348. Future Strategies for Digital Customer Acquisition, Why to Stay Small While You Scale, and S&M Strategies at Different Customer ACV Tiers (Brian O’Malley)

Brian O’Malley of Forerunner Ventures joins Nick to discuss Future Strategies for Digital Customer Acquisition, Why to Stay Small While You Scale, and S&M Strategies at Different Customer ACV Tiers. In this episode we cover:

Common Marketplace Mistakes and Overblown Trends
Capitalizing on Consumer Interest in Local and Sustainable Products
Marketplace Liquidity and Cohort Analysis
And more!

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Transcribed with AI:

0:00
Brian O’Malley joins us today from San Francisco. He is Managing Partner at Forerunner Ventures, a seed to growth stage venture fund investing at the forefront of commerce. Brian has invested in companies including Coupa, HotelTonight, Narvar, Canal and Arrived Homes. Prior to Forerunner, Brian was a software entrepreneur, a GP at Battery, a Eartner at Excel. And he has also been named to Forbes Midas list VC draft of Hot Prospects. Brian, welcome to the show.
0:30
Nick, thanks for having me. Appreciate it.
0:32
That’s a mouthful. You’ve had quite an experience in venture. Can you walk us through it? And give us a bit of your background?
0:39
Yeah, definitely. So before getting on, I was listening to some of the other recent podcasts and was excited to hear a Tripp Jones on there as well. And I think similar to him, maybe not at eight years old. But I was one of those people that liked venture was excited about the category. I think most people talk about falling into it somewhat haphazardly. And for me, it was always a goal. But it was something that in college, I was told, you can’t really do this, until you have real world experience, or you need to have some glorious MBA, be an opera singer and speak five languages. That’s why it was early 2000s, which I did none of those. And so I went down more of the path of helping launch a few startups as an early employee to third one, I figured I should learn a little bit more about the business first. And that was a real great crash course in everything to do wrong. This was the tail end of the.com bust, lived through several rounds of layoffs, lived through some hard times with our customers, and ultimately decided that the enterprise world was not one that that I was very excited about. Because a lot of times the customers would buy for us for the right political reasons versus because our product was the right fit. And so as I ended up getting into venture, I started out working for one of our investors. And then once I was kind of in the industry, I was able to quickly move over and work for from battery ventures, which was this great journey for me to start as an associate and end up being one of the eight general partners worldwide after about 10 years. But along the way, I wanted to focus on things with the best products, one. And so that’s what led me to doing more things in the consumer space. And then moved over to Excel. I was there for five years. And all along had been working with originally, Kiersten and then Uri, she came on board, and just have this chemistry with a foreigner team where I feel like we complete each other’s sentences. They had an office in San Francisco long before other firms did. And so I would hang out their office, and we would talk shop about what was going on places like Instagram, and then I’ll go back to my partnerships and explain a lot of that to the network security guy who didn’t really spend a lot of time in the consumer space. And so I joined here about four years ago, and the rest is history. It’s been a whole lot of fun. And I think we’re doing good work.
2:48
Very good. And what is the thesis at Forerunner?
2:51
Sure. So just like the best startups, we think that you need to focus to be great at something. And we think entrepreneurs are savvy, so they don’t want to just work with a venture firm, that’s got a good brand. They want to work with the right venture firm for the company they’re building. And so for owner, we’re specifically focused on companies that are focused on the cultural zeitgeist, that what’s changing in people’s lives? What’s important than today? What’s top of mind? And how are those new ventures solving important problems. And so in order to do that, we spend a lot less of our time pontificating, and a lot more of our time doing primary research and listening. And that’s the people who are actually buying products. So it’s predominantly women. It’s predominantly, you know, Gen Z millennial, and we try to have the right instincts to understand both emotionally Why do people do things? And intellectually, why do people do things? And to try to really understand the President Well, and so that’s been the focus since the beginning of the firm. And as we’ve evolved and gotten larger, we’ve got a little bit more opportunity to invest across stages. But that fundamental thesis has been consistent, really, for the past 10 years since the firm started.
4:01
Got it. Are you exclusively focused on consumer brands?
4:05
So we do about 75% of our investments are ultimately in products, services, marketplaces, things that touch the end consumer, and then about 25% goes into the underlying software infrastructure that ultimately powers those experiences. And so like a lot of my best investments historically have been sold into enterprise, but they’re ultimately looking at Commerce experiences, they’re ultimately looking at the end user journey, in a way that fits the consumer thesis where your understanding that even though someone works at a business, they’re buying with their company’s dollars, they’re ultimately making an emotional decision for why that’s the right choice for their career and for their company.
4:43
You know, Brian, a lot of firms are not very differentiated. Many VCs look like and it’s a criticism we get from LPS often like, another SaaS fund, show me something new. What would you say is unique about Foreunner?
