What is Poshmark?

Poshmark is a platform that allows users to buy and sell clothing and accessories from each other’s “closets”. Although items are shoppable on desktop, a user can only sell goods through the mobile app. Users can post items to sell “in less than 60 seconds”, and Poshmark makes 20% commission on all items sold. Although Poshmark provides the shipping label for sellers, the buyer is responsible for paying the standard shipping price of $4.99.

With over 700K users, Poshmark has raised $47.2 million in outside funding and has over 10 million items for sale at any point in time. Items for sale are displayed in an instagram like feed that can easily be liked, commented, or shared.

Magic Sauce: The Community

Users love interacting with each other and will even shop for a “posh friend” they have met through the app. This makes users more likely to share not only their own items, but other user’s items with their followers. Users are constantly looking for more followers and other user to follow you. This cycle continues then continues over and over. Once a user has reached a certain threshold they can become a suggested user and will appear on the many users timelines as someone they should follow.

A Like acts as a watch feature for items a user may want to buy. All liked items are stored in the app and users are notified when the price of a liked item has dropped.

Bundling allows sellers to provide a discount to buyers who buy multiple items from their closet. It incentivizes more sales at a faster rate. One common bundle is buy 3 items and receive 15% off total purchase.

Shopping Parties are blocks of time where items of a certain theme are available for purchase. Users enter the party to shop or share their items for sale. The limited time encourages users to act

Community Meetups is Poshmark’s way of taking the online offline by bringing together poshers in the same physical community to share tips and talk about their experience. This continues the user buyin to the Poshmark brand.

Platform Risks

Although all transactions should occur on the app, there are many users who leave comments on items and request that they be sold through Mercari or direct with Paypal. Mercari is a hugely successful mobile shopping app in Japan that launched in the US in July. They do not charge any fees or take a portion of the sales and the seller is responsible for shipping. Because Mercari does not take any fees, sellers could potentially get 20% more for their items.

Any time your business is a platform, there is a risk that users can bypass the platform. Some users simply list clothes on Poshmark to reach a broad base of potential customers and then conduct all of their transactions through Paypal, cutting Poshmark out completely. When buyers do this, they leave behind all of their protection. However, the Poshmark community feels trustworthy due to all the communication and interaction that happens between users.

There is also the buying and selling of counterfeit goods. Poshmark offers a $35 authentication service for goods over $500. The buyer purchases an item through the app and the seller ships the item to Poshmark. Once the item has been verified as authentic, it is then sent to the buyer. Given this high threshold, there are complaints of many counterfeit goods being sold.

The Future

There is so much competition in this space that it is too early to tell who will be the market leader. However, Poshmark has built a strong community and can continue to build services and features to add to the stickiness of their platform, which will position it for success in the future.

Sources
https://poshmark.com/what_is_poshmark
http://fashionista.com/2015/04/poshmark-funding-round
http://techcrunch.com/2015/04/21/fashion-marketplace-poshmark-raises-25-million-more-heads-to-apple-watch
http://blog.poshmark.com/community-meet-ups/”

By: Anndrea Moore


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Over the past few months, we have heard some reputed venture capitalists like Mike Moritz (Sequoia Capital) and Bill Gurley (Benchmarks) warn us about frothiness in the tech sector. As Fred Wilson captures in this blogpost, this is primarily stemming from concerns over negative gross margins. While the tech bubble in the late 90s was fueled by companies without a revenue model, there is worry that today’s companies are creating a different bubble by showing growth by selling products or services below cost. While these are private companies and their gross margins aren’t known, media reports and conversations with suppliers (drivers, delivery people) indicate that companies like Instacart, Doordash, Handy, Homejoy, Uber, Lyft and Postmates have adopted this across the board or in some markets.  So, the main question for online marketplaces today is whether you can sell below cost to create adoption and build liquidity in the marketplace?

To answer this question, let us first understand why companies might resort to selling below cost since that goes against business basics.

  1. Large market- markets like transportations, groceries, food delivery, cleaning services are worth tens of billions of dollars. There is obviously investor interest in these sectors. Companies are looking to build a foothold and gain market share here before anyone else.
  2. Building liquidity in a two sided marketplace is hard- building demand and supply in balance can be a slow organic process. The easiest way to do this is to make it attractive financially for both the supplier and customer to use it. So, for an Uber, this would imply paying drivers more than the actual trips they do and subsidizing consumers below the actual cost of the ride. Here is an article which talks about Uber adopting this strategy in India.
  3. Lack of differentiation pushing companies to grab share- the biggest barrier to entry in many two sided marketplaces is liquidity.  By pricing below cost, companies attract greater demand and hence a greater share of the market. This helps them show faster growth.
  4. Vicious cycle of fundraising- showing faster growth by subsidizing consumers/suppliers helps these companies raise capital. To sustain investor’s expectation growth, they are forced to resort to more subsidization.

