Retail's "Last Mile" problem (and how to make the most of it)

A few weeks ago the New York Times ran a piece about near-record vacancy rates at shopping malls around the country:

"Malls, over the last 50 years, have gone from the community center in some cities to a relic of the way people once wanted to shop. While malls have faced problems in the past, the Internet is now pulling even more sales away from them."

A lifetime ago in internet time (~15 years ago in actual calendar time) I ran several product lines for outdoor retailer Patagonia and also led the creation of the company's first online retail presence. Even then -- in the earliest days of e-commerce -- I remember lively discussions about the need for location-based retail to reconsider its reason for being.

Once upon a time, retail stores served as valued curators, merchandisers and local points of distribution for national brands. 

Slowly at first, and now in bigger and more decisive bites, each of those roles is being replaced by digital intermediaries:

• Online megastores like Amazon.com deliver more assortment and convenience than any local store can possibly match; 
• Curation platforms like Pinterest, Polyvore and Fab.com make product discovery effortless and fun (especially for iPad owners); and 
• Peer-to-peer commerce platforms like Etsy, Storenvy and Shopify have enabled an explosion of "indie" shopping experiences that even the most artful local boutiques struggle to match.

So what's left for location-based retail to own?

Fifteen years ago the futurists in retail were all talking about "shopping as entertainment" -- thinking about the retail experience not in terms of merchandise (or even merchandising), but as a fundamentally social and sensory experience that occupied the same mental + economic space as eating in a restaurant, going to a bar or coffee shop, or attending a movie.

As the internet continues to undermine the traditional foundation of retail, this insight -- -- wrapping merchandise sales in social + high-touch experiences -- feels more valid than ever. The only part of the retail experience that the web can't take away is the social and sensory layer (which is a big part of the reason people -- especially women -- choose to shop in the first place).

There will always be a "last mile" problem -- and opportunity -- in retail, not to connect people with stuff, but to connect them with each other.

If I were creating a location-based retail concept today, it would include some combination of the following elements:

• Subscription Commerce -- Like BeachMint, BirchBox or ShoeDazzle do for online sales, organize groups of local shoppers around tightly-defined lifestyle + merchandise segments, and offer them an ongoing stream of benefits that make them feel like members in a club.

• Group Buying -- Give the group a reason to stick together, and invite others, by delivering more value to them as a unit than they would receive as individual shoppers.

• Flash Sales -- It doesn't have to be the core of the value proposition, but artificial scarcity and time urgency are incredibly powerful intermittent reinforcement mechanisms to maintain engagement and keep response rates high. 

• Curated Experiences -- Remember, it's not just about stuff. As with flash sales, members will show up more often for one-off "exclusive" experiences -- all pivoting around your selected lifestyle theme(s) -- that take them out of their ordinary lives and make them feel special.

I don't know of any existing or insurgent retail brand that's running this exact playbook today, but bits and pieces of it are certainly visible among both online and the more forward-looking location-based retailers. 

By pivoting around people and experiences, and not stuff, this approach turns traditional retailing on its head -- which is exactly what's needed to survive. It's only a matter of time before all these elements come together in a single offering -- and when it does it's going to kill.

Should Mobile App Designers Fear the Back Button?

This morning I got together with Tony Wright -- one of my favorite Seattle-area entrepreneurs and a deep thinker on the topic of mobile app distribution and user experience design (among many other things).

We covered a lot of ground in the discussion, but one idea in particular stuck in my head. On the topic of designing for native mobile experiences, Tony said something to the effect that:

"I don't worry about the back button so much when designing for mobile"

It took a minute for this to sink in, but in retrospect it's a critically important idea for anyone who's trying to translate their web product experience into a native mobile context.

One of the longest-standing cliches in the web software business is that "your competitors are always just a click away" -- a first-time web visitor is a fragile and flighty creature, liable at any moment to click the back button and leave forever. A whole industry of landing page optimization, A/B testing and real-time analytics has grown up around this mythology of the all-powerful back button.

Tony's point is that much of this web-centric conditioning is just plain wrong-headed when applied to native mobile experiences.

This *doesn't* mean that you should treat your mobile customers like shit -- creating a great first use experience critically important for any product. But it *does* mean that you should reconsider where you are in the engagement funnel by the time a mobile user first launches your app.

In web terms, the "landing page" for any mobile app isn't actually in the app -- it's the page (either in the app store or on the web) where the user first decides to commit to downloading your app to their device. It's on that page (or set of pages) where you need to treat the user like the flighty, uncommitted web user you're used to dealing with. (This emerging discipline is called App Store Optimization, and it promises to be at least as big a deal for mobile as SEO is to the web.)

