Podcast Summary
From struggling post-college to a successful investor, Lydia Jett's career has been defined by her curiosity and understanding of business risks.: Lydia Jett's diverse finance background and curiosity about business risks have shaped her successful career as an investor, from JPMorgan to SoftBank's growth equity team, and now as a consumer internet and e-commerce investor.
Lydia Jett, a managing partner at SoftBank Investment Advisors, has had a varied career in finance, from struggling to find her footing post-college to landing at JPMorgan during the last crisis, where she learned about capital structure and risk. After transitioning into investing, she focused on private equity and understanding business risks. In 2015, she joined SoftBank's growth equity team, which was a new and seemingly wild place for her after a decade of disciplined and focused risk assessment. However, her experiences and curiosity thread have united throughout her career – understanding the underlying risks and optimizing business structures. This has led her to her current role as a consumer internet and e-commerce investor at SoftBank. The episode, sponsored by Tigas and Brex, explores Lydia's evolution as an investor and her insights into ecommerce.
Identifying business tailwinds for growth: Focus on businesses improving with technology and automation, e.g. ecommerce, for growth opportunities rather than decaying ones.
The shift in business strategy from focusing on what could go wrong to what could go right, also known as identifying tailwinds, has been a game-changer for the speaker's career. This approach, which she learned during her time at SoftBank, involves investing in businesses that are on the curve of growth, have identified their market position, and are fundamentally improving their business models over time. The concept of tailwinds refers to the big fundamental technology changes that provide protection and drive growth for businesses. The speaker believes that ecommerce is a major tailwind, as it provides consumers with greater efficiencies and access to a wider range of products at lower prices. Masa, a notable figure at SoftBank, emphasizes the importance of identifying and investing in businesses that are improving through automation and technology, rather than just decaying. The speaker spends a lot of time considering these three dimensions when evaluating potential investments. To identify tailwinds, it's important to consider the industry and geographical trends, as well as the specific business model and its potential for growth. The speaker believes that the ecommerce transition is still ongoing, with significant opportunities remaining in various regions around the world.
The Transition to Ecommerce: Unique Factors and Competitive Frontiers: Countries with lower ecommerce penetration prioritize value, and integrating supply chain technology can improve speed and efficiency in ecommerce markets. Traditional retailers like Walmart are innovating to offer digital services, signaling ongoing growth in the ecommerce landscape.
The transition to ecommerce is ongoing and varies greatly by country, with significant economic benefits driving continued growth. Countries with lower ecommerce penetration, such as India and Indonesia, have unique factors that make them under-retailed and value-driven markets. Competitive frontiers in ecommerce include factors like experience, speed, and cost, with some markets prioritizing value over speed. Integrating supply chain operations and technology can help improve speed and efficiency, but this varies depending on the specific market and infrastructure. Walmart and other traditional retailers are innovating to bring digital offerings to their customer bases, indicating that the ecommerce landscape is far from reaching a stopping point.
Innovations in ecommerce, like video-based commerce, give startups an edge in challenging established players: Immigrant founders, with a global perspective and a focus on innovation, are driving growth in ecommerce, particularly in video-based commerce
The speed and innovation in ecommerce, particularly in areas like live and social commerce, are key advantages for startups looking to challenge established players. While companies like Amazon have traditionally excelled in areas like scale and distribution, the pandemic has highlighted vulnerabilities and opened opportunities for new players. Innovations like video-based commerce, which has seen significant success in the Eastern world, are expected to gain traction in the US market, despite differences in consumer behavior and retail landscape. The engagement levels with video content are much higher, and platforms like TikTok have shown explosive growth. Companies like Firework are making it easier for businesses to integrate video into their ecommerce offerings, resulting in significant conversion rate improvements. While the US may not see the same velocity of video commerce as China, there is significant potential for optimization and growth in this area. Immigrant founders with a wider worldview and a natural tendency to look outward for innovation are often overrepresented in successful ecommerce startups.
Differences in tech market and consumer preferences between China and the West: Investing in China offers unique insights and opportunities for US investors, with vastly different scales, velocities, and aesthetic preferences in tech and ecommerce.
China's tech market and consumer preferences are vastly different from those in the Western Hemisphere, particularly in terms of scale, velocity, and aesthetic. The speaker, who has invested in international companies, was initially myopically focused on Silicon Valley but was blown away by the innovation and consumer behavior in China. An example of this difference is the cluttered, single-landing page approach to ecommerce in countries like China and Indonesia, which contrasts sharply with the clean UI preferred in the US. In 2021, the speaker and their firm focused on the least penetrated categories of commerce, specifically food consumption and purchasing, and trying to figure out how these would change in the new 10-year economy. The US has strong, established retailers and dominant online retail platforms, leading to less innovation in ecommerce enablement. Overall, the international market offers unique insights and opportunities for investors to challenge their assumptions and adapt to different consumer preferences.
