Here’s How Today’s Hottest New Companies Actually Disrupt
Micah Rosenbloom, managing partner at Founder Collective in San Francisco, knows a thing or two about bringing digital ideas to the analog world. The Cornell grad started the 3D scanning company Brontes, which introduced a handheld scanner to replace the conventional dental impressions used for centuries.
His company was purchased by 3M, which he says “put enough money in my pockets to start angel investing.” At Founder Collective, he and his partners built a fund to invest in the next generation of great businesses at the seed stage. While the company originally focused on technology companies like Uber, BuzzFeed and Hotel Tonight, Rosenbloom quickly became attracted to brands that were building digital success while selling old-school analog products like mattresses, jewelry and eyeglasses.
Rosenbloom joined eCornell’s Chris Wofford as part of our Entrepreneurship WebCast Series. What follows is an abridged version of his presentation.
These companies are what Andy Dunn, the CEO of Bonobos, has dubbed ‘DNVBs”—Digitally Native Vertical Brands.” In other words, brands that have a direct relationship with their customers. For example, if you were to buy a mattress from Sealy in the past, Sealy didn’t know that you yourself were the buyer of their mattress. All the company knew was that it was selling mattresses to Sleepy’s Mattress Store, and Sleepy’s was the one that actually had the knowledge of the buyer. What most businesses come to realize is that whoever knows the end customer has the most value. In the end, the customer information and that relationship is the most valuable.
Many new companies have decided to go directly to the customer rather than through retailers. Some may not even go through Amazon. There are exceptions to this, of course, but the idea is that most of these brands are primarily online.
Most of these “DNVB” brands were born in the last ten years and that newness has allowed them to be built on modern systems. They’re not saddled with legacy software. They’re not bogged down by crazy inventory systems that have to talk to Target and Walmart. They’re building on web-based technologies that give them a way of speeding up the process in the way they communicate with customers or offer promotions.
That’s just too hard for the incumbents—they simply couldn’t build a business this way. So that’s why you are seeing a lot of the big players starting to buy these new guys up.
That’s the D—digital—in DNVB. Now let’s talk about the V: the vertical specific. One of the things you learn in the startup world is focus, focus, focus. While conventional wisdom has always been that it is better to have a bigger menu and the more options the better, what some of these new hot brands have realized is that people are overwhelmed with information. It’s actually very difficult to pick which glasses, which mattress, which this and which that. We want people to help us pick it. So what we’re seeing is a realization of the benefits of just having one or maybe a few products.
Price is also really important here. The best Digital Native Vertical Brands are a fifth to a tenth of the cost of the traditional ones. Dollar Shave Club is probably the perfect example of this. Just as the name suggests, they came in and said, “It’s a dollar.” There are those who say that the blades at Dollar Shave Club are not as good as Gillette blades, but for the lion’s share of the customer base, being able to save that much money on the product and still get a good enough product is a really strong value proposition.
So when you’re thinking about these businesses, both as an investor and as a builder, the goal is to be able to charge five to ten times less than a similar equivalent by pulling out of physical retail, by focusing on a few products and by not paying a margin to a distributor.
Some DNVB companies have also managed to disrupt the traditional buying practices. I think most consumers kind of hate the experience of buying a mattress and even to an extent, buying things like glasses or luggage. You just feel like it was a lot of B.S., a lot of marketing. One of the interesting things about Casper is they have a 100 night trial. After a hundred nights or fewer, if you don’t like it, they’ll take it back for a full refund. Changing the way people think about buying things—taking out the risk, the anxiety, the dealing with that sleazy salesperson—really changes the game and that’s why you’re seeing the growth of a lot of these brands.