By the time a mobile user has evaluated your app, initiated download and agreed to the terms of use, they've escalated their commitment *way* beyond a traditional web visitor -- and you have more headroom than you think to surprise and delight them.

Not only is a new mobile user much deeper in the funnel than you might think, but switching apps is more costly (in terms of time + effort) than hitting the back button, so the power of inertia is also on your side.

What you do with this opportunity is up to you -- but don't make the mistake of porting your web design instincts to your mobile app without taking Tony's advice into account.

Amazon's Achilles Heel

Disclosure - I'm an unabashed Amazon fan. Not only is it one of the most aggressive, forward-thinking and best-led companies in tech, it's also the beating heart of the Seattle tech scene. The comments that follow are offered out of deep respect and a sincere desire to see Amazon dominate the *next* decade of the digital economy.

I interact with Amazon.com all the time -- as a customer, as a supplier, and -- not as often as I'd like, but enough to keep me coming back for more -- as a partner.

These interactions are uniformly excellent -- crisp, smart, decisive, clear and direct. But they always leave me wanting more. And I'm worried that I'm not alone.

Poet and writer Maya Angelou captured the missing feeling better than I ever will:

People will forget what you said
People will forget what you did
But people will never forget how you made them feel.

Amazon is excellent at so many things, but as my partner Andy says about people with poor emotional intelligence, the company has "bad interface" -- they always deliver the goods, but there's no human warmth in the interaction.

Amazon doesn't make you feel anything at all. 

Jeff Bezos has said that this robotic experience is a feature, not a bug -- here's his response to Wired's question about the cultural impact of the Zappos purchase:

Wired: In 2009, you bought [US clothing etailer] Zappos. Was that a bid to absorb their "culture of happiness" and customer service?  

Bezos: No, no, no. We like their unique culture, but we don't want that culture at Amazon. We like our culture, too. Our version of a perfect customer experience is one in which our customer doesn't want to talk to us. Every time a customer contacts us, we see it as a defect.

The first rev of the consumer web was all about connecting people to information -- Amazon, Google, and Yahoo made it easy to search, learn about and purchase almost anything in the world. And we loved them for it.

But human beings don't just want data. They need more than stuff. What they crave most of all is human connection.

The current winners on the web are companies that make those human connections happen. Facebook and Twitter are the dominant platforms, but nearly every service that has captured customers' and investors' imaginations in the past five years -- firms like LinkedIn, Zynga, Foursquare, Etsy, Kickstarter, Pinterest -- is built around the power of connecting people with people.

Amazon has dabbled with adding "social" layers to their products -- Business Insider called their Facebook integration "the future of commerce" (and they were probably right), but if this feature still exists it's pretty hard to find...

Amazon is now making a huge bet on digital media -- a category where word of mouth has always driven sales and "social discovery" (via Twitter and Facebook shares) is becoming the default way to find new titles. But -- to take just one example -- the native "social reading" features in the Kindle platform are so buried / poorly implemented that it took an unauthorized 3rd-party startup -- a Steven Johnson / Betaworks collaboration called Findings -- to finally deliver a credible offering.

I know Amazon has the intellectual and engineering capacity to build a truly excellent social experience, so this isn't a failure of execution. It's a failure of will.

The only plausible explanation for the "empathy gap" in the Amazon experience is cultural -- actually having to interact with customers is seen as a defect, a failure of the machine -- and that cultural strain is embedded so deep and runs so high in the org that it can't be challenged.

Amazon is already a force to be reckoned with across an astoundingly broad spectrum of the digital economy. They have all the tools, talents and ambition needed to be a dominant force in the future of the web. My most urgent wish for Amazon -- as a customer, a fan and an advocate -- is that they take Maya Angelou's advice and pay just a little more attention to how they make people feel.

There is magic in the human connection that all the data scientists in the world will never decode. If Amazon can to tap into that magic with the same conviction they bring to everything else they do, they will be unstoppable.

Embracing Entropy -- the Consumerization of Work

The global economy is in a long-term path toward disaggregation, a gradual shift in economic power from the enterprise to the individual.

This shift is most visible among the most "wired" segments of society -- workers on the leading edge of the mobile / social / "indie" revolution.

But as Venkat Rao illustrates in his excellent article, "A Brief History of the Corporation: 1600 to 2100", the erosion of corporate employment has been underway for over 30 years.

Bryce Roberts published a great piece over the weekend called "Rise of the Independents" -- in his words:

I think we’re entering a golden age for Indie businesses. Some will take the shape of long term durable companies, others will take the shape of projects that spin up and wind down to meet bursts of demand or to scratch a passing itch.

