Building a Global/Local Platform with Etsy

In a recent and very informative fireside chat, Linda Kozlowski, COO of Etsy was in conversation with Sarah Moran, CEO of Girl Geek Academy. Key themes of the discussion included the challenges in building a “global/local” platform, making sure you are addressing the right audience needs, and in a two-sided market place, knowing how to balance the interests of sellers and buyers.

etsyOrganised by StartupVic and hosted by inspire9, it was yet another example of how fortunate Melbourne is to attract and host so many leading global figures in the startup world, willing to share their insights (as well as learn more about the local startup scene – which probably does not get as big a rap as it should, especially in mainstream media).

With previous operational roles at both Alibaba and Evernote, Linda brings a strong combination of experience in tech and market places, and describes her current position as covering “CX and revenue from end-to-end”. Her primary focus is on product development, global expansion and addressing sellers’ problems.

At Etsy, the aim is to develop a global product platform that is culturally diverse. There is a natural tension between fully localised customisation (which can be costly to maintain – translation, version control, managing updates), and a “best of breed” model that can serve most users (which can lead to too many compromises). So instead, Etsy pursues a strategy of locally originated products and features, combined with open APIs.

Etsy has also identified sellers as their core audience. This means that so much of the CX is actually determined by sellers’ needs, to whom Etsy then serves up customers to the platform via social media, content marketing and SOE. Etsy sees this as a point of differentiation when considering traditional retailers who often end up squeezing their suppliers on pricing and margins.

In balancing the needs of two-sided markets, again Etsy focuses on the seller first – because buyers want to see depth of inventory and a range of quality products, so get sellers on-board and the buyers will come.

Asked how Etsy avoids buyers going direct to suppliers, Ms Kozlowski commented that it all really depends on where transactions happen: make the CX is so sticky that sellers want to stay on the platform, offer great seller features, and bring in quality buyers. On the other hand, it’s a healthy market place, so there is no mandating or exclusivity – because of course, successful sellers will sell in multiple places.

Etsy believes in investing in the right technology and the right marketing at the same time. For example, although the business was started in 2004, Etsy only began brand marketing in 2016. The types of marketing deployed include storytelling, identifying key differentiators, understanding customer influences, extensive content strategy, plus performance marketing (site traffic, SEO) to see what else customers may be looking for. According to Ms Kozlowski, a retail site should spend about 20-30% of revenue on marketing, otherwise you are buying traffic and customers (red flag to investors!) Alternatively, establish some ROI goals for marketing costs, especially performance marketing, and during the startup phase (up to 1 year) begin with 15-20% of revenue.

At the heart of Etsy’s business model is an evolving technology and e-commerce platform that allows micro-businesses to run at scale. The USP is a community of network effects: 1.7m sellers, 27m buyers, 40m products, 12,000 “teams”, whose “captains” recruit other sellers. (Australia is actually in Etsy’s Top 5 markets.) In addition, Etsy aims to act with integrity in respect to dispute resolution and addressing fraud – they use machine learning to detect rogue sellers (although often, buyer disputes are a reflection of seller inexperience, rather than fraudulent behaviour). Etsy also offers training and support to resolve disputes, and the community is very good at policing itself.

What are some of the unexpected challenges of market places? When it comes to distinguishing between commodity items and unique creative products, technology will under-price and displace commodity goods that are easily made. It’s also important to build human-to-human connections, and to have a global perspective – for reasons of quality and diversity, and not self-limiting your business, especially when it comes to managing different market and economic cycles. Remember to “follow the data”, and anticipate demand and trends. Among some of the technology challenges, dealing with different devices in different countries can be an issue.

In conclusion, Ms Kozlowski offered some advice for anyone thinking of launching a market place:

First, consider why there are very few local e-commerce markets in Australia (from my personal perspective it’s a complex mix of retailers getting burned in the dotcom boom/bust, cosy market duopolies, and perpetual geo-blocking…). But let’s not forget that Alibaba has just opened its Australian & New Zealand HQ in Melbourne, likely to ruffle a few feathers in the retail sector.

Second, embrace a local/global mix (for the reasons mentioned above)

Third, don’t price too low (although Australia is notorious for being a “price-sensitive” market…).

Finally, the conversation ended with a tantalising glimpse of “the future consumer” (Gen Z) where makers connect directly with buyers.

Next week: Spaceship launches the future of superannuation

Gigster is coming to town….

