NEW YORK — In just a few short years, Fab went from a $1 billion valuation to a $15 million fire sale.
Across eCommerce, success is more unpredictable than ever. When it comes to culture-driven products, things that worked in the past often do not work in the future – the sheer number of Avengers sequels notwithstanding. But despite the inherent unpredictability of our tastes and the complex way they interact, venture capital still places a heavy bet on pattern recognition. These patterns: be it a proprietary product, low-cost customer acquisition tactics, or the ability to reach scale fast – are hardly reliable predictors of success.
For example, Harry’s proprietary product is manufactured in its German factory. Insourcing manufacturing was a great initial way to differentiate their razors from Gillette’s low-quality but expensive razors. But, superior product quality has since become table stakes in the shaving market, with a number of startups all offering the same key features. Five years and $375 million venture dollars later, Harry’s has only 5% market share in the traditional retail sales market. It is a distant third in the online manual shave market. Not until Target provided its massive distribution muscle, did Harry’s growth begin to tilt upwards. To stay competitive in this mass market, Harry’s now needs to worry about the shelf space and brand marketing – just like the incumbent.
Dollar Shave Club, with 21% of the online market share, was not profitable when Unilever bought it in 2016. Its media-beloved Youtube ad was viewed more than 25 million times since 2012. Social media was responsible for Dollar Shave Club’s awareness but that form of media also undid its staying power. The main lesson: awareness doesn’t equal conversion and fast user growth doesn’t mean profitability.
To hack growth, startups have to – first – hack culture.
In addition to the usual signals, venture capitalists should look into whether or not a company has roots in trend or subculture. A subculture is made up of people who are more informed and passionate about a topic than anyone else. They are likely to be beta-testers, source material, and advocates for a new product or service. Cycling brand Rapha started from cycling obsessives. Apparel brand Patagonia started from the subculture of social responsibility. A deep subculture entrenchment ensures that a company can maintain and enhance its difference as it scales. Long-term defensibility has more to do with whether a company can believably connect with a community through the shared things. This takes precedence over a proprietary product or its acquisition channels.
Success also has to do with what Japanese call kuuki wo yomu or, reading the atmosphere. In the October 2013 article titled Yes, Real Men Drink Beer and Use Skin Moisturizer, Bloomberg magazine quotes Mintel’s data on the 5-year rise in the global sales of personal-care merchandise geared to men. Harry’s was founded earlier that year, Dollar Shave Club two years prior. Both of them capitalized on the shift in the culture of modern masculinity, but neither of them invented it.
The shift was already happening. As sociologist Duncan Watts notes in his research on social influence: if a society is ready to embrace a trend, almost anyone can start one. But if it isn’t then almost no one can. The success of Harry’s or Dollar Shave Club didn’t have to do much with a spiffy video or on the German factory-produced razors. It had more to do with how susceptible men already were to the idea of grooming and how easily persuaded they were to invest in it.
Social influence is often mistaken for disruption.
The dynamics of how trends spread are shifting from (1) brands, media, and retailers pushing ideas to (2) mass market exploitation to the (3) networks of niches and taste communities. Both startups and VCs have to consider social processes that ultimately define success of their inventions.
In addition to engineering products and services, startups then need to engineer social influence in their market. The fastest way is to piggyback on the already existing social influence, and amplify it through go-to-market strategy that emphasizes social activity among a company’s initial following. This social activity then serves an ad for a product or service aimed at the mass audience. Luggage brand Away’s initial community of travelers – and their stories – became an ad for its products; rides of the Rapha’s Cycling Clubs are the ad for Rapha’s gear.
Social activity in a market accumulates social capital. How a social currency is going to be created and exchanged is the inherent part of business plan. It’s a business’ core value unit. And whether a company has the potential to build and trade in social currency should become part of venture capitalist’s evaluative criteria. Beauty brand Glossier’s currency is beauty preferences of its fans. Glossier’s currency is so strong that this brand is now creating the entire marketplace around it. Social currency builds scale, defensibility, and network effects.
To prevent social currency from being devalued due to the reverse network effects, companies need to maintain and grow their distinction as they scale. The best way to do this is through product and service diversification. A brand is an umbrella for a portfolio of unique products. Streetwear brand Supreme mastered the art of distinction, with a large part of its audience owning unique brand products. Product diversification increases the number of bets, reduces risk, preserves social currency, and organizes a company around the inherent unpredictability of people’s tastes.
The ultimate irony of the popular disruption narratives is that they venerate a deeply anti-social attitude. They celebrate an outsider and a renegade who “moves fast and breaks things.” But without social influence that creates the susceptible mood and allows the new products, services, and ideas to spread, there is no “disruption.” Instead of applauding the world’s outliers, we should direct our attention to the society that makes them thrive. There should be a sociologist among engineers.
Read the No. 294 curation here.
By Ana Andjelic| Edited by Web Smith. About Ana: named to Forbes CMO Next list, Ana was most recently the Chief Brand Officer of Rebecca Minkoff. She has earned her doctorate degree in sociology and worked at the world’s top advertising agencies. She’s also a frequently published author, public speaker and writer. She lives in New York City.