4:58
Sure, well, first of all, we don’t look very similar to a lot of other venture firms, you know, I was sort of the diversity hire, they were lacking straight white men. And so fortunately, I was on the right side of the phone call for that one. But jokes aside, yeah, it’s it was funny, I remember when I was coming up to the ranks at battery. And I thought I had this killer pitch for why we were so special and why we were unique. And I went to this business plan competition, and it wasn’t your to be a judge. And it wasn’t your stereotypical thing where the students, the business school students are presenting businesses, they were ultimately acting as the venture firms in this case, and they had real entrepreneurs, real founders come in, and pitch them. And so in each case, the students had to come up with a fictional venture firm, and they needed to pitch themselves to these founders. And what was funny about it was that, you know, in the matter of a half hour that they each had to come up with their firm their firm’s name, what was special about them, they all sounded exactly the same. And they also all sounded exactly the same as my perfectly honed pitch that I’ve been working on for the last five years. And so, you know, took that with a dose of humility, around the fact that if you’re meeting someone, for the first, it’s unlikely that you’re going to sound particularly different, because at the end, they were selling a commodity or selling capital. And then what we put on top of that is the differentiator. And so for runner, we spent a lot of time trying to again, be more focused. And by being more focused, we think we can be a little bit savvier about the businesses that are walking through our doors. We think that that focus has helped us generate a differentiated relationship with the founders. But at the end of the day, it’s like just a question of how much work are we all putting in? And are we doing the right things? And does that reputation precede us because ultimately, we need to do two things very well, we need to first show up and see the right opportunities. But we also need to be the choice at the end of the day. And so we do very well in that latter regard. Like if people put the work in, get to know us, and ultimately do references and understand what we’re like to work with, we tend to win the vast majority of those opportunities, our big challenges of firm is just seeing more of the right deals, as our thesis has grown, as our firm has expanded.
7:05
Yeah, and you guys have grown quite a bit over time, you’re doing deals at multiple stages. Now, you know, how do you hold on to kind of that differentiation and that identity of Forerunner, as you scale the firm, the talent, and the portfolio?
7:21
Yes, it’s not easy. I’ll say that it’s not an industry that scales particularly well. But it is helpful not trying to do everything under the sun. And so the first thing that we’re doing is we’re not evolving the thesis, right, the thesis evolves on its own, but we’re still living within the same concentric circles, we always have been, we’re just investing more broadly across stages. And so when we think about that, we all have backgrounds invest in across stages. And we really want to be able to be a capital partner for companies from the seed stage all the way through growth equity rounds. And so that doesn’t require a lot more work, whether you own you know, 2% of a company, or whether you’ve invested and led multiple rounds, and you own, you know, 20% plus, that’s ultimately similar amount of work, you’re just getting more leverage along the way. And then we’ve also decided to keep our team small. And this was something that for me coming from larger firms, like an Excel or like a battery, we used to have, you know, you need to hit the See More button on the website to kind of see everyone that worked at the firm. And that’s not the path, we’re going down here a foreigner, we want to keep the decision making framework tight, we want it to be a smaller group where we all know each other intrinsically, we all trust each other intrinsically, because we think that makes smarter, faster decisions. And so we’re trying to scale our research efforts. We think that that’s something that we can be more proactive about looking at more sectors at the same time, by by scaling the research side. And then also looking at the activities that we do on a daily basis, we’re, we’re maybe not the best in the world at it, right. So I think a lot of venture firms have recruiting functions, that’s not exactly novel. But for us, when you’re thinking about a smaller set of companies that have more overlap, there’s going to be more searches for a head of marketing, or that the set of people that were interested in but we’re not the right fit, might be relevant to the next company, there’s gonna be more lessons that can carry over. And so instead of trying to do all that ourselves, or we’re not experts, we brought in this this woman, Annie, and she’s great. She comes from, you know, at sea, she was at gusto, she was early people hire and leader in each of those cases. And her job is not to have one off calls with every company, but to document and create the right databases, and then set it up so that the people leads for are later stage companies can then work with the earlier stage companies, and you know, and pay it forward. So we’re looking for the kinds of software leverage that we would hope our portfolio companies would have. We’re looking for the type of network effects that we would hope our portfolio companies would have, and trying to bring those internally as opposed to building a massive organization, which is ultimately not the way we think we’ll be successful.
9:53
How do you scale those research efforts without you know, increasing headcount substantially?
10:00
We’re figuring it out as we go. So some of it might be, you know, additional people, but they might not be full time employees, right? It’s something that we look for our portfolio companies that specialize and do what they do uniquely well, but work with third party groups for the areas where it’s a little bit more commoditized. Or there’s other people that are better. And so we’re, we’re exploring what we should have in house where we can work with third parties. And in an industry where a lot of investors think they already have the right answers. Even just a light level of surveys, a light level of purchase data analysis, can put you in front of others. And so we’re trying to do that work. But we’re, you know, figuring out the organization as we speak for what that should look like over the next five to seven years.
10:44
Very good. And what’s the current AUM at Forerunner? And how many folks do you have on the team?
10:49
Sure. So it’s about 2 billion. The most recent fund was was a billion, which is behind the scenes about 500 million to focus on early stage 500 million focused on follow on and I think the investment team right now is eight people. Wow, amazing. And about half of those are check writers, half of them are more sport, folks. So we’re again, we’re figuring it out right now, we work a lot of hours. But we’d rather do that than err on the side of hiring people that we don’t have rapport with, we don’t have trust with and then that starts to creep in where you have extraneous process that is more there to keep the organization in line than it is to make everyone successful as individuals.