Melbourne’s Work Club recently hosted Gigster Senior Project Engineer, Catherine Waggoner, in conversation with Venture-Store’s George Tomeski. Part of Startup Victoria‘s Fireside Chats, it likely herald’s Gigster opening an office in Melbourne, to service local clients and to tap into the local developer community.

gigsterFor the uninitiated, Gigster describes itself as the “world’s engineering firm”, that helps clients scope, design and build software, apps and digital products. Using an established product development methodology, and drawing on the resources of a 1,000 strong network of freelance designers, developers and product managers, Gigster is taking much of the pain out of the costing and requirements process for new projects, as well as building a growing client base of enterprise customers.

Not mincing her words, Ms Waggoner opened her remarks by commenting, “The software development industry model is f*#$ed”, because:

  • Requirements are poorly defined
  • Scoping is laborious
  • Development costs blow out, and
  • The whole process is not very transparent and not very accessible.

As a case in point, she mentioned the significant cost disparity between what some digital design agencies or app studios might quote for building an iOS product compared to what Gigster would estimate. By: breaking projects down into the distinct stages of scoping, design and pre- and post-MVP; only engaging the “best of the best talent”; using proprietary tools both to estimate fixed rate costs (rather than billable hours) and to define and source solutions; and re-using content from a library of “Community Software” resources, Gigster is able to deliver quality projects in shorter time, and on more modest budgets. For example, based on the large number of projects that they have fulfilled, their “Gigulator” estimating tool incorporates 5,000 possible features.

From an investor perspective, Mr Tomeski mentioned that the “VC inflexion point is getting much earlier” in tech startups. Meaning, with lower development costs (and potentially, reduced valuation multiples), investors are looking to get in sooner, with lower exposure, but still generate reasonable returns on exit, thanks to cheaper establishment costs.

Of course, Gigster sits at the heart of the gig economy, a huge issue when it comes to discussing the Future of Work. Interestingly, many of Gigster’s contractors are themselves startup founders, who freelance while building their own businesses. But such is the strength of the network, something like 35%40% of their contractors work full-time for Gigster – they like the flexibility combined with the continuity. Many of the contractors are referrals from existing team members, and a number of teams (known at Gigster as “houses” – presumably a frat thing?) have bonded to such an extent that they get allocated specific projects to work on together, even though they themselves may be working in different locations, based on previous projects.

Working for Gigster is probably a career choice for some contractors, because there is a variety of projects to work on, and the opportunity to be involved from start to finish. Which may be the opposite if working in a more corporate or enterprise environment, where work may be routine, repetitive and reasonably narrow in scope.

If Gigster does decide to set up shop in Melbourne (with encouragement from
InvestVictoria) they will be joining the likes of Slack, Stripe and Square, tempted by financial and other incentives. Such a move may challenge a number of local digital agencies, who will face even more competition for talent and customers.

According to Ms Waggoner, enterprise clients represent 40% of the business, and should comprise 60%-80% very soon. Not only that, but the average deal was initially $15k, now it’s more like $100k. However, enterprise clients have a much longer sales cycle. Plus, many innovation teams within enterprises are more like loosely formed groups of niche experts, so they need training on how to think like a startup. When you consider the greater dependency on legacy software by corporate clients (where it may make financial sense to retire some assets and build afresh, but the emotional disruption can be huge…), combined with the greater emphasis placed on after-sales service, Gigster has had to adapt its business model accordingly.

But Gigster must be doing something right. They’ve stopped outbound marketing and prospecting, relying on in-bound leads, repeat business and client referrals. There has been a shift from a sales focus to a customer focus, complete with a dedicated customer success team.

A number of audience questions related to getting VCs interested in your idea: What do they look for? How do they assess opportunities? How far should you go in building a product before you can attract funding? What’s the best way to validate an idea? etc. Much of this is about product/market fit, building the right team, getting customer traction, and executing on your strategy (aka Product Development 101.) As part of her closing comments, Ms Waggoner noted that unlike some of the high-profile VC funds (e.g, Y-Combinator, Techstars and 500 Startups) many VCs are becoming more sector specific, because they prefer to invest in what they know and understand.