Now that we have given some rationale for selling below cost, let us look at some conditions under which this can be successful. This is obviously not going to work across all two-sided marketplaces.

  1. Network effects- subsidizing the market can help grow the market but comes at the risk of a competitor raising more capital. For this strategy to work, it clearly indicates a need for the early entrant or leader following this strategy to believe that there are strong network effects. It is widely believed that India’s e-commerce market leader Flipkart had followed the subsidization strategy. Once Amazon entered the market, the lack of strong network effects has helped them to catch up. As this article indicates, they are neck to neck in traffic though they entered the market 5-6 years after Flipkart.
  2. Preventing disintermediation- subsidizing consumers for growth implicitly assumes consumer loyalty. Only if there are enough repeat purchases would the LTV/CAC (life time value of customer divided by customer acquisition cost) be greater than one. Preventing disintermediation requires randomness and unpredictability. In Uber’s case, given every trip has a different source and destination and the availability of drivers around is variant, it adds this degree of uncertainty. In the cleaning services space, this does not seem to be the case. As this article on Homejoy’s failure explains, once a user found a cleaner they liked, they disintermediated Homejoy.
  3. Winner take all market- the first two points are prerequisites for a winner take all market. If the market is large and is likely winner take all, it could work out. Paypal followed this strategy of offering their service below cost (the famous $10 sign in bonus strategy) but were able to manage it because peer to peer payments is a sticky product where the winner takes most or all value.
  4. Ability to raise capital in the interim- selling below cost puts companies in a weird situation where they burn more cash as they grow. This requires a patient investor who can write large checks and support the company over the long term. The graph below shows an illustrative example of how selling below cost can change the cash burn situation and the cash required to build a business. While the value of the prize maybe large, the cost of the capital to support the higher cash burn has to be lower the expected return on investment. We have seen more businesses sell below cost in the last 5 years since capital availability has been cheap. This drastically changes how much you can subsidize the consumer/supplier.

With many unicorns today not satisfying some of these prerequisites for selling below cost and with the Fed looking to raise rates, the alarm from notable VCs seems aptly timed or it might already be too late. As Mike Moritz said in his interview to Bloomberg, “Gravity hasn’t been repealed”. Not yet at least.

By: Kaushik Anand


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Can innovation truly be democratized and how?

Quirky was launched in 2009 by Ben Kaufman to democratize innovation – anybody with a good idea could bring a product to market with Quirky’s support. Quirky was backed by VC powerhouses  such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers as well as GE, and raised over $185 million. However, on September 22, 2015, the company filed for Chapter 11 bankruptcy as it ran out money. I’d like to take a look at what caused the demise of such a promising and innovative startup and offer suggestions for version 2.0.

How did Quirky work?

It was simple:

1.       You submit a hardware idea; it could be developed independently, or jointly with Quirky community members with various expertise who would later share in the product revenue

2.       Community members and Quirky employees would then discuss and vote weekly at a live product evaluation session called Eval

3.       Quirky would then pitch winning products to their brand partners like GE,  Mattel, Harman, Poppy or manufacture the products themselves

4.       Quirky then sold the products to big box retailers and online

5.       The innovator earned commission on each item sold

At the time of the bankruptcy, Quirky had over 1 million community members, was receiving 4,000 ideas a week, had developed more than 400 products and was in 50,000 retail stores.

So what went wrong?

A pseudo multi-sided platform that was overly concentrated on one stakeholder: Quirky’s platform comprised of 3 main groups – community members, brand partners and big box retailers. Quirky did a great job creating a large community of innovators and innovation influencers – 1 .15 million strong! However, it failed on the brand partner and retail side. Quirky had only a handful of large brand partners who picked some (likely a minority!) of innovations to manufacture. Quirky therefore had to bear the high cost of manufacturing and distributing several products with its own capital. It also failed in its selection of retail partners. It targeted only big box chain retailers who had strong buying power/leverage and so offered very low margins (retailers wanted 60-70% margin) and required large volumes to stock all their brick and mortar stores. Therefore, Quirky was unable to test concepts in stores in small volumes. It is also worth noting that some large retailers, like Walmart, are able to return unsold inventory to manufacturers, which could prove costly for failed Quirky products.

