Stealing Signs - Issue 46
Esty: A Handmade Giant in the Passion Economy, Opportunities for Innovation in the Finance Tech Stack, Recurring Revenue as an Asset Class, & Brandzooka raises $$
Worth Reading
Etsy: A Handmade Giant in the Passion Economy
Abdullah Al-Rezwan, Mostly Borrowed Ideas
“I never would have guessed that bread and bread-making products would be a big category on Etsy. Never in a million years would it have occurred to me. But in the month of May, we started to see bread shortages in stores, and a lot of people stuck at home decided to take up bread-making as a hobby. And so they turned to Etsy, and we started to see a surge in keywords, in demand, and literally within hours, bakers are coming on Etsy and starting to meet that demand. And supply and demand met effortlessly and almost instantaneously because the communities are paying enough attention and bakers started to talk to bakers and word just got out. So we actually didn’t need to do anything in that case, and we had enough supply.”
That quote perfectly encapsulates the power of marketplace business model. Etsy, as the owner of the marketplace, does not have to predict all granular details of consumer behavior. All they have to do is come up with some high-level rules and regulations in terms of what you can sell and what you cannot, and then empower the good old capitalism at work. Millions of sellers are experimenting every minute what sells and what doesn’t, and they are adapting every day to make sure they make products for which there are buyers out there. At times, it can be face masks, or even bread making products.
Excellent deep dive on the fast growing handmade item and vintage goods marketplace, Etsy. As a marketplace junkie, the most interesting debate in this piece is around the proper take rate (cut of total transactions). It’s logical to think the take rate scales up with value provided to users, but it’s often not that simple. Much of it depends on the nature of the buyers and sellers. In Etsy’s case, the buyers seem to be much less price sensitive than the sellers, meaning Etsy need be more concerned with sellers when increasing take rate. A sure fire way to safely increase take rate is to increase the number of sellers while also increasing value provided to them.
On a related note, Etsy’s IR team says they’re eyeing the Indian market for potential sellers, which is an interesting example of leveraging cultural norms and societal dynamics to build a platform. As MBI notes:
Coming from South Asian background, I know for a fact that handmade items are incredibly popular in this part of the world, and there is a pretty robust network of sellers (mostly women) which could be a good fit for Etsy platform.
Much like the passion economy emerged in the U.S. with the introduction of new technology tools, Etsy could be a key tool for the passion economy to emerge in new markets. This approach would also allow Etsy to increase their take rate — the value to new sellers who weren’t able to sell handmade goods online previously is immense, plus the number of potential sellers in the Indian market is massive.
Shifting gears, MBI identifies what allows many companies to combat competition from Amazon — customer experience. Amazon has yet to figure out, or invest enough resources, into a the last mile of the internet, which allows for companies like Etsy to compete with them on the customer experience vector:
Moreover, experience on Etsy marketplace is reasonably differentiated from your experience in Amazon. ~30% items on Etsy can be customized which typically have ~30% higher Average Order Value (AOV). Sometimes, buyers initiate conversation with sellers to customize the item and conversion rate and AOV after buyer-initiated conversation is ~12x and 200% respectively.
There exist opportunities in other eCommerce verticals to compete with Amazon by offering a better customer experience, too. An interesting exercise would be to unbundle each of Amazon’s top categories, identify the top eCommerce players in each category, and plot them onto a ‘competitive threat’ and ‘user experience’ matrix. I'd bet the strongest Amazon competitors in specific verticals offer the best customer experience.
Lastly, the quote below surfaces an interesting perspective about TAM analysis. This exercise is commonplace among private and public investors alike, yet it can sometimes be a fool’s errand, especially at the early stage. The most compelling case against rigid TAM analysis Uber or Airbnb. The market for ridesharing didn’t yet exist at the time Uber as founded. The market for sharing one’s home with strangers didn’t either when Airbnb was founded. They created markets, which would have made for a difficult TAM analysis at the time. I think a more fruitful exercise is deeply understand potential customers, their behavior, existing tools and workflows, and what might happen should a significant number of potential users begin actually using the product. To be clear, market size is a variable worth understanding in evaluating a company’s potential, but that’s all it is — a variable. And it’s certainly more valuable in the context of the information above.
As an investor, I am less married to the exact size of the TAM and more interested in having an informed opinion on management’s estimates and reasonableness of those assumptions. I believe if Etsy finds it difficult to grow in future, it won’t be because their TAM is smaller than expected. If Etsy experiences lackluster growth in future, the most likely rationale will be poor execution. The market is indeed big enough for them to continue to grow at double digit for this entire decade.
There are tons more interesting bits in this post — I can’t recommend it strongly enough.
