Chasing wins not value in e-commerce
Trading potatoes isn't what it used to be
What does it mean to be a winner?
Some call it the “Silicon Valley mindset,” although the behavior of building uncontrollably large businesses transcends far beyond the boundaries of Palo Alto. However, after spending a few years in the trenches of the D2C (direct-to-consumer) space and working closely with bootstrapped and venture-backed brands, I’ve come to realize there’s a vital flaw, and sadness, in the way people are building businesses today, particularly in e-commerce.
I’ve talked before about the difference between building a brand and building a business. Anyone can build a business, especially a s***ty one. Not many people can build a profitable, growing, and sustainable brand in this space anymore. As I said before: it’s never been easier to build a business, but it’s never been harder to build a profitable one. However, it’s the founder psychology that’s changed over the years, also with credit to the advancement of technology supporting scale and policies in government centered around risk. But in my opinion, it’s the ecosystem that facilitates exit opportunities that’s not helping, and more often than not, e-commerce brands are being built with growth as a priority over profit. So what about the investors? More often than not, they’re totally cool with it.
As the saying goes: it pays to be a winner.
The wins are different for everyone.
Everyone’s motivation for brand building is different, but there’s a strong pattern in the e-commerce space (as well as software) that’s changed the way people build companies. Especially for venture-backed businesses, the “wins” may be very different than they are for a bootstrapped business. Here are a few of my favorites:
The Who Cares Win: For some founders, fundraising is the win. This means you’ve been a good enough salesman to convince an investor (or family, which is even worse) that your product is worth their money. You’re being paid a salary on someone else’s dime with a pretty nonchalant attitude towards the success of the brand. What if it fails? Well, c'est la vie.
The Secondary Win: Remember, when you raise for a business, investors are the priority shareholders (almost always). So by selling your secondary shares (or some of them) between raises to an investor, you’re taking some of your chips off the table. This is an art form. You have to convince the investor that you’re still motivated to run the company to increase its value, but you’re too salary-heavy and need more cash to justify your time.
The Get Yourself Fired Win: As much as I hate to give Adam Neumann credit for building one of the worst businesses of the last 10 years (WeWork), a $1 billion golden parachute fee is impressive, and he’s not the only one. Getting fired will often mean investors are legally obliged to pay you your share value in the business to leave. This will often apply to public companies, where CEOs, if relieved of their duties by the board, are paid out of their shares. Knowing Neumann’s rep, I bet he threw one hell of an exit party too.
The IPO Win: As expected, for a lot of founders, this is a massive milestone, and a bucket-list item for many successful entrepreneurs is taking a company public. Normally, founders who’ve stayed aboard for this long have had enough interest invested in the business that they’re keen to ride the wave. By going public, you’ll enjoy a pay rise given the capital injection and also have the ability to cash some of your shares within certain trading windows. This is a big payday for most.
The Big Win: This is the founder that dedicates their life to a brand or an idea and is in it for the long run. There are founders obsessed with building wealth and value over many years, knowing that great businesses are not built in the short term but take sometimes decades to flourish into true pioneers in their space. Whether their goal is size, success, or just stability, this is a very rare breed of individual. In a game where patience is a skill mastered by very few, this is where the most motivational and impressive case studies emerge.
Replacing the need for the want
I’ve gone back and forth with others to determine whether it’s generational and how today’s digital shopping engine supports growth over profit. If we go way back to the 1900s, or even further, when trade and commerce routes were opened, people traded with the intention of selling a product at a profit to meet a "need" rather than a "want." Access to luxury goods was limited, available only to the upper-middle-class, making it a priority to profit from trading produce or commodities. For instance, if your country needed potatoes to survive, you’d source them cheaply from farmers and sell them to consumers at a profit. On a larger scale, if your community needed coal for heating, you’d find a supplier and sell coal at a profit. The same applied to oil, rice, wheat, sugar, and other essential commodities.
In the early 1900s, the culture of loans and debt had not yet been commercialized for businesses as it is today. Back then, entrepreneurs and traders had no choice but to establish their businesses with the understanding that they had to turn a profit to stay afloat. However, U.S. policies evolved, allowing business owners to separate personal liability from their business assets when declaring bankruptcy. This legal protection, particularly through structures like limited liability companies (LLCs) and corporations, has contributed to the "go big or go home" entrepreneurial mindset prevalent in the U.S. today. The financial system actively supports scaling and growth, making business failure a more acceptable risk for entrepreneurs.
The world has slowly shifted from wins being defined by selling what people “need” to what people “want,” and technology is merely a host of that virus. It’s given human beings in commerce the ability to scale and provide unnecessary solutions that have no long term value to our survival. Founders over time have tried to build products centred around virality and quick-exit opportunities, with little accountability for failure instead of building a business that are built to survive and grow over a lifetime.
**There are the most incredible advancements in technology, and the ability to scale great businesses in commerce is still possible. But it’s the mindset and founder psychology that’s changed, with lenders and investors building an ecosystem that allows short-term wins.
Quick read: The New New Thing, by Michael Lewis.
One of my favorite Lewis books, talks about Jim Clark, a Silicon Valley titan who’s journey amplifies just how powerful technology can drive virality, especially during the .com era and how the ecosystem of investing/exits worked at the time.
The world has slowly shifted from wins being defined by selling what people “need” to what people “want,” and technology is merely a host of that virus.
This resonates.