom by creating unique content that may (or may not) be personal to you that you can't get elsewhere.

Simple examples of this are Spreadshirt, CustomInk, and Gemvara.

can you offer any data to support the idea "ecomeerce as a whole will continue to grow rapidly and eat into offline commerce"? certainly some obvious situations come to mind -- amazon crushing barnes and noble and borders and best buy. but wal mart has not been negatively affected by ecommerce. nor has costco, target, and grocery retailing. plus exciting new truly successful offline newcos continue to pop up, even as none pop up in ecommerce -- lululemon. restoration hardware. gamestop. i 100% agree ecommerce is mighty an d exciting and growing and growing. i just see little evidence of the decline or even erosion of offline commerce, the death of which (like so many things) has probably been greatly exaggerated?

Obviously I don't have data from the future, but ecommerce continues to grow rapidly year over year and with some exceptions like Walmart it is eating into offline. Latest data I saw put ecommerce at 8% of commerce. Even if it just goes to say 20% over next 5-10 years that is huge growth rate.

The comScore data is pretty useful and timely. Q22012 non-travel ecommerce up 15% YoY, all retail 2%, 8-9% of overall spend.

"The channel shift to online was particularly evident in Q2 2012, with online retail growing nearly 4x the rate of total consumer spending or 7x on an apples-to-apples basis."

http://www.comscore.com/Pre...

sorry not asking for data from the future. the present will do. agreed, ecommerce is growing, and seems destined to grow for some time. but in what way does that mean its a zero sum game? cant ecommerce prosper *and* offline commerce also prosper? thats what seems to be happening, at least based on what data i see. particularly striking given the severity and length of the recent recession, which might have been expected to ravage retailing much more than it seems to have done?

I guess the assumption is overall commerce will be constrained by, say, GDP growth, so if online is growing faster than that, offline will shrink.

Chris,

I get and generally agree with your argument, but what's interesting is when you peel the onion on Amazon:
* Amazon ecommerce is two businesses: 1P - First party where Amazon is the retailer and 3P - what we all call the marketplace business.* Amazon actually makes a good bit more profit on 3P than 1P
* 1P is growing ~30%, 3P is growing north of 65%
* 3P is now 40% of 'paid units' on Amazon

Amazon is transforming from a retailer to a marketplace+services provider over time. That fact actually is kind of the opposite of what you+JoshK are saying.

* Who are these 3Ps? why are they able to essentially able to compete with Amazon on Amazon and win?
* Certainly they are smaller than Amazon?

So there's this case in the middle of bull and bear - why take all the costs and DIY when you can ride on Amazon's infrastructure investment, customer base and FCs. There's some interesting companies doing that with a lot of success.

Scot

The point you are missing, is the changing landscape of payments in the offline world. Where would you classify a vendor selling stuff and collecting money with square? when that gets coupled with location, offers etc, the whole thing is mixed up.

Yeah, the lines are definitely blurring.

Just started on https://upvend.com to catch this "social commerce" wave for creators selling digital goods. Are there UPC codes on digital goods? :)

You may want to reconsider. Gumroad seems to be taking your approach. I can't say how well it's going for them but you may be on to something. What's your user feedback telling you?