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!

Do Listed Markets Understand Ecommerce?

I have been keeping a close eye on the recent IPO activity of online retail businesses in the UK.

AO World is the most recent example, an online retail business selling a range of white good brands which listed on March 3rd 2014 and achieved a market capitalisation in excess of £1.5B (close to 6x historic revenues), joining ASOS and Ocado in what seems to be an uncontrollable euforia amongst retail investors for anything that involves selling and online.

Having looked at ecommerce businesses in the private market as an investor over the past four years, what caught my interest is that such valuations are nowhere to be seen in private equity land. Some of the most recent deals in the private markets (interestingly one has to go back to December 2011 to find the first relevant one), such as Wiggle, Moonpig or MyProtein, were done at 2-3x revenue and 10-13x EBITDA. This is a world apart from what the listed markets are valuing online retails businesses at the moment: Ocado (70x EBITDA), ASOS (80x EBITDA), AO (147x EBITDA).

So why are private equity investors not paying such high multiples for online retail businesses, while listed market investors pile in?

A few charts should help shed some light. Red dots represent listed online retail companies (including the ones rumoured to be listing in the next few months e.g. Boohoo, Photobox), blue dots represent privately owned online retail companies. Three things appear quite evident:

1) Listed market investors are happy to pay a premium for revenue growth, unlike private equity investors;

Valuation / revenue

2) Private equity investors value margins, while the listed market investors don’t seem to care that much;

Screen Shot 2014-03-10 at 20.01.35

3) There is a slight premium for scale in the listed markets, not in the private markets;

Screen Shot 2014-03-10 at 20.01.44

Three things could be explaining this data:

1 – The level of sophistication amongst private equity investors is higher than that of listed market investors (listed equity fund managers, pension funds, retail investors). This would explain private equity’s obsession with margin (a rough proxy for the quality of the business model) rather than topline growth (which could come at the expense of margins). In a nutshell this is Amazon’s equity story of how they won the heart of Wall Street: a business carefully run at zero margin to keep topline growing at >20% pa to win market share of all retail. More equity analysts covering UK ecommerce stocks could be a good thing as the market capitalisation of online retail businesses in the UK now tops £10B.

2- There is a scarcity of growth stocks for UK fund managers to take exposure to and the offline to online shift is still one of the few attractive growth stories remaining out there. So anything that simply smells ecommerce, regardless of the actual underlying business model, will attract a premium valuation. This is actually causing severe headaches amongst some of the best IPO candidates (and their bankers) that, despite operating at 30-40% margins, will inevitably be thrown in the “online retail” bucket by the listed markets and possibly get an Ocado (5% margin) or an (3% margin) multiple on their revenue (c. 4x). I am sure they won’t be un-happy about those multiples, but in theory they should trade at a premium to less attractive business models.

3 – Listed markets seem to believe that with size come economies of scale in ecommerce, and therefore they are happy to ascribe a premium for larger businesses. But is that actually the case? The same data set suggests the opposite, the larger the business the lower the margins (a proxy for its efficiency) i.e. it’s either growth/scale or margin in ecommerce. This brings us back to point 1: how sophisticated are the listed market investors?

