The Phygital Frontier

COVID-19 accelerated digital and eCommerce adoption by at least 10 years. The retail industry has been slow to unite physical and digital (“phygital”) channels and was put to the test during the shutdown. Not surprisingly, those retailers with agile infrastructure and omnichannel technologies fared the best. This article unpacks the forces at play and the consumer-focused technology offerings that proved pivotal.

COVID Crisis

As I write this article, the United States is 130+ days into the first wave of the COVID-19 pandemic.  The majority of brick and mortar stores have reopened with health and safety restrictions in place.  Retail executives are operating in a new paradigm as virus hot spots re-emerge in the southeast, forcing a second wave of store closures.

When the shelter-in-place orders went into effect, the proverbial music stopped on the retail rally.

Government-mandated store closures for all but “essential retail”, resulted in massive pileups of seasonal store inventory. 

At the same time, online sales surged as consumers were sequestered-at-home and stocked up on essential products weather the shutdown.  

As noted in Figure 1: Retail Ecommerce Sales in the US, prior to the pandemic, eCommerce sales were 11% of total retail sales.  Given the acceleration of eCommerce during COVID, forecasters are predicting unprecedented growth in online sales (+18%) and market share (14.5%) by year-end 2020.

Figure 1

Source: eMarketer.com

Throughout the pandemic, most retailers have struggled to adapt to the sudden shift in channel demand.  The majority of traditional companies lack the responsive supply chains, scalable technology stacks, and agile organizational structures required for such rapid pivots.   

For years, the retailing industry has neglected to keep pace with innovation.  In addition to legacy systems, most companies are hampered by the historical separation of brick and mortar and eCommerce divisions.  As mobile penetration and digitally-savvy consumers collided, the demands for more seamless retailing options forced retailers to invest or die.

COVID-19 has ushered in the forces to cause a decade worth of transformation in 4 short months.  New customer expectations of fast and convenient home delivery and contactless in-store or curbside pickup have forced the convergence of physical and digital “phygital” channels.

Trailblazing retailers like Walmart and Best Buy began investing in phygital operations in the early 2000s.  At the time, these efforts were mostly an attempt to keep pace with Amazon’s meteoric rise.  After years of losing marketing share to the online juggernaut, brands finally realized that their brick and mortar stores, when well-designed and appropriately stocked, were a key competitive advantage.

Only when the tide goes out do you discover who’s been swimming naked.

Warren Buffett

When we look for bright spots in the retail landscape during COVID, it’s no surprise that the retailers who performed best, were those that invested in and perfected their omnichannel transformation well in advance of this downturn.  

The companies that funded IT and data analytics roadmaps and prioritized scalable agile operations, unified omnichannel commerce (defined below in Figure 2: Omnichannel Retailing), and end-to-end enterprise resource planning are the clear winners of today.

Figure 2

Source: Forrester Research

Tale of Two Categories

Tailwind Categories

Further complicating matters is the bifurcation in retail based on the type of goods retailers carry.  In the first camp are those brands that sold a high percentage of “essential goods” (e.g. groceries, pharmacies, hardware) and were able to keep both brick and mortar and online stores open during the pause. 

Also in this group are businesses who were forced to close their physical stores, but were fortunate that the lion share of their products saw surges in demand during COVID (e.g. at-home fitness, office furniture, health and wellness, baking goods and alcohol). 

For the aforementioned companies, the pandemic has been a winning lottery ticket.  Despite the 13% drop in overall consumer spending in April, many of these large and niche brands recorded Cyber Monday-like sales.

Even the brands that lacked omnichannel capabilities were able to squeeze out impressive gains, in spite of online stock-outs and website performance issues.

Furthermore, the digital leaders in this category enjoyed sizable market share gains and goodwill as they supported communities during this devastating period. We will explore more on this tailwind group later.

Headwind Categories

The second group of retailers was not so fortunate.  These mostly traditional brands have large brick and mortar fleets and sell a high percentage of non-essential goods like apparel and arts and crafts.  Many of these companies lacked advanced omnichannel infrastructures and thus were relegated to selling their goods online. 