No strategic focus/market segmentation: Quirky manufactured everything – from a smart air conditioner selling for $350 to a $3.00 citrus spritzer.  It was focused on bringing any and all good ideas to market at light speed. As a result, there was no strong brand identity. This negatively impacted high value items as customers were not willing to pay the price for an unknown brand. Quirky attempted to create several sub-brands, but failed in getting buy in from consumers.  Furthermore, Quirky was so focused on volume that it did not spend time iterating and improving on products once launched.

Improvements for version 2.0

Earlier this year, Quirky tried to pivot by a) focusing more on internet connected devices for the home, anchored to its Wink app; and b) positioning itself as a supplier of ideas to large companies like GE and Harman, who will do the manufacturing and distribution. The products will carry the big company brands and the tag line ‘Powered by Quirky’.

However, investors had lost faith in the company and were unwilling to pour in more cash. Wink is now up for sale, with Flextronics as the leading potential buyer. The Quirky brand and community is being sold separately.

I would like to offer the following considerations to anyone who decides to pick up from where Quirky left off.

·       Redefine mission and become an asset lite company: Quirky should serve only as the Uber for ideas; its purpose should be to continue to filter ideas through Eval and then connect stakeholders in the value chain to figure out manufacturing and distribution. In order to ensure quality, manufacturers and retailers should also be rated by users on the platform to facilitate the selection process by innovators.

·       Refine selection of stakeholders and create a true marketplace: Quirky should look to sign up all sizes (small, medium, large) of OEMs/contract manufactures to bid for innovations it promotes. These manufacturers will have the option to purchase the IP outright and/or offer royalty to the innovator while bearing the full cost of manufacturing. However, if an innovator can bear the cost of manufacturing, he can still source a manufacturer on the platform.  On the distribution front, small, medium and big box retailers can then purchase from manufacturers or innovators on the platform. Big box retailers can have the option to bid to manufacture the products themselves or with a manufacturer on the platform as private label at their own cost.

·       Focus on simple, functional, low value items: High value items require significant investment in product development, manufacturing and marketing. It’s best left to companies like Bolt (https://www.bolt.io/) who can be more hands on, iterate and achieve better product market fit and provide financing. Being just a supplier of ideas to large companies is also a weak position to be in. GE, Harman could easily create their own platforms to source ideas for high value items. The next iteration should rather focus on low value items like the Quirky flexible power strip (http://www.amazon.com/Quirky-PPVPP-BK01-Pivot-Power-POP/dp/B002YWIHB6/ref=sr_1_1?ie=UTF8&qid=1446060574&sr=8-1&keywords=flexible+power+strip). Very little branding/marketing is required for such products and they could easily be sold online only to reduce distribution cost.

Sources:

https://www.quirky.com/how-it-works

https://blog.bolt.io/the-real-reason-why-quirky-failed-c362b3a3abd7#.z7jfga7oj

http://www.nytimes.com/2015/09/23/business/the-invention-start-up-quirky-files-for-bankruptcy.html

http://www.businessinsider.com/ben-kaufman-on-why-quirky-failed-2015-7

By: Alice Agyiri


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Will There Be More Than One Winner in the Local Services Market?

For years, investors and technologists have been pointing to the trend of “verticalization”, or the need for a new marketplace start-up to be vertically focused on an industry or function in order to succeed.  As Chris Dixon, a partner at Andreessen Horowitz, pointed out, with the dominance of Craigslist’s marketplace across almost any category you can imagine, this focus increases a start-up’s chance of success by allowing for a better user experience and quicker minimum viable liquidity on both sides of the platform.

As Uber, Airbnb, Lending Club, and others have shown, because many of the categories on Craigslist are addressing multi-billion dollar markets, there is enough demand to create a billion dollar business by just focusing on one sub-category listed on Craigslist. As David Haber illustrates in a blog post (pictured below), dozens of large, successful, businesses have been built doing just that.

haber market map

This trend towards vertical specialization has persisted in business models today. In just the local services category on Craigslist, companies are focusing on specific sub categories like dog walking (Trottr), cleaning (Handy), and home improvement (Porch), among others. However, Thumbtack, one of the latest tech unicorns, has bucked conventional belief and focused on a more horizontal approach. Despite skeptics view that this approach is doomed to fail because of Thumbtack’s lack of specialization relative to its more vertically focused competitors, Thumbtack has seen impressive growth, fielding thousands of requests for providers a day.

