Q&A: What DFJ Gotham Sees in E-Commerce Plays Like Moms’ Site Totsy

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getting comfortable with the idea that a flash sale company in the moms and kids space was in fact distinct and unique enough from what some of the other players were doing. We got very comfortable with that.

Selling general merchandise out in the marketplace is one thing, but when you’re selling to moms you’re getting a whole different layer of passion. And it is a big, deep market, even if you’re not selling at the commodity end of the product category. That was one of the things we really liked. The other thing we liked about the business is there’s one kid, and then there’s the second kid, and then there’s a third kid. So while kid No. 1 might age out at 7, 8, or 9, you sort of have a built-in replacement system. Another key element is that in the moms and kids space, returns are a fraction of what they are in any adult space. If something doesn’t fit a 3-year-old quite right is the mom returning it? Nah, he’ll grow into it.

And you’ve got to back someone who can recruit outstanding talent. Totsy has done a phenomenal job of that. It was great to see them persuade a guy like David Niggli, who had previously been president at FAO Schwartz, to come over to Totsy and be the chief merchandising officer. That’s a sign of the persuasiveness of the model and the business, and the team’s passion and leadership.

X: What did investors and entrepreneurs learn from the first e-commerce boom and bust, when we saw highly touted companies like eToys fail?
DD: It’s a great question. The cost structure and capital expense needed to sustain an eToys then vs. what might be eToys today are totally different. Online payment, online merchandising, fulfillment—it all costs less now. And so much business is now beginning to shift online that hadn’t yet really gained momentum back then. If we were starting Totsy ten years ago, it probably would cost ten times as much as what it costs today.

One of the pieces of diligence we did was we called up the guys who invested in BabyStyle. Back in the day, BabyStyle was a hot website—Cindy Crawford was involved in it—and they sold things to moms and kids. It went under when the Internet bubble burst. The issue wasn’t the online business. When the bubble burst, they ended up altering their strategy to establish a brick-and-mortar presence. The brand and the ability to sell could not keep up with the cost structure they had created. But as an online business it was fantastically successful. They had a very high revenue run rate. They indeed had real customers and real products they were selling.

X: Where will the best investing opportunities be going forward in the e-commerce space?
DS: One of the trends that’s a big opportunity is what I call “what’s under the hood,” or what other people call “big data.” A tremendous amount of what’s under the hood can help Totsy runs their business better and smarter. Then there’s also the aggregation of all that data, and how it can be monetized by slicing and dicing and packaging it up. It is a big big problem. I refer to it as “boiling the ocean.” It’s hard to take the enormity—the vast amount of data out there—and make sense of it. We’ve looked at startups that are helping individual companies manipulate their own data to understand how their business will perform better. But we have yet to make major investments in this area.

X: What has DFJ Gotham brought to the table in terms of guiding Totsy through the next growth stage?
GG: A lot of what we do together is plan for the future. We’re in a space that’s moving quickly and we want to be ahead of the curve. They help us make sure we don’t get buried in the day-to-day.

DS: My perspective on that as an investor with any of our businesses and certainly with Totsy is to think of it like hockey. I love hockey. I play, my kids play. Hockey is about skating on the edge in a low-friction environment. Startups exist day-to-day in that skating-on-the-edge environment. Our key for helping entrepreneurs is to take as much friction out of business building as possible, through our relationships, or what we’ve learned from past successes and failures.

It’s hard enough building a startup. If we can help take friction out of building a business we’ll create velocity and hopefully success.

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