I feel like I’m doing a commercial for Casper, but it is also a good example of how these types of businesses focus on design and packaging. If you search on YouTube, you can find all of these videos of people unboxing their mattresses and they spring out because they are so highly compressed into this box. If you think about it, it’s a real innovation. In the past, if you were buying a mattress, not only would you have to buy it from a sleazy dude but usually a couple other sleazy guys would come into your home, maybe take their shoes off if you’re lucky, go into your bedroom, take out the old mattress, and put in the new one. The reason they did this is that mattresses just couldn’t ship via UPS. Now all of a sudden, you’ve got a brand that uses traditional delivery services, and that changes the way one can get a mattress.
A lot of the innovation also centers around packaging. We’re involved with a company called PillPack, which is a pharmacy that fills all your prescriptions. Instead of those little brown bottles with the white tops that are hard to open, they put the pills in this beautifully designed sealed envelope that will have your name and the day of the week. The pack will say ‘Thursday’ and then you rip it open and it’s everything you should take on Thursday. It’s a great experience but it’s not a different product. These are the same pills you would take if you went to CVS or Walgreens, but it’s the packaging and the design.
The other thing these great brands share is having a voice. They have a unique edge, a unique perspective, a unique way of talking to their customers. Casper’s branding, for example, uses a lot of animation. The Warby Parker branding uses a lot of cool literary names to market the glasses. The Honest Company has the actress Jessica Alba as the spokesperson and face behind it and even that word, Honest, suggests something very specific about the company’s voice, which is, “You’re going to know the ingredients, you’re going to trust us, and this is going to be good for you.”
That voice has to be very inherent to the owners of the brand, it can’t be artificial. I think that’s what sets these modern companies apart from the traditional guys. When you see a Gillette commercial you kind of think, “Yeah, it was entertaining, but there was probably an agency, and there was a committee, and there were edits.” Then you watch the Dollar Shave Club video with the the dude who says, “Our blades are f’ing great,” and you think, “ I like that guy.” There’s something really authentic about it and it makes you want to buy them.
We’re starting to see the fruits of these new approaches and I think it’s just the beginning. You see Unilever buying Dollar Shave Club for a billion dollars, you see Unilever also in talks to buy Honest Company, and I suspect it’s only a matter of time before we start seeing some of the other brands, like Warby and Casper and these others, potentially get acquired or maybe even go public.
That’s sort of the next chapter, but as they say, it’s the early days. Having said everything I’ve said about these brands, I think you have to be careful. It’s not as easy as simply saying you’re going to come up with the best new earbuds or shirts or cell phone cases. Most of these categories have been historically extremely hard to break into, and there are many, many companies out there.
Product companies, unlike traditional technology companies, require building stuff, making stuff, slow turnarounds, and taking inventory. It is not just bits and bytes like software, where you can write some more code, see how it goes, release it into the wild, and fix it tomorrow. You can’t do that with glasses or mattresses or shampoo.
I think one needs to do a lot of homework before thinking about launching their own brand, or investing in one. So here’s some of the cold water. One, the multiples in these industries are low. Historically, consumer goods have traded at one to 3x sales, not five to 10x like software and technology. Second, you’ll quickly find that you have a lot of competitors. If you Google “buy a mattress online,” you’ll see Casper was first but is now hardly alone. So new companies will find that others will quickly copy them and undercut them on pricing, so that’s a challenge. Third, the brand message is hard to get right. You really have to have that voice and it’s got to be authentic. Some brands do that well and some don’t.
Finally, this idea of creating a hipster brand for everything that’s going to cost less is just not that simple. There are structural differences between all these industries. You’ve got to really look at the industry structure and see if you think there are some soft spots.
Let’s take glasses for example. If you Google Luxottica you’ll discover it owns almost every other brand in glasses you could ever imagine. But I think what what is nice about monopolies from an entrepreneur’s standpoint is that typically one company that owns a lot of the market will price a little bit too high because it’s had pricing power, so if you can get in there with a new product you can really disrupt practices that have been around for a long time.
Want to hear more? This article is based on Micah Rosenbloom’s live eCornell WebSeries event, Building Digital Brands in Analog Product Categories. Subscribe now to gain access to a recording of this event and other Entrepreneurship topics.