With democratized digital distribution and the rise of crowdfunding sources of capital, many companies will be in a position to stay independent and play by their own rules. And I think that’s a very important and powerful development worthy of it’s own word.

What Bryce *didn't* say (but acknowledged in the reader comments), is that this trend creates all kinds of interesting opportunities for entrepreneurs and investors with a passion for powering the rise of the indies.

This isn't a new idea -- some of the most exciting companies and technology trends of the past few years represent various flavors of "indie economy platforms"...

• Etsy, Storenvy and Shopify in eCommerce; 
• Kickstarter, Y Combinator and TechStars in startup funding; and
• the iOS and Android mobile app ecosystems -- jointly powering the biggest indie software economy in history.

But beyond these obvious, headline examples are dozens of lesser-known or more oblique examples of the same theme:

• Maker Markets -- Elance is the grandaddy of technical labor markets,  oDesk is a more recent (and more diversified) entrant, and recent TechStars SEA grad Group Talent is staking a claim to the high end of the "digital creative work" market (disclosure: I'm an investor).

• Task Markets -- Amazon's Mechanical Turk pioneered the marketplace for lower-skill tasks, but sexed-up / localized Silicon Valley versions include TaskRabbit, Zaarly, and the most recent + high-touch entrant, Coffe + Power.

• Content Markets -- There are dozens of pay-by-the-word content marketplaces out there, but Seattle entrepreneur Joe Heitzeberg brought the form up a level with MediaPiston, and TechStars NY grad Contently has now introduced the model at the elite levels of professional journalism.

• Seller Markets -- Avon, Mary Kay and Amway are pioneers of Multi-Level Marketing (MLM), relying on armies of independent sales reps, peculiar wholesale value chains and complex, game-like seller incentive systems to drive sales. But lately this tired (and somewhat tainted) model has been reinvigorated by brands like Stella & Dot, Chloe & Isabel and Passion Parties, drawing a new generation of (mostly female) sellers into the game.

The bulk of the economy -- and the most obvious, near-term startup ideas -- still sit firmly within the traditional enterprise and consumer markets. But if you're interested in the future of work and not just the present tense, take a minute to think about a world in which the basic unit of economic value is the individual, not the enterprise -- not just the consumerization of IT, but the "consumerization of work"

Instead of fighting the natural entropy in the economy, I'm interested in makers who aspire to be the dark matter in this expanding labor universe -- the invisible but essential glue that holds it all together. If you share this passion, please give me a shout.

Toll Takers vs. Pied Pipers

The "great acceleration" of software innovation over the past decade has fundamentally changed the playbook for entrepreneurial success.

The new methods are obvious to the current generation of software entrepreneurs -- the GenY applicants to Y Combinator and TechStars -- but seasoned participants in the old model still struggle to grok how completely the world has changed.

I was reminded of this generation gap by several recent conversations with senior execs in some of the biggest winners in the prior generation of tech entrepreneurship. The general topic of these conversations was "entreprise innovation" -- the ways that large-scale, incumbent players can foster disruptive innovation within their own firms.

Across a range of industries and firm types, the most common playbook I heard expressed by these enterprise players is what I call the "Toll Taker" approach -- define an opportunity on the horizon of innovation, quietly deploy big teams of engineers in secret labs to build prototypes and lock down intellectual property rights, and when you believe you've staked a sufficiently threatening claim to the opportunity, announce your position to the market and demand "tolls" (in the form of IP licensing fees, selling access to your enabling tech, etc.).

Perhaps the purest representation of the Toll Taker mindset is Intellectual Ventures, a massively-funded IP aggregation platform (led principally by ex-Microsoft folks) whose mission appears to be to erect tollbooths on every significant vector of tech innovation.

The intellectual and economic roots of the Toll Taker mindset can be found in the historical mechanics of technology innovation: a decade ago (and earlier), creating new tech was massively expensive and time consuming. Hardware and software were expensive capital requirements, engineer productivity was limited by crude tooling, and teams often had to build their own foundational tech before they could even begin work on the innovation layer.

The only way a business could justify the time and cost required to innovate was to seek total control over their intellectual property.

Contrast this Toll Taker mindset with the path to success represented by the two most valuable tech companies in the current generation: Twitter and Facebook.

Both companies began life as hacker projects, not strategic initiatives. Their beginnings were modest -- a way to help Harvard students hook up; a tool to help hipsters find the action at SXSW. And users were invited into the product development process from the beginning, sometimes directly, but always in the form of analytics-driven innovation, steering the future product direction based on the actual usage patterns of current customers.

