Not all communities are created equal

Building a community can indeed provide a moat. But–I find many companies/brands/creators profess to have community, when they really just have customers or followers.

To have a truly defensible community, I believe the following need to be present: high intentionality, P2P interactions, & UGC content.

Hallmarks of “real” community:

1) Intentionality: Members seek out the community as a destination, not just as part of a broader platform’s feed

2) P2P interactions: Strong engagement and ties between members

3) UGC content: Members contribute content vs. just engaging w/ what’s broadcasted to them

More thoughts on community:

Future of Social

I like this article by Sam Lessin on the future of social, but think there’s a big omission. Namely, one of the major opportunities in social is to first focus on helping creators monetize and own their audiences, then layering in social elements on top.

Companies here may not look like social products at first, but evolve in that direction. Take Substack, for instance: first launched as a paid newsletter tool, then added community features so that readers can engage with the writer & with each other: https://on.substack.com/p/new-on-substack-build-your-community

Creators are the ones that possess user attention & trust, and will be the central players for the next wave of social.

Community-as-a-Service, or how to monetize access

As consumers desire greater control over how they spend their attention, an emerging biz model will be paying for ongoing access to *people*–or what I’ll call “Community-as-a-Service.”

There’s now lots of subscription services for high-quality premium content (Substack for newsletters; Knowable & Luminary for audio, etc). But for creators who lack the ability to sell something tangible, Community-as-a-Service enables monetizing *time* and *access*.

Examples of Communities-as-a-Service:

– Tools like InviteRobot & LaunchPass enable paid Slack groups

– Knowledge Planet in China allows KOLs to create paid groups & interact w/ subscribers

– Video games: people pay for status & attention in communities like Twitch, Fortnite, etc

The Community-as-a-Service model can combine paid subscriptions for access to the community itself, and tipping to express support/appreciation (including admins tipping community members for valuable contributions!).

Not every community can successfully charge for access. The paid model works best when there’s high intentionality (the community is a destination), desire for recognition within the community, peer-to-peer affinity & interactions, and potential for ongoing exchange of value.

For fans, the value prop is meaningful conversations and connection with each other and deeper engagement w/ someone they have affinity for. For creators, the benefit is being able to earn money and engage with fans, without having to produce something.

Deeper trends driving this:

– Creators have amassed audiences but lack ways to monetize it in a value-aligned way (not ads)

– Desire for creators to own user relationships directly

– Move towards curated micro-communities

– Value of experience over things

Paid Groups & The Passion Economy

In the next few years, we’ll see more large communities moving off major social platforms where they originated + setting up their own independent properties, with built-in direct monetization models.

This is a fascinating example of the Passion Economy at work.

Some notable recent examples:

– Earlier this year, the 800k+ member subreddit Change My View–which promotes discourse around opposing viewpoints–launched its own website with custom features that go beyond Reddit’s capabilities

– The Woolfer, a FB group for women over 40 with 30K members, moved to a paid app/website. The reason? “This is a volunteer-run organization that has gotten too big, and we can’t sustain it anymore unless we make money” (h/t @juliey4’s great thread https://twitter.com/juliey4/status/1184264248874061824…)

The themes behind these moves to a dedicated property are:
– Outgrowing existing social platforms and needing additional product features specific to their community
– Lack of monetization options/viable business model for group creators on existing ad-driven social platforms
– In addition, various models have de-risked that consumers are willing to pay for curated, high-quality content/community (e.g. Substack, The Wing, etc).

The challenge will be to leverage existing horizontal social platforms for discovery & distribution, while giving a compelling enough value proposition so that power users move to a narrower, premium community.

It’s the 1000 True Fans idea in action.

What are other examples you’ve seen of this?

Pros and Cons of Managed Marketplaces

Thread: We all know managed marketplaces (where the platform provides additional value-add in terms of intermediating the service delivery) can create a step-function improvement in user experience, but despite that, they can actually struggle to scale as businesses.

Examples of the functions that managed marketplaces often take on include vetting providers, handling logistics, or authenticating goods. This translates into a much better user experience, but can also mean greater operational overhead, lower margins, and difficulty growing.

