Tag Archives: FleetBoston Financial Corporation

About 4465 days ago E-Commerce

E-Tailing By The Numbers

realbusiness.com The Scorekeepers What’s the key to successful online sales? First you find a great niche. Then you set rigorous numerical standards and stick to them Company: Shoebuy.com, in Boston What it does: Sells shoes online Number of employees: 8 Conventional wisdom: Everybody knows that E-tailing is dead. Just read the papers. Unconventional wisdom: Executed well, the E-tailing model can yield healthy profits. Revenue growth: $1.8 million in 2000; more than $30 million projected for 2001 Profit profile: Founded in April 1999, the company first turned a profit in January 2001. Capital: Start-up investment of $200,000 in personal funds; $2.3 million from angel investors Selling shoes online. It’s the kind of business you’d expect to be the brainchild of a fashion maven with a closet full of Manolo Blahniks. But Scott Savitz and Craig Starble couldn’t care less about shoes. What turned the two investment bankers on to peddling oxfords online was the opportunity to use their quantitative skills to test whether E-tailing could really work. In early 1999, Savitz and Starble were working at BankBoston (now Fleet Bank). Starble, now 38, was managing global treasury funds, while Savitz, 32, specialized in individual investments. Investment bankers, says Savitz, take a “very formularized approach to recognizing value in any opportunity,” adding that he himself was always conservative with his clients’ funds. “We never went for home runs,” he says. “We aimed more for singles.” As the pair witnessed all the start-up activity in E-tailing, they decided to take a shot at it themselves. But what exactly would they sell? At the time it seemed as if almost everything that you could conceivably sell online was already being sold there. But no one appeared to be selling shoes over the Internet, at least not in any major way. Which, of course, made them wonder why. Would consumers buy shoes without trying them on first? “Until about the fall of 2000 we tried to talk ourselves out of doing Shoebuy,” says Savitz. “But the more we did the numbers, the more it made sense.” What made particular sense to them was that the people who were already buying $2.5 billion worth of shoes through mail-order catalogs would almost certainly be open to shopping for them online. As Savitz and Starble made their calculations, they came to believe they had uncovered what Savitz calls “a hidden gem.” It seemed that if shoes were sold right, they could bring in extraordinarily healthy profits. Typical shoe retailers, says Savitz, start with about a 100% markup, but that usually whittles down to a 3.5% net margin after they deduct all their costs. Savitz and Starble were determined to eliminate as many of those costs as possible. To entice potentially reluctant shoppers, they decided to offer free shipping. But even after subtracting that cost and salaries for customer-service, technical, and business-development personnel, they were left with a staggering — albeit still theoretical — 30% net profit. Savitz was determined to maintain that 30%, which to him meant that the company would have no sales force, no inventory, no warehouse, and as few employees as possible. It would be, in other words, a virtual organization. “The virtual company was supposed to be the promise of the Internet,” says Savitz, “but somehow that got lost for a lot of people along the way.” Maintaining a warehouse and inventory would erode their precious margin by 18 points. Moreover, says Savitz, by holding inventory Shoebuy would incur the exposure to loss from radically changing trends in footwear. Adding a sales staff would cost the company another 10%. For that reason, Savitz says, he has no plans to add to his staff of eight at any time soon. “We just have to make sure we never spend more than our model will allow,” he says. “Otherwise it won’t work.” Armed with what they saw as a terrific market potential and the chance to land some hefty margins, the partners set out to use their quantitative skills to manipulate those numbers to their advantage. The number that in the end would matter most: the lowest customer-acquisition cost possible. One afternoon last fall, Savitz sat at a folding table in Shoebuy’s modest corporate office in Boston’s financial district, animatedly describing his passion for keeping customer-acquisition costs low. He briskly rattled off a series of well-known online players and the average amounts he had estimated that they spent to snag a single sale: Amazon, $103; Bluefly.com used to be $245 but got it down to $58. And the now-defunct Garden.com, Pets.com, and Furniture.com had struggled along at $71, $200, and $500, respectively. Savitz wouldn’t allow Shoebuy’s figure to rise above $15. He chose to keep marketing costs low by establishing alliances with shopping sites and striking customer-share deals with highly focused E-tailers. He also scored a cobranding coup: Shoebuy was featured prominently in a MasterCard ad that appeared in fall and winter 2000 issues of Bon AppÉtit, Martha Stewart Living, and Gourmet magazines, among others. The ad didn’t cost Shoebuy anything up front, although customers received a discount by using Master-Card for their Shoebuy purchases. The other number that would make or break Shoebuy would be what Savitz calls the company’s “fulfillment metric” — how fast manufacturers could get their shoes to Shoebuy’s customers. But