11:27
Sure. Sure. Well, clearly, you’ve figured something out to get to this level of scale and success. So you know, kudos to you and the team. You know, while we’re talking about talent, there is sort of the sentiment lately that startups should be more conservative and cut back, you know, burn reduction. If you read VC Twitter alone, you’d probably read that tweet once or twice.
11:49
Yeah, you’d probably think we’re in like, the most dire straits of all time. But, you know, how are you and the team of Forerunner advising founders during this downturn?
11:59
Yeah, well, look, it’s it’s a great opportunity to have some of the conversations that maybe shouldn’t have been had over the last couple of years in terms of which expenses are really needed, which additional headcount is really needed. And part of that comes down to the expense side. But part of that also comes down to just a productivity and a focus side for being able to do the right things. And it’s a little bit embarrassing how many half hour hour conversations can come up with a bunch of things that could be done, you know, more more efficiently than they have been over the last couple of years, it’s also a great opportunity to look at the quality of revenue, right? Like as people have been trying to grow as quickly as possible along the way, a lot of times inefficient revenues coming in the door, unscalable revenues coming in the door, and not all revenue is created equal, and not all revenue is actually beneficial. So which customers should you actually fire and not work with anymore, because they’re more more of a pain than they are benefits of the business. But at the end of the day, like I think startups need to recognize that if you just value them based on cash flows are not particularly exciting businesses, you know, they’re there with the hope and the ambition, that these can be seminal companies, and can can ultimately change industry. And so unless you’re profitable or set up to be profitable, you ultimately need to go back to a set of investors. And that set of investors is using the same criteria, if not more stringent criteria for how they evaluate follow on. And that ultimately looks at the same kind of questions around momentum, the same questions around moat the same questions around quality of team, the same questions around market opportunity, as they’ve always asked. And so there’s this ugly middle ground that the startups need to avoid, where you either need to push and find a way to get to be profitable, or you never need to talk to another new investor, again, which is an incredibly liberating experience, or you need to recognize that at some point, you’re gonna go out, you’re gonna have to talk to investors. And if you’re more efficient, but also not really growing very quickly, there’s no value oriented venture market. And so you’re going to end up with a lot of people kicking the tires, but a lot of knows along the way. And so we think, you know, there’s an opportunity now to revisit and be more efficient. But at the end of the day, if you’re burning cash, and you’re trying to build something that no one’s done before, that takes a level of ambition, and that level of ambition requires spending some money to get there.
14:19
Very good. I know this is not necessarily your expertise, but embattled company in the public markets is Peloton, are you long term bull or bear on Peloton prospects?
14:32
I don’t know how it’s trading these days. And by the time this podcast comes out, we’ll see we’ll see what’s changed in the market. I would say I’m more bearish on them. Not because of the opportunity that’s in front of them, but they feel a little bit lost as a business in terms of what the right next step is. Right. And so you’ll look at some businesses that have gotten beaten up in the markets, but it feels like they understand what they’re doing feels like they still have a good read on their customer and I think a lot of companies that benefited from changes around COVID, they kind of like fell into some of those benefits didn’t fully understand which ones were temporary, which ones were permanent, they’ve even started to drink some of their own Kool Aid. And then as things change back don’t necessarily have the right framework for looking at going forward. So obviously, not in any internal meetings, but when I think about how they’ve tried to evolve the digital side of the business, how they’ve gotten rid of some of the hardware side of it, which in some ways, the quality of the hardware is what drew people to the brand in the first place, and started to move into some things like apparel, which ultimately feel like a nice like way to add on a few, you know, dimes to every dollar of revenue, but not something that’s going to help unlock the next chapter of growth feels like a missed opportunity for me, because it is a loved brand. It’s a high quality product. And something that you know, as people figure out the right fitness regimen, and this next phase still has a fair amount of market cap and a fair amount of audience that they can leverage. But again, like fitness is a hard market. It’s something that is really important to consumers. But historically gyms have a naturally high churn rate. And that’s because it requires real work to get in shape. It’s a lot easier to sell the seven deadly sins that is the sell health.
16:15
Right, right. I mean, that said, if you look at tam for gems, which he cited, you know, memberships, and there’s more to a gym than just exercise, of course. Yeah. Was a social experience, right? Yeah, yeah. But there’s a lot of tam out there, when it comes to fitness and classes and all the things that peloton potentially could extend into if, you know, they sort of centralized the thesis.
16:41
Yeah, that’s the opportunity. I mean, again, it feels like they have a really special position in the market. But if you look at some of the at least the news, I’ve heard about them over the past couple of quarters, it feels a little bit lost as opposed to taking an offensive position right now. And you know, partnering up with some of those local gyms, which have had challenging times are coming out of it could really use a partner like peloton along the way to acquire new folks think about peloton selling, you know, a combination of the studio plus a local membership, recognizing a lot of people won’t use that. But that’s that’s cashflow for those gym owners. So there’s maybe an opportunity there to not necessarily go full class paths, but to think about ways to partner up with local, as opposed to seeing them as the competition.
17:29
So, Brian, while we’re talking about trends in the market, you know, what right now do you think is overblown or misunderstood? As far as trends go?
