Unleashed: A Renewed Interest in Pets

Most venture capitalists wouldn’t touch the pet industry with a 10-foot pooper scooper.

That’s partly the result of Pets.com, the poster child of the dot-com bubble. Known for its sock puppet advertising, the company raised some $50 million from Hummer Winblad Venture Partners, Bowman Capital and Amazon.com Inc., went public and then flamed out nine months later in late 2000 and is often called one of the worst VC investments of all time.

“Investors still have this perception that because Pets.com ran a Super Bowl ad and was not successful that the pet business isn’t viable,” says Greg Gottesman, a managing director at Madrona Venture Group. “But this is a massive market and to think there isn’t a huge online opportunity around this category doesn’t make any sense.”

However, a new breed of venture-backed pet startups—including Petflow.com, Dog Vacay, Rover.com and Doggyloot.com—is trying to prove that the online pet business can pay dividends.

Perhaps the most compelling argument is the size of the market. Last year, Americans spent more than $50 billion on products and services for their beloved animals, according to the American Pet Products Association. But online transactions only accounted for a fraction of those sales. PetSmart, for instance, is one of the largest retailers of pet supplies worldwide. But, according to data from its annual report, less than 1% of its total revenue comes from online sales.

It’s not just that the traditional big box players in the pet industry don’t get ecommerce. It’s that they don’t understand the changing relationship between people and their pets, argues Millie Tadewaldt, managing director at Sandbox Industries, which incubated and funded a daily deal/private sale site for dog owners called DoggyLoot.com.

“Consumers are starting to think about their pets as a regular member of the family,” she says. They don’t want to give their pets crappy chew toys. They don’t want to feed them mystery meat. And they don’t want to stick them in a grungy kennel when they go on vacation.

“That’s why we’re seeing things like eco-friendly materials and grass-fed beef and travel accommodations for pets,” she says. “The entrenched players in the pet space don’t get this trend very well, and they don’t cater to it.”

“We’re seeing things like eco-friendly materials and grass-fed beef and travel accommodations for pets. The entrenched players in the pet space don’t get this trend very well, and they don’t cater to it.”

Millie Tadewaldt

Managing Director

Sandbox Industries

But many of today’s venture-backed pet startups are targeted precisely at this new movement. Take Rover.com and Dog Vacay, which raised $3.4 million and $1 million, respectively. Both of these startups were founded on the premise that boarding your beloved canine in a kennel when you go on a trip is both cruel and expensive.

In taking a page from the Airbnb vacation rental model, these sites let you search for local dog sitters in your neighborhood who will watch your pet in their home, and presumably give it much more love and attention than a big kennel.

Dog sitters can set their own prices, typically about $30 a night, which is much cheaper than the $50 charged by most kennels. Seattle-based Rover.com and Santa Monica, Calif.-based Dog Vacay each take a cut of the transaction, somewhere between 5% and 10 percent. They also offer insurance and veterinary care in case of an emergency. Pet owners can have daily photos and videos uploaded to their Facebook page so they can see how well their furry friend is being cared for.

“Right now, there is no real online company focused on the pet services space,” says Madrona’s Gottesman, who not only led the funding for Rover.com, but also incubated the company. “Think about who owns that space. You draw a blank. So there is a massive opportunity for a company like Rover to solve real problems that pet owners are having with pet sitting, but ultimately trying to solve other problems that are important to pet owners too.”

[peh_archive_image id=”170439″]

“Even Pets.com had tons of demand and great sales. But they lost money on every sale. If the demand is still there and now you can make money on every sale, then that’s a pretty good business.”

Jeremy Liew

Managing Director

Lightspeed Venture Partners

Gottesman started Rover.com because of a bad experience he had. He returned home from a weekend trip and raced to the kennel to pick up his dog, Ruby Tuesday. But he was five minutes late and the kennel was closing, so he had to pay $50 for an extra night of boarding. When he finally got Ruby Tuesday home the next day, she had a nasty case of kennel cough.

“I knew there had to be a better way,” he says. “I knew there was probably someone down the street who would have loved to have Ruby for the weekend. And they would have done it for less money and it would have been a better experience for the dog.”