before he could determine what that number should be, Savitz had to persuade manufacturers to drop-ship shoes from their own warehouses. Typically, shoe manufacturers receive shipments from overseas factories in large crates, which they then ship to retailers. To work with Shoebuy, vendors must set up a consumer-direct fulfillment system from scratch, a process Savitz says has been arduous at best. Even after Savitz signs up a vendor to sell its shoes through Shoebuy, it can take up to six months to get its product on the site. Mike Kormos, president of Footwear Consulting Group, in Nashville, says it’s no surprise that Shoebuy has met with resistance. For one, he says, manufacturers fear channel conflict. More important, says Kormos, is the traditional, hidebound nature of the footwear industry. “There’s typically a lethargy in adopting new technology,” he says. Savitz says that manufacturers have gradually embraced the Shoebuy concept. One thing that’s worked in Shoebuy’s favor has been the attraction of one-stop shopping. “It’s hard to make money on the Web when you’re only selling a single brand,” says Savitz. But what really convinced manufacturers of Shoebuy’s value, says Savitz, was their own botched E-tailing efforts. “Some companies have tried selling online on their own,” he says. “And they’ve seen what a costly procedure it is, from building the site to installing in-house customer service. It actually becomes a losing proposition for them.” Savitz admits that launching the company would have been a lot easier if it had maintained its own inventory. “But then you start taking away all the things that make our business model so appealing,” he says. Under its current system, Shoebuy can offer a selection of products that would have been impossible if the company had kept its own inventory. The arrangement is also good for cash flow. “We don’t pay for shoes until after we sell them,” says Savitz. Savitz believes that Shoebuy’s cash-flow advantage explains why the company is still around and onetime competitors like MyFavoriteShoe.com aren’t. “They immediately went out and put good names on the site, signed deals with the Bruno Maglis, and bought a boatload of inventory,” he says. From Savitz’s perspective, that approach was flawed. Even if the folks at MyFavoriteShoe had perfectly forecast their prospective customers’ buying patterns, they still would have tied up their cash for six or seven months while they waited for their inventory to sell. Shoebuy takes on a limited number of each new manufacturer’s products on a trial basis. Companies that sign on with Shoebuy agree to ship shoes within an average of three to five days after an order has been placed. “We can’t explain to the customer that it wasn’t us; the manufacturer screwed up,” says Savitz. He and Starble monitor each manufacturer’s sales history, and unless a particular style meets their sales expectations, it comes off the site. Given Savitz and Starble’s careful calculations, Shoebuy’s 2001 revenue projection seems jarring: somewhere north of $30 million, up from $1.8 million in 2000. How can the founders justify such a “hockey stick” trend line? “We’re in a very scalable position,” says Savitz. “We have a large market with virtually no competition and more than $60 million in ‘inventory’ available on the site. We have the infrastructure to sell at that rate, but we don’t have the actual inventory risk.” Savitz admits that if the company stays at its current run rate, 2001 revenues will be closer to $4 million. “But we went up over 100% from third to fourth quarter 2000 without hiring anyone, and that momentum hasn’t stopped,” he says. But for the company to make those projections, will Savitz and Starble need to seek additional outside funding? “No, but we probably will anyway,” says Savitz, “because the environment is so good for acquisition targets.” Possible candidates might sell similar or complementary items that Shoebuy could roll into its model and scale up appropriately. “But we will never hold inventory, and you can quote me on that,” emphasizes Savitz. “I can’t see that we’d ever go against our model or abandon the metrics we’ve established.” With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4890 days ago E-Commerce

The Start-Up Diaries: Mother Is the Necessity of Invention

Adam Kanner needed the highest-powered talent he could get. And he knew just where to find it When Rob Levinson faced Adam Kanner across the threshold of Kanner’s family home in October 1998, the two might have been posing for an iconic portrait of the old and new economies. There was Levinson, a 35-year-old refugee from a big Boston ad agency, all decked out in nice clothes and a tie. And there was Kanner, the then-27-year-old founder of the Internet start-up edu.com, dressed in jeans and a T-shirt and sockless to boot. But in a matter of seconds Levinson had bridged the cultural gap. “I know exactly how you feel,” edu.com’s marketing-director-to-be told Kanner. “I used to run a business with my mother, too.” The fact that Kanner is launching edu.com with Linda Kanner, who also launched him, has introduced what both mother and son call a “huge weirdness factor” into what is otherwise an archetypal dot-com start-up tale. Inverted hierarchy adds another twist: as chief operating officer, 55-year-old Linda Kanner reports to her son. “Everyone asks about it,” says Adam, taking a chair near the slightly more boyish version of himself that peers out from a frame on