17:38
Sure, so So I think a lot of people have been hating on web three lately after it was sort of the darling of the venture industry for the last couple of years. And I don’t mean to paint on it as well. But I think the thing that’s been misunderstood in my mind is that a lot of the ideas I’ve heard in the web three category, basically get it this concept of shared ownership, where there are people that have helped these platforms get built, haven’t necessarily participate in the upside historically. And now there’s this huge opportunity to do that. And I think there’s a fundamental misunderstanding of what consumers want in that idea. And what I mean by that is, if you were to tell me about this restaurant, and say, look, the food sucks, they only have 107, so they can’t really cook that much stuff. But if you go eat there now, and if you tell your friends about it, you’re gonna get this currency. And if the restaurant becomes popular over, you know, you’re gonna make some money along the way. At the end of the day, like, I just want a good meal, right? And I want to like, I want to enjoy the food, I want to join the atmosphere, I want good service. And then I want to go home and think about it. And I think a lot of consumers, they just don’t want to think too much. And these these ideas, they require a fair amount of thought they require understanding of currency fluctuations, they require understanding of incentive packages along the way. And there’s just a lack of simplicity there. And so if you look back at like, which sort of promos for generating additional business have worked really well. You can always look at the old carwash, right? The carwash does amazing things. There’s the like, buy five, get one free wash, there’s the monthly subscription, there’s the tele friend and get a free wash. Like there are all these schemes that have been out there. There’s MLM businesses that have been generating sales for years. And so there’s, there’s already ways in which helping a business grow can benefit consumers. But when the lines blur too much, and the product itself doesn’t stand on its own. That’s where I think folks are struggling. And that’s where the focus should be. In my mind. I think there’s, in my mind, there’s a lot more interesting opportunities for companies to build great products that people love. And then to add a web three strategy on later, as opposed to starting there when the product and service isn’t loved. But it’s more about, Hey, how can I make a few bucks on my own as opposed to have a great experience? I think it’s hard to blur those lines between supply and demand. Like we’ll talk about marketplaces. Maybe a little bit later. But people tend to be on one side of the curve versus the other, as opposed to, you know, operate on both sides.
20:07
So are you actively investing in web three? And or the metaverse, Brian?
20:12
We have a few investments. As a firm, I would say we’ve probably had more companies pivot into the category than start out there. But I’m not too active in it. And a lot of that is because like, at the end of the day, if I can’t explain it to my mom, then I don’t feel like it’s worth putting teacher, you know, pension fund money, or, you know, Children’s Hospital money behind those ideas. There’s enough entrepreneurs that they fundamentally understand their business, right, or I understand it. And I’m ultimately accountable for the deals I do. There’s been a few that have been hard, you know, hard misses along the way. But I’m ultimately accountable for the checks that I say yes to and the deals that I invest in. And there’s more than enough there where I fundamentally understand why someone’s going to do something, as opposed to thinking about rolling the dice and asking what if.
20:57
Yeah, feels like really powerful technology that’s still kind of looking for a set of killer apps for the mainstream consumer. But there are some killer apps for the tails, but not necessarily for the majority quite yet.
21:09
Yeah, it’s hard. And people will talk about like, well, you know, who would have known what Amazon was gonna do. But I remember the first book I ordered from Amazon. And first of all, no sales tax back then it was it was beautiful. pay sales tax normally, but I didn’t pay sales tax on Amazon’s I was getting a discount. It showed up two days later. And it relied on the existing rails of the beautiful FedEx, you know, the existing credit card rails, like there was less infrastructure that we built for them to get something in market. And the book offerings stood on its own right, it had this infinite bookshelf, it was a good consumer experience. And that’s where I think some of these guys should maybe narrow down the focus and think, what’s a good consumer experience day one, as opposed to how do I sell the entire vision and then work backwards is something that adds value. Right, a good consumer experience that requires either blockchain technology or some sort of decentralization in order to function, right? There’s too many pitches that we’ve seen gets there over time, right? Like, sure, yeah. In a lot of cases, it only starts there, because that’s a better investor pitch. How does it benefit the consumer today? And if it doesn’t benefit the consumer today, it’s not needed, it can be added later.
22:16
Well, thank you to all the VCs out there that are investing in the first generation of those companies and helping us figure it out.
22:24
And by the way, that’s not a universal Forerunner opinion. That is my opinion. And that’s why there’s the benefit of partnerships. Because sometimes we say no, as an individual, we don’t love a particular opportunity, but it works out later. And that’s the beauty of partnerships.
22:38
Okay, so Brian, you mentioned marketplaces, not to focus on the negative but you know, early on in a marketplaces life, or an early startup launching a marketplace business. What do you think most founders miss? Is there a key insight or, you know, a key launch strategy that founders tend to get wrong?
22:57
Yeah, I think in general, a lot of people over inflate the value of their startup to everyone else in the world, right? It’s their baby, it’s a beautiful thing, they’ve spent a ton of time on it. No one wakes up in the morning wanting to buy from a marketplace, right? A lot of times marketplaces fill in the gaps from where you can’t just buy something from an existing vendor. Like if you look at like a Turo, for example, I would rather just go to Hertz, National, Avis, one of these kinds of places that has a beautiful website has people working at a customer service desk. But in a lot of cases, especially over the last couple years, they haven’t had the right inventory, their inventory is more expensive, is not as convenient or as easy to get access to. And in those gaps is where there’s opportunities for marketplaces, to evolve. And to gain a better inventory or foothold than was maybe there before, right you think about, you know, Uber, that was ultimately a gap in the San Francisco Taxi ecosystem that enabled them to to thrive in a way that maybe wouldn’t have been possible if existing offerings were better. And so I think a lot of times when people think about marketplaces, they get intellectually interested in the supply demand side without recognizing the consumer just wants a simple, good experience. And I looked at companies like goat as a great proxy. There’s a lot of magic and interesting things going on behind the scenes. But if you show up as a consumer, you just like buy shoes, and they have the size listed. And so they’ve done a lot to simplify the front end, to get away from the crappy kind of eBay experience, where you’re having to look through multiple listings at the same time to figure something out. I think a lot of marketplaces could benefit from more simplicity out of the gate, as opposed to try and have every bell and whistle under the sun and ultimate flexibility.