Scale vs margin in ecommerce

8 Areas of Internet & Digital Media I Will Pay Closer Attention to in 2014

(1) Vertical integration in retail. I refer to the process of brands cutting out the intermediaries and selling own products directly to their end consumers, primarily via the web. The intermediary share of the value normally created along the value chain gets split between the end customers and the brands, as higher customer satisfaction (higher quality at lower price) also results in higher gross margins. The enablers have been the web channel at the front end, which allows for effective and scalable direct to consumer distribution without the need to add more brick & mortar stores, and the emergence of rapid designing, prototyping and manufacturing technologies at the back end, which have shortened production cycles significantly. Despite what Oliver Samwer thinks, I believe the offline channel will still play an important role, not necessarily as a sales channel though but more as part of a multi-channel approach to retail. Services such as Appear Here will provide online brands the ability to access the high street “on demand”, at the right time and location. I will watch particularly closely for businesses embracing scalable manufacturing technologies, such as 3D printing, in their processes and leveraging flexible offline presence at the front end.
Examples: Makie Lab, Align Tech, Shoesofprey, Rapha, Walker & Company, Harry’sBonobos, Warby Parker, Shapeways, Intelligent Beauty.
(2) Mobile as the main delivery platform. As obvious as it sounds in 2014, any business not putting mobile at its core is soon going to be obsolete. I believe in 2-3 years the large majority of our digital interactions will occur via mobile or tablets, including commerce (mobile commerce is still only 25% of ecommerce). Some of this shift will be just desktop-replacement, but a large portion will be incremental as mobile makes us all ubiquitously connected, always a click away from another purchase or booking. Some services are also just better delivered via the mobile (think Hailo, Uber, Instagram, Snapchat, Citymapper, Yplan etc). Marketplaces are an example of a business model that mobile has enhanced, since it makes it “vastly quicker and cheaper than ever before to ‘wire up’ both sides” as Matt Cohler noted recently. Opportunities will be plenty for businesses delivering beautifully simple mobile experiences.
Examples: Hailo*, Uber, Depop, Bizzby, Hotel Tonight, Citymapper, yplan, Osom.
(3) Image-led ecommerce: the trend of commerce and content converging has been in the headlines for a long time already, with publishers getting closer and closer to the transaction (e.g. Mail Online, Conde Naste) and online retailers investing heavily in curation and content (e.g. Asos, Farfetch, Net-a-Porter etc). I expect more companies attempting to bridge the gap between rich media (photos/videos) and commerce as users attention span gets lower and lower (as Biz Stone, co-founder of Twitter and Jelly puts it: “In a world where 140 characters is considered a maximum length, a picture really is worth a thousand words”) and mobile and tablets, with their constrained screen real estate, made the economic model of traditional advertising inefficient.
Examples: Houzz, Osom, Asap54Pinterest, Fancy, WireWAX, Olapic.
(4) C2C economies: it is about the emergence of online (often mobile-only) vertical marketplaces that allow any individual with excess capacity of an asset (e.g. skills, know-how, money, time, car, taxi, couch, bed, room, house etc) to efficiently monetise it. An interesting trend that has emerged from the resulting over-fragmentation (and thus expansion) of supply is that hard ownership has become redundant for certain asset classes that can be now available on demand: it’s happening to transportation, apparel, music and even server space. Watch this happen to other verticals.
Examples: Airbnbuber, lyft, blablacarboatboundStylebee, Vestiare Collective, Lending Club, Zopa*.
(5) Offline to online shift in large and ripe industries: while most industries and product/service categories have already transitioned online, there are still a few large industries that are resilient to moving online, but inevitably doomed to (e.g. commercial real estate, healthcare, education, law, financial services, automotive).
Examples: Zesty, zocdocAppear Here*, nutmeg, covestor, Shake, LawPivot, LawpalWealthFront, Carwow.
(6) Twitter ecosystem. I am long Twitter as an interest-based advertising AND ecommerce platform in the making. To the extent that “interest” is more strongly correlated to purchase intent than just “friendship”, I believe Twitter has the potential to become an effective platform for commerce, where Facebook effectively failed. I believe the userbase gap with Facebook will slim significantly in the next few years.
Examples: socialbro, Driftrock*, Buffer, Hootsuite.
(7) Online education. I think in 2014 we will start to see the pace of investing and consolidation accelerating in the space as the new learning/teaching formats become increasingly accepted and incumbents realise they have missed the boat and decide to up their digital exposure. Opportunities remain as an enormous industry is changing fast and new value chains become clearer. I continue to believe the value captured by the online educational content producer will diminish as competition intensifies (there are countless sites already where I can learn the basics of coding for example) and therefore businesses building tools and services that sit on top the content providers to create better online learning environments (ultimately improving outcomes) will thrive.
Examples: Clever, Blikbook*, TopHat, Piazza.
(8) Pervasive computing. I include in this area the entire ecosystem created around the ability of any device, from wearables to connected home appliances and drones, to capture, analyse and act upon data. The technology is now available for this to happen. As this is a new area for me, I will aim to learn as much as possible about it in 2014.
Examples: Cyberhawk, SkycatchStrava, Alert Me, 3D Robotics.
* Forward’s investments

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…

Amazon: Growing More Inefficient?

