How can VC and startups make the most of the evolving digital retail environment?

Today’s retail industry is facing huge disruption from the likes of Amazon and other online retailers. At the same time, 2018 was characterised as one of the best years in retail we’ve had in recent days. What should venture capitalists and the startups they invest in be aware of, and how can they make the most of today’s retail environment?

Before venture capital, you were an executive at Target Corporation and you have written frequently about today’s changing retail world. Retail is a dynamic industry, presenting opportunities and challenges for VCs and the startups in which they invest. How would you characterise today’s retail environment?

Amazon has changed everything. When I was with Target Corporation from 2011-2016 it was considered taboo to talk about Amazon and Walmart. Exclusivity was king. Times have changed- today, buyers want to see how a product performs on Amazon before they will greenlight it for store shelves. Consumers can now digitally vote for products via online purchases and reviews, which dramatically speeds up the process of assessing product/market fit.

As a result, today’s environment is more cut-throat. Brands need to invest significant dollars into marketing in order to compete with incumbent sellers, and there is no room for error. A buyer in the baby department at Target (baby is a booming category) recently told me he needs brands to invest a minimum of $2m in marketing to effectively launch a product. For startups, this can be daunting. We are now seeing an emergence of direct to consumer brands that capitalise off of more efficient (and sometimes less expensive) ways to reach customers, including influencer marketing.

What have been the primary drivers of recent change in the industry? Where do you expect to see the most significant disruption in 2019 and beyond?

From an industry standpoint, Amazon will continue to be the primary disruptor of the retail space. The original driver of the disruption was incumbent retailers moving far too slowly in the digital space, and failing to offer the speedy shipping that customers were demanding.

Going forward, disruption will come from the vanishing of the wholesale/middleman environment. Nascent brands are launching direct to consumers, and Amazon is focusing more heavily on its more-profitable marketplace platform, which is essentially a direct-to-consumer platform. Brands will find it less and less profitable to launch in traditional retail, which operates on a wholesale model. Brands will shift dollars to digital marketing instead.

People will continue to buy groceries, home goods, some clothing and pharmacy items in stores, but even these categories will be disrupted eventually. One thing we know for sure is that consumers love convenience.

The National Retail Federation characterised 2018 as one of the best years for retail in a decade and projects continued growth this year. How can startups most effectively capitalise on this growth? What types of companies will be best positioned to take advantage of the new paradigm in retail?

The economy was booming in 2018, and retailers reaped the benefits. For retailers such as Target, Walmart, and Best Buy, the truth will come with the next recession. If these retailers are doubling down on supply chain efficiencies and innovation, they may survive- otherwise store closures are certainly in the future as consumers continue to shift toward online convenience. Today, 10% of all retail purchases are made online, and half of that goes to Amazon. The next closest big box retailer is Walmart at 3.7%. That’s not good for Walmart.

Consumer product startups at in a unique position to re-write the launch playbook. It’s now possible to reach impressive scale without ever hitting a store shelf. Some of the most exciting new brands, including Glossier, Allbirds and Caspar, have minimal physical presence. Startups should take a cue from these success stories: double down on content and marketing talent, consider skipping brick-and-mortar retailers.

Venture capital investors appear to be bullish on the retail sector, with Forrester predicting a 35% year-over-year increase in retail tech investments in 2019. Where do you see the greatest opportunities for VCs in today’s retail?

In tech! As a tech investor today, I see how automation can dramatically affect operations, from scanning inventory to quickly packing boxes. Hardware and software startups both have bright futures in the retail space. Robotics and sensor technologies will continue to have a major impact on operations, as will self-driving technologies when it comes to deliveries and supply chain. AI will play an increasingly important role in digital shopping and demand planning. Voice will continue to drive incremental purchases. Opportunity exists whenever it’s faster, cheaper and easier to get products into consumers’ hands.

Your session at SuperReturn US West was focused on women in VC. According to All Raise, only 9% of decision-makers at US-based VC firms are women, and 74% of US-based firms have no female investors. Why is there still such a dearth of female representation in VC and what do you think are the most effective means to address the issue?

Today, most of my friends who are new to VC have very similar profiles to the founding partners of their firms: typically male, from the same business schools, high schools, etc. They usually got the job through a warm intro from a mutual connection. This has to change! The most important place to focus is on the beginning of the talent pipeline. If women (and other under-represented groups) are more easily able to get a foot in the door, the gap will shrink.

If you are in a hiring position, broaden the search for new talent: post the job online, take cold calls, network with organisations who bring together more diverse pools of talent (Women in Hardware is a great example).  If you get a networking cold call from someone exploring VC, take it! Spend the time and energy to share your experiences, and be open to deal flow and conversations from everyone, not just warm intros from people you already know. Have mentorship programs in place for everyone in your company - not just under-represented hires.

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Under the spotlight: Kate Whitcomb

Kate is a Partner at HAX, the world’s first and most prolific hardware accelerator and investor, with offices in San Francisco and Shenzhen, China. HAX is a program of SOSV, a global venture capital firm with over $525M in assets under management. Kate is focused on investments in the robotics, enterprise, health tech and consumer spaces.