24:43
How does one know when they’ve achieved liquidity with a marketplace startup?
24:49
I think the first sign is just multiple nodes interacting with multiple nodes, right? So it’s not that you are just facilitating one transaction between two two individuals. And going back and forth, when you see someone show up for one thing, maybe they’re, you know, selling one item, and they’ve got another item that they want to sell as well or, you know, people are buying from, you know, multiple constituents. I think once you start seeing those nodes interact and things happen that weren’t happening on a one off basis or weren’t happening on a local basis, that’s when you start to feel like there’s some level of liquidity, some level of stickiness, but it ebbs and flows. And a lot of times, I think it’s easy to focus on this kind of growth metric along the way of saying, hey, we want x number of new supply on boarded. But if you don’t get the right balance that can ultimately create a fair amount of challenges where, you know, people aren’t getting their wishes filled in terms of a certain level of income, certain love, busy busyness, on the flip side of that consumers aren’t getting what they need. So you want to find that liquidity, but you want to find it in a way where the sides have all been balanced as the company grows.
25:57
Sure, yeah, we had Mike Evans on the show recently, co founder of GrubHub. And his belief is that you always have to cheat one side of the market in order to kind of get it up to speed. And in his instance, he walked the streets of San Francisco and Chicago and collected menus from all these restaurants. He put them on a website, and that that’s kind of how they cheated the supply side to kind of hack the system, you know, early on illegal now, but it worked. It worked very well. You know, many things are I mean, Uber, the example brought up before, you know, not necessarily on the right side of the law. Yeah, well, cheap might be the right word. But what do you think, do you think you’d have to kind of hack one side supply side or demand side in order to, you know, get these tricky two sided marketplaces to some level of liquidity?
26:43
Yeah, definitely. I think one of the questions that will ask marketplace founders when they come in, it’s just like, which is the most important side of the equation to figure out day one? And, you know, and how do you, you said, hack the system to get critical mass on that side. And and then if you do it, right, the other side should fall in place, right. And so a lot of marketplaces that have been successful over the past decade or so I’ve really been about figuring out the supply side, because they’ve been pulling something together that was just not aggregated, previously, in a way that’s really beneficial to end consumers. And so the supply side marketplace, I would say, has been more of what’s been successful, to date. And then, in some ways, the demand side has really been more like social media properties and things like that, that are ultimately more advertising focused. But yeah, I think you got to focus on one area, and understand where the scarcity is in the particular category you’re going after. And the right founders have a real clear vision for what that should look like.
27:46
And Brian, how about the scale phase? Right, so let’s assume some level of product market fit has been achieved, founders raised, you know, a few rounds of capital, and they’ve gotten to that kind of scale phase, are there a set of heuristics that, you know, you look for, in order to know it’s time to kind of really inject a lot of capital and go for scale? And are there a set of things that you recommend, you know, founders manage very closely and monitor, you know, as they’re going through the scale phase for a marketplace business?
28:20
Sure, this is an area where I think a lot of venture people ultimately agree with one another. And it’s really just looking at the cohort retention charts. I listen to the podcast with with any from red point on and she mentioned this as well. So I don’t know if this is a unique answer. But when you see the companies that have those kind of beautiful layer cake Charts, where you know, their customers, at least from $1 retention standpoint, are sticking around and then just adding one on top of another. And when you see those kind of layers of the cake getting thicker, as they go up, where that group is adding more, more to a more efficiently. That’s a beautiful thing, and something that you don’t see every day. But at the end of the day, it’s that stickiness that really matters. A lot of companies not just in the marketplace space, suffer from a real leaky bucket problem, which might not seem like an issue if you focus at the weeks or months level. But there’s ultimately this question of, hey, how much of next year’s revenue has already been generated this year. And if it’s, you know, 80% of what you’re trying to get to next year, that’s a pretty easy leap of faith, if 80% of what you’re trying to get to next year needs to show up next year. That’s ultimately going to be a marketing exercise that maybe works for a little while, but taps out at some point. And so that level of retention, that level of sticky behavior is is incredibly important from a metric standpoint. And then the other question is just always, where do you go next, right? You have this audience, you have their attention, you have their time. Where are natural extensions to the business that ultimately add value to those people as opposed to just us of business. And that’s something that, again, founders that really understand their customer base, they understand naturally, where can they go next? As opposed to, you know, where should you just stay focused and do that job that much better?
