No. 345: The Arming Of The Rebels


Joann King Herring sat across the living room, lively and engaging as ever. I was standing in her world. As a 16-year-old junior at Houston’s Jesuit Preparatory School, I was a lower middle-class outsider thrust into a world that I couldn’t fully grasp at the time. The geopolitical concerns of the 1980s were long past (or so we all believed at the time). But the 70-year-old socialite and philanthropist still carried herself as though she influenced foreign policy, and in the home of a mutual friend in Houston’s famed River Oaks area, Herring still held court. In a small corner of a major city, she was a titan that influenced outcomes a world over.

It was 1999 and, perhaps, the first time that I heard the phrase “arm the rebels.” Herring was a friend to a Texas Congressman named Charlie Wilson and four years after that meeting, their story, Charlie Wilson’s War, would be on the New York Times‘ best seller list [1] before getting turned into a major Hollywood motion picture in 2007. It was a tale about short-term success and long-term failure. It was about doing too little and doing too much. The film covered two American figures who lobbied the US government to fund a resistance against the then-USSR’s occupying forces in Afghanistan.

Now 90 years old, Joann and her friend Charlie armed the rebels over a 10-year event known as Operation Cyclone [2]. As the conflict came to a close, an official of one of the war’s affected countries would later tell the sitting US President, “You are creating a Frankenstein.”

But Herring and Wilson’s efforts worked, in the end. They armed the rebels and those rebels won. Whether or not the fruits of their labor had a net-positive or net-negative effect on global war and peace will be left to national security experts. The relevancy of this anecdote being used is simple: the act of “arming the rebels” maintained three components over that ten-year span from 1979 to 1989: (1) tools, (2) money, and (3) psychological support.

The rebels defeated a heavily-armed Russian military machine with American tools, American money, and the promise that they had the full support of the American government. This communicated to the opposing military that the money, the tools, and the rebellion would continue. The unbeatable army was beaten by endless supply, force, and psychological warfare.

Shopify and The Arming of The Rebels

Harley Finkelstein on Twitter

Arming the rebels @Shopify-style, a 3 step guide: 1. Create a network of fulfillment centers across America 🕸️ 2. Allow small businesses to leverage these centers 📦 3. Add in robots 🤖 Result: Affordable products shipped on a two day cycle to 99% of America. 💪

Shopify has done a tremendous job executing on their corporate rallying cry: We arm the rebels. Having passed Ebay to become the second-largest eCommerce ecosystem in North America, Shopify has maintained that Amazon is next – an unbeatable army in its own right. Once known solely for its role in small cap eCommerce, Shopify now services financial processing, loans, fulfillment, hardware, and an ecosystem of developers at the beck and call of merchants who can afford their services.

Shopify exists to basically arm the rebels. We want a lot of people to go out and compete against Amazon.

Tobi Lütke, founder and CEO

But what happens when you execute on two components – the tools and the money – without the psychological support? The phrase “arming the rebels”, coined by Ruby on Rails creator David Hansson in reference to Shopify’s role in a densifying eCommerce landscape [3], has a hopeful ring to it. It implies that Shopify is punching upwards (it is). But Shopify will also need to punch downwards to maintain its position.

Shopify has investors excited because it is increasingly seen as the most likely challenger to Amazon’s ecommerce dominance. While many retailers, both traditional and online, have tried to tackle Amazon’s “everything store” head-on, Shopify has succeeded by arming individual merchants with the same technology and capabilities, but with more control. [4]

Shopify’s merchants have nearly every resource at their disposal except for one. The company is slow to champion the very brands that use their platform. Out of fear of coming off as partial, Shopify has thus far hesitated to provide the one advantage that could lock brands into their ecosystem for the long term. Yes, one of three components necessary to arm the rebels: psychological support.

The Big Game Ad That Wasn’t

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I waited, fruitlessly, for Shopify’s Super Bowl advertisement. I wanted the brand to discuss – in front of the biggest audience – its evolution over time: the agencies that its ecosystem has fostered, its move into financial technologies, the DTC Era that Shopify’s invention pioneered, and the robots that will eventually fill its 3PLs.

Shopify has armed the rebels by supplying some of them with the funds necessary to operate or expand. Now, it needs to influence the demand curve for the businesses on its platforms. Shopify needs to become an evangelist for its brands.

