DEA’s Reading Digest (08/11/2019)

Photo courtesy of Unsplash: https://unsplash.com/photos/2_3c4dIFYFU

A. Stories, strategies & expert opinions

PDD 2019 Letter to Shareholders

  • First of all, we think the primary characteristic of “new e-commerce” is “Benefit All.”
  • As the new platform born of this time, our mission has been to serve all and benefit all. From day one, we have devoted ourselves to this mission, working hard to increase the income of farmers by bringing agricultural products to cities directly, while providing savings to the urban population. This effort was the most important driving force behind the growth of our platform. Thereafter, through the C2M (Consumer-to-Manufacturer) model of direct sales from factories, we have improved the value-for-money proposition of the merchandise on our platform, thus providing affordable and better-quality household items to all.
  • The second characteristic of “new e-commerce” is “People First.”
  • “New e-commerce” no longer treats each individual merely as traffic nor does it simply take wholesale distribution of such traffic as its business model. Instead, “new e-commerce” tries to understand the human touch behind each click; it tries to aggregate similar needs through analyzing the connections and trust amongst people. Only when we wholeheartedly serve and respect people, can we harness the collective power of the people and transform long-cycled scattered demand into short-cycled aggregated demand. This introduces the possibility of on demand customized production, improves supply chain efficiency, and returns value to their creators — the everyday workers.
  • The third characteristic of “new e-commerce” is “More Open.”
  • Similarly, at this current stage, Pinduoduo has the ability to generate revenue, but it is weakly correlated with the large amount of spending we choose to incur. These short-term expenses are highly discretionary. In fact, we view a significant portion as long-term investments where we foresee meaningful continuous returns. It is probably not a good idea to put our money “in the piggy bank” into a fixed deposit at this stage. Hence, we will not change our business strategy for a considerable period of time.

A founder metric that matters

  • In fact, all founders and chief executives in the technology industry should share personal metrics showing how many times per day or a week they use their own service.
  • When founders and executives are active users of their product, it shows — both in the effectiveness of the product and the rapidity of change. I mean, if the big boss isn’t watching, do you really think any of the product people are going to make continuous attempts at improvement instead of playing it safe?
  • Steve Jobs might not have been everyone’s cup of tea, but he did use his products obsessively. This kind of KPI is meaningful, and it reflects that these executives have not forgotten who experiences their products. If you expect people to use your product, you should be using it too. Just like everyone else.

The best metric for determining quantitative product market fit

  • Cohort retention rate is the most important product market fit metric.
  • Prior to product market fit, you should be focused on making the product better for your existing users. When a product has “product market fit”, it means that the product is good enough to start shifting focus from improving the product to growing distribution channels. If you distribute a product that isn’t great, even if you are able to get a lot of initial users, a few months down the road your user base won’t grow significantly or may even decline. So, you can also think of product market fit as “time to start building scalable acquisition channels”.
  • Any product with great cohort retention rate can be distributed with good growth strategy and execution.
  • Cohort retention rate — given a group of users who joined around the same time, the % of those users that stay long term.
  • As you improve your product, newer cohorts will have high cohort retention rates. So, it’s important to have a cohort retention “triangle” chart to track progress.
  • Once you have a few cohorts that level off at a vertical-specific number, then you’ve achieved product market fit!
  • Different types of products have different “points” of product market fit, so it’s important to find the retention rate of some comparable products that have been able to significantly grow to find the right benchmark for you.
  • A good rule of thumb is for consumer products, 25% is a good floor and for B2B SaaS products, 70% is a good floor.
  • You will feel product market fit, but maybe not at first.
  • “Pushing a boulder: don’t have product/market fit. Chasing a boulder: have product/market fit.” This is a pretty good indicator of product market fit, since if you have great cohort retention, it will be a lot easier to grow. Good retention amplifies your acquisition efforts, since the users you acquire actually stay. Good retention is also usually correlated with how much users love your product, which amplifies your word of mouth. Users are more likely to share your product with friends if they are still using it after a long period of time.
  • The main thing to watch out for is if your product goes viral but doesn’t have good retention rates. You will have the “chasing a boulder” feeling since you might not be able to keep up with demand, but you don’t actually have product market fit, meaning you should still work on improving the product, not shift focus to acquisition.