So while sales for tailwind categories were up year-over-year, the retailers in this headwind category saw precipitous sales declines of 60-80% during this period.  Several of the prominent retailers falling into this segment are among the 20+ retailers that have been forced into bankruptcy so far in 2020 (see Figure 3: Retail Bankruptcies Rage on in 2020).

Figure 3

Source: Yahoo Finance

Tech Stars

While the essential workers and medical teams were the undisputed heroes of the pandemic (7 pm applause please!), special recognition is also deserved for the operations and technology teams who kept retailers and headquarters running. 

From the sales associates who put their lives at risk to ensure consumers had the essentials to survive, to the tech professionals who pivoted on a dime to set up remote work capabilities. 

Underpinning life in this ‘new normal’ is the consistent and enabling presence of technology.

The stellar financial results cited above for tailwind brands were likely aided by frictionless shopping journeys that leveraged the best of human and automated interactions. 

In Figure 4: COVID-19 and Omnichannel Competitor Matrix, we analyzed a competitive set of select large and widely covered retailers.  Evaluating each company based on penetration of COVID-friendly product categories versus digital maturity helped explain the duality in financial results.

Figure 4

Source: Catalyst Consulting

By our estimates, visionary companies that embraced technology and funded innovation are at the head of the pack as we emerge from (or are still in) this crisis. 

One of the few silver linings in these dark times is that the retail CIOs and CTOs finally have a seat at the table!  The retailing industry has been criticized for its lack of innovation, and we have the virus outbreak to thank for accelerating digital efforts within the industry. 

It has become appallingly obvious that our technology has exceeded our humanity.

Albert Einstein

Based on reviews of the retailers’ press releases and earnings reports, the COVID winners had a similar playbook for responding to this crisis: 1) analyze data, predict trends and in real-time shift their 2) inventory and supply chains 3) distribution strategies 4) human capital and 5) marketing dollars.  

The simplicity of the above statement completely masks the complexity involved in executing each of its tenets.

Underlying the seemingly auto-magical experience of buying a product online or in-app and having it delivered to your doorstep is a highly integrated and expensive technology architecture. Calling upon no less than five enterprise-level systems, omnichannel is the holy grail of phygital, and as such, is the most elusive in retail.

Figure 5

Source: Catalyst Consulting

The core enabling technologies that are required to successfully execute the five steps are as follows: 1) business analytics and real-time insights software, 2) enterprise resource management systems, 3) omnichannel order management platforms, 4) workforce management tools and 5) CRM solutions with a 360-degree view of customers and products with online and offline integrations.

I have classified seven common omnichannel use cases into Figure 5: Omnichannel Maturity Index to chart a brand’s linear journey to omnichannel from a customer’s point of view.  While there is no one way to execute or deploy these feature sets, Figure 6: Omnichannel Technology Infrastructure provides a practitioner’s perspective on the complexity, level of investment, and potential business impact of each of these technology solutions.

In building out a roadmap to achieve omnichannel (see Figure 6), there are stepping-stones and phased customer offerings that can be addressed along the way.  While it is rare to design a technology stack from scratch, as most of us inherit legacy systems and technical debt, it is useful to disaggregate the solutions to ensure you are getting the most out of the core systems you do have.

Below in Figure 6: Omnichannel Technology Infrastructure, I have broken down each phased omnichannel offering with an analysis of the underlying technology and organizational/consumer benefit.

Figure 6

Source: Catalyst Consulting
  1. UNIFIED PRODUCT AND INVENTORY

Conversational Commerce (CC) is the first phygital solution.  From a minimum viable product perspective, only a shared product catalog between the website and store associate device is necessary.  Fully integrated cart capabilities between the website and mobile point of sale (mPOS) is an attractive add-on but are not required to unleash the power of this feature.

As the least advanced solution, this feature set is ideal for heritage brands with antiquated and non-integrated systems. Conversational commerce gives sales associates the ability to intercept website traffic and apply proven upsell techniques.  The resulting increases in units per transaction, average unit retail, and conversion should yield an attractive return on investment. 