The phrase “arming the rebels” has a hopeful ring to it. It implies that Shopify is punching upwards (it is) but will also need to punch downwards to maintain its position.

When Squarespace’s Super Bowl ad premiered, it was enough of a threat to Shopify’s market position that the company’s corporate Twitter addressed their smaller competitor in a sequence of tweets that felt somewhat out of character. Shopify is currently trading at a $54 billion market cap; Squarespace remains orders of magnitude smaller, and private.

Shopify on Twitter

Hey, @SquareSpace we believe in supporting independent businesses too! In fact, there are over 40 businesses in #WinonaMN that are on @Shopify. So we’re going to promote as many of them as possible during the #BigGame. #WelcometoWinona #SupportingIndependents

Given the market position that Shopify has earned, it’s become clear that Lütke’s position on psychological support must change and it should have begun with Super Bowl LIV. Shopify’s promotional power could reduce insurgent competition while closing the gap with the incumbent company that it is challenging: Amazon. Shopify must evolve into its own marketplace. As customer acquisition costs rise for small-to-middle market retailers, Amazon has become a reasonable partner for retailers looking to increase top-of-funnel awareness. From 2PM‘s A Familiar Strategy:

Amazon is harvesting consumer data to become an efficient vertical reseller. The Amazon products will continue to have the preferred place on product pages. In this way, opposing marketers’ frustrations are founded. It may be true that external brands will continue to be penalized for competing against Amazon’s private labels. The Seattle eCommerce giant seems to be preparing for a day when their data harvesting practices – a process that has spawned countless private labels – will be called into question.

Lütke’s likely opposition to this idea is clear: By selecting brands or products to feature in a marketplace format, Shopify becomes a kingmaker of sorts. A kingmaker is a person or organization with great influence on the value of a candidate. This person or organization uses policy, finance, and competitive forces to influence succession. I contend that offering loans or advancements to merchants is another form of kingmaking. Now that Shopify has begun to market financial products, there is less of an argument to be made. 

Shopify’s moat has been discussed at length: Community and the partnership ecosystem are two buzz phrases that come to mind. But the Ottawa-based SaaS company has drawn the line at promoting the businesses that support the ecosystem; the company rarely pushes traffic and media attention to the companies growing within the ecosystem.

One of the three key resources for Operation Cyclone was psychological support. In the context of Shopify’s use of the phrase, the third resource is missing. If Shopify is comfortable defending its position against Squarespace by promoting independent retailers on Twitter, their management team should also feel comfortable supporting its own marketplace.

In December 2019, saw nearly 47 million visitors with over 40% of the traffic coming from the United States. While official numbers have yet to be reported, the Super Bowl was viewed by over 150 million people. Situated in this audience were potential consumers who may want to start their own company, developers who may want to build for Shopify, and consumers who may want to buy from Shopify.

Amazon, Google, Microsoft, Walmart, Hulu, Quibi, Verizon, and Squarespace shelled out fees to advertise during the big game. However – direct-to-consumer brands were noticeably absent, priced out by the exorbitant costs of doing business. Imagine a $5.7 million, 30-second advertisement that sent tens of millions of Americans to When those potential customers, developers, and consumers arrive: they’d see a curation of Shopify’s greatest brands – new and old, established and fresh. Shopify wouldn’t have only gained new customers or partnership prospects. Shopify would have influenced the awareness, growth, and viability for a number of brands that are dependent on three key resources.

In a June 2013 report by the Foreign Press [5], Edward Luttwak lists the five rules for arming the rebels: (1) Figure out who your friends are (2) Be prepared to do all of the work (3) Don’t give away anything that you wouldn’t want back (4) Do not invite an equal and opposite reaction by a larger power and (5) Lay groundwork for the endgame. For Shopify, that endgame involves an emphasis on demand-side economics. For the companies that rely on Shopify’s increasing suite of tools, they must thrive to remain B2B users.