The most important growth metric for early startups

  • Looking at your entire userbase as a whole while calculating retention is not a good way to calculate retention because it depends on your mix of old and new users. It doesn’t make sense to compare retention rates of a newly joined user and a user who has been around for a long time, so the correct way is to measure it by cohort. A cohort is a group of users who joined around the same time. So, you should graph a cohort retention graph by taking a single cohort of users (week or month is a typical time period), and plotting how many of them come back or do a key action over time.
  • There’s a specific point on the cohort retention graph that’s very important to know — founders and growth leaders should basically have this memorized.
  • At around 5 weeks, this retention graph starts to flattens at 35%. This data point is important for two purposes. First, you can expect around 35% of your signups to be around long term, which can be used for back of the envelope calculations for things like paid acquisition. The 35% number is your long term cohort retention rate, which is the most important growth metric for early startups.
  • Next, if you launch any big product features or run any experiments, you know that you will need to wait around 5 weeks to get accurate data on how many additional retained users your change has acquired. The takeaway here is not that you should run experiments for 5 weeks, since that is too slow, but to take retention data previous to 5 weeks with a grain of salt. An experiment that acquires a lot of additional low intent users may seem promising in the beginning, but fall back down to control levels as it approaches this 5 week mark.
  • If your cohort graph bottoms out near 0%, improving that is your #1 growth priority.

The future of fundraising is already here — it’s just unevenly distributed

  • Notion’s ambitions are big — the company wants to replace Microsoft Office. But its executives don’t believe they need hundreds of millions of dollars in financing to do it, nor do they want the strings that come attached.
  • Focus on revenue and profits early allowing they to skip one, or many, rounds of funding and dilution.
  • “Notion’s funding round means it is giving up about 1% of its equity, which is tiny relative to its valuation. Mr. Kothari said “Hopefully we never have to raise again,” adding that Notion has been “net profitable for the last few months.”

Ecommerce as video’s killer app

  • It turns out that commerce may be video’s killer app. And not only could video apps become ecommerce apps, but all ecommerce apps may also have to become video apps.
  • Take TikTok, the AI-first short video app (now with 1.1B+ total installs) that’s known for its funny videos, memes, and challenges. It currently monetizes through advertising and livestream tipping. But the Chinese version of Tiktok — called Douyin (both owned by Bytedance) — is also a growing ecommerce platform that integrates with popular shopping sites in China.
  • Small- and medium-sized businesses are using short videos as next- generation advertisements. One strategy merchants in China use is to tell the story of a product’s origin — showcasing the factory where consumer electronics are produced, or the farm where cherries are picked. Another strategy is to provide a glimpse into “a day in the life” of the maker.
  • On TikTok competitor Kwai, 10% of livestreamers have already started to sell goods on-platform, and one popular vertical that’s emerged is fruit ecommerce. Livestreams and short videos are commonly used to advertise the juiciness of fruit, showcase rare varieties, or give viewers orchard tours.
  • There’s a simple ecommerce checkout flow on Douyin where products can be purchased in as little as three taps. After the short video plays once, the video repeats itself — and this time, a pop-up allows the viewer to tap in and complete a purchase.
  • Notably, in the suggested products section, clicking “related products” loads viral short videos rather than static product information pages.
  • It’s still early days, but Douyin is already showing signs of allowing users to book all sorts of services without ever leaving the app — making it a superapp.
  • If a picture is worth a thousand words, than a video is worth a million, making a far more compelling case than a static-image advertisement.
  • As of August 2018, on China’s largest ecommerce platform Taobao, 42% of the product pages had short videos, up from 15% the year before. The company also generated more than $15 billion in sales through livestreams, up nearly 400% from the year before. The CEO of Taobao observed that livestreaming “is not just bells and whistles” but that “in the future, it will be the mainstream ecommerce model”. This intersection between video, commerce, and content is an important trend to watch.