So, last year, he wrote a quick business plan and entered a Startup Weekend competition in Seattle. He won the event.

“The idea immediately resonated with everyone,” Gottesman says. That’s when he decided to put some resources behind Rover.com. Madrona agreed to incubate the company, which has since grown to 20,000 registered members in a few short months.

When he got the idea for Rover.com, Gottesman says that he was shocked by how little innovation there was in the pet space.

“Pets.com had something to do with that,” he says. “It’s easy to poke fun at the category and joke about the sock puppet, so VCs shied away from the pet industry because they were afraid of what their peers might think if they make an investment here.”

Howard Morgan, a partner at First Round Capital and an investor in Dog Vacay, sees a big difference between the Pets.com bubble from years ago and the re-emergence of the online pets industry today.

“The problem back then was anything you were doing on the Internet in 2000 involved 10 million people on dial-up lines,” he says. “And anything you do today involves 200 million people on broadband fully connected. Today the markets are 20 times as big and much more interesting.”

He says the fact that a lot of investors still have the Pets.com fiasco burned on their brains means there is opportunity for those brave enough to take the leap.

“The timing has come around and it is a very good time to be involved in the pet industry,” he says.

This is not Morgan’s first foray in the pet industry. He invested in PetSmart.com more than a decade ago when he was at Idealab. The knowledge he gained with that investment made his bet on Dog Vacay easier to swallow.

“I learned with PetSmart.com that pet owners are fanatic and will spend any amount of money on them,” he says. “I also learned that shipping big, heavy low-value items is not a way to get great margins. In the case of Dog Vacay, it’s in the services area so the margins are a lot better.”

But one new online pet company called Petflow.com isn’t afraid of those 40-pound bags of dog food. In fact, it’s embracing them. The two-year-old company, which recently closed a $10 million round led by Lightspeed Venture Partners, ships about 1 million pounds of pet food a month. Petflow says the beauty of its model is that dogs and cats need the exact same portion of the exact same food every day, which lends itself perfectly to a subscription model. In fact, more than half of all Petflow customers have the pet food automatically shipped to them each month. The company recently told the Wall Street Journal it will break even in the second quarter of this year and reach $30 million in sales in 2012.

“There are so many things attractive about Petflow,” says Jeremy Liew, a managing director at Lightspeed. “First is the size of the industry. Second, this is a high repeat purchase category, which builds lifetime value. Third, the space is still largely dominated by slow moving incumbents that are not taking advantages of the opportunities the internet provides.”

He also notes that building an ecommerce infrastructure, fulfilling orders and acquiring customers are orders of magnitude cheaper today than a decade ago. Liew was surprised that the Petflow deal was not as competitive as it should have been.

“This was a deal that a lot of people were aware of, but not everyone was willing to have to explain to people why the invested in it,” Liew says. “Even Pets.com had tons of demand and great sales. But they lost money on every sale. If the demand is still there and now you can make money on every sale, then that’s a pretty good business.”

Still, Alex Zhardanovsky, the CEO of Petflow, keeps the Pets.com sock puppet in his office as a reminder of what can go wrong.

Sandbox’s Tadewaldt says the idea of shipping 40-pound bags of dog food terrifies her. That’s why DoggyLoot is focused on light weight, higher-margins items, such as chew toys and accessories. The company started as a “Groupon for dogs,” but pivoted to the private sale model pioneered by the likes of Vente Privee and HauteLook.

Each day, subscribers get an email advertising a sale on doggy treats or organic sleeping mats. To better control the customer experience, DoggyLoot keeps its own inventory and fulfills all orders within a week. Tadewaldt says the company, which raised $1.2 million in seed money from Sandbox, is generating “millions” of dollars in sales and is now looking for its first round of institutional venture funding.

“We just have to get people to look past the Pets.com thing, which has been an issue so far, and get them to crunch the numbers the way they would with any normal ecommerce investment,” she says.

Time will tell whether more pet startups find a home with VCs or whether they are barking up the wrong tree.

Tom Stein is a Palo Alto, Calif.-based contributor. He can be reached at tom.stein@yahoo.com.