Since Q3 2010 Amazon has been consistently growing headcount at a faster rate than net sales: while TTM net sales went from $30.8B in Q3 2010 to $66.8B in Q2 2013 (2.2x), headcount grew from 28k to almost 100k (3.1x) over the same period. What’s interesting is that this is a clear inversion of trend compared to the quarters leading up to Q3 2010: from 2001 to 2010 net sales grew by a factor of 10x while headcount ‘only’ trebled.


Amazon: net sales vs headcount growth

If one then looks at sales growth by segment (Amazon reports net sales by Media, Electronics & General Merchandise and Other), it all starts making sense: the bulk of the growth in absolute terms has come from the EGM segment, which grew from $15.6B TTM net sales in Q3 2010 to $43.1B TTM net sales in Q2 2013 and now accounts for close to two thirds of Amazon total net sales. EGM includes stuff like consumer electronics, DVDs, software, home & garden furniture, toys etc. which, unlike books, movies and video games (included in the Media segment) is heavy and bulky and requires both more warehouse employees AND more warehouse space. Also, as Amazon pushes aggressively towards same day delivery, more fulfillment centres are required to get closer and closer to the end customer, which is likely to further diminish Amazon efficiency at generating revenues.

Q3 2010 looks like an inflection point when the Media segment started being shadowed by the EGM segment in terms of net sales.


Amazon: revenue per employee

Benedict Evans, in a brilliant post on Amazon’s (lack of) profits, has recently speculated that the company could well be a cleverly orchestrated ‘Ponzi’ scheme where top line growth can only be sustained by suppressing profitability and constantly re-investing every cent of free cashflow back into the business (and particularly, in fulfillment centre staff).

“The other view is that this isn’t actually possible – that Amazon is a sort of Ponzi scheme. It can only grow by running at zero profit – as soon as it puts up prices or cuts capex the business will collapse, and as soon as the share price stops going up all the staff will leave. “

While the market does not seem yet to buy into this thesis (Amazon stock price trebled since Q3 2010, despite razor thin profits), I think it is interesting to draw a comparison between Amazon and other brick and mortar retailers that have historically suffered from Amazon stellar growth.

While Amazon pulls in c. $700k in annual sales per employee, the bricks & mortar retailers average just over $200k per employee. Again, that all still makes sense: the volume of online customers that can be serviced for every warehouse employee exceeds that of a physical retail store; and while Amazon’s servers don’t need that many dev ops to keep them up at night, other retailers need cleaners to mop the floors at each store location every night. That’s why on paper ecommerce beats brick & mortar retail on a unit economics basis. What’s interesting though is the trend in Amazon revenue per employee: while Amazon is still significantly more efficient than its offline competitors at generating revenues, the trend is now clearly showing a steady decline.

The acquisition of Kiva Systems, a warehouse automation company, in March 2012 (Amazon’s second largest ever after Zappos) was timely, although it is yet to make an impact on revenue / employee efficiency.

I will be monitoring this metric over the next few quarters.

[UPDATE TO Q3 2013: numbers are out. As expected Amazon continues to grow more inefficient. With total employees now at 110k, it’s average LTM revenue per employee is at a 10 year low of $730k]

Traditional Retailers Race to Online Drives eCommerce Valuations

I just read about Walgreens acquisition of for over $400mm. Wow.Traditional retailers are really feeling left behind in the race to online…this is happening more and more often. Not too long ago Morrisons, the UK supermarket group, acquired Kiddicare and snapped up a minority stake in FreshDirect, the US online groceries retailer. While this is a natural move for companies that have traditionally operated in the offline world (and do not have a clue about online), it is also driving valuations of eCommerce businesses through the roof, literally.

These are some multiples I have calculated based on public info:

  •, at $409mm enterprise value, is being valued by Walgreens at 25x 2010 EBITDA and 22x 2011 projected EBITDA
  • Kiddicare, at £70mm, was valued by Morrisons at well over 20x 2010 EBITDA
  • ASOS trades at over 30x 2011 forecast EBITDA!
  • Ocado trades at 30x 2011 forecast EBITDA

I would love to see a chart of eCommerce multiples pre dotcom crash..I bet they were not that far away from what we are seeing in the market these days (if you have a source, please send me the link!). 

