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Big Boys Going after Consumer Lending

Earlier this week, I shared my thoughts on consumer lending heating up. It’s a large and growing market that’s big enough for multiple winners and hasn’t kept up with changing consumer behavior. The market opportunity could move the needle for any company, even a juggernaut like Apple.

Today it was reported that Apple is partnering with Affirm to offer a buy-now-pay-later option for Apple devices purchase in Canada. This is yet another big announcement in the consumer lending space within a short time. Apple and Square are making big bets on it. (Affirm was already in the space.)

I figured consumer lending would be strategically important and change quickly, and it appears to be changing even faster than I thought. Change is generally good—I’m a fan of it. Especially when it helps solve pain points for consumers in a better way. I can’t wait to see how this space is revolutionized by these new entrants.

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Land Grab Turned into a Land Mine

Speaking with a founder today reminded me of my days as a founder. He and his team have a great product and they’re focused on producing as many of them as possible to get them in the hands of customers. It’s early days for them, and naturally they don’t know everything. They’re still trying to find product–market fit.

I remember a time I had a bright idea at CCAW: let’s add a ton of new distribution centers all at once. We literally flipped a switch one day and added over a dozen massive warehouses to our distribution footprint. What could go wrong? Um . . . huge problems kept orders from being in customers’ hands when they expected them. Working through the various reasons this happened was painful and stressful for our team.

I later realized that we had trained our valuable energy on the wrong thing: growing our distribution footprint and revenue. We didn’t have product–market fit yet, so we should have been listening to our existing customers, not executing a land grab to get new ones. We missed out on valuable customer insight during a critical phase of our startup journey. The company still scaled and was successful, but I believe that missed insight was the difference between eight figures in revenue (which we achieved) and nine (which we did not).

Focusing on the right thing at the right time is critical for early-stage companies—there’s only so much bandwidth to go around. If I could do it all over again, I’d work on understanding my customer’s problems before adding operational complexity to acquire more customers.

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Customer Retention Matters

Customer acquisition was always top of mind at my startup. I’m not marketing-minded and I wasn’t smart enough to hire someone strong in this area, so we struggled. Eventually I figured out a decent strategy. When we acquired customers, we did so in a profitable manner. Over time, I realized that retention (which in our business model meant having customers who bought repeatedly) was key to our growth.

We spent tons of time, energy, and money trying to find new customers. Once we had them, it was easier to convince them to stay (purchase again) than it was to find new customers. If I had to continually replace old customers with new ones, fast growth would be extremely difficult. When I figured this out, we started to focus on the things that mattered most to our customers AND the type of customers most likely to be loyal. This, with other adjustments, allowed us to grow quickly to over $10 million in annual revenue.

Getting customers is important, but founders should also think about how to keep them. If your customers stick around, you’re on to something!

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Founders Should Think Big-Picture Regularly

As an early founder, I was responsible for everything. I was the linchpin holding everything together, and I was into all the details. As my company grew, I realized that I was spending too much time working in the business and not enough working on the business. I added to the team, but I still found myself thinking about the weeds more than I should. I wanted to be thinking big-picture, but my brain was used to thinking details. With the help of some founder friends and good strategic frameworks, I eventually lifted my head to focus on the forest—not the trees.

Building a company is a journey full of twists and turns. It’s not uncommon for teams to get caught up in the day-to-day turmoil and lose sight of the destination. When this happens, it’s like going in circles: you’re going nowhere fast. Thinking big-picture is a must for founders. It helps ensure that they don’t lose sight of what they set out to achieve. Getting down in the weeds is often necessary early on, but founders should be thinking high-level from the beginning. It’s easier said than done, which is why I’m a big fan of defining and reviewing high-level objectives every quarter to make sure everyone understands the big picture and then defining what needs to happen in the upcoming quarter.

If you’re a founder or thinking about becoming one, raise your head. Take time to think about the big picture often.