The complexity of intermediating the transaction is not trivial.

Consider Beepi–a managed marketplace for used cars–which created an amazing user experience (90+ NPS), but ultimately shut down due to challenges becoming unit economic profitable in many markets. For Beepi, the costs associated with each transaction included rigorous inspections, free returns, delivery, and a guarantee to buy the car if it didn’t sell within a certain time frame.

In categories where services are viewed by users as commodities and/or users are especially price-sensitive, the open version of a marketplace often wins out over more managed versions.

For example, Craigslist and Thumbtack are much bigger businesses than marketplaces that have attempted to employ home services pros themselves and own the end-to-end experience.

But for more emotional categories that are more ongoing in nature or have variable outcomes, where each provider is meaningfully different, and the stakes or $ values are higher, the managed version often does better than the unmanaged version.

Here’s some examples where managed marketplaces have gained ground:
– Uber (more managed w/ centralized matching and pricing) vs. Sidecar (double opt in, no centralized pricing)
– Lambda School (managed) vs. open MOOC platforms
– Rover vs. finding a dog walker on CL/via WOM
– TheRealReal vs. unmanaged consignment marketplaces

What do these managed marketplace companies have in common?
1) Focus on a service category where users value the experience differential and are willing to pay a premium that offsets increased costs
2) Building software to improve efficiency
3) Focus on high AOV & high frequency

Another factor to consider is that labor/service marketplaces typically have more overhead than product marketplaces in terms of management.

That’s because every aspect of a service can be managed end-to-end, and there’s frequently a geo-specific aspect to the overhead, vs. a product marketplace can just manage specific aspects of the transaction (validation, logistics)–much of which can be outsourced / centralized.

With any unmanaged marketplace, there’s going to be variance in quality. For categories where there’s less tolerance for uncertain quality/experience and desire for more consistency/certainty, a managed approach can win out.

For founders, the key is finding a way to provide a more delightful, managed experience where it matters, but doing so scalably, leveraging software. For instance, designer goods marketplaces can reduce the # of items needing manual authentication by predicting which items are most likely to be fake.

In addition, validate that you can charge higher prices or increase take rate to cover the costs of managing the marketplace.

TL;DR: Managed marketplaces can create a step-function improvement is user experience, but they can be complicated to operate & challenging to scale. There’s a number of factors to consider in whether to go unmanaged vs. managed, and to what degree.
For more on managed marketplaces, see our blog post:

https://a16z.com/2018/11/27/services-marketplaces-service-economy-evolution-whats-next/

Enterprization of consumer

New tools are emerging and focusing on *consumers* first. That’s because consumers today aspire to become businesses tomorrow. I’ll dub this the “enterprization of consumer.”

It used to be the case that software tools focused foremost on business customers, because they had business needs and could spend money on such products. In that vein, Canva, Shopify, Wix, etc. built multi-billion dollar businesses based on empowering and selling to a large number of SMBs. 

Now, a new generation of tools have users that are initially just regular individuals, but who want to grow into businesses in their own right. There’s an opportunity to engage users pre-”enterprization”, enable their growth, and capture greater economic value as they professionalize.

The recipe is to start with a very basic offering — something that might even look like just a toy — and, as customers grow and start to earn revenue and develop new needs, get pulled into additional product capabilities. 

By virtue of engaging users early and enabling them to start and grow their businesses, these products build deep workflow lock-in and loyalty, and have the potential to supplant existing b2b-focused platforms.

The undercurrent here is that digital platforms have enabled people to amass an audience, and so creates an opening to help individuals turn their unique skills/knowledge into a business, whether that’s through designing and selling merch, self-publishing, starting a podcast, or other means.