Another functionality that can be deployed to consumers as retailers take steps toward increased phygital offerings, is eShop Stores.  Launching these capabilities allows retailers to test and iterate use cases that measure customer interest in-store inventory while shopping online. 

2. OMNICHANNEL INTEGRATED WEBSITE

The ability to reserve a product and/or make an in-store styling appointment (ROPIS), return an online purchase in-store (BORIS) or purchase an online item for contactless store pickup (Curbside Pickup) represent the next phase in omnichannel maturity.

As noted in Figure 6, the key component of these online-to-store offerings is having an enterprise-level and flexible front-end website that synchronizes via a real-time API layer with inventory, financial accounting, and mobile POS systems. 

I have been encouraged by the number of retailers who enhanced or optimized their tech stacks during COVID and deployed these mission-critical technologies to keep customers safe. 

As the gateway to omnichannel, deploying these technologies is typically painful for traditional retailers.  However, the foundational benefits of establishing this synchronized platform hub is unparalleled. From this solid customer-centric infrastructure, retailers can bolt on a number of future-proof direct-to-consumer offerings.

3. OMNICHANNEL INTEGRATED WEBSITE

The final leg of the omnichannel journey, buy online ship from/to store (BOSS) and buy online pick up in-store (BOPIS) (also referred to as click and collect) is reserved for the winner’s circle.

My favorite omnichannel capability is BOSS.  As an advocate for sustainability, efficiency, and high return on investment, I find BOSS to be as revolutionary as just-in-time inventory.

The ability to pool inventory without sacrificing delivery times is ground-breaking.  Yet again, we have Amazon to thank for pushing the boundaries on their regional distribution center strategy, which caused retailers to emulate that concept.  Macy’s, Walmart, and Best Buy were among the first to use their brick and mortar stores as mini-fulfillment centers.

Enabling BOSS requires not only having all of the aforementioned non-consumer facing technologies but also integrating order management and sophisticated inventory planning systems.  The significant investment of time and money combined with the pitfall laden path of tying together unwieldy backend systems is daunting. 

An important commonality between BOSS and BOPIS is the ability of in-store teams to master in-store fulfillment.  The training and change management required to operationalize picking, packing, and shipping should not be discounted.  Consumer service level agreements, whether stated or implied, do not lessen for either feature set, so enforcing compliance for this new offering is paramount.

In the end, BOSS is a true inventory optimizer and when deployed correctly can improve sell-through, gross profit, and keep inventory balances in line for superior return on invested capital.  Another advantage of BOSS is while retailers wait for the return of footfall in stores, BOSS can be an effective way to align channel demand and inventory.

Nirvana in omnichannel retailing is buy online pick up in-store (BOPIS), a combination of eShop by Store, ROPIS, Curbside, and BOSS.  To give you a sense of the magnitude of this initiative, some large scale retailers have spent over $1 billion launching these omnichannel initiatives. 

BOPIS is the quadruple jump of phygital retail, and fittingly it was the star of shopping experiences during the pandemic.  The ease, speed, and convenience of finding something online, and having that item in your possession within 1-2 hours is powerful.

Some savvy brands bolted on same-day home delivery options via Postmates, Instacart, etc. This combined BOPIS plus same-day delivery experience rivaled Amazon’s, especially at the start of the pandemic when many Prime delivery windows were extended.

The core technology for BOPIS is a front-end website with an intuitive user experience that allows a shopper to search for inventory by zip code or location.  Often requiring custom development, this offering is expensive, but post-pandemic BOPIS is quickly becoming table stakes for digitally-savvy consumers. 

As noted in Figure 7: The Benefits of Omnichannel, the incremental revenue lift and enhanced loyalty from offering BOPIS are sizable.  In addition to the financial benefits, organizations that successfully undergo digital transformation are poised for sustained future growth.  All in, the pain experienced while pursuing omnichannel is worth it financially, and if not pursued, many retailers may experience the pain of bankruptcy. 

Figure 7

Source: Forrester Research

I’d be remiss if I didn’t mention that there are new technology vendors that are purpose-built to fill gaps in omnichannel architecture and unite discrete platforms to cobble together a BOPIS-like experience.  It is highly likely in a few years new brands will be able to afford and quickly launch full-featured omnichannel solutions leveraging these upstart SaaS players. 