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Large Landlords Acquiring Tenants on Airbnb

A friend shared an article with me today. It’s about an institutional investor, ReAlpha, planning to spend $1.5 billion to buy 5,000 homes to rent out. I’ve followed institutional buyers of single-family homes for the last decade. Atlanta is one of the biggest markets for companies like Invitation Homes and American Homes 4 rent, both of which are publicly traded and own tens of thousands of single-family homes across the country that they rent out on a long-term basis. The strategy has worked well as home prices and rental rates have steadily increased since the financial crisis.

The article discussed a slightly different strategy: purchasing thousands of homes to rent out short-term on Airbnb. The idea isn’t new, but it hasn’t been pursued at scale by institutional investors. The customer acquisition strategy is intriguing. Instead of acquiring customers (i.e., renters) through traditional sales and marketing efforts, they plan to acquire them on Airbnb, which is a marketplace.

Marketplaces are places where buyers and sellers connect. Using a marketplace to acquire customers is an attractive and capital-efficient strategy for sellers. The fee (or take rate) is usually a fixed percentage of the revenue a buyer pays. That leads to a highly predictable customer acquisition cost. Sellers pay X cents for every dollar in revenue from buyers. Sellers don’t have to worry about paying to attract potential buyers who never pan out; they pay only to acquire revenue-producing customers. Sellers don’t even need to take on sales or marketing—they need only have the ability to service customers.

This approach has downsides, and the customer relationship is a big one. The marketplace owns the customer relationship. Buyers aren’t loyal to the seller they transact with; they’re loyal to the marketplace. Concentration is also a big risk. If you get all your customers from a single source that you don’t control, changes can significantly affect your revenue. Lots of stories circulate about businesses being crushed when a marketplace they rely on changes how listings are displayed or suspends their account.

If ReAlpha moves forward with these plans, it will be a huge growth opportunity for Airbnb. I’d imagine ReAlpha will seek discounts on Airbnb’s fees, but even so this could unlock a new product offering with the potential for massive scale in Airbnb’s platform.

I’ll be watching to see how this evolves.


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Incubating a New Company within the One You’ve Got

Companies aim to create value by solving a problem. Founders, to increase their chances of creating a solution that has value—i.e., that customers will pay for—should have a deep understanding of the problem. An interesting approach to this goal is incubating a company inside another company: A company has a problem. It builds something to solve it. Management realizes others have the same problem. The company begins selling its solution. The solution grows so quickly that it’s separated from the parent company to become a stand-alone entity. I know a few founders who’ve successfully incubated companies this way—and the new companies became massive over time.

I’ve noticed a few things about this approach. If the parent organization has ample resources (usually money and people), this can be a great way to get something off the ground without raising capital. If not, it can drain and burden the parent company. The legacy company’s leaders often are attracted to the new growth company because it has great potential. But managing both companies can become challenging. I’ve seen leaders put someone in place to run the legacy company while they focus on the growth company. This works well—if the right person can be found, which isn’t easy.  

I like this approach. It isn’t realistic in most companies, but when it is, it can lead to something big.

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Think about Using Other People’s Assets

At CCAW, to expand our distribution, we partnered with companies that had underutilized warehouse infrastructure and wanted to optimize it to get a better return on their investment. Using other companies’ warehouses, we could add a new distribution point in a matter of days, so we scaled our distribution network rapidly and could reach any consumer’s home in one or two days. With technology, we overcame lots of logistical challenges, which I I won’t get into. I still love this concept. I think it’s applicable in many other areas.

I learned about a company planning to build a national restaurant brand using this approach. No more building out locations or franchising. This brand hopes to leverage, through technology, existing restaurant infrastructure that’s not fully utilized. I’m not sure if it will work, but I like the thought process.

Some companies have become big winners by solving problems for customers using others’ underutilized assets. For example, Uber and Lyft got their start when their founders noticed how many cars on the highway had only one occupant (i.e., lots of empty seats). I think that technology will accelerate this trend. We will see more companies leveraging existing assets and building large businesses in the process.

If you’re a founder looking to solve a problem but don’t have the assets, consider using some else’s.

