TCV’s Woody Marshall talks about e-commerce’s new business model

It’s been a busy several weeks at Technology Crossover Ventures. In early August, the firm announced its $2.5 billion ninth fund. A handful of days before, Unilever agreed to purchase portfolio company Dollar Shave Club for about $1 billion.

Hardly a summer for sand-in-the-toes vacations.

General Partner Woody Marshall said the size of the new fund is commensurate with the tremendous opportunities he sees in consumer Internet, software, technology-enabled services, infrastructure and elsewhere.

“If you take a look at growth-company formation, it’s one of the most interesting times in the 25 years I’ve been in the business to invest in some of these companies,” Marshall said. “We’re thinking about how much money we needed for a 24 to 36 month investment period. Given the pace we’ve been at, this was the right number for us.”

He added he wasn’t surprised by the price paid for Dollar Shave Club. It is a remarkably sticky subscription service that has successfully extended its product portfolio.

“The only thing that was going to get management and the investors excited about not executing on this,” he argues, claiming it would have made an attractive public company, was “a really interesting sale price.”

He declined to discuss his investment return.

However, Marshall did stress that not all innovation stems from Silicon Valley. Less than 15 percent of TCV’s investments today come from the San Francisco Bay Area.

“When you invest in places like St Louis, Missouri, or Chicago, or Virginia, or even markets like Seattle, where there is not as much capital, people tend to be a little more cautious and efficient in how they spend their money,” he said.

Does that mean TCV is looking at expanding in a meaningful way into India or China?

No plans at present, he noted. Yet over time the move is something he thinks will happen. He just doesn’t know when.

VCJ recently had the chance to speak with Marshall. An edited transcript of the conversation follows.

Q: Dollar Shave Club isn’t your typical venture-backed e-commerce startup. Nor are companies such as Green Dot, Rent the Runway or HomeAway. How do you see them fitting into the spectrum of Silicon Valley e-commerce startups?

A: What these companies got right initially was a better e-commerce model based on producing their own goods under their own brand, which allowed higher gross margins, and created a sticky product. This allowed them to have marketing leverage.

The result was that the founders like Michael Dubin at Dollar Shave created brands. And many of them have extended their brands. These are the consumer products companies of the future.

Woody Marshall
Woody Marshall, general partner, Technology Crossover Ventures. Photo courtesy of the firm.

Q: So the key is gross margin and marketing leverage?

A: The way we’ve always looked at it with e-commerce businesses is the first thing you look at gross margin. If you are selling somebody else’s stuff, there is not a lot of margin in that.

The other way you look at it is what kind of marketing leverage do you get? Do you have an actual subscription or quasi-subscription model? Because that means over time, if you have great retention, you should get marketing leverage.

The marketing for each incremental sale should go down over time as a percent of revenue.

If you have gross margin leverage because you’re selling something that may be branded, or is your own product, and you have marketing leverage, you can actually build a real business.

Q: How valuable then is brand?

A: If you go back to Dollar Shave, or some of these other businesses, what they were doing is selling their own products.

Many of them had recurring models, or quasi-recurring models, based on customer retention. Those were economic models that in the e-commerce world worked.

I would say at least with us, while we valued the brand, I don’t think we realized how valuable the brand was. When you think about the full-stack consumer business that Venrock’s David Pakman describes in his blog one of the things you really need is a brand wrapper around it.

Q: As you ponder the future of e-commerce and the evolving e-commerce business model, what is next?

A: We think about it a little bit differently. We’re into execution. Is there a business that exists and how do you accelerate that business?

When I think about consumer businesses, I think about these models that allow for rapid iteration. Somebody like Dollar Shave Club has well over 3 million active members that it can send a sample to. It has a communications with them. You can get that feedback and the feedback loop is compressed.

I use that as an example of what I think will happen with consumer products companies. The cycle times of product development will compress. The relationships become far more personal. You start getting into personalized products.

Look at Minted. Minted does a great job with selling personalized greeting cards and stationery certainly around Christmas time. If you don’t have community and an authentic dialogue with your customer, you can’t do that.

Q: You’re in GoFundMe. What do you see in crowdfunding that interests you?

A: We like this long-tail social-fundraising opportunity. It you look at what’s gotten a lot of press, it has been the Kickstarters and the Indiegogos around inventions and developments.

We think that is a real interesting space. But if you take a look at the ZIP codes in the country where there would be GoFundMe campaigns, those are typically ZIP codes that have not been touched by technology. In some of those ZIP codes, they probably have never heard of Kickstarter or Indiegogo. But when there is some tragedy or some reason for the community to come together, they are familiar with GoFundMe.

Q: You have a significant focus on Europe. Is this an attractive time in Europe?

A: Absolutely. I would say there are certain parts of the tech economy in Europe that are a little bit behind the U.S.

I also think there is no such thing as a just European or just U.S. business. Everything is global.

And in the same way that we don’t only invest in Silicon Valley, we invest in other parts of the country, we also invest in other parts of the world. If you are in a conference room in Berlin, or Dublin, or Scandinavia, or in the U.K., the conversations and the ideas and the exciting entrepreneurs are there just like they are in Silicon Valley.

The thing that is most interesting is you now have had enough successes and even failures in all markets including Europe. So you have more what I think of as practical entrepreneurs. You’ll get entrepreneurs that have been second and third time successful entrepreneurs.