New digital native startups will likely bring about the final frontier of omnichannel retailing which will include more personalization via artificial intelligence and machine learning.  Amazon and internet of things (IOT) manufacturers already offer consumers subscriptions for auto-replenishment of commodity goods.  In many ways, Stitch Fix, Birchbox and Rent the Runway were trailblazers in this space, so expect an eventual converging of phygital, subscription, and rental models. 

In Summary

We all hope that it won’t take another exogenous shock, like a pandemic or natural disaster to force retailers to embrace innovation and experimentation. 

I am hopeful that the retail industry will heed the lessons and elect to continue the unsexy digital transformation work required to align with consumer expectations. 

Bio

Follow me (BlogTwitterLinkedin) to join the conversation.

Lockie Andrews is the CEO of Catalyst Consulting (www.catalystconsult.com), a boutique advisory firm to retail and consumer brands and technology companies, as well as venture capital and private equity funds. Lockie is also the Chief Digital Officer (CDO) and Chief Information Officer (CIO) of UNTUCKit, a digitally native brand located in New York City, and the 2020 awardee of The Lead Digital Icon award.

With 20+ years of general management experience, Lockie has assisted high growth companies (e.g. Nike, Lane Bryant, Limited Stores, ANINE BING, and various high growth startups) in diverse areas such as digital transformation, technology, analytics, digital marketing, revenue enhancement, and operational/financial improvement.

Lockie is a speaker, angel investor and sector lead for the HBS Alumni Angels of NYC, and the Co-VP of Programming for the HBS Club of New York. She is also the founder of the Black 100 Initiative, a non-profit focused on increasing board representation of Black executives in Fortune 1000 companies.

Innovation Universal

Time to Stop Judging & Start Mentoring Millennials

Sustaining Innovation in the Millennial Age: Why Everyone is a Millennial

Originally posted on RiseSmart’s blog.  

In a four part series, innovation and “growth hacking” consultant, Lockie Andrews outlines the primary forces that drive millennial engagement – and the surprising connection between millennial-friendly cultures and innovation.

Last month I hosted a RiseSmart webinar (recording available here) in which I presented 5 Ways Innovative Companies Attract and Retain Millennials.

MILLENNIAL RESEARCH

A quick search on Amazon reveals over 5,000 books on Millennials. The research studies and academic papers on this generation are equally voluminous.

It seems everyone has chosen a side in this debate. Are Millennials different from prior generations? Why do they still live at home with their parents? Do they deserve the title of entitled and lazy?

What’s lacking in this debate, and what I plan to contribute, is a forward-looking and constructive analysis on the impact Millennials will have on future organizations.

After all, whether they are different or the same, and whether you like or dislike their behaviors, Millennials are who they are. They will change, like all generations, but change will come slowly- and the business world needs them now.

To build my prescription for Millennial engagement, I based my research on a recent study by Gallup. I prefer Gallup’s How Millennials Want to Work and Live, 2016 because it presents survey results with low bias and judgment.

What’s also compelling about the decades of research from Gallup, is the easy comparison between empirical data sets for Millennials, Gen Xers, Baby Boomers and Traditionalists. There is clear evidence that Millennials are the least engaged generation at work (at this age), and that there are other substantive differences from prior generations.

screen-shot-2016-09-30-at-12-30-14-pm

I’ve been mentoring and working with this cohort for some time, so these differences have been clear to me.

I’ve spent the last few years figuring out ways to engage and motivate Millennials. Because, honestly, it doesn’t matter what others think about their generation. Our opinions and assessments of Millennials will not change these hard truths:

  • Today, Millennials = 30% of workforce
  • In four years, Millennials will = 50% of workforce

screen-shot-2016-09-30-at-12-22-19-pm

Given their sheer size and their obvious digital advantages, the business world needs to do a better job recruiting and retaining young people. The fact that Millennials feel disengaged is a problem that belongs to all of us, plain and simple.

HOW TO APPEAL TO MILLENNIALS?

So how have some companies figured out how to build Millennial-friendly work places?