30:15
You know, something that we’ve got hung up on before Brian, I would love your input, you know, marketplaces where there’s high frequency and high usage, let’s say, you know, meal delivery or even go you know, folks that collect a lot of sneakers and stuff the probably make a handful of purchases a year on the platform. But then you mentioned Turo before, right? Turo could be a very infrequent use case, it could be you’re renting a car, I don’t know, once a year, but it’s a high dollar figure, you know, maybe it’s $300. Because you’re renting a car for a week versus, you know, meal delivery 4050 bucks, you know, how do you manage that stickiness and look at the cohort analysis when the average selling price is high, but the frequency is quite low.
31:05
So with with marketplaces, and I would say kind of consumer purchase businesses in general, you either want to be on one extreme or the other, I kind of think about this no man’s land, where you’re hoping someone’s going to purchase a couple times a year, in order to make the economics work for your business. So think about you know, that might be apparel would be a category that, you know, you’re hoping that first purchase, you don’t fully get enough contribution margin for it to really matter. But then a lot of people don’t show back up, that can be a dangerous zone to be in. And so, you know, I’d rather it be a weekly use case, even if it’s a low margin one, because usually there are economies of scale and ways of improving that margin, you look at, you know, dashpass, or things that ultimately add some level of subscription or recurring revenue to it. Or where that first transaction has plenty of contribution margin, and you want people to show back up, but if they don’t show back up, the cash flow side of the business is good enough that you don’t need to raise a lot of venture along the way and you can ultimately scale more more organically and so so the more daily weekly use case, but low margin requires a ton of capital. But naturally, a lot of those use cases are really large markets where winning matters. Or there are other side of the equation where it’s like, Hey, this is in frequent use case. You know, listen, like that hipcamp kind of use case like where it’s pretty infrequent, but you’re gonna get enough margin that if someone doesn’t show up immediately afterwards, it’s not the end of the world, you probably didn’t have to pay a lot of money to acquire them in the first place. And there was enough of creativeness along the way that it works out. It’s the middle zone where on average, it looks okay. Because you average a customer base, we have some people showing back up 1020 times, but where a lot of people are only purchasing once, and and that one time purchase, isn’t contribution margin positive. That can be a dangerous math exercise where it looks okay on paper, but from a cash flow dynamics, you’re heavily reliant on venture money. And there’s not a lot of venture money for some of those companies down the road. Interesting. So unit economics and payback period would affect it significantly low use case stuff, if you’re paying back your unit economics in the initial sale, a creative and healthy, right, yeah, and it’s this danger of averages that a lot of companies, you know, when you look at all these stats, they will show you the averages. But a lot of these businesses have this kind of whale component where their top 20% of their customers are really generating all the margin. And then everyone else is just sort of, you know, the fodder, the cannon fodder along the way. And that can work out okay, over time, but then you really need to stand Hey, are there more whales out there? Or do you already? Have you already saturated that market with your earlier offering?
33:56
Very good. Brian, you invest in a lot of consumer driven and E commerce startups? You know, I feel like we’re seeing a lot of shifts in consumer habits where many are now actively trying to shop locally, as opposed to you know, supporting sort of the tech ecommerce giants like Amazon or some of the big box stores like Target or WalMart, with this shift in focus to local economies. What are some of the startup solutions that you’ve seen emerge?
34:22
Yeah, so we’re a big believer that there are things consumers want to do. But where there’s too much friction, too much pain for them to really live their best life. In reality, that’s certainly been the case in a lot of sustainability solutions, where like, they want to be the person that buys the cloth diapers, but it’s just not just not convenient. doesn’t work out. That wasn’t Yeah. And so when people are thinking about sustainable solutions, it needs to be sustainable, but it also needs to be equivalently priced and equivalently. Convenient as well. Yeah, that’s that’s led to some slowdown in that category. It goes the same for local right people have this idea of In the guy or gal that’s got the, you know, the paper sack, they’re walking in a local business, they say hi to Frank, who’s you know, the guy behind the counter. And those dollars are staying local, they’re supporting the economy, but it’s hard to buy from a lot of local companies, they don’t have the same inventory selection, they don’t have the same sort of return policies, they don’t frequently have the right sort of delivery options. And so the convenience isn’t there. And people go back to buying from from Amazon. And so the the startups that we’ve been interested in that category are not the ones that are actively selling software. A lot of small local merchants don’t really have budget for software. But they do have budget for people who are bringing in new customers, they do have budget for people who are streamline operations or unlocking additional capital. And so, you know, we look at companies like service Titan as a great proxy for someone that has done interesting things with local businesses, not just because they have the software, but they’re ultimately driving better upsell along the way for their companies and providing a better service experience along the way, we look at companies like our portfolio investment, and a business called fair, that really gives tools for merchants to be more sophisticated about the products that they’re buying. But still recognizing that a lot of small businesses act like consumers where they’re used to getting free returns, and their normal life if they don’t want something. And so as a small business, they’re more willing to try out a new product that they can send it back to you and not have to worry about it. And so small businesses have historically been really hard. Again, they spend like consumers, but they make decisions like enterprise, but there’s enough going on there, there’s enough, I would say, latency around digital payments and digital features that I’m still writing checks for a lot of the businesses I work with locally. And I kind of liked that opportunity better to take things that are real entrepreneurs who have real companies and have real transaction volume, trying to help bring them into a digital world, versus take people who are hobbyists online and try to help them become businesses, I’ll take the former over the latter when I get that option, because it feels like there’s a lot that can be done in the next couple of years.