The Finance Tech Stack: Opportunities for Innovation
Medha Agarwal & Urvashi Barooah, Redpoint Ventures
Sales forecasts influence critical downstream decisions. However, accurately forecasting sales (and therefore cash flow) is tough, especially for businesses without subscription revenue. One CFO of a transactional consumer software business shared with us that 70% of the company’s revenue for the year is done in a span of three weeks. In order to accurately forecast, such companies have to develop manual workarounds which involve downloading data 2–3x a day from billing systems and running static Excel analyses on them. It’s critical for early stage companies, too, to know when they are about to run out of cash.
Many of the opportunities in the finance tech stack seem to be problems that persist through the waves of technological innovation. The lack of collaboration and version control features in Excel is a good example. This has long been an issue and there are countless startups who’ve tried to unseat Excel, but have found it quite difficult.
One interesting company working with Excel is Workscope, whose solution relies on the heavy usage of Excel in financial services firms. Workscope sits on top of Excel, analyzing user behavior, data within the spreadsheets, and version control to reduce user error and model integrity at firms with thousands of different spreadsheets. This may prove to be a more effective approach than trying to replace Excel entirely. Of course they must consider platform risk, but making Excel a more valuable tool for customers seems to be a strong value prop.
An opportunity not mentioned in this post is in cash flow optimization. Whether it be tax optimization or contract optimization, juicing every last bit of revenue and cutting every possible cost adds up quickly. It’s tedious, complex, and often involves regulators or legal, which means it’s ripe for a software tool to step in and reduce the burden.
Recurring Revenue: The Rise of an Asset Class
Adobe has had one of the most successful transitions from a license model to a SaaS model. From 2010-2019, recurring revenue as a percentage of total revenue increased from less than 10% to greater than 90%; and this shift has led to a much higher valuation. Over that same time period, Adobe’s trailing EV/S multiple has increased from 4.0x to 18.0x and its EV/EBITDA from 8.5x to 32.0x.
Excellent breakdown of Pipe. Subscription revenue is the recent darling of business models, but it does result in sacrificing cash flow efficiency. Pipe gives SaaS companies the benefits of upfront payments while still able to maintain subscription business model. It’s quite clever.
As the quote above suggests, subscription revenue is all the rage and companies are rewarded for transitioning to more consistent, predictable revenue models. It’s also the most common, at least recently, revenue model for services businesses. Part of the power of subscription revenue models lies in the flexibility it affords companies to bundle services and blend costs. I’ve been thinking a lot about eCommerce and what innovations we’ll see in the next few years, and subscription eCommerce feels like a model well see more of. StitchFix is a leader in this model and it seems more eCommerce companies could benefit from predictable revenue. They key, though, is that subscription eCommerce enables companies to easily offer services in addition to their products. 1-on-1 consultations are a good example of a service that an eCommerce company might typically charge extra for, but with a subscription model can bundle this cost into the monthly subscription fee. Another service could include an embedded finance product like insurance or lending. In other words, the subscription model may help eCommerce companies offer a better customer experience, which is the key battleground for them right now.
The meaty portion of this post discusses the rise of an asset class based on subscription revenue, where MRR can be bought and sold and thus converted into ARR. This levers up the benefits of subscription revenue by securing the certainty of annual revenue vs. monthly revenue, while leaving the business model unchanged. Subscription models don’t guarantee annual revenue unless customer sign up for an annual plan, which, according to this piece, just ~7% of clients do even when offered a discount. So, this fills the only glaring gap in subscription revenue, which is cash flow efficiency.
<stuff> Weekly
LOL Weekly: Your Local Halloween Superstore
lol it’s that time of year
Funding Weekly: Brandzooka
Brandzooka makes it possible for agencies of all sizes to to deploy targeted and high-performing rich media across digital and TV at any budget level.
Brandzooka raised a $5.6M Series A from Mark IV Capital, Lagomaj Capital, Sweet Moose Enterprises, Rockies Venture Fund & Batshit Crazy Ventures. They’re building a programmatic ads platform which access 30+ ad networks to identify the most effective media channels on which to advertise at a given time. They sit on top of all of the major ad networks and figure out which media channels offer the best ad value, for example, or which will get a brand the most eyeballs, etc. With the increasing pressure on consumer brands to efficiently acquire customers and the pandemic inflating digital ad prices, this platform appears more useful now than ever.
Baseball Weekly: Kershaw’s Pitches & Grips
Very cool short video on showing each of Clayton Kershaw’s four pitches and associated grips, spin rate, and vertical and horizontal movement. It’s exciting to see him perform well in the playoffs after a career of postseason underperformance. After they Tampa Bay Rays, the Dodgers have my support to win the WS only so Kershaw gets a ring.
Art Weekly: Island
Sam Friedman
“With this new body of work Friedman further explores and deepens an artistic practice that has been characterizing his pictorial output for years: He is not literally painting landscapes but adopts the flow and movement he sees in nature in order to address questions about the medium itself. As such, all of his works are to be viewed primarily as exercises in color, composition, line quality, opacity, sheen, and the physical interaction between paint, brush, canvas and the artist himself,”