However, several questions still remain. Who will eventually win in the local services space? Is it a winner-take-all market or can there be more than one player in these verticals?

For the following reasons, I personally believe there can be multiple winners due to diverse consumer preferences and markets that are large enough to support more than one player, and that Thumbtack’s horizontal approach and business model will allow it to succeed.

 First, let’s start with Thumbtack’s business model. Thumbtack is a horizontal marketplace for local services, meaning that consumers can find specialists to perform almost any task for them in their local area. Consumers fill out a form describing what they need and Thumbtack provides them with up to 5 bids from local providers. In order to be able to bid on consumers’ requests, providers need to buy points, essentially paying to bid on specific customer requests.

1) Why There Will be Multiple “Winners” in Local Services

  • Consumer preferences for local service providers are diverse and thus there is strong demand for differentiated products. Some consumers want the “quickest solution” while others want “lowest cost” and others want “high quality”. Different platforms that cater to these different market segments can co-exist.
  • In fact, multi-homing costs not that high, meaning that it is relatively easy to compare prices and providers across multiple platforms. For example, consumers will often check Amazon, Thumbtack, and Taskrabbit before selecting a provider to install their new television.
  • Local services market is large. Forbes estimates it to be between $400-800 billion. Within the overall category, many verticals, like catering and home repair, are multi-billion dollar markets.  Therefore there is enough value to be captured for more than one player to build a multi-million dollar business in terms of revenue and profits.

2) Why Thumbtack Will be a “Winner”

  • Often, consumers’ preferences for a specific provider are based on who they believe provides the greatest “value”. However, consumers’ view of value (e.g. lowest cost, quickest service, etc.) differs not only across consumers, but also specific tasks (e.g. moving vs. catering). Thumbtack allows consumers to compare providers and decide which one provides the optimal value for them by job they need completed.
  • Thumbtack’s pay-per-lead system is distinct from other competitors in that it forces service providers to pay upfront to bid on a job. If the market is working correctly, this competitive bidding model should only attract proposals from service providers who are qualified for the job and who offer competitive rates, otherwise consumers will not select them from their service provider options.
  • Lastly, because all service providers pay the same amount to bid on a particular job, Thumbtack is indifferent as to which provider the consumer picks from a revenue perspective, aligning the service providers’ incentives with Thumbtack’s. In comparison, on other platforms service providers pay a hefty percentage of the total transaction value, incentivizing providers to charge a higher rate. 

For the reasons above, I believe that Thumbtack will be one, but not the only, “winner” in the local services market. Thumbtack’s business model, though contrary to current wisdom about vertical specialization, creates a marketplace that provides great value to both the providers and consumers on its platform, while also being able to extract value through its bidding system.

However, Thumbtack and its competitors are still working hard to build their businesses and experts still differ on the questions of who will succeed and why. It will definitely be interesting to see how competition plays out in this space and to see how many “winners” do emerge, and which companies they will be.

By: Medha Agarwal


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ONE

TWO

(Intel ad from the mid 90’s and an image of the recently announced Samsung Gear VR)

For those following trends in Silicon Valley, one might experience a sense of déjà vu recalling the mid-1990’s when Virtual Reality first captured the zeitgeist for its promise as an immersive portal into the nascent world of cyberspace. Twenty years later, the amorphous medium has transformed from a “not too distant future” captured in the low-resolution computer graphics and millenarianism of 90’s Sci-Fi films into a commercial reality. The the 2.4 billion dollar acquisition of the Kickstarter funded Oculus VR by Facebook and the recently announced $542 Million dollar Series B financing round for the VR/Augmented Reality start-up, Magic Leap (led by Google with Qualcomm, Legendary Entertainment, KKR, Vulcan Capital, Kleiner Perkins, Andreessen Horowitz and Obvious Ventures) suggests that large tech companies are committed to developing virtual reality platforms. The big question is how will companies like Oculus / Facebook and competitors like Google mobilize development of their virtual reality platforms?

The Oculus Platform

In his explanation of the acquisition of Oculus VR to investors and the public, Mark Zuckerberg characterized the virtual reality startup as pioneering a “new communication platform” that was part of “a long term bet on the future of computing”. In the same way that mobile phones have created a new form of ubiquitous computing, virtual reality may similarly add qualitatively higher levels of immersion in computing, enabling a new ecosystem of applications to develop. Whereas mobile applications make novel use technologies like embedded cameras, GPS and accelerometers, virtual reality apps can use technologies like positional head tracking and three-dimensional high-resolution, wide field view screens to create new online products and businesses.