This emergent pattern -- what I call the "Pied Piper" approach to innovation -- has been enabled by a dozen loosely related developments across software tooling (open source communities, more efficient language + framework development), infrastructure (cloud / IaaS, PaaS, NoOps), business process (lean / agile) finance (accelerators, super-angel funds), and culture (economic downturn, unemployment, loss of faith in institutions). Taken in aggregate, these changes have laid down a fundamentally different pathway to technology innovation than the one followed by the Toll Takers.

In the Pied Piper approach, long-term value creation and defensibility is based on customer engagement and velocity -- inviting customers to co-create the product with you, making frequent improvements based on customer feedback, and continually out-innovating the competition to retain customer loyalty -- as opposed to the massive investment, stealth and legal scaffolding typical of Toll Takers.

In the simplest terms, Toll Takers compete through fear, while Pied Pipers compete through love.

If Intellectual Ventures is the archetype of the Toll Taker method, Kickstarter represents the opposite extreme -- a site where entrepreneurs publicly declare their intentions before they've even begun to build, asking prospective customers to pledge their support as a precursor to product development. The site has been building fans in the maker community for several years, but just broke through to a more mainstream audience by helping game maker Double Fine raise more than $1MM in just 24 hours to develop a new title.

None of this means that Toll Taking won't continue to be a valid pathway to business success -- massive, secret allocations of talent and capital toward big visions will continue to produce returns, some of the time.

But if I had to place a bet on the best risk-adjusted path to value creation in software -- and on behalf of our Founders Co-op limited partners that's what I do every day -- I'd go all-in on the Pied Piper playbook. In software as in life, love conquers fear every time.

Accelerator != Incubator (and why it matters)

Well-meaning normal: "So Founders Co-op is an incubator?"

Me (cringing): "Umm, no, I actually hate that word"

Why does the word "incubator" make my skin crawl? Here's why...

I'm a word geek, so I'm hypersensitive to the nuances of language, but I firmly believe that words have incredible power: they're full of latent meanings that shape attitudes and behavior, often in ways we aren't even fully aware of.

To me, "Incubator" reeks of the era -- not very long ago in years, but a lifetime in cultural terms -- when capital mattered more than talent.

Unpack the word incubator and you get something like the image above -- it's loaded with assumptions like:

• Capital + institutions are the most powerful forces in the economy.
• Digital creatives need the support and protection of capital + institutions to succeed.
• A big chunk of the value created by success should be captured by the providers of capital and sources of institutional validation.

It happened so fast that a lot of folks haven't realized it yet, but that world is gone, and it's not coming back.

TechStars calls itself the "#1 startup accelerator in the world" [emphasis added]. Why is "accelerator" a better description for what TechStars (or Y Combinator, or any other maker-centric accelerator program) does than "incubator"?

To my sensitive ears, "accelerator" carries a completely different values payload:

• "Makers" -- the digital creative class -- are unleashing massive cultural and economic change.
• Enabling that change -- by connecting makers with high-performing peers and mentors -- will accelerate the disruption we all know is coming.
• Capital + institutions have a role, but they don't call the shots, and they can't demand a bigger share of the pie than they deserve.

I love Chris Dixon's crystal-clear framing of the choice between incumbents and insurgents:

"Predicting the future of the Internet is easy: anything it hasn’t yet dramatically transformed, it will.  People, companies, investors and even countries can’t stop this transformation. The only choice you have is whether you join the side of innovation and progress or you don’t."

The distinction between "Incubator" and "Accelerator" may seem like semantics to people whose daily lives don't revolve around tech, but to me the choice is as clear and stark as Chris describes.

The future of the global economy -- communication, retail, entertainment, finance, education, health care, nearly every industry that matters -- is now in the hands of the makers.

In industry after industry, the maker class is pulling back the curtain on the great and powerful Oz of incumbency and capital.

User-centered design, lean/agile methods, open source, cloud, SaaS, PaaS, mobile -- a perfect storm of disruption is gathering momentum, and it will continue to sweep away companies and eviscerate markets with astonishing speed.

No matter where you sit in the global economy, the only defense against the accelerating disruption being wrought by technology is total offense: embrace the maker class with full conviction, empower them with all the tools and resources at your disposal, and drag the resistors in your organization kicking and screaming onto the bus.

The maker class isn't in need of adult supervision. Help them get where they're going or get the fuck out of the way. 

Traders vs. Makers

My feed is full of Facebook IPO filing "news", but the winning quote for the day seems to be this one, from Mark Zuckerberg's letter to investors:

"we don't build services to make money; we make money to build better services"

Like a lot of people, I love that quote for what it says about the motivations of great entrepreneurs: they do what they do to create value for users and make a difference in the world; if they happen to make money along the way they're cool with that, but it's a means to an end, not the end in itself.