UPDATE: some useful data on Ben Horowitz‘s blog, which compares multiples now vs. the dotcom bubble. The answer is: we are not in a bubble! yet.



How Social is Affecting Online Purchase Behaviour

I recently came across a very interesting presentation about social ecommerce called “The Social Shopping Explosion”, by Immediate Future. One of the main point of the slides was about how social is changing our online purchase behaviour and how brands are reacting to it.

Think about it, go back a few years (say five). Back then, when you needed a new pair of shoes (and you were just a bit online savvy) your typical journey would have probably looked like this: > [pink leather shoes] > [Zappos] (ad or organic result) > [] >> purchase.
Your purchase decision was made off-line and you moved on-line to transact. We have all done that.    

Come back to present now. You are likely to be online 24/7, at your desk or on-the-go, and most of that time is spent on social networks, interacting with your friends, your followers, your colleagues, etc. It is increasingly more the case that your purchase decisions are being driven and affected by your social graph rather than by actual/immediate needs. It is pretty hard to argue against the fact that social media has significantly transformed our online behaviour and that our purchase decisions have now largely moved online.        

Companies like Blippy et al, Foursquare et al, Groupon et al, Polyvore, Modcloth, to name just a few, are leveraging off this trend. All they are trying to do is catch users and convert them to buyers during their regular online social activity. Other services, like Wishpot and Payvment, power brands with e-commerce solutions to sell through their Facebook fan pages.  

That does not mean that the traditional customer journey is no longer relevant. Advertisers will keep spending big bucks in trying to catch customers while they are searching for something. But the paradigm is clearly shifting, product discovery has become am much richer, social and collaborative experience. That explains Google’s rumoured plans to build a social layer called “Google me” on top of search, fearing that Facebook might actually end up overshadowing their highly profitable search business .

But what does that mean for brands then? 
What it means is that there are now greater opportunities to connect with customers across the social space, before, during and after the actual purchase. Those include social commerce (i.e. purchasing directly from social networking platforms), social communication (forums, blogs, communities) and social media “touch-points” (Facebook and Twitter pages). To the eyes of a brand, a social shopper is not longer just a buyer, but it is now also “an expert, a critic, an influencer and their best advocate”. Interestingly, according to a recent report by Synapse, well summarised here, a Facebook Fan is supposedly worth $136, based on the evidence that it is likely to spend more than a non-fan, that it is more loyal and more likely to recommend the product or brand.     

Fabio De Bernardi, head of European business development for Wishpot is convinced social shopping will drive online retail growth:  

I’m a strong believer in the rise of the importance of social shopping / social commerce (depending on where you look at it from, the buyer perspective or the seller’s) and in its becoming truly mainstream in the next 18 months max. I also believe that those forward looking brands that are positioning themselves now on this emerging channel will rip most of the benefits when buying from a Facebook page or by clicking on a YouTube video will hit prime time. And it won’t be long…

We’re clearly going to a direction where anyone (retailers included) fights against each other for 2 scarce things: time and attention. And it’s also clear that there are some new internet giants, Facebook first and foremost, attracting vast audiences and countless hours of web browsing. Therefore it’s essential to benefit from the rise of these new giants rather than going against them with a surpassed strategy (being only a stand-alone destination site doesn’t really work anymore in the current environment).

At Wishpot we’re seeing numbers growing constantly, not only for sales originated via Facebook and Twitter, but also for engagement metrics. In fact in social commerce there is an amazing underlying opportunity to create brand advocates just by enabling people to carry the brand’s products to their friends in a genuine and spontaneous way. Also, we’re seeing much more interest and understanding from retailers compared to a year ago, which means that among all the catch phrases and buzzwords more and more e-commerce and marketing directors are getting used to the idea of using social media as a way to drive money and better ROI to their company.”


Will Google succeed in its social move? I am long Facebook and short Google…