Monetizing the creator economy: A sustainable model: Providing creators with a platform and resources while acting as a distribution partner to retailers creates a sustainable economic model in the creator economy
The creator economy, which allows individuals to monetize their content or sales abilities, is an exciting area for investment. However, finding a sustainable economic model that supports a long tail of fragmented creators is a challenge. The speaker has learned that successful models often involve providing creators with a platform and economic resources to build their businesses, while also acting as a distribution partner to retailers. This approach allows retailers to reach new consumers in a more authentic and trusted way. An example of such a company is LTK, which functions as a marketplace connecting creators with retailers, taking a small cut of the commerce enabled and providing advertising budgets to work with. By matching both sides, LTK has found an economic model that is exciting and worth investing in. This model is different from the traditional one in the US, where trust is built around established brands and retailers, but in the creator economy, trust is built around individuals and their authentic voice.
New influencer networks offer targeted collaborations for brands: Brands can reach desired audiences through targeted influencer collaborations on social media and apps like LTK. Understanding unique market dynamics and implementing vertical integration strategies can lead to significant growth opportunities.
New influencer networks, like LTK, provide a more targeted approach for brands to collaborate with influencers based on specific audience demographics. This approach allows brands to reach their desired audience through both social media platforms and the LTK app. Cameo can be seen as an analog as it also focuses on connecting individuals, but the main difference lies in the one-to-one model vs. LTK's influencer-to-audience model. Another key takeaway is the importance of understanding unique market dynamics, such as the underretailed economy and limited ecommerce penetration in Korea, which can lead to significant growth opportunities for ecommerce companies like Coupang. Western investors often overlook such markets due to misconceptions about their size and development. Lastly, vertical integration has emerged as an essential strategy for companies serving merchants and enabling commerce. By controlling various aspects of the fulfillment process, companies like Coupang, Amazon, and Shopify can offer faster speed, larger assortments, and better pricing, ultimately providing a more competitive edge.
Vertical integration in e-commerce for efficiency, innovation, and economics: Investing in vertical integration in e-commerce can lead to significant advantages in efficiency, innovation, and economics. Focus on efficiency before scaling and consider a company's geographic focus, customer base, and contribution margin to assess its potential for margin improvement.
Vertical integration, particularly in e-commerce businesses, can lead to significant advantages in terms of efficiency, innovation, and economics. This was exemplified by Coupang, which was able to achieve exceptional efficiency through a significant upfront investment from SoftBank. The focus on efficiency before scaling is crucial, allowing for creative solutions to packaging, logistics, and returns networks. Margins are a key component of a successful e-commerce business, and it's important to prove out the core business model before adding adjacencies. Evaluating a younger company's potential to drive margins requires recognizing that they will be worse at the beginning and will improve over time. It's essential to consider the company's geographic focus, customer base, and contribution margin to assess its potential for margin improvement. Additionally, unintended events can impact margins, so it's crucial to remain adaptable and flexible in business strategies.
Extracting operational efficiencies and negotiating power for improved margins: Scaling up operations increases negotiating power and allows for operational efficiencies, leading to improved unit economics. Extreme efficiency gains often come from negotiating leverage on cost of goods sold.
Improving margins through operational efficiencies and negotiating power is a key factor in the success of many companies, especially those that were not profitable at the time of investment. Scale is important because it increases negotiating power and allows for operational efficiencies to be extracted, leading to improved unit economics. However, making these improvements is not always straightforward and requires significant effort, as the underlying drivers and outcomes often do not align with initial forecasts. The most extreme efficiency gains have come from extracting further margin on products through negotiating leverage, as the cost of goods sold (COGS) is typically the largest cost structure for businesses. While these improvements may not be immediately noticeable on a day-to-day basis, they can lead to significant changes in the long term. A consistent piece of feedback for companies that have not succeeded with SoftBank's investments is that they were not thinking big enough in terms of improving customer experience or economic value proposition.
SoftBank's Reputation for Thinking Big and Moving Fast: SoftBank's aggressive investment style, rooted in Masa Son's ability to simplify complex ideas, has led to success but also oversimplified perceptions and risks.
SoftBank's reputation for thinking big and moving fast is rooted in reality, but it's not the right fit for every company. Masa Son's ability to clarify complex ideas into simple concepts, like SoftBank's aggressive investment style, has led to some oversimplified perceptions. SoftBank's enormous capital pool, which has grown from $6 billion to $100 billion, allows the fund to invest aggressively in a larger number of companies. However, there are risks associated with deploying such a large amount of capital, including a lack of discipline and focus, which can hinder a company's growth. Despite these challenges, SoftBank's strategy of investing in market leaders and aggressively capitalizing them has been largely successful, but it's not a one-size-fits-all approach. Companies need to be carefully selected and able to absorb large amounts of capital effectively to succeed as SoftBank-backed companies.