This quote struck me more than usual today, because yesterday I wrote about how hard it is to create business value when SMBs are your target customer. A commenter (who reached me offline, not in the public comments) challenged my dim view of local by reminding me of the many founders and early investors who had made money in the sector.

Creating Wealth != Creating Value

The point of my post yesterday was that -- given the level of human effort, capital and time required to build *any* business -- local was a tougher-than-average place to create business value, defined as: "taking away [customer] pain for money, with accelerating [positive] margins at scale." As examples I cited some of the "winners" in local, none of which had succeeded in building a business that actually generated more money than it cost to build and run.

The commenter's counter-argument was that -- because the founders and investors in some of these businesses had created significant wealth for themselves (despite the poor economics of the businesses they had built) -- the businesses actually *were* successful, and I shouldn't be so dismissive of the opportunity.

Zuck's quote was timely, because it reminded me why that argument doesn't work for me. It also brought home for about the millionth time since we started Founders Co-op why I love what I do, and why there's never been a better time to do it.

Traders vs. Makers

I have a not-very-nice view of the financial services business that goes like this: the farther you progress up the capital markets stack -- from seed investing at the bottom; through the various stages of venture and growth capital; to public market equities; and on up to quantitative trading and pure risk arbitrage -- the more the emphasis of the principals shifts from a positive-sum game of value creation to the zero-sum game of value extraction.

In the simplest terms, makers focus on creating value; traders on creating wealth.

Not very many years ago, when it took more money to build a software business than it does today, the influence of "trader culture" on startups was very strong. Companies were formed by business founders and financed by venture capitalists who learned their trade at investment banks. Developers were low-level code monkeys hired to build what the business guys told them to build. And the public markets -- a liquidity machine controlled by traders -- were where the traders went to turn business ideas into money.

This was the golden era of "other people's money" and "greater fool" investing.

In the last 10 years, the actual capital cost of building a software company has fallen precipitously -- from millions of dollars to hundreds of thousands or (for very agile teams of makers) nothing at all. Open source tools and cloud infrastructure are the proximate cause, but these are just tools in the hands of the makers -- small teams of digital creatives who know how to place the levers that can move the world.

The traders' loss has been the makers' gain.

As the power of money in software entrepreneurship wanes, an entirely new class of maker-founders and entrepreneur-investors has burst onto the scene. Makers no longer need the traders' permission to get into business -- they still (occasionally) need some money, but they prefer to take it from fellow-entrepreneurs who have walked in their shoes and can help them hone their craft.

The leaders in this new world aren't admired for being aggregators of capital, but aggregators of talent: Y Combinator, TechStars, Foundry Group, First Round Capital -- these are firms built by makers, for makers. And the most admired tech firms today -- Facebook, Twitter, Google and Apple -- were built by makers, not traders. (Jeff Bezos began life as a trader, but is clearly on the side of value creation).

Makers actually care about their customers.

There's a strong, causal relationship between the rise of maker culture and the growing focus on user-centered design and agile software development.

When makers set out to build a business, they tend to design from the customer in. The core assumption of the Lean Startup movement is that frequent, high-velocity customer engagement is the only reliable path to business success. We're also witnessing the rise of the designer-founder, reinforcing the idea that the experience layer of the business -- the parts the customer actually touches -- is as fundamental to long-term value creation as the underlying machinery.

When traders set out to build a business, the ends (creating wealth for founders and investors) justify the means (doing whatever it takes to drive price up and get out before the roof falls in). The business design is optimized for financial and capital markets outcomes, not company or customer gains. [Or as MC Solaar says in the video above, "La fin justifie les moyens"]

Wealth creation should flow from value creation


Back to Zuck and his investor letter, the Facebook IPO is likely to be one of the biggest tech wealth creation events ever (and Twitter's not looking too shabby either). In fact, I can mentally list dozens of maker-led, user-centered software companies that are on track to produce billions of dollars of investor return.

As it turns out, making better services is a great way to make a ton of money.

The evolving transition from a trader-led culture of software entrepreneurship to a maker-led one doesn't signal the kind of creeping socialism that kept Nixon up at night. I actually believe we're witnessing the early ripples of a culture shift that will eventually make its way to Wall Street (though not without a little regulatory encouragement).

If this continues, we may actually see the day when pure trading behaviors are (gently) discouraged, while public and private capital investments that actually produce long-term value are supported and celebrated.

Our culture *should* reward and encourage entrepreneurs who work hard to grow the pie, not just cut a bigger slice for themselves. The maker community is leading the way, and I feel lucky to have a bit part in the action.