By the end of that evening in Houston in 1999, I conjured up the courage to ask Herring a question or two. I was wearing my nice blue blazer, that night, so I had more confidence than usual. We learned about Operation Cyclone from an alum of the school in one of our courses but it wasn’t yet a widely known story. So on that night, I felt privileged to speak with her before her answers would be honed by Madison Avenue public relations spinmasters. I asked Ms. Herring the type of simple question that a 16-year-old student would: “What did you learn from it all?” She replied with something to the effect of, “We should have given them more and faster. It all dragged on too long. We could have done 10 years’ work in three or four.”

When you arm the rebels, do whatever you can to make sure that they win. They’re fighting for their supplier as much as they’re fighting for their own well-being. After all, their war is now your war.

Read the No. 345 edition here.

Report by Web Smith, Edited by Hilary Milnes | About 2PM 

Member Brief: The DTC Holding Company

The return of Victor Gruen’s Ringstrasse concept. Acclaimed architect Victor Gruen once envisioned an American city center that resembled Vienna’s Ring Road, a vibrant area of multi-use commerce, art, and experience.There, retail, dining, art, and entertainment flowed effortlessly. That original concept gave way to more American ideas in the 1950’s: size, volume, and inevitability.Gruen, an ambitious and driven creative, was devastated for decades. His original concept was coopted and poorly executed. But today’s best retail developments resemble Gruen’s initial concept for the American mall. And digitally native brands stand to benefit from the concept’s resurgence.

No. 333: Food52 and Linear Commerce


There have been few meaningful exits over 13 years. As such, questions surrounding the direct-to-consumer industry’s lack of exits have reached fever pitch. Investors have long questioned the viability of marketplaces and DTC brands. Initially pitched as technology companies, platforms like Shopify and BigCommerce streamlined the technical requirements for many go-to-market strategies. This left many investors questioning defensibility, proprietary advantages, or the value of a brand’s intellectual property – if any.  With many DTC companies raising capital with the intention of growing like software companies, it begs the question: do they understand their true value? The short answer is no.

No Title

I’m not sure that a lot of DTC brand owners realize that they’re building companies valued at 1 – 1.5x revenues.

When venture capitalist Fred Wilson published his thoughts on the Great Public Market Reckoning, he set the stage for an important discussion on the valuations of venture-backed companies. WeWork’s 2018 revenue was $1.8 billion on $1.9 billion in losses. In August 2019, America’s finest investment banks were selling consumer investors the story that the company’s discounted cash flows (DCF) justified a $47 billion valuation at IPO.

If the product is software and thus can produce software gross margins (75% or greater), then it should be valued as a software company. If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software.

Softbank, WeWork’s latest investor, believed that the company could eventually exceed $100 billion in value. As of today, that IPO filing has been shelved indefinitely; the IPO prospectus that once valued the company at nearly $50 billion has been rescinded. WeWork is back to the drawing board and on a hunt for a healthy EBITDA, as it’s likely that a company like that will be judged by a different standard. This may be a difficult path. The coworking company maintains 20% gross margins. Until recently, the cognitive dissonance between value and valuation continued to widen.

Peloton is trading at 6x revenues, rather than the 7-8x that underwriters intended. Based on their gross margins (46%), it’s likely that the multiple will 5x. Lyft maintains a 39% gross margin; Lyft is trading at 4-5x and may eventually fall to somewhere between 3-4x. The commonality shared by Lyft, Uber, and Peloton is the software leverage that they share. Each of the three maintains a software angle that places a premium on their respective valuations.

For many DTC brands, that same leverage rarely exists. For every StitchFix, there are dozens of retailers that fall within that range. These are companies without much technical IP, if any at all. This is a gift and a curse. Shopify has streamlined many of the requirements that would have required a technical co-founder just a decade ago. It’s for this reason that tech’s multiples of revenue shouldn’t be the measure at all. Online retailers are EBITDA businesses. And it’s time that the category optimizes for improved gross margins and sustainability. This may mean less venture capital raised and slower growth over a longer time horizon.

Venture capital isn’t right for many businesses, but if you do want to raise from a VC at some point, you need to understand that often investors care more about growth than profits. They don’t want high burn rates but they will never fund slow growth. [1]

The public market’s rebuke of WeWork is just one of the latest hits to the private market’s penchant for marketing overestimated valuations. In online retail, there is a key adjustment that can be made to better position the DTC industry for exit optionality. The first of which is to learn community building from digital media publishers.