Based on research and experience, I’ve identified five core characteristics that give companies an edge with Millennials.

Principles Driving Millennial Engagement

The first two principles relate to the core DNA of a company. A firm’s values and purpose are factors that are traditionally set by the founders, Board of Directors and owners.

The next two principles are processes the management team creates to execute on its purpose and values. How a company communicates and collaborates is the spinal chord of every organization. Without a healthy and flexible system, the culture, speed and business performance will be hampered.

Interestingly, it turns out that communication and collaboration are also critical enabling factors in highly innovative cultures (more to come on this finding).

The final principle is a modern mindset that appreciates both the professional and personal needs of employees. Companies with enlightened management appreciate work/life balance and show a significant level of empathy towards their employees.

All five of these principles are controllable, and with commitment and focus, can be achieved by any corporation.

SOCIAL PROOF

During the webinar, I took the audience through illustrative case studies on the top five Millennial-friendly companies that ranked highly on Glassdoor’s Best Places to Work list (Airbnb, Bain & Company, Guidewire, Hubspot and Facebook). I will explore these examples in more detail in future articles.

In the interim, do you know any companies (startup or mature enterprises) that have done a great job of appealing to Millennials? We’d love to hear your thoughts. And follow me (Blog, Twitter, Linkedin) to subscribe to this series and be a part of this important conversation!

 

Lockie Andrews is the CEO of Catalyst Consulting (www.catalystconsult.com), a boutique advisory firm to retail and consumer brands, digital, media and technology companies, as well as venture capital and private equity funds. With 20+ years of general management experience, Lockie has assisted high growth companies (e.g. Nike, Lane Bryant, Limited Stores, and various high growth startups) in diverse areas such as strategy, innovation, digital marketing, revenue enhancement, operational/financial improvement and fundraising. Lockie is a speaker, author of an upcoming book on Innovation, and a sector lead for the HBS Alumni Angels of NYC.

Innovation
5 Ways Innovative Companies Attract and Retain Millennials

5 Ways Innovative Companies Attract and Retain Millennials

Despite a volatile employment landscape, smart companies are always looking for ways to attract the next generation of talent. Engaging with Millennials, however, requires a strategic approach. Are you prepared?

In this #SmartTalkHR webinar with Lockie Andrews- consultant, Angel/VC/PE Investor, and keynote speaker from Catalyst Consulting, you’ll learn why Millennials are a tremendous talent opportunity—and why they flock to certain companies while avoiding others.  Lockie will lead us through an intriguing discussion on the following topics:

  • The current trends in hiring and employment for startups, and how to leverage these trends to help your organization succeed
  • The five corporate principles that drive high Millennial engagement
  • Examples from leading large enterprises that have created Millennial-friendly cultures (and how they apply to you)

Discover the startup trends that will help your organization succeed, and learn about the principles that drive high Millennial engagement.

Watch a recording of the webinar here:

– See more at: http://www.risesmart.com/resources#sthash.ThlRZaDQ.dpuf

Screen Shot 2016-09-03 at 2.41.56 PM

Lockie Andrews is the CEO and Managing Director of Catalyst Consulting, a boutique advisory firm to retail and consumer brands, digital, media and technology companies, as well as venture capital and private equity funds. With 20+ years of general management experience, Lockie has assisted high growth companies (e.g. Nike, Lane Bryant, Limited Stores, and various high growth startups) in diverse areas such as strategy, innovation, digital marketing, growth hacking, revenue enhancement, operational/financial improvement and M&A/capital raising. Lockie is also a sector lead for the HBS Alumni Angels of NYC.  Follow Lockie on Twitter and Linkedin

 

Innovation

Why Wal-Mart’s Acquisition of Jet.com Makes Perfect Sense

…and why other traditional enterprises must acquire innovation to stay relevant and competitive.

The retail sector is abuzz about the latest rumor Wal-Mart is acquiring or investing in Jet at a reported $3 billion valuation.

There are increasingly more examples of these “innovation acquisitions”. Incumbents view these money-losing innovators like they are fountains of youth.

