Gilt, Groupon, One Kings Lane, Oh My

Posted on December 9, 2009. Filed under: startups, venture capital | Tags: , , , |

When I shut down Untitled Partners, before returning half the money to our investors, I went through the analysis of potential pivots we could make in light of the change in macro environment post meltdown.  As prices in the art market plummeted and volume of transactions evaporated, what the art market really needed was an effective liquidation model to help suppliers free up cash by delivering deep discounts to buyers who would not buy on any other terms.

At this time (early 2009), was about two years into their business, showing meteoric growth, largely because luxury clothing retailers (suppliers) were experiencing the same inventory management and liquidity issues that were luxury suppliers in our market.  For those not familiar with, they are basically an online T.J. Maxx (or “sample sale” if you want to get cute about it) for high end fashion apparel.  Consumers are able to purchase luxury goods online at 50-70% discounts during short window sales.  Retailers sacrifice margin (through discounting) in exchange for volume (through online marketing) while still protecting their brand and price point due to the one-time, short windowed nature of the sales.  Gilt, although they couldn’t have known it from the start, timed the market perfectly.

In a boom market, the effort of convincing these luxury retailers to give up this kind of margin, and to potentially dilute their brand, would have been a heavy sales effort.  But when people stopped buying $2000 handbags in Bloomingdales, manufacturers of said handbags were much more willing to take risks in order to keep their cash flows above water.  Like any marketplace, with supply, demand will follow, and in a market where even the wealthiest consumers are cost conscious and scared to spend, the value proposition of absurd discounts resounded greatly.  The result: Gilt did $25M in revenue in 2008, claims to be on track for $125M this year, and was just valued at $400M in  a $40M venture round led by General Atlantic and Matrix Partners.

The logical startup move for our company, given the success of this liquidation model in an analogous market, would have been to pivot toward a Gilt model in the high end art market…but an illogical supply chain and status-conscious consumer in our market ruled this move out.

So we weren’t able to leverage the beauty of  a liquidation model in a down market, but many others were.  Multiple “me too” Gilt competitors experienced similar growth trajectories.  Gilt’s market crowded with the presence of Rue La La,  Ideeli, and others, but to date, there has been enough volume to go around.  I hear a lot of new startup ideas, and I can’t tell you how many aspire to be “the Gilt for this” or “the Gilt for that.”  Gilt, itself, even funded an extension of their model in the travel market (now called  Kleiner Perkins and First Round Capital just backed a similar model called One Kings Lane in the home furnishings market…and modifications of this liquidation model have even been implemented with great success in the local SMB market (i.e. Groupon, which just took $30M bucks from Accel).

So here’s my question…all of these models experienced their growth when they were able to provide fledgling businesses with an avenue to move inventory in illiquid markets.  But what happens when the economy fully recovers, retailers are able to move their supply without deep discounting, and the already saturating market full of liquidation companies begin running into stiffer competition for inventory?  The consumer side of their model shouldn’t change.  Consumers will always want deals and be happy to by at discounts, but the breadth and quality of inventory that these companies can offer will decline.  Perhaps stupidly (I have only the most superficial data to support this thesis), I am guessing that most of these models will shift onto a trajectory of more linear growth in the next 18-24 months…

This is not an argument that all the venture investment that has gone into the space was poorly spent.  The growth that has already occurred will sustain these early winners for years to come, and the macroeconomic picture isn’t going to 180 tomorrow.  My caution, is more for entrepreneurs and very early stage startups that are contemplating this type of model now and going forward.  Seems like the perfect storm for liquidation models is close to or already behind us.

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at (p.s. i don’t use spell check…deal with it)


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