Sramana Mitra: You may have read my article on this subject especially in the context of fashion. I did the first e-commerce in fashion with exactly this premise – that it needs to be a personalized store. You have to use technology in the backend, and it’s a very expensive technology to build.
Daniel Gulati: I think the point, is we’re moving away from gut and more towards more of these analytical techniques. On the consumer side, there are some interesting apps that provide deep recommendations where you get to know the consumer. They go through and they actually have many product attributes for each SKU that they carry.
If I put what I know about you together with deep product attribution, can I give you the best recommendation that you will get? The return rates are really low. In fashion, we see category average return rates of anywhere between 20% to 30%. A lot of these apps are generating return rates that are fractions of that. Their recommendations are primarily based on browser, click-through data, and purchase data. That gets you to a certain level. You’re going to see a whole host of companies doing deep recommendation.
Sramana Mitra: It is the unexplored territory in fashion because you need both deep computer science and deep understanding of fashion in one person. That is not easy to find. The geeks are not the most fashionable people in the world. It’s expensive technology to build.
It’s all largely lean startups today. Venture capitalists are moving farther and farther away. By and large, the industry is moving far and far away upstream and entrepreneurs have to build things for lean. These are more fat startups scenarios. That’s one of the things that’s standing in the way of entrepreneurs.
Daniel Gulati: You’ve touched on this a couple of times now. The technology build is expensive. How do you go about this? Just to be constructive, the way that you get a shot at this is, think of this concept of digestible milestones. If it’s going to take you $20 million to produce a hardware prototype, how I see it work on the ground is entrepreneurs are being thoughtful about what does $2 million get you?
It might not get you to prototype level. It may get you penetration in your target market. It’s about being thoughtful about chunking down the ambition into digestible pieces. I would really be focusing on finding the first and second derivative of your ambition.
Sramana Mitra: My caution to entrepreneurs who are trying to do this is today, given where venture capital is, there are very few VCs who know how to do fat startups. If you look at the history of the venture capital industry, there were lots of fat startups going on at one point. That’s how the whole infrastructure of the technology industry has been built.
There were all kinds of hardware investments that were done earlier on in the industry which were fat startups. People were willing to do fat startups. People knew that it took money to build intense technology. That whole knowledge and that whole patient investor category have disappeared. We don’t see that. In the consumer investors, we hardly see that anymore.
Even in enterprise investors, we don’t see that anymore. Right now, the expectation is that somehow the entrepreneur is going to be scrappy and figure out a way to do what they want to do on their own time and then the VCs are going to basically come to the rescue of victory.
Daniel Gulati: You have this Catch-22 situation as an entrepreneur where the VC wants to see traction, but you’re not able to get that traction without a team and a product. One thing I’ve learned is that it’s hard to look at VC as this one homogeneous group. It only takes one VC to say yes for you to close a round. You have to be precise about the VCs that you want to work with.
Sramana Mitra: I don’t agree with that at all. You basically have a terrible time raising the follow-on round. It’s not a question of raising one round. It’s a question of raising multiple rounds. This is where the Series A gap is gaping. You have 70,000 seed-funded companies and only 1,200 get venture funding.
You’re talking about very specialized expertise. It’s these kinds of expensive technology-building challenges and whole gap in early stage financing that makes fat startups really difficult to build. It’s a very serious problem. I thought a lot about it.
Daniel Gulati: Agree to disagree. When you are trying to start a company, you are trying to be the exception in every possible way. I know a gazillion hardware VCs that do great work. As a startup, you are trying to be the exception. On the VC side, there are always exceptions. For every 10 VCs that say they won’t fund hardware, there are three that will say we’ll only do hardware. These generalizations don’t really help. As an entrepreneur, you need to find the business partners on the financing side that share your vision.
Sramana Mitra: Good talking to you. People will find interesting nuggets out of it on the readership side. Thank you for your time.