THREE

Rather than building a business around selling hardware, Oculus VR and Facebook have focused on developing their “Oculus Platform” – a store for new virtual reality applications. Oculus VR / Facebook has partnered with Samsung to build virtual reality devices on top of existing mobile devices – which are rapidly increasing in screen resolution and processing power – and have expressly said that they will be pricing their virtual reality headsets at or below cost in order to grow the VR ecosystem. In other words, Oculus will subsidize virtual reality hardware in order to build a large developer and user base needed for a software ecosystem and app marketplace to develop.

To assist in the development of the virtual reality ecosystem Oculus is investing in developers subsidizing headsets as well as providing the tools to create new VR Apps. These include developer support forums, developer “best practice” manuals with clear guidance on the technical standards, and finally free software for updating apps as virtual reality hardware changes. Additionally, in its September “Connect” conference, Oculus announced an expanded strategic partnership with the game development platform Unity, providing free Oculus add ons for Unity Developers to further build a developer ecosystem. Although Oculus is assisting and subsidizing the development of third party apps, the company is also creating sponsored Oculus Apps that will raise the quality level of early consumer virtual reality experiences.

FOUR

In addition to building its developer base, Oculus VR / Facebook has decided to wait and let the virtual reality ecosystem to develop before releasing mass commercial products. The company has already released three different Developer Kit headsets (DK1, 2 & 3) with a consumer version yet to be officially announced. Oculus’ stated intention is to first develop a marketplace of high-quality virtual reality experiences before releasing mass consumer products, as they are concerned that the platform can be undermined by a lack of compelling content.

As the virtual reality app marketplace is growing, Oculus is also providing its own ratings of apps on its platform. Additionally, while the company is allowing the development of third party accessories, they are also building sponsored Oculus accessories. These moves allow Oculus to control the quality of the platform, creating a high quality experience for consumers that they describe as “good for everyone.” This discretion to control the platform can be a powerful tool for Oculus, allowing the company to define the parameters of its app marketplace leading to higher quality and potentially inreased market power.

In contrast to Facebook / Oculus, Google’s strategy for developing a virtual reality platform is less clear, and perhaps at an earlier stage of development. Although the company did launch Google Cardboard, a cheap cardboard adapter and mobile app turning all mobile phones into virtual reality devices, they have yet to be as public about their intentions in virtual reality. However, the company’s investment in exotic stealth technologies like Magic Leap’s digital lightfield displays, may signal broader ambitions in the virtual reality market. Currently, Google appears to be offering compatibility with Facebook, Oculus and Samsung products alongside its suite of products, suggesting that there is currently collaboration in virtual reality.

As virtual reality ecosystems develop, there are questions about whether this initial collaboration across will be replaced by competition once the market becomes lucrative enough. For example, although the Oculus Platform is compatible with multiple mobile phone based operating systems, it is not yet clear whether the Apple store will allow the Oculus Platform app to run on iOS phones. Additionally, it is unclear exactly how Facebook / Oculus will monetize their virtual reality platforms once they attract a large enough user base to make it economically viable for developers to continue committing large resources towards developing virtual reality applications. Finally, it is unclear whether formal standards will emerge for developing virtual reality applications or whether there will be competition between different standards.

We may be seeing the rise of new computing and entertainment platforms that will create remarkable new collaborative possibilities as well as competitive challenges for the largest media and technology companies – stay tuned!

Links:

On Mark Zuckerberg’s statements regarding the acquisition of Oculus VR:

https://www.facebook.com/zuck/posts/10101319050523971

http://www.technologyreview.com/news/525881/what-zuckerberg-sees-in-oculus-rift/

http://arstechnica.com/gaming/2014/08/why-oculus-sees-virtual-reality-as-the-final-compute-platform/

Articles on the Oculus Platform and Developer Support

http://techcrunch.com/2014/09/20/oculus-platform/

http://www.roadtovr.com/oculus-rift-best-practices-guide-virtual-reality-recommended-age/

http://unity3d.com/company/public-relations/news/unity-technologies-and-oculus-expand-strategic-partnership

Links about Magic Leap:

http://www.technologyreview.com/news/532001/how-magic-leaps-augmented-reality-works/#

http://recode.net/2014/10/20/look-who-else-is-joining-google-to-back-magic-leap-the-secret-augmented-reality-startup

Recommended Virtual Reality 90’s Movies: eXistenZ and Strange Days


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