A common DTC multiple of revenue is 1.5-2x. The Steve Madden acquisition of Greats Brand was reportedly within this range. A $13 million revenue year resulted in a sale for $20-25 million. A common marketplace multiple of revenue is 2-4x, this is a company like or A common multiple of revenue for a commerce-first media brand is 3-7x. Glossier has been valued at over $1 billion with a revenue total ranging between $100 – $150 million. For tech companies, SaaS has a premium. In some cases, 10x revenue multiples.  For retailers, valuation multiples are influenced by organic audiences.

Linear Commerce and Revenue Multiples

1565363735634-buyables2_2Food52 is a member of a new breed of digital platform, one that combines commerce and media operations. This aids diversificaton of revenue channels while minimizing the rising costs of traditional customer acquisition. It is not easy but it can be rewarding. There are a number of publishers in this category, to include: Barstool Sports, Uncrate, Highsnobiety, Hypebeast, and Hodinkee. And remember, Glossier began as a blog called Into The Gloss.

No. 314 Linear Commerce: for the brands that are most suited to the modern retail economy, media and commerce operations combine to optimize for audience and conversion. This is the efficient path for sustained growth, retention, and profitability.

Screen-Shot-2019-04-22-at-1.01.30-PM (4)
Food52 is a ‘Version 4’ retailer. Most DTC brands maintain a ‘Version 1’ structure.

Each of these publishers attracts a niche, passionate audience. Their audiences fuel several revenue operations: affiliate marketing, display advertising, native advertising, and DTC retail. Commerce is prioritized and traditional advertising is minimized.

The deal does fit in with the direction The Chernin Group has been headed: The company, which once had plans to put together a very big internet conglomerate after acquiring an big anchor like Hulu, has instead been buying and building a stable of internet companies aimed at distinct audiences, all of which rely on revenue streams beyond internet advertising. [2]

In early September, 25 operators spanning digital media, traditional media, and commerce were seated in a Manhattan dining room. Of them were the founders of Food52, Amanda Hesser and Merrill Stubbs. The venture firm and host of the evening’s festivities let the cat out of the bag. In a surprise announcement, The Chernin Group mentioned that they were set on acquiring a majority of Food52. The room applauded the founders. It was a rare exit in an industry that has struggled to gain its footing.

TCG owns a controlling stake in MeatEater Inc., a digital media company aimed at hunters, fishermen and home cooks, and has also invested in Action Network, a sports-betting analytics startup. [3]

The attendees brushed the impromptu announcement aside and allowed the natural public relations cycle run its course. And that it did. Yesterday, a number of outlets reported the sale. Here are the numbers:

  • $83 million acquisition of the majority of the company
  • A valuation of $100 million
  • $13 million raised over four equity rounds
  • A reported 2018 revenue of $30 million (not profitable)
  • Traffic: 7 million monthly active uniques
  • Paid traffic: less than 2.5% of overall volume
Mike Kerns, President

A Fund 1 investment by Lerer Hippeau, the Food52 acquisition was a positive outcome for investors and founders alike. It’s also a glimpse into the methods that more digital-first companies employ to improve their exit optionality. Those methods? Building brand equity, fostering community, and owning their audience. In a 2PM conversation, Mike Kerns, President of The Chernin Group, stated:

We love to invest in entrepreneurs who are building enduring brands that have engaged audiences. Food52 has built a growing commerce business with very little marketing spend. Their marketing is building their enterprise value and defensibility which is the investment in to their content and community.

Kerns continues:

For TCG we like businesses that can build businesses with their audience established versus trying to purchase the audience from someone else.

In Kerns short statement lies a bit of truth that many in the DTC space fail to recognize. The stronger the organic audience, the higher the premium on a company’s valuation. All revenue is not equal. If a retailer can earn a sale without buying an audience each time, this becomes attractive to potential investors. So why the resistance towards this approach? In short, it isn’t easy to do.

The most viable companies across the digital ecosystem will share a common trait: established, organic audiences. Content and community are core to that outcome. For the well-executed linear commerce brands, retention rates will be high and CAC will be low. The road map is there for the brands looking for a sustainable advantage and improved optionality. Perhaps, the public and private markets will reward more of them.

Read the No. 333 curation here.

Report by Web Smith | About 2PM