37:14
So you have a lot of experience working with startups that have sold to lower, you know, ACV customers, you know, these can be individuals, they can be small businesses, but selling software to non enterprise clients in this, you know, we’ve read a lot about product led growth, but sales and marketing mix is always a tough balance. You know, when you’re serving customers at low annual contract values, give us your thoughts on the best ways to sell software to individuals and small businesses.
37:46
Yeah, it’s interesting, because I actually think the framework is relatively similar, whether you’re selling to enterprises, or whether you’re selling to individuals, and a lot of that has to do with like, what’s the lifetime value, or what’s the annual value of that contract. And so if someone’s going to be worth, you know, let’s take the high end, right, let’s talk about like a million dollars, or $100,000. Plus, on the business side, there’s a lot of software that price is in that range. On the consumer side, maybe that’s like super high net worth type individuals, you can afford to have someone fly out b in person, you know, get a fair amount of individual attention at that level. As you go down to 100k annual contract value, you can still afford to have high touch salespeople, maybe they’re you know, not necessarily on the road, you get down to you know, the 20k, for example, sales volume, now you’re looking more aggressively at phone sales, you know, 2k, you can do offline marketing, 200 bucks, you can do online marketing 20 bucks a year, you better have a pretty good viral funnel. Otherwise, it’s not going to work out so well for you. And that tends to hold true, whether it’s selling to a business, or whether it’s selling to a consumer. And so a lot of the question is that there’s not a universal framework for what’s right. It’s really understanding which of those buckets are you playing in? And do you have the right sales and marketing model for the kinds of dollars that someone’s going to show up with and when I say dollars, I don’t just mean like GMV, or some kind of nominal notion of value. I mean, like actual cash flow contribution margin, and in for consumer businesses, we’ve seen that some of them have a relatively high lifetime value, and investing in the relationship side of it, investing in the onboarding side, actually, bringing people back into the equation has a really big impact on conversion rate. And if you get the right conversion rate, you can spend a whole lot more money on the upfront media along the way. And this is this has been important as the whole idea of just kind of sprinkling dollars into Facebook and having customers fall out the other side has gotten more complicated. And so being more sophisticated as you think about that whole conversion funnel all the way due to the repeat purchase, is in some ways a better way of getting contribution margin than just trying to change your media mix up front.
40:08
So the sprinkling dollars into Facebook has changed a bit with Apple’s changes.
40:14
Yeah, it’s got a little harder.
40:15
Yes, it’s a bit harder. So what can we expect from the standpoint of online customer acquisition in the future in a much less data abundant environment for advertisers?
40:26
Yeah, I mean, the first area that we’ve been spending a lot of time on is just how to get more out of your existing customer base, how to leverage those relationships where someone cared enough to visit you, at some point, make a purchase, spend their hard earned money with your company. And then for the most part, like 90% of those people are never seen, seen or heard from again. And so we’ve been investing in a fair amount of enabling technology companies that help out with that theme. So companies like a Navarre, which does package tracking, return automation, you know, really helping companies think through the lifetime value of that customer by having a great post purchase experience. That would be one example, we have a company called Canal, which helps any online merchant build a third party marketplace on their site. So if you think about someone, you know, fellow’s one of their customers, they sell these really cool coffee brewing machines. And that’s great, but it’s largely a one time purchase. And so those guys really know a lot of coffee. Now, they’re able to sell a bunch of their favorite coffee providers along the way, as a subsequent purchase, where historically if they had to inventory that they had to think about, you know, shipping and deal with all that, it just doesn’t make sense for Amazon to do that they’ve shifted heavily to third party sellers. And so why not enable any online merchant to have a third party seller marketplace, as well. And so we’ve spent a fair amount of time thinking about companies where they’re able to kind of leverage the value inherent in your install base. And if your existing customers are worth more than on the flip side, you could actually spend more money to acquire your next customer as well. So that would be you know, that would be one, one bucket. And then the other side is just being more creative, about how you go about acquiring customers.
42:21
How you think about non Google Facebook strategies for customer acquisition.
42:26
So I’ll give an example. We’ve got a company called homeroom that we invest in, and they’re going after this, what seems like a cottage market basically is these are these after school enrichment programs for elementary school kids predominantly where you know, mom and dad don’t get home at 230 anymore. And so they want, you know, JR to stay at school and learn origami or learn chess or playing Minecraft, or whatever it is. And these are typically run at schools, but they’re provide third party providers, so their local businesses organized by the PTA, no one wants to deal with any of this stuff. But there’s, you know, hundreds of 1000s of dollars of commerce happening on these little school campuses. And it’s even more predominant in lower income or more more rural areas. And so homerooms customer acquisition strategy, as they just get, they just onboard that school, and it’s usually working with one PTA volunteer, but once the school is on boarded, there are now this marketplace for local commerce, that thinks about the elementary school as the place where a lot of parents and kids interact and a good place to, to build off of so they don’t have to think at all about Facebook spending because they’re really about enabling these local marketplaces. And so we’re excited about businesses where they’re not necessarily saying, hey, our CAC on Facebook is $44, we want to raise $10 million, because we think we can keep getting $44. Like, we all know that there’s a decrease in efficiency in those channels. And so ones where the channel might be a little bit harder, it might be a little bit more difficult out of the gate. But we feel like if they unlock it, they can 100x growth, just by continuing to do that playbook over and over again. Those are businesses we’re excited about nowadays, because it helps add diversity to the portfolio. We’re not totally reliant on what changes Apple might make, or what changes Facebook, I make tomorrow.