Some examples of the “enterprization of consumer”:

  • Instasize started as a free app for resizing IG photos, then realized much of their user base was comprised of “aspirational influencers” who want to uplevel + differentiate their content and grow their following. So they moved into premium features to help users achieve these goals, including filters and editing tools, as well as an inspiration map that helps users find photo-worthy/Instagrammable locations around the world
  • Substack helps individuals easily launch paid email newsletters. The tool is built to be intuitive enough for normal consumers to use, who can opt to make their newsletters free. At the high end, top creators on Substack are making $500K a year! In the old world, these writers would likely have had to join an existing media publication as their livelihood.
  • Universe enables people to create websites entirely from mobile in a few taps. As a result of being mobile-native, the user base skews young and international. Lots of the websites created w/ Universe are purely personal/just for fun–sites that people likely wouldn’t have built with SMB-focused website builders. You can imagine these mobile-native consumers staying with Universe as they grow and monetize, and the platform can capture more value by building out richer functionality and features.
  • CALA is fashion house technology that makes it easy to design, produce, and deliver custom apparel. Initially, the product was used by a lot of fashion design students and influencers to create one-off projects. As these creators grow into the next generation of fashion designers and launch their own brands, CALA grows with them and can capture more value through the managed marketplace.

The “enterprization of consumer” is all about starting off as a lightweight, accessible consumer product. But as those individual consumers grow into businesses — whether as influencer brands, writers, podcasters, streamers, etc. (jobs that don’t even exist now) — these tools can evolve to meet their needs. 

See my thread on the influencer stack here for related thoughts: https://twitter.com/ljin18/status/1088501349187182592?lang=en

What else have you seen like this?

Tweetstorm: The best marketplaces solve a demand need

Tweetstorm: The “influencer stack” and China’s influence incubators

5 Things to Look for to Make E-commerce Startups Work

There are over 400 startups trying to be the next Warby Parker, but history shows that 90%+ of e-commerce companies will fail. What separates the successes from the failures? Here are 5 things I look for to figure out if an e-commerce startup is a good opportunity –>

1. Does it have defensible, scalable acquisition channels?
2. Is it operating in a category that is well-suited to brand building, and if so, has it built a brand that people love and trust?
3. Is it selling a unique product that not everyone can offer?
4. Does the business have network effects?
5. Are there economies of scale that can be captured ahead of later entrants?

Unpacking each one of these:

1. Customer acquisition: It’s unsustainable to rely heavily on paid acquisition channels to grow, as the margin ends up being bid away.

Instead, does the company have unique, scalable ways to reach new consumers, e.g. a devoted community who spreads the word, or exclusive distribution channels?
Dollar Shave Club’s launch video was a major accelerant for customer growth, and cost just $4500 to produce. While viral videos aren’t an uncrossable moat, it was an advantage that helped build up brand awareness cheaply, and enabled DSC to reach scale first.

2. Brand: Brand as defensibility exists for a lot of companies–but not all product categories are suited to building strong brands, and brand defensibility is also difficult to assess in the time frames that map to venture investing.
Brand as defensibility works better in categories where there is a big emotional component to the purchase, where a sense of identity or community is intertwined with the brand, e.g. categories like health, cosmetics, or anything aspirational.

Whitelabel a Glossier/Chanel/La Mer product, and chances are women won’t covet them nearly as much, even if the contents inside are the same. See my tweetstorm on the shifting power balance between brands & aggregators–and where the opportunities are:

3. Product: Does the startup have defensibility in terms of creating a proprietary product that others don’t have the ability to create, whether that’s derived from better design, deeper customer understanding, or manufacturing moats?

As an example, Hubble Contacts found that the vast majority of the contact lens market is controlled by a few manufacturers. Hubble was able to establish exclusive supplier relationships that blocked other contact lens startups from scaling in the US.

4. Network effects: There are various flavors of network effects in e-commerce. Marketplaces, obviously, improve with more buyers and sellers.

But even a single retailer or brand can have network effects. Stitch Fix’s algorithms for predictions and recommendations improve each time a customer reviews the items their stylist chose for them, leading to greater retention and LTV.

5. Scale effects: Amazon is the archetypal example of a retailer that thrives on economies of scale. As a startup example, Rent the Runway purchases expensive designer apparel and accessories, amortizing that cost over multiple rentals from different customers.

With greater scale, RTR can increase utilization, expand its inventory, and lower prices, making it harder for another women’s rentals startup to compete.