Screen Shot 2016-08-05 at 11.36.31 AM

For years, I have been advising traditional retailers/brands to “pair up” with startups. Conditions are ideal for these marriages given the slowdown in venture capital funding and the state of cash-strapped startups.

No company wants to be Blockbuster in a Netflix world.  And well-funded traditional enterprises are feeding internal innovation by pouncing on wounded unicorns.

The strategic benefits to large companies from innovation acquisitions are obvious:

  • Fend off disruption by digital upstarts
  • Address changes in consumer preferences and shopping behaviors
  • Find new growth channels, products and customers
  • Acquire proven technologies and platforms

Of course, long term the preferred route is to transform traditional enterprises into lean innovation machines. However, from time to time, it makes sense to look outside for innovation.

There are three compelling reasons why incumbents like Wal-Mart should buy innovators like Jet:

REASON #1: Innovation is HARD

Building an innovative and entrepreneurial culture in large traditional enterprises is incredibly difficult.  Most innovation initiatives die under the rigid controls that fuel hierarchical organizations.

Even companies that succeed in creating innovative environments run the risk of having their efforts erased during the first downturn or management change.

REASON #2: Innovation is EXPENSIVE

Wal-Mart is undisputedly the heavyweight brick and mortar champ.  Unfortunately despite years of investing billions of dollars online, they have not kept pace with Amazon:

  • 2015 Online Sales were only $14 billion (3% of Total Revenue of $482 billion) as compared to Amazon.com’s $80 billion in Product Sales.
  • Last year, Amazon overtook Wal-Mart in market capitalization, and this year Amazon is 40% larger.
  • Growth on Walmart.com has slowed for six straight quarters.

Screen Shot 2016-08-05 at 11.50.31 AM

An acquisition of Jet is a risky and expensive bet, but it’s a small price to pay for long term growth.

REASON #3: Innovation fuels GROWTH

A recent Street.com article hypothesized potential deal synergies between Wal-Mart and Jet.  Assuming Street.com’s analysis is correct, the complementary nature of their customers and products could be a catalyst for Wal-Mart’s stock price.

Of course, integrating an acquisition target while realizing merger synergies is just as hard as transforming traditional enterprises.  The path of “acquiring versus building” innovation is fraught with risk, and will be an uphill battle for Wal-Mart.

That said, Wal-Mart is one of the few companies with the size and scale to compete with Amazon.

A potential acquisition of Jet.com COULD turn out to be a brilliant win-win for both companies.

And that win-win could be Amazon’s Achilles heel.

Pass the popcorn.

 

Lockie Andrews is the CEO and Managing Director of Catalyst Consulting, a boutique advisory firm to retail and consumer brands, digital, media and technology companies, as well as venture capital and private equity funds. With 20+ years of general management experience, Lockie has assisted high growth companies (e.g. Nike, Lane Bryant, Limited Stores, and various high growth startups) in diverse areas such as strategy, innovation, digital marketing, revenue enhancement, operational/financial improvement and M&A/capital raising. Lockie is also a sector lead for the HBS Alumni Angels of NYC.

 

Disruption Universal

The Slowdown in Tech Startup Funding

Published on Linkedin May 11, 2016

In this series, professionals at Shoptalk discuss the most pressing issues facing their industries today.

 

Waiting for fundamentals and reason to return to startup investing has been like waiting for daybreak – anticipation of the inevitable awakening. Fortunately, we didn’t have to wait too long for the current market frenzy to subside.

We’ve been here before…?

It’s only been 7 years since the end of the Great Recession and 13 years since the carnage of the dot-com bust. Despite the short timing, investors seem to have forgotten the lessons from prior downturns.

Anytime technology startups are likened to mythical creatures – thus the aptly named Unicorns; privately held startups with ZERO dollars in profits, but implied valuations of $1+ billion – that should serve as a wake-up call for sophisticated investors/advisors of an impending bubble:

An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might reasonably be expected to be realized from owning or holding the asset.

Watching the Unicorn proliferation felt like reading a textbook.  Hopefully, the coming market correction won’t be as bad at the dot-com bust.

