The Investment Thesis Behind Opendesk

Over the summer of 2014 I personally invested in Opendesk, a three-sided online marketplace for locally made office furniture. The marketplace connects furniture designers (who can upload their designs to the platform and get paid in the form of royalties), with a network of local furniture workshops (who get commissioned work from the platform) and companies (who are in the market for office furniture).
The business is a spin-out of Project 00, a highly creative design-oriented studio.
Opendesk successfully raised an over-subscribed seed round on Crowdcube over the summer, with further participation for Telefonica incubator Wayra and a number of high profile angels. I was then asked to joined the board of the company as a non-executive director and we recently had our first board meeting.
I thought it would be a good time to share my investment thesis for future record:
  1. An underlying trend supporting the rise of digital fabrication
    • The downward spiral in entry costs for small-scale digital fabrication (i.e. 3D printing, CNC milling, laser cutting), coupled with the improved output quality and the widespread adoption of digital design softwares, have revolutionized the economics of batch manufacturing. As these machines become widely available at local small-scale workshops, it is now possible to leverage a network of makers that can manufacture high quality products, on demand and in small batches, while being close to the end customers and without having to rely on economies of scale to drive their economics.
    • We are still only at the dawn of this trend, and OD is well positioned to ride along it.
  2. A compelling user proposition for all 3 sides of the marketplace
    • For designers: OD aims to be a remunerative route-to-market for both up and coming and established product designers who normally struggle to bring commercially viable product designs to market via the traditional routes. Stuck in a vicious cycle of needing strong retail appetite in order to secure financing for the manufacturing, while not being able to test retailers’ appetite for their product designs unless they have resources to manufacture them, they can only hope that a brand discovers them and gives them access to their infrastructure. On OD furniture designers can upload their digital creations and connect directly with end customers: OD will act as the curator/moderator who ensures the designs are commercially viable and uploaded in the right format, ready to be manufactured by the local manufacturers that are plugged into OD. Designers will ultimately earn royalties, as well as gain visibility in a community of like-minded professionals.
    • For makers: OD aims to be a source of highly qualified, validated and paying customers for furniture workshops, who welcome a no-risk way to fill up surplus capacity (similarly to what Just-Eat does for takeaway restaurants) by accessing both quality designs and end customers on OD.
    • For customers:
      • Quality at affordable prices: on OD they can find real wood, customisable design furniture at only 2-3x the price of equivalent mass produced furniture (which, by the way, is often made of pulp rather than actual wood) and well below the more expensive alternatives of buying wooden designer branded furniture (generally 10-20x more expensive than anything on OD), or commissioning custom made furniture.
      • Short lead times: since OD furniture is manufactured locally by leveraging a network of furniture workshops, lead times from purchase to delivery tend to be significantly shorter than the alternatives offered by traditional design furniture distribution companies that often rely on sea shipping from the Far-East and are generally are not able to cope efficiently and economically with small order quantities.
      • Emotional appeal: I believe there is an increasingly evident demand among consumers and companies for unique products and experiences, handmade goods, craft and artisan-ship, locally made and sourced a products and a wider movement away from the mass-produced, the commodity shopping establishment, the Ikeas and Tescos of the world. Consumers ascribe an emotional premium to the experience of having a direct connection with the makers (think Esty), the hosts (think airbnb), the drivers (think Uber/Lyft) or whoever is crafting the experience for the end user. OD, by connecting the customers with the makers and the designers, provides a much more engaging, transparent and responsible way to buy furniture that the alternatives out there.
  3. An elegant “asset-light” business model
    • The OD marketplace is built on top of the pre-existing digital fabrication supply chain, and as such it does not require investment in the hard assets that a traditional retailer or brand would need in order to operate, such as warehouses, inventory, working capital, manufacturing equipment, raw materials, logistics network etc. OD simply enables the existing supply chain to function more efficiently by removing the frictions and the intermediaries that exist in the traditional retail or manufacturing value chains, and in doing that is able to capture (and defend in the long term) a large share of the incremental value it unlocks along the way.
  4. A big and compelling vision executed by a team with deep domain knowledge
    • Office furniture is clearly only the first step for OD, although it in itself represents a large opportunity to build a valuable business. Once the machine is well oiled though, there is nothing stopping OD from moving into home furniture and home decor more broadly and, eventually, into any product category that can be digitally fabricated. The idea of of ultimately taking on Ikea, a €30B revenue business, is not that far fetched.
    • I am confident that a team with deep domain knowledge in industrial design and crowd-sourcing, such as the one that Tim is leading up, is best placed to execute on this compelling vision.