Teams need trust to be brilliantly successful

  • Have you ever been part of an amazing team? In this team, you could be yourself which means that you could speak openly and honestly, admit when you didn’t know the answer and feel comfortable asking for help. Members of this team made sure that you knew they had your back in every situation and encouraged you to be your best.
  • Have you ever been part of a team that was a nightmare to work with? This team constantly challenged your every actions and decisions, mistakes were never owned up to or recognised and getting support to try something new seemed impossible. These team members would also repeatedly fail to follow through on their word to you and acted only when it was convenient for them.
  • Along this journey, we realised that there was one trait which was crucial to hitting the ground running and working productively with new faces in fast-paced environments. This trait was trust.
  • Trust is a necessary trait for healthy and strong relationships in both our personal lives and the workplace.
  • Failures are largely influenced by a break down in communication.
  • Trust is feeling protected about your decisions and relying upon or placing confidence in someone or something.
  • “Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships”.
  • Ultimately, trust means that people feel safe to feel vulnerable.
  • Building trust takes time.
  • Many organisations that we worked with had regular team and company events which took place outside the workplace such as bowling, mini golf and sailing on the harbour. As a result, these activities enhanced trust which led to improvements in communication, collaboration and productivity in the workplace.
  • Emotions can also help to build trust. For example, gratitude and confidence build trust, where as shame and anger weakens it.
  • 10 ways to developing and maintaining trust:
  1. Be transparent, collaborative and open
  2. Have constructive and productive conflicts
  3. Demonstrate vulnerability — showing empathy towards team members
  4. Listen actively and attentively — be present and explicitly seek to understand whilst remaining open to new perspectives
  5. Be reliable, consistent and accountable
  6. “Walk the talk” — follow through on your actions; achieve results
  7. Share knowledge in the same way you expect knowledge to be shared with you
  8. Be genuinely empathetic — it builds rapport and effective communication
  9. Be respectful towards others
  10. Be candid — it shows that you care and can be direct in a respectful way
  • “Without trust we don’t truly collaborate; we merely coordinate or, at best, cooperate. It is trust that transforms a group of people into a team.”
  • Trust is powerful because it’s not something that you can fake or buy. It must be earned.
  • Trust is earned when actions meet words.

The holy grail of ecommerce

  • The holy grail of ecommerce is to grow your cohorts over time. In other words, the customers you acquire today spend even more the following year and year after that, such that your existing customer base is a source of growth. It’s a very healthy position to be in as you aren’t dependent on acquiring new customers to grow.
  • Chewy, which recently IPO’d, is a beautiful example of a company with growing cohorts. Chewy sells pet products online with nearly 11 million active customers. Their cohort repeat rate is so strong, “existing customers account for approximately 90% of our net sales in any given period,” and “our net sales in fiscal year 2018 would have grown by 20% fiscal year over fiscal year as a result of increased spending among our customer base without any net increase in customers.
  • A chart of healthy repeat cohorts looks like the below:
  • Generating higher revenue from cohorts year after year means getting those customers to buy more.
  • Chewy has been able to achieve this holy grail of ecommerce a few ways: i) they have expanded the breadth of products they offer customers and now have 45,000 SKU’s; ii) they have improved the way their customers purchase from them by offering services like their autoship subscription program which automatically sends you products on a schedule, as well as an app for easy ordering from your phone; and iii) they have improved the customer experience with things like overnight shipping, which they can do to 80% of the US thanks to 7 strategically placed fulfillment centers. In summary, growing your cohort spend is not just about offering more products, it’s about offering a better experience and more ways for your customers to buy.
  • Below is Chewy’s LTV to CAC which as you can see is below 1.0x in the first year, meaning they actually lose money on the customer in year 1, but then grows to 4.0x over time. For ecommerce companies we look at, 3x+ LTV to CAC within 4 to 5 years is where we like to see the data.

Eat less meat: UN climate change report calls for change to human diet

  • Efforts to curb greenhouse gas-emissions and the impacts of global warming will fall significantly short without drastic changes in global land use, agriculture and human diets.
  • By 2050, dietary changes could free millions of square kilometres of land, and reduce global CO2 emissions by up to eight billion tonnes per year, relative to business as usual, the scientists estimate.
  • “The biggest hurdle we face is to try and teach about half a billion farmers globally to re-work their agricultural model to be carbon sensitive.“

B. Startups & market trends

Which categories of seed startups are thriving? Which aren’t?