Next week: Building a Global/Local Platform with Etsy

Final Startup Vic Pitch Night of 2016

There was something of a festive mood in the room for Startup Vic‘s final pitch night of 2016, hosted at inspire9. It certainly had an end of term feel, as a number of the long-term Startup Vic team members said their farewells before moving on to new ventures. So it will be interesting to see how these monthly events continue to evolve in 2017.

screen-shot-2016-12-10-at-4-01-47-pmContinuing the theme of recent pitch nights, diversity was the key – this month’s startup hopefuls came from the energy, AI, environmental and consumer sectors. As usual, I will comment on each pitch in the order that they presented:

BioFuel Innovations

With the simple aim of turning waste into fuel, BioFuel Innovations uses an enzyme, as opposed to a more caustic chemical catalyst, to convert used cooking oil from restaurant kitchens into biodiesel. Given this greener and more sustainable process, the company can use lower quality feedstock, consume less energy and reduce the amount of waste water.

Having built a pilot plant in Dandenong, the founders are currently developing a containerised “turnkey solution” comprising a pilot micro-refinery, which can be financed by 3rd party lenders (a bit like some solar energy schemes). However, they are seeking funding to gain access to a startup accelerator program.

With a number of existing service providers that collect used cooking oil from restaurants and food processing plants, BioFuel Innovations only plan to produce their own fuel on a small scale. Rather, their business model is to sell micro-refineries for biodiesel production.

Asked by the judges why they are focusing on biodiesel rather than other higher-yield fuels, the team pointed out that some of those products require high temperature processing, and therefore consume more energy. Also, in concentrating on this type of biodiesel production, the founders believe they are helping to solve the problem of disposing of waste oils. However, longer term, they may explore even more sustainable energy derivatives and regeneratives. And in Asia Pacific, for example, there is a need to re-process palm oil residues.

Finally, a key to their success will be streamlined manufacturing processes and logistics, such as building supply chain partnerships for the shipping containers that hold the micro-refineries.

Breathable

This is an environmental design concept that aims to use plants to replace air ventilation systems in offices and homes. Based on research from Maastricht University in the Netherlands, Breathable uses an algorithm based design solution. Taking into account the building dimensions, natural light, air flow, number of people, amount of mechanical and electrical equipment, etc., the team can design the right combination and layout of plants for each given location.

Established as a bootstrapped social enterprise, whose profits go to helping asthma sufferers and patients with respiratory complaints, Breathable is hoping to make a large and sustainable impact.

The first question from the judges was, why set up in Australia? The team explained that given certain plants are not allowed here, the underlying algorithm has to be reconfigured for native plants, by a local team.

This was a very timely comment, given the recent episode of “thunderstorm asthma” in Melbourne. However, the judges were a little concerned that while there was a clear connection between purpose and passion, they wondered whether it is more of a lifestyle business for the founders, especially as thus far, no IP has been registered or protected. (On this specific point, the team simply said, “we challenge people to do it better”.)

There is an expansion plan, to develop fully self-sustaining eco-systems – such as using plants to power lights that help generate photosynthesis. But big goals need big marketing budgets, and with an active waiting list of 20 corporate clients, the challenge for the business is in how to scale.

MagicPi

I should say upfront that based on what I had read in advance on their website, this pitch was not what I had expected. Instead of a presentation on artificial intelligence, we got a pitch about Australia’s Chinese tourism “problem”. Namely that, based on a 2016 report from Bloomberg, by 2020 Australia will host 5 million Chinese visitors a year, representing a $13bn market. (And as I know from having worked with the founders at China Digital, many tourist destinations in Australia are far from China ready.)

Using natural language AI (cognitive, cloud, machine learning – “Siri with a human touch”) MagicPi is targeting Destination Marketing Organisations (conventions, conferences, local tourism boards). They plan to create content and solutions for client websites, and then take a commission on bookings. With a presence on both WeChat (including a voice recognition bot) and AliPay, MagicPi has a long-term vision of being the “intelligent interface for everything”.

However, the judges questioned whether the solution works or even exists. They felt that there was currently no visibility for investors or consumers. Claiming to have built a demo app, the team stated that there is a lack of quality information for Chinese tourists, and people are willing to pay for premium content – and to distinguish mere “recommendations” from the visitor “reality”.

Despite adopting a deliberate enterprise solution, the judges felt that the pitch needed to stress the “why”, rather than focusing on the problem.

The Cider Link

I should mention that I first met the team from The Cider Link about a year ago, and was intrigued by their mission to build an online craft cider market that connects makers with customers. (So much so, that I connected them to local wine producer, Richard Stockman, who invited them to appear as guests on his weekly food and drink radio program.)

The Cider Link is challenging both the market duopoly for cider retailing, and the ubiquity of “commercial” cider, much of which is produced from bulk juice mixed with alcohol – rather than being fomented from freshly pressed fruit, as is the case with craft ciders.

