Promising Startup: Situation Analysis by Mark Saster

Original author: Mark Suster
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Note perev .: in this article, Marc Saster, venture capitalist and investment partner of Upfront Ventures, talks about the MakeSpace project, which he supported.

Mark discusses how to implement Clayton Christensen's ideas about disruptive innovation in practice and which areas of development of modern technology businesses from his point of view may turn out to be the most successful and financially sustainable.

Amazon This name has become a household name. It has become synonymous with other Internet companies for which the French invented the contemptuous term “les GAFA”, which includes the abbreviation Google-Apple-Facebook-Amazon and emphasizes the superiority of American companies on the Web.

Try to imagine that you have not heard anything about Amazon, and company representatives go to meetings with venture capitalists and tell you that they are going to turn the commerce market, starting with books, and then gradually moving on to selling electronics, clothes, toys and so on. It is unlikely that they would have received a warm welcome from investors - until one day they would have shown them how orders from the Amazon website delivered drones.

Amazon symbolizes companies that are rebalancing the market without making a lot of noise. They are breaking through due to well-established supplies, supplies, inventory management and storage, customer support, merchandising, cross-selling and, ultimately, better prices and significant market coverage.

All this is difficult to imagine until you see how such a business works in full force, overtaking retailers who spend money on rents and because of this either increase prices for products or reduce their profits.

That is why Amazon has a market capitalization of $ 200 billion.

In the same way that I was struck by the apparent dominance of this retail monster in the US e-commerce market today, I was puzzled by the idea of ​​creating the MakeSpace project. The goal of Sam [Rosen] was to create a technology company that provides opportunities for storing tangible items in the “cloud” and building a large-scale business that will be very difficult to compete with.

I had several investor friends who instantly saw a parallel between these two concepts, but others scratched their heads and said: “How can a company engaged in storage of tangible objects, even using the term“ cloud ”as a promotion, be really technological?”

Let's start from the beginning.

In the United States alone, the warehouse market, which is completely divided into segments where the leading player is a company that controls 10% of the total market, attracts $ 24 billion in annual revenue. And, let's say, today these companies do not equip their business with any technology.

I have not met a single person who would be completely satisfied with the services of a company providing him with storage facilities. No one. Most people who are not very knowledgeable about this industry assume that individual storage is used exclusively in densely populated cities like New York. In fact, New York's share is only 3% of the total US market, and areas such as Dallas in Texas, on the contrary, are among the five territories where this service is most in demand.

Vaults are used in many [economic] markets for a wide variety of purposes that you are not even aware of. This business has gained significant size not only in Dallas, but also in San Diego, Phoenix and Sacramento, as well as in Boston, Chicago, Washington and, of course, in San Francisco.

How much do these obsolete enterprises cost? One of the largest storage facilities in the United States costs $ 35 billion, and the cost of a few more smaller ones also amounts to billions.

Nor are they equipped with any modern technology. They do not use innovation at all. Warehouses are akin to real estate investments, and your skis, bicycles and winter clothes become their inhabitants.

MakeSpace set out to completely update the entire storage process. We ship the boxes to your home, you pack them, and we take them back for free. We take a bird's eye view of your belongings and provide you with a convenient application for reliable tracking of values ​​distributed across labeled containers.

If you need any separate container at a specific time, you need to leave a notice 24 hours in advance. Thus, all your things will arrive on time: a tuxedo - just in time for the wedding ceremony, ski - before leaving for vacation, and winter clothes will be returned to the warehouse in spring.

The value proposition is pretty clear. Most customers will not travel a few miles to the warehouse: they opt primarily for small local companies. However, today's advantage - real estate ownership - tomorrow can be a big obstacle.

That's why Blockbuster Video video rental stores are eagerly waiting for a company with centralized vaults, cost advantages and logistical capabilities to rent their outdated premises. This is the classic “innovator dilemma,” and we know how it ends. I have no doubt that multi-billion dollar startups with products of higher quality and lower prices will upset the existing balance of power in this market.