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Early Founders Should Email Updates Regularly

I recently got an update email from a founder I haven’t spoken with in months. He sends them out every month to a distribution list. They’re pretty good, and this one put his company back at the top of my mind.

Update emails are a simple yet powerful tool that can benefit early-stage founders. They help with accountability and focus and they remind outsiders that the company exists. The exercise of creating the email is good for founders because it forces them to reflect on the most important things that have happened and how the company’s KPIs or other metrics look.

These emails don’t have to be long or dense. The more concise the better, in fact. I’ve seen founders create a template and change only key pieces of information each time. Most importantly, these emails should be consistent and truthful. Pick a time interval (I’d suggest monthly at a minimum) and stick to it. Sporadic updates with constantly changing formats and KPIs give the impression that the company or founder is unfocused.

Updates shouldn’t be all about everything that’s going well. Running a startup is hard, and things are constantly going wrong. Share those things, too. When you’re open about where you need help, it’s easier for people to help you. And people will tend to trust you if they feel they’re getting the complete story. If you say your startup never struggles, people won’t believe you.

If you’re an early-stage founder, consider asking people you meet with (at the end of the meeting) if you can add them to your update email list. And send regular updates to everyone on it.

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Apple Might Be Your Next Bank

I recently replaced an Apple product. Having not kept up with their products for the last few years, I did some research. As I read their website and spoke with their customer service, I observed several things. The main one: Apple is edging into financial services.

  • Trade-ins – People can dispose of an old device and receive a credit toward the cost of a new one. Reminds me of the car dealership business. I suspect this is handled by a third-party company behind the scenes, but it’s still a smart way to make products more affordable without using discounts or sales. The brand integrity is maintained. I’m pretty sure this reduces the average time between device upgrades.
  • Financing – New purchases are eligible for 0% interest for a year if the customer signs up for Apple Card (more on this). This stretches the cost of a sizeable purchase into digestible monthly payments, making the products more accessible to more people. If you can afford the monthly payment, you can get a device now instead of having to wait until you have the cash for the full purchase price, and you don’t have to pay interest for a year. More importantly, this is an ingenious way to introduce consumers to the new Apple Card product.
  • Apple Card – This is a credit card product, but done the Apple way. It offers a lot of things consumers value, such as cash back and no fees. The software and user experience appear to be very different than those of traditional credit cards. It integrates tightly with Apple devices and services that consumers already use every day. iPhones conditioned people to think of Apple as a company that helps them communicate. Apple Card will likely kick-start people into thinking of Apple as a company that can help them manage their money. If Apple builds a significant financial services business, this product will have paved the way.
  • Apple Pay – This product is focused on making it easier for consumers to pay. It’s a mobile payment and digital wallet service. It’s been around since 2014, so it’s not new. It has gained traction. It positions Apple between consumers who love their devices and merchants who want to sell to those consumers. I noticed that Apple Card offers a 2% cash back on charges made via Apple Pay. Another great way to entice consumers to use multiple products.

Apple is a strong company whose hardware and software have heavily influenced our society since the release of the iPhone fourteen years ago. I suspect financial services (in addition to other unannounced businesses) will further solidify its role in consumers’ everyday lives. If it’s successful, I can see a day in the future when people will think of Apple as a place to go for help with managing their money.

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Create Value to Control Your Destiny

I connected with an early-stage founder who spent a few years building some amazing technology. He released the beta version of his product within the last seven months. To his surprise, he’s received two unsolicited acquisition offers. He’s now deciding whether he should raise capital to grow or be acquired (he’d become an employee of the acquiring company).

This founder is in a great position. Users are signing up and paying for the early version of his product. Two larger companies want to acquire the technology. These are signs that the solution he built is creating value. He has a difficult choice to make. I have no idea which way he’ll go, but I’m sure his decision will be well thought-out and he’ll do well.

I think this founder’s situation is one other founders should take note of. Why is he in a position to choose his destiny? Because he hyper-focused on solving a single problem extremely well. His solution is creating massive value that others are happy to pay for!

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