  • Hot spaces: Artificial intelligence, blockchain, fintech, food and beverage, software
  • Cooling spaces: Advertising, analytics, big data, social media

India’s Indifi raises $20.4M to expand its online lending platform

  • Indifi, a Gurgaon-based startup that offers loans to small and medium-sized businesses and also operates an online lending marketplace, has raised 1,450 million Indian rupees ($20.4 million) in a new financing round to expand its business in the country.
  • A typical loan processed by Indifi is of about $7,000 in size. Overall, the startup offers between $1,400 to $70,000 in capital to businesses.
  • Unlike banks and many other online lenders, Indifi works with an ecosystem of companies to assess risk factors before granting a loan to a business, Mittal said. For instance, Indifi works with food-delivery startups Zomato and Swiggy and checks a restaurant’s history and feedback from their customers before issuing to a restaurant.

SoftBank-backed Fair taps three executives to lead vehicle subscription app expansion

  • Fair has tweaked the traditional lease to give consumers more options. Users can subscribe to the program and switch vehicles through the term of their “lease.”
  • “After closing $385M in our Series B, it’s time to put that capital to work for us to buy cars and propel growth — with this new executive team providing us with important insights and leadership.”
  • Fair acquired in January 2018 the active leasing portfolio of Xchange Leasing, a service Uber first established in 2015 to lease new and nearly new vehicles to drivers who did not come to the service with their own cars.

Klarna raises $460 million, looks to expand its payments presence in the US

  • Swedish payments provider Klarna has announced a new round of equity funding, adding $460 million at a post-money valuation of $5.5 billion, which makes it one of the most highly valued private fintech companies in the world.
  • Klarna’s European presence is strong, based on the back of its credit card- alternative payment method, which allows customers to pay over time, with the purchase price broken up over four equal installments, but directly from their bank accounts and without incurring any interest.

Scale AI and its 22-year-old CEO lock down $100 million to label Silicon Valley’s data

  • Big artificial intelligence companies are promising an automated future, but many of their products rely on the labeled training data coming from Scale AI, a startup that highlights machine learning’s intimate bond between human contractors and algorithms.
  • The three-year-old startup announced Monday that it had closed a $100 million Series C round of financing.
  • Scale has around 100 employees, according to Wang, but its limited full- time staff is a small fraction of the human-power behind the services Scale offers. The startup has nearly 30,000 contractors aiding in the labeling process.
  • Companies provide Scale with data via their API and the startup puts its resources to work labeling the text, audio, pictures and video so that its customers’ machine learning models can be trained.

India’s Lendingkart raises $30M to help small businesses access working capital

  • Lendingkart, one of the many startups in the country that is helping micro, small and medium-sized enterprises access working capital, has raised $30 million as part of its Series D financing round.
  • The five-year-old, Bangalore-based startup has raised $143 million to date.
  • Lendingkart Finance has issued over 60,000 loans to more than 55,000 small and medium-sized enterprises in 1,300 cities across India.
  • Like in other developing markets, many businesses in India, including those that are operating in the exporting space, have to wait for days before they get paid from their previous clients. This creates an immense challenge for many who don’t have any savings. Their options are severely limited as traditional banks find them too risky to lend money.

This startup is helping food app delivery workers start their own damn delivery companies

  • Its big idea: turn today’s delivery workers into “solopreneurs” who build their own book of clients and keep much more of the money.
  • More than 500 across the country are operating in 37 states. And we want to give them everything they need. A big part of that is capital, so we give [them] a credit card, then it’s effectively the operational support, including order management, customer relationship functionality, customer communication, a storefront, an app that they can use to run their business from their phone.
  • We’re taking a percentage of each transaction. The [solopreneuer] pays us $5 per transaction as a platform fee; the shopper pays us 5% atop the delivery fee set by the [person who is delivering their goods].

Y Combinator-backed Trella brings transparency to Egypt’s trucking and shipping industry

  • The Egyptian company founded by Omar Hagrass, Mohammed el Garem, and Pierre Saad already has 20 shippers using its service and is monitoring and managing the shipment of 1,500 loads per month.
  • Like other logistics management services, Trella is trying to consolidate a fragmented industry around its app that provides price transparency and increases efficiency by giving carriers and shippers better price transparency and a way to see how cargo is moving around the country.

Co-Founder at Calii. Interest in e-commerce, groceries, social, logistics, fintech.