Invest Like the Best with Patrick O'Shaughnessy - Jeremy Cai - Manufacturer to Customer – [Founder’s Field Guide, EP. 33]

Episode Date: May 13, 2021

My guest today is Jeremy Cai, founder, and CEO of Italic, a subscription marketplace for consumer goods that works directly with manufacturers. I was introduced to Jeremy by my friend Blake Robbins and was dying to better understand the Italic business model. In our conversation, we discuss the Italic business model, the evolving role of manufacturers in supply chains, and the concept of building the next generation “everything store.” I love learning and discovering new business models, and this was fun to dig into. Please enjoy my conversation with Jeremy Cai.   For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to by Dell Technologies. Dell Technologies and Windows can help you upgrade your business tech with its Small Business Month specials. Save up to 45% on PCs with Windows 10 Pro— plus business docks, monitors & more. To learn more, call a Dell Technologies Advisor at 877-ASK-DELL or check out the deals at dell.com/en-us/work/shop/deals. ----- This episode is brought to you by Eight Sleep. Eight Sleep's new Pod Pro Cover is the easiest and fastest way to sleep at your perfect temperature. Simply add the Pod Pro Cover to your current mattress and start sleeping as cool as 55°F or as hot as 110°F. To embrace the future of sleep and get $150 off your new mattress, go to eightsleep.com/patrick or use code "Patrick." ----- Founder's Field Guide is a property of Colossus, Inc. For more episodes of Founder's Field Guide, visit joincolossus.com/episodes.   Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.   Follow us on Twitter: @patrick_oshag | @JoinColossus   Show Notes [00:02:45] - [First question] - Overview of Italic’s business model [00:04:51] - Why comparing Italic to Costco isn’t completely accurate [00:10:06] - His initial experience with manufacturers and how that world works [00:15:21] - Direct to consumer commerce and the power of a brand’s story [00:20:06] - Where manufacturers find the cash to effectively manage their inventory [00:25:26] - How design and R & D are handled by manufacturers in the current era [00:29:36] - Educated consumers and emotional versus rational buying decisions  [00:31:12] - Analyzing Italic’s five-step master plan and what needed to be built first [00:35:42] - Becoming more than just an aggregator and a platform [00:38:01] - Lessons learned from building Italic so far [00:39:02] - Other