And here is the thing. The main reason we consumers make repeated purchases on is both price and service. It is much simpler and more convenient to order goods with home delivery within one day, while being able to choose among a large assortment, make purchases at low prices and not experience difficulties in the event of a return of goods. This is a no brainer.

What do consumers think about MakeSpace 18 months after launching a project in New York?

Everything is very simple: if you provide excellent customer experience in an area that is potentially interesting to users, but which they are now ignoring due to the lack of convenient solutions, you can create exceptional devotion to your brand from customers.

When we talk about "disruptive innovation" in the sense embodied in Clayton Christensen 's magnificent book "The Innovator’s Dilemma" , we mean that "disruption" almost always occurs due to cheaper prices, which, in turn, often leads to an increase in volumes market. This is what led me to the following conclusion: all the major Internet companies are "deflationary . " This made me invest primarily in MakeSpace.

Below I have placed a financial chart ...

42% of today's customers simply would not want to store their belongings in a traditional warehouse complex. These are young city dwellers who do not have the time, money and desire to drag their belongings somewhere to the outskirts of the city to put them in a 6 × 6 container, and 60 days later not have a clue what they left there, and how it all can be easily returned back. And if you think that 42% of our customers are a large market share, see what happens when we reduce costs, disperse our enterprises across the country and increase brand awareness.

Are these companies as archaic as dinosaurs? Of course yes. They know that they will not be able to get around startups in innovation, so they began to conduct advertising campaigns in New York, saying: "do not trust your things to the cloud storage." Ha. How much do they need to worry?

In just the first year of operation in New York, MakeSpace attracted more than 2% of its target market customers with almost zero budgets for marketing and customer acquisition. The modern personal storage market (unlike Blockbuster Video) has a long enough history to capitalize on this and realize that today's assets may tomorrow become a stone on the neck.

Since we reached a payback about 5 months ago, taking into account the costs of attracting users, and our indicator of the ratio of the lifetime value of the consumer (LTV) to the sum of the costs of attracting users (САС) is already more than 4.5 (and continues to increase due to a decrease CAC, and by increasing LTV), we will have many opportunities for growth as soon as we decide to focus on capitalization.

“But, Mark !,” you say. - Well, let's say I get an advantage by centralizing the service. But can you say that MakeSpace is a technology company? Is this really so? ”

Much more technological than you might think - that’s why the money received from our last round of raising capital went to the construction of technological infrastructure, which will allow us to be very different from the clone companies that began to appear in this area. Some of them literally stole images from our website, our price lists and copied the format of communication with customers - as if this is the only thing necessary to succeed. Try copying the Amazon frontend now!

Which areas did the capital raised by us go for development? These are driver routing systems, planning, inventory management and tracking systems, warehouse management systems, photo automation, customer service applications, as well as familiar front-end solutions, such as a thing tracking application.

We have an excellent team of drivers in New York, Washington, Chicago, who deliver things daily to local warehouses, while choosing the most optimal and low-cost routes using our technologies. But, as you understand, we also made these technologies available to third-party companies working in areas that were not mastered by our own drivers. In addition, for a product called MakeSpace Air, we have implemented integration with UPS.

We are creating a national business and a recognized brand within a large segmented market that many hate. I know that the market for storing goods is very unattractive for many, but from the point of view of the potential for disruptive innovations, this direction is just a paradise on earth.

And finally, another thought. Imagine a solution whereby things of people from all over the country are stored centrally and securely. Imagine a company that owns its own cars and attracts third-party drivers to cooperate. Imagine a business that offers relatively inexpensive solutions, but with a revenue stream, like a SaaS platform. Having gathered all these elements together, you can imagine the direction of our movement in the future. We believe that we will be able to expand our common existing market from 50 to 75 billion dollars in the United States alone.

I believe that the future lies with the teams that create technology companies around tangible objects. It is more difficult for such enterprises to develop, but if they succeed, they will be able to provide higher reliability of cash flow compared to startups that create now popular consumer applications.

And we intend to compete with the dinosaur enterprises without technical equipment and the “dairy cows” enterprises, which should arm themselves, because in our face they will see barbarians at their gates.

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