Not every company will be a ‘yes’ to all of the above, but more of these being true can indicate a stronger opportunity.

There’s also interactions between these: Strength in one regard can compensate for the absence of another. A manufacturing moat in a large category means establishing a beloved brand is less important. A strong distribution advantage can be investible in and of itself.

Obviously, building a great company and making investment decisions is more nuanced than just 5 factors. It’s apparent that there’s still tons of exciting opportunities left to build great e-commerce companies, and I’d love to chat if you’re working on one!

 

Software Eats Brands: Aggregators Are The New Consumer Brands

1/ Consumers increasingly trust Amazon, Stitchfix, and other aggregators to sort and surface the best products, which diminishes the importance of individual manufacturers. This means the algorithm is the new consumer brand–signaling trust and quality.

2/ Brands used to play an important role in an offline world with limited access to information, acting as a proxy for preference, functionality, and quality. For instance: I need to buy detergent, and I trust that Tide will do the job well.

3/ But with ecommerce, algorithms incorporated user preferences, reviews, and product traits, and became smarter with more purchases & data. “Amazon’s Choice” or “recommended for you” fill the same need that brands used to, giving us confidence that we will like something.

4/ The decline in importance of brand is not limited to utilitarian, Amazon Basics-able categories. It’s also happening in categories where brand used to really matter.

5/ In fashion, personal styling companies like Stitch Fix capture data on users’ style and size, and bypass user choice to send them clothing they’re likely to love. If you ask a customer where an item is from, she’ll likely say “Stitch Fix,” not the actual underlying brand.

6/ In the travel vertical, Airbnb and other aggregators have also eroded the power of hotel brands. Hotels represented a certain experience and quality–the name was so important that most public hotel companies’ revenues come from franchising.

7/ But user reviews and algorithmic recommendations chipped away at this brand advantage, enabling independent operators to compete on the same footing as established hotel brands.

8/ As more verticals get “Stitch Fix’ed” by shopping platforms with data network effects and growing user trust, the winners are long-tail brands that can be discovered and build healthy businesses. But the losers are big brands who can’t win on the basis of brand alone.

9/ So what does this mean for founders who are aiming to build consumer companies?

10/ First, the platform always wins. If you rely disproportionately on digital platforms at any point in the purchasing funnel, it’s important to realize that your ability to reach consumers depends on a black-box algorithm.

11/ Secondly, not all consumer categories are created equal. Some are less prone to algorithmic disruption than others. In some categories, brand will remain important for years to come. More attractive categories for brand-building include:

12/ a) Categories where look and feel and emotion matters just as much, or more, as the underlying function. No one will ever say to Alexa, “Buy a smartphone” because they care too much about the intangibles of look and feel.

13/ Many women are happy to pay an extra $30 for a Dior mascara even though there’s widely known drugstore dupes, simply because of how it makes them feel.

14/ b) Categories where people’s taste is hyper-unique and specific. Food is a literal example of this: there’s actually preferences at the chemical level. Being a Pittsburgh native, I will only eat Heinz ketchup because it actually tastes better than other brands!

15/ c) Categories where brand is closely tied to a sense of identity. Strong brands can create a language for self-expression, where having their product feels like gaining membership in a club.

16/ I’d wager that ridesharing and AVs will be more disruptive to lower/mid-tier car manufacturers where the product is viewed as a utility, vs. luxury brands where ownership is just as much a signal of personal identity.

17/ Outside of the core product, there’s also a universe of other factors that can serve to shore up brand defensibility–for instance, the content and community that build user loyalty and foster an emotional connection. Or, a unique shopping experience that serves as a draw.

18/ And removing yourself from the algorithm entirely can also work, if you can get enough leverage. Existing outside of aggregators like Amazon, and creating a standalone presence for your brand online and offline is a sure way to own the end customer relationship and mindshare.

19/ Overall, the winner in this shifting power balance between aggregators and brands is the consumer. We’re lucky that instead of spending time & energy sifting through products, or relying on brands as shortcuts, we now have access to services that do the hard work for us.