his mother’s desk. “They want to know, What happens if Mom screws up? Will people work for a mother-son team? Can Linda be objective when the person making decisions is her son?” But what outsiders find curious, the CEO simply considers smart staffing. Growing up, Kanner watched his mother power her way through a series of high-profile positions, including senior vice-presidencies at BankBoston and Bank of New England. Even after he left Boston for marketing jobs in New York City, hers was the number he dialed whenever he wanted to toss out a new business idea. So when one idea — an E-commerce site selling discounted brand-name goods to the college crowd — finally stuck, he desperately wanted her to be part of it. “Every entrepreneur my age should have the benefit of bringing someone like that to the table,” says Kanner. But clearly edu.com is Adam Kanner’s table — one he’s been mentally setting since the mid-1990s, when he was working at prestigious New York ad agencies J. Walter Thompson and Saatchi & Saatchi. As an account manager, he was charged with initiating lifelong love affairs between Gen-Xers and products like Tide detergent. “These marketers are willing to spend a disproportionate amount of money to get products into college students’ hands because that’s the point at which they’re developing brand loyalties,” says Kanner. “But handing out samples is a flip of the coin, and traditional media advertising isn’t efficient. When the Internet started to get big, I thought it might be the answer.” At the time Kanner was also toying with a plan to manufacture customized CDs, and he figured a stint at Harvard Business School would let him put both ideas through their paces. So he made the CD project the center of a yearlong field study and split the college-marketing scheme among the remainder of his classes, emerging at the end of his second year with full-fledged business and marketing plans and a polished investor presentation. By June 1998 he was convinced that the college Web site was the better bet. “The only drawback to starting this thing was that I’d have to live at home for a while and I couldn’t spend the summer in Europe,” says Kanner. “As far as I could see, there was zero downside.” Well, almost zero. Like any Internet entrepreneur worth his salt, Kanner has been logging 16-hour workdays, resulting in the total annihilation of his personal life. Most of his time is spent on the fund-raising and sales circuits, as the young CEO hammers out partnerships with those stellar brands he feels the company can’t live without. And often his mother has been beside him. After the young founder moved back into his family’s home in Lincoln, Mass., in the summer of 1998, he hopscotched across the country, pitching blue chippers such as IBM, Dell, and AT&T on the merits of making edu.com their collegiate distribution channel. Linda Kanner was still only a consultant for the start-up at that point and was unsure about making a greater commitment. Several Boston venture capitalists had reacted unfavorably when the two had informally floated the idea of her assuming the COO role. “I told Adam that if you have to get rid of Mama to get funding, then that’s fine,” Linda says. That November, having already netted $150,000 in cash from individual investors (including $50,000 from his grandfather) and offers totaling $1.5 million more from several angels, Adam flew out to Silicon Valley, hoping to persuade Apple and some other computer-industry types to offer their products through his site. It was never meant to be a fund-raising trip — he figured that edu.com was still too embryonic to parade before professional investors — but on the advice of a friend he decided to drop in on a few VCs. “I had a list of firms, but I’d only heard of a few of them,” he says. When he went to see people at the Mayfield Fund, a respected 30-year-old firm that manages more than a billion dollars in capital, “I didn’t know them from Joe’s Venture Capital Firm and Garage,” Kanner says. That navetÉ turned out to be to his advantage. “If I had known the stature of the people I was dealing with and the stakes that were involved, I would have been intimidated. But I didn’t know,” he says. “So I would be really frank. I’d say, ‘Listen, if you’re not going to come to me with a valuation in this range, it’s not going to happen. It was great to meet you. Let’s stay in touch.” Linda Kanner found it hard to share her son’s sangfroid. “I’m sitting there listening to Adam talk to these guys and thinking he should be thrilled that they’re interested, even at lower levels,” she says with mixed horror and admiration. “And he’s saying, ‘Nope, not good enough. We’re worth more than that.’ I couldn’t even listen.” But the VCs did listen, and Adam Kanner’s three-day sales trip turned into a three-week fund-raising marathon, at the end of which he flew home with $2 million from the Mayfield Fund and an additional $1.8 million from Information Technology Ventures. Better yet, unlike some of their East Coast counterparts, the Silicon Valley funds smiled upon Linda Kanner as welcome seasoning for the young firm. Today, as edu.com’s 55 employees get comfortable in newly rehabbed office space on the cusp of Boston’s Chinatown, close to 30 vendors have embraced edu.com’s business model, which has grown increasingly sophisticated since the days when Adam conceived of a place for college kids to buy stuff cheap. The company is now a multifaceted commerce site that offers vendors of computer products, financial and telecommunications services, textbooks, and travel a way to sell to, collect information on, and customize pitches to college students. The company makes money in two ways: from product sales, and from marketing dollars that pay for research studies, banner ads, customized storefronts, and other services. Of course, most of those revenues are so far theoretical. Kanner projects that edu.com will remain unprofitable until the end of 2002. The start-up also faces some formidable obstacles. For one thing the indisputable yumminess of the college market (15 million mostly wired students spending a total of $120 billion a year on goods and services) has not gone unnoticed. Edu.com’s potential competitors include on-line textbook sellers like VarsityBooks.com, which is one of its partners, and peddlers of more general merchandise like CollegiateMall.com, CollegeClub.com, and StudentMarket.com. “I think we’re going to be part of a consolidated industry with at least one or two multibillion-dollar players and maybe a few smaller ones,” says Kanner. “We may be the consolidator. We may be consolidated.” Another fly edu.com has to pluck from its ointment involves technology. Its Web site is a complex, heavy-duty commerce engine that as of last fall still needed a lot of banging. Kanner hoped to achieve relative perfection by year-end, but during the site’s first few weeks of operation “the most frequently visited page was the error message,” says the CEO. He attributes most of the problems to haste: in order to fulfill its commitment to a partner, edu.com had to launch in time for the back-to-school season, which left just two weeks for testing. Adding to the stress is Kanner’s heavy business-development schedule, which has kept him out of the office and remote from what he now considers critical decisions. “I didn’t even see the problems until the site went live,” he says. “I went on to check what we were charging for a Targus computer bag that I had seen advertised on another site, and I couldn’t find it. It took me 10 minutes just to figure out how to search for it. I couldn’t believe that a business grounded in creating a best-of-market commerce experience was this disaster of consumer unfriendliness. It made me almost explode.” On that occasion Kanner charged down the hall to confront the person who was ultimately responsible for the mistake: his mother. “She was just as upset as I was, but we had to have this conversation that said, ‘You dropped the ball, and how are we going to fix this thing?” says Kanner, sounding like anything but a mama’s boy. “There’s probably a downside in this for her in that I hold her to standards much higher than I hold any other employee. I always thought my mom was perfect. Now I’m getting to know her better, and you know what? She’s a real person who makes mistakes.” Leigh Buchanan is a senior editor at Inc. Read the complete Start-Up Diaries series. Executive Summary COMPANY: edu.com FOUNDER: Adam Kanner, 29 FAMILY: Single EDUCATION: B.A. in government from Harvard University; M.B.A., also from Harvard TYPICAL WORKWEEK: 90-plus hours, much of it spent on the road raising money and negotiating with potential partners. “I have no life,” Kanner says. CONCEPT: Create a Web site where major consumer brands can win the dollars and loyalty of college students — a market that is hugely wired and poised to embark on a lifetime of spending — by offering best-in-market pricing on everything they need for school FINANCING: $1.8 million from Information Technology Ventures, $2 million from the Mayfield Fund, and $150,000 from private investors PROJECTIONS: Profitability by the end of 2002 HURDLES: Getting noticed in an electronic marketplace as noisy as a frat party; competing with a slew of other student-hungry start-ups; quickly assembling a mighty technology team and bringing the site up to snuff PERSONAL FUNDS INVESTED: Zero EQUITY HELD: The largest slice of the company pie SALARY: Enough to live on PREVIOUS JOB: Account manager at ad agencies J. Walter Thompson and Saatchi & Saatchi SOURCE OF IDEA: Years spent helping major marketers sell to college students combined with his own miserable experiences as a college student trying to buy stuff BOARD OF DIRECTORS: Jeffrey Rayport, associate professor of business administration at Harvard Business School and a specialist in digital commerce; Michael Bronner, chairman of direct-marketing agency Bronnercom and originator of the idea to distribute free coupon books to college students through their campus mailboxes; Tony Menchaca, former chairman and CEO of CUC International and founding partner of venture firm eCom Partners; Michael Levinthal, partner in the Mayfield Fund; and Virginia Turezyn, cofounder and general partner of Information Technology Ventures WHAT HE DREAMS ABOUT: Building a sustainable business that in a perfect world would be a leading multibillion-dollar company; making a lot of money for his mother WHAT HE’LL DO IF THIS FAILS: Return to the world of corporate marketing until the time is ripe for the next start-up SOURCE OF INSPIRATION: The desire to control his own life; the college students from whom edu.com seeks constant feedback and reinforcement; his overachieving family ROLE MODELS: His mother and his grandfather. (“He built a company [J. Baker, operator of Big and Tall stores and other apparel retailers] from the ground up the hard way over 50 years and is still giving good advice,” says Kanner.)