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

When New York-based e-commerce site Totsy raised a $5 million Series A in late 2010, the startup gained the expertise of two of New York’s best-known venture capital groups: Rho Ventures and DFJ Gotham Ventures, which led the round. Since then, the site—which holds limited time “flash sales” of merchandise for parents and children—has grown exponentially. Within a year of the funding, monthly revenues were up 3,000 percent, according to the company, and the number of brands willing to sell on Totsy’s site had grown from 96 to 500.

A source close to Totsy says the company is currently in the process of raising additional funding.

Daniel Schultz, co-founder and managing director of DFJ Gotham (pictured at right), is a member of Totsy’s board of directors, and a key advisor to CEO Guillaume Gauthereau (at left). The company has recruited marketing talent from the likes of FAO Schwartz and 1800FLOWERS.com. Now the management team is gearing up for the next stage of the company’s growth, which will require them to deftly navigate a rapidly expanding and extremely competitive e-commerce environment. In August, Totsy’s top competitor—Seattle-based, mom-friendly site Zulily—raised $43 million in funding. But the explosion of new e-commerce sites has sparked a fair amount of consolidation: In the fall, for example, flash-sales site Gilt Groupe bought struggling daily deals site BuyWithMe.

Schultz and Gauthereau sat down with Xconomy New York last week at the offices of DFJ Gotham to talk about e-commerce strategies, and what it will take to keep Totsy at the top of the pack.

X: The flash-sales category is very crowded, with players such as Gilt Groupe, ideeli, and Rue La La. How was Totsy designed to stand out from the competition?
GG: When we started we went for a very difference audience. We weren’t targeting the woman living in the rich neighborhood in Boston. We were approaching every single mom. From day one we had the vision that we believe every woman in the country is going to buy something in a flash sale at some point. So we went broad. The second element is that we tried from day one to be representative of everything you buy. I would say 70 or 80 percent of the sites are about what you wear. We believed that was part of what we should do, but it should not be the only thing we do.

X: How did Totsy connect with DFJ Gotham, and what made it a good marriage?
GG: We felt we wanted a local partner in New York City because we are based here. And New York is becoming one of the great cities for online retail. We thought that DFJ Gotham really understood our space and had great insights on our vision. When I looked at DFJ Gotham’s investing track record I thought, “they see what’s coming up next.” We want to benefit from that.

DFJ Gotham has been able to connect us to a few interesting companies in their portfolio, like StellaService, which is becoming really big in the consumer space. They’re benchmarking customer service practices. DFJ also has an investment in a company called SailThru. They have an e-mail marketing platform that reacts to behavior. It looks at what time you open your e-mail, when you read it, what articles you look at, and instead of sending you the same e-mail as everyone else, it sends you something personal. The products might be different, or you might receive it later because you don’t open your e-mail until 10 p.m. Now we’re on contract with both SailThru and StellaService.

DS: We’re not only investors in sites like Totsy, but we like e-commerce infrastructure and enablers, as well. SailThru and StellaService are not destination sites, but they enhance the performance of them, or they enable better conversion of customers on e-commerce sites.

X: But there are so many e-commerce companies popping up now, particularly in New York. How does DFJ Gotham predict which ones are likely to rise to the top?
DS: There has to be a certain amount of moxie and bravado coupled with some realism and tactical ability. It’s hard to find that combination. In the case of Totsy, we really tracked the business. We looked at potentially participating in the seed round, but we felt we had our work cut out for us 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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