Managing and Allocating Capital Wisely in Tech Industry: Effective finance functions and smart capital allocation strategies are crucial before scaling up. Overcapitalization, debt, and investing in capital-consumptive businesses should be avoided.
That managing and allocating large amounts of capital wisely in the tech industry is a significant challenge. The speaker, who was involved in raising billions of dollars for the SoftBank Vision Fund, shared lessons learned from this experience. One key insight gained was the importance of having a strong finance function within a business and effective capital allocation strategies before scaling up. Overcapitalization of companies, putting debt on their balance sheets, and investing in capital-consumptive businesses were identified as mistakes. The speaker emphasized the need to focus on efficiency and smart capital allocation before pursuing scale. The Vision Fund's investments in companies like Coupang and Fanatics were validated as successful, but the importance of acknowledging and learning from mistakes was also emphasized.
Early focus on financial management crucial for startups: Invest in financial expertise to navigate financial side of business, impress growth equity investors with unit economics, cohort retention, and engagement trends.
Financial discipline and understanding the financial aspects of a business are crucial for startups, especially as they grow and seek outside investment. Uber is an exceptional example of a company that thrived due to its early focus on financial management. However, many founders overlook this aspect of their business, often relying solely on their charisma and product potential to secure funding. This can lead to issues when investors start looking for financial plans and expectations to be met. As such, it's essential for startups, even at the series B stage, to invest in financial expertise, such as a strategic finance person or a CFO, to help navigate the financial side of their business and prepare for conversations with growth equity investors. These investors focus on the core economics of a business, including unit economics, cohort retention, and engagement trends, and having this information readily available can make all the difference in securing investment.
Selecting and optimizing KPIs for business success: Deep understanding of company's levers, adaptability to new learnings, avoiding premature optimization, authenticity with investors, strong founder impact, continuous improvement
Effective key performance indicator (KPI) selection and optimization in business requires a deep understanding of the company's most important levers and the ability to adapt to new learnings. Premature optimization can lead to unintended consequences and hidden costs, so it's crucial to identify what truly matters and focus on it. Every business is messy, and being authentic and open about mistakes and learnings with investors and stakeholders builds trust and fosters successful relationships. The importance of a strong founder for e-commerce businesses cannot be overstated, and the impact of replacing an average founder with an exceptional one can be significant. The focus should be on continuous improvement and a willingness to adapt to new learnings.
Leadership and Economic Profitability in Operational Businesses: Exceptional leaders like Tony Hsu at DoorDash combine vision and analytics to build successful companies, despite initial economic disadvantages in ecommerce. Automation and growth focus can improve margins, and experienced investors offer valuable insights.
Exceptional leadership plays a crucial role in building successful companies, especially in operational businesses with complex economics. Tony Hsu at DoorDash is an example of a leader who is both visionary and analytically minded, enabling the company to reach massive scale and improve its economic profile. Ecommerce companies often start from a disadvantaged position due to impaired margins, but by automating processes and focusing on growth, they can eventually match or surpass the margins of traditional businesses. Working with experienced investors like Masa can provide valuable insights and help founders navigate the unique challenges of their market environment. Ultimately, understanding the market and building a clear, big vision supported by fundamental economic tailwinds are essential for success.
Masa Son's Adaptability and High-Trust Environment Set SoftBank Apart: SoftBank's Masa Son is a unique venture capitalist known for his adaptability and high-trust environment, allowing the company to pivot strategies and attract top talent, making it an attractive partner for founders.
Masa Son, the CEO of SoftBank, stands out in the venture capital industry due to his ability to adapt quickly to changing market conditions and his high-trust environment. Unlike many financial institutions, Masa can pivot his strategy when necessary, allowing SoftBank to stay at the forefront of headlines in the rapidly changing capital markets. Additionally, Masa grants a high level of trust to his team and takes personal responsibility for mistakes, creating an optimistic and exciting work environment for founders. These qualities, combined with SoftBank's significant resources, make Masa and SoftBank an attractive partner for founders looking to build big things. The venture capital industry is unique in that it is more reliant on the aggregation of talent and the unpredictability of people, making it a challenging and unquantifiable business. Despite the challenges, Masa's approach sets SoftBank apart from other investors.
The longer you're in venture capital, the more humility and patience you need: Success in venture capital depends on experience, patience, humility, and a good dose of luck. Giving feedback to team members is essential for building confidence and value.
Learning from this conversation with Olivia is that the longer you're involved in venture capital, the more humility and patience you must cultivate. Great investors are often those who have been in the industry for a long time, have weathered multiple cycles, and have been fortunate enough to be part of successful ventures. However, success in this field also depends on a significant amount of luck. As Olivia shared, she's grateful for the countless individuals who have given her feedback and helped her grow as a leader. She emphasizes the importance of giving feedback to team members to help them build confidence and establish their value. Ultimately, survival is the name of the game in venture capital, and humility is a crucial trait for any investor looking to make a meaningful impact.