Cider is currently enjoying 10% annual growth by volume (based on bottle shop sales alone). So, online, cider and craft are all “on trend”. The founders have built a commission-based market place, and with connections to producers who are members of industry body Cider Australia, The Cider Link is also appearing at festivals and related events.

In the Q&A with judges, the team explained that success for them would be sales of 1000 cases a month, making it a $1m business. They also plan to take the model to the UK, which has the largest cider market in the world.

In addition to attracting more customers, the founders are seeking investment to improve sales conversions and support some advertising.

Given the mix of pitches, and the range of business models and sectors, based on judging criteria and audience votes, the winner was Breathable.

Next week: End of Year Reflection

 

Bridging the Digital Divide

Is there still a digital divide in Australia? If so, how do we bridge that gap? If not, how do we address the apparent chasm that is leaving some “digital have-nots” behind? Is it as simple as rolling out the National Broadband Network and equipping every school child with their own tablet device? Or is it also about creating a digital mindset to ensure everyone can take advantage of the educational, social and economic opportunities that the range of digital technologies has to offer?

Mobile phone internet usage is projected to keep growing. Source: Statista

Mobile phone internet usage is projected to keep growing. Source: Statista

Based on consumer research, we would appear to be a well-connected country, with a high concentration of PC, smart phone and tablet devices, if data from Roy Morgan is any indicator. However, some recent research by Scott Ewing of Swinburne University based on ABS data has suggested that despite the narrowing of the divide, there is a deeper disconnect among those who do not have internet access.

There are multiple factors contributing to this disconnect: socio-economic, age, location and education. I would expect that within 5-10 years, age will be a far less relevant factor in who does or doesn’t have access to the internet. You could also argue that with more people accessing the internet via mobile devices, and with the increasing number of free WiFi zones across our cities (cafes, shopping centres, office buildings), public institutions (libraries, museums and galleries) and transport infrastructure (plus the reducing price of data and storage), cost may not be as much of an issue either. And once the NBN is complete, the percentage of the population without physical access to the internet should likewise be much smaller.

So that leaves education – according to the ABS-derived data, the more educated you are, the more likely you are to access the internet. Should this infer that we aren’t doing enough to teach digital skills in the classroom? Or are we teaching the wrong set of skills? Or is it a bit like learning English grammar or applied mathematics – unless you use them in your everyday life, you soon forget them, and never remember why it was important to learn them in first place?

Computer science, programming and coding courses are increasingly being taught in schools, either as part of the core syllabus or as extra-curricular activities. Many pupils have to use tablets as an integral part of their school lessons. And some schools are also running hackathons and entrepreneurial projects to help students navigate the new world of work shaped by innovation, digital disruption and the “gig” economy.

The changing nature of work is challenging schools and parents to think about how we should be preparing pupils for the future. It’s not just learning about the technology (important as it is to study data analytics, automation, robotics, AI etc.), it’s also about understanding the context and the potential for what it can do. It’s also increasingly apparent that more and more of today’s students want to do work that is meaningful, rewarding, challenging and which helps connect them to their values and “purpose”.

I like to think that as part of a well-rounded liberal education, today’s pupils will receive:

  • a solid grounding in digital literacy (as important and as vital as the 3 R’s)
  • an awareness of how “digital displacement” (through automation etc.) may impact their chosen career path (even in ways which we cannot yet predict – we must assume it will happen, as no profession, trade or vocation will be totally immune)
  • an appetite for lifelong learning (as one of the ways to cope with the inevitable changes they will face)
  • a set of life skills that instill self-awareness, curiosity, resilience, empathy, flexibility and adaptability.

Finally, if we are to truly grasp why this ability to adapt and change is important, we only need look beyond the digital debate and ask why the National Innovation and Science Agenda is failing to cut through. In large part, the NISA message failed to connect with the general electorate because many people could not identify with it, and therefore it did not resonate with them. Just as “necessity is the parent of invention”, so adversity often needs to be the catalyst for embracing change.

Notwithstanding the economic, environmental and societal challenges we face, there is considerable complacency and acceptance that “she’ll be right” – especially within the political, institutional and corporate elites that claim to lead us. As long as so few of the main actors among these bastions of power and influence decline to change their own culture, behaviours and ways of doing business, then it’s not surprising that the public feels unwilling or unable to change.

So our only real hope is to empower the next generations to shape their own future, not to be constrained by our traditional notions of “job” (in my view, an increasingly outmoded economic unit of value….) and think for themselves as to what change they want to create with all the technology, resources and opportunities at their disposal.

Next week: My Extended Gap Year