I am excited to see the business grow and validate my investment thesis over the next few years!

Is Offline Undervalued?

Every year, 40 million people walk in and out of Piccadilly Circus underground station in London. That’s 770 thousand a week, 110 thousand a day, every day. That’s a lot of footfall, but also potential eyeballs.

You can actually rent a retail shop in Piccadilly Circus station for £1,500 / week. To keep it simple, you could just hang a large billboard in front of the shop unit, so you don’t have to bother about fitting it, staffing it, stocking it etc.

Now, assuming that all 770 thousand people walking in and out of the station on a weekly basis look at your billboard, that’s costing you just shy of £2.0 CPM (£2 for every 1,000 impressions).

Let’s say you wanted to buy 770 thousand impressions online from an audience that is similar to the people that pass through Piccadilly Circus every day (i.e. 50/50 men/women, ABC1, shoppers, tourists, 18-40,  professionals). That’s likely to cost you a lot more than £2.0 CPM. For example, the Mail Online, world’s largest online news site (with close to 200 million monthly UVs and an audience somewhat comparable to the Piccadilly crowd) charges anywhere between £20-50 CPM for ad space on its web property.

I’ve made the assumption that all people walking through the station would look at the billboard, which is obviously optimistic. However to achieve a CPM comparable to the online CPM only 4-10% of the people would have to look at the billboard, which feels quite conservative given people have to walk by it to get in an out (I for example always look at ads in the tube and at stations, I suspect I am not the only one).

I have also assumed for simplicity that one would just hang a billboard in front of the shop, which would not attract higher than average attention from the crowd. In reality, with a little investment, the unit can become an interactive billboard where potential customers can walk, touch and feel the products, talk to staff and buy.

Overall it feels like there is an opportunity for online businesses to leverage flexible offline retail presence to drive impressions at attractive CPM rates, with the upside of the human interaction.

How Important is the Off-Price Channel in Retail

I have been thinking at the off-price retail market recently, both offline and online. Businesses playing into this market rely on accessing surplus stock from brands, and then selling it down to the end customers at a markup (but still at heavy discounts to RRP). Surplus stock fundamentally exists because of structural inefficiencies in the retail industry which make it difficult for brands to accurately forecast demand (and therefore production): production cycles are long, so brands don’t know if it will be a good season until it’s too late to react. In categories like fashion, where trends are volatile and their lifespan difficult to predict, this factor is even more important: fear of missing out forces brands to deliberately over-produce.

One key question from the investor’s perspective is whether these structural imperfections will at some point go away, as brands become increasingly good at forecasting demand.  That would obviously reduce the economic need for off-price retailers, as in a perfect retail marketplace brands should be able to sell 100% of their inventory at full price.

So I looked at the US market, where more data is available on listed off-price retailers. I specifically looked for evidence of low / decreasing importance of off-price retailers in the retail value chain (in my mind low was <5% of the entire market, a completely arbitrary low number). I was therefore surprised to find that the basket of six off-price retailers I used in my analysis contributed to 16.3% of the US Clothing & Clothing Accessories market in 2012, up from 12.9% in 2005. I looked at the clothing and accessories market as off-price retailers tend to mainly sell that.

US Clothing & Clothing Accessories Market

Note: off-price include TJX, Ross Stores, Big Lots, Stein Mart, Overstock, Bluefly.

Source: companies accounts, US Census

This is even more impressive if one thinks that those off-price sales occurred at c. 50% discount to full retail price, so in terms of volumes the importance of off-price retailers in this category is enormous.

My analysis is deliberately conservative as it is excluding all privately-owned off-price retailers which I could not easily get revenue data for. These include large online off-price retailers such as Gilt, RueLaLa, HauteLook etc which experienced very high growth over the period I looked at and certainly would add % points to the 16.3% number I got to and steepness to the red curve.

What this is suggesting is that surplus stock is unlikely to go away from the industry any time soon and, if anything, brands should be feeling more comfortable in their over-production decision because of the efficiency of these channels in clearing up their unsold stock.

What this is not showing though is the impact on margins that this channel has for the brands…