Dot-Com Era Revisited

In the early 2000s, the initial public offering (IPO) market was the “well-established market” that foolishly priced immature companies at astronomical levels. The dot-com startups’ growth prospects did not justify the valuation forward multiples, causing a severe market pullback.

Once investor funding dried up, dot-com management teams sealed their own fate by spending irresponsibly and prioritizing growth over profits. The rest is history.

Does any of this sound familiar?

Despite the striking similarities between the dot-com and tech startup eras, some people are questioning the current slowdown in VC investment.

So what happened in Q1 2016?

Well, I believe the first rays of enlightenment are starting to illuminate the landscape.  I am hopeful that this wake-up call is a return to reason.

Depending on which venture capital authority you trust, the market seems to be signaling that something is afoot. According to Thomson Reuters, Q1 2016 was the strongest quarter for VC dollars raised since 2006!

  •  U.S. venture capital (VC) firms raised $12 billion during Q1 2016
  • a 59% increase in dollar commitments over the same period in 2015

Now despite healthy coffers, VC investment in startups during the same period was mostly flat.  So why the disconnect?

Perhaps it’s due to the realization among investors, academics and journalists that Unicorn valuations and growth prospects are unreasonable.  Only time will tell.

Here’s the good news.  Unlike prior bubbles, Unicorns are still privately held, so VC firms and institutional investors will bear the brunt of falling valuations.  Yes, startups will suffer more closures, layoffs and belt-tightening, but the fallout will mostly be contained.

Reason vs. Unicorn Fantasies

The return to reason has already begun.  Since Q4 2015, we’ve seen signals of investor caution.  The decrease in the number of Unicorns, the down rounds and the well-publicized write-downs offer additional clues.  I am encouraged by my recent retail/consumer angel investor due diligence meetings, where the focus has shifted to questions around profitability, business model and sustainability.

In hindsight, it makes perfect sense that investors took a less analytical approach when evaluating pioneers like Facebook, Google or Amazon.  However, let’s not confuse ourselves, or be convinced by the founders of the tenth “me too” startup that their primary focus should be on growth, not profits.

Yes, now that dollars and sense are a guiding force, I’m excited to meet the last startups standing.  The winners will be startups with viable business models and loyal paying consumers.  The losers will be startups with limited addressable markets and no path to profitability.

Much like the NCAA during March Madness, what is emerging is a new breed of Cinderella startups.  Founding teams that glorify grit and avoid chasing fads and vanity metrics will come out on top.

A New Day Dawns

Of course, plenty of transformational opportunities remain.  We are still just scratching the surface in the consumer industry on artificial intelligence; virtual reality; big data; and leveraging the power of technology to automate retail.  Evaluating investments in the aforementioned sectors will take time and will likely breed a new class of Unicorns who blaze a path.

For the vast majority of tech startups in more mature sectors, nightfall lasted too long.

I’m looking forward to being a conduit for those deserving entrepreneurs with good ideas, amazing work ethic and the humility to learn from mistakes. Likewise, I’m relieved to see an end to the entitled mindsets looking for a quick exit.

Thank goodness that no matter what happens in the dark of night, dawn always comes in the morning.

@LockieAndrews is the CEO and Founder of Catalyst Consulting www.catalystconsult.com, a boutique consulting firm to retail and consumer brands, digital and technology firms, and venture capital and private equity firms.  With 20+ years of general management experience, Lockie has assisted high growth companies (e.g. Nike, Lane Bryant, Limited Stores, Concrete Platform) in diverse areas such as strategy, innovation, revenue enhancement, operational/financial improvement and fundraising.  Lockie is also a sector lead for the HBS Alumni Angels of NYC.  She will be moderating the “Beyond Venture Capital Investment” panel at @ShopTalk in Las Vegas in May 2016.

 

Sources: Dealogic, Wikipedia, CB Insights, Thomson Reuters

Startups

Welcome to Lockie’s Blog

Musings on innovation, disruption and the digital age from a direct-to-consumer executive and thought leader.  Due to COVID-19 we’ve just experienced a decade worth of digital transformation in 4 months.  I provide tips and tricks on how to stay relevant during these perilous times.

Startups