44:17
100% We just completed an investment in a company that’s selling pet insurance. Nice. They’re working with software providers for shelters. Yeah. So you know, they get it at point of sale in their competition out there is trying to do digital marketing acquisition online, you know, through advertisements. And it turns out most people that are Google searching for pet insurance have a problem, you know, their pet scan problem.
44:41
Exactly. Maybe not the right selection bias.
44:44
Right.
44:46
Yeah. And that’s where people find trust anyways, right? I think a lot of times we underestimate the existing trust networks that are already there in people’s local market. Like we’ve got a company called Sunday, which started out selling like customized fertilizer plant answering people’s homes and as moved into really being a solution for your kind of broader home needs outside of, you know, what you would go to Home Depot for and have to look across like shelves and, you know, make a more complicated purchase than you maybe want. And they did the math and realize that one out of every five customers of theirs has a neighbor that is also a Sunday customer. And this is one of these things where they don’t this is not coming through their referral program. This is not something that is like explicitly agreed or agreed to when people are signing up. But there’s this underlying word of mouth of like, man, your lawn looks pretty damn good. You know, what happened, that a lot of startups don’t realize is there if you just have a product that works and a product that people love? 100% 100% Yeah, we all underestimate the power of an amazing product that delights people in the word of mouth, you know, the effect you get from that and the drop to customer acquisition that’s sometimes hard to track, you know, that last mile attribution and referral attribution or earned revenue attribution is tough to track. But it’s so powerful. Yeah, it’s challenging. A lot of it’s just kind of back to basics, right. And if we meet with a founder, who has a real clear understanding of what their customers want, and has a unique and differentiated offering, there’s typically a lot we can bring to that equation. If we talked to someone who’s already optimized every channel along the way, that can be a lot more difficult for us to be able to help that company get to the next level.
46:29
Interesting. Brian, if we can feature anyone here on the show? Who do you think we should interview on what topic would you like to hear them speak about?
46:37
Sure. So I mentioned this company, Narvar, before they do the tracking and return automation, the guy who founded the company, this guy, Ahmed Sharma, he’s one of the most knowledgeable people around supply chain and everything that happens behind the scenes in commerce that I know. And Narvar is one of these businesses, because he’s so humble, he doesn’t really toot his own horn. So I feel like I’m going to do it for him. But they’re $100 million recurring revenue company, they’re profitable, you know, they’re growing really nicely. And not just that there’s a successful company in their own, but they really have this unique data set, where they’re doing 10 million individual consumer transactions a day, at this point across, you know, the Nike, you know, Nordstrom Home Depot, all these large retailers. So when people have questions about inflation, or about consumer spending, what back to school looks like, they’re sitting on this treasure trove of data, because they know actually like what people are buying and how those trends compared to previous years. And they’re able to leverage a lot of that data with the different companies they work with in terms of understanding like, hey, you know, this person, you maybe shouldn’t give them free returns, because they, you know, they always, they always buy too many and try to return it all. But he’s one of these humble people that a lot of times podcast hosts tend to be the people that toot their own horns. And, you know, some founders are really good at that. But this guy is like a wealth of information. He’s got an amazing beard at this point. So if anyone’s gonna tune into the video version, they might be appreciative of that. But I’m thinking about not just how do you build a resilient startup get to profitability, but what’s really going on with the consumer, they have a unique lens on that data.
48:19
Brian, is there a resource, a book or an article or something that you’d recommend the listeners?
48:26
Man, I’m looking for new resources these days. So I might ask you that question after this, but like, one book that that I read recently, that I really enjoyed was the David McCullough Wright Brothers book, I don’t know if you if you ever read that I haven’t. And we’ve all heard the stories about Kittyhawk and about the Wright brothers. And, but this was really a much more detailed biography. And at a point where I think a lot of folks are feeling a little banged up about America. And like, what’s going on here was this really great story returning to just like this grit and determination around the entrepreneurial spirit, where everyone doubted them, and they just kind of grinded it out and solved one problem after another, they didn’t listen to any of the conventional wisdom. And, you know, now we’re able to fly around the world because of the innovation that they had. But it just wasn’t very well written. I learned a lot about you know, two entrepreneurs I didn’t know much about previously. And I really kind of like, you know, they’ve got this Dayton, Ohio Spirit to them that was was refreshing, given a lot of the political unrest that we’re dealing with on a daily basis these days.
49:30
Well, and finally here Brian, what’s the best way for listeners to connect with you and follow along with foreigner?
49:36
Sure, so Twitter, love it or hate it is still a pretty good way. I’m at Omal. So o-m-a-l. That’s a great way or your email is it also works it’s B O’Malley at Forerunnerventures.com.
49:49
Well, he is Brian O’Malley, the firm is Forerunner Ventures. Brian, thanks so much for the time and all the insights.
49:56
Sounds good, and I appreciate you having me.
49:58
Thanks, Brian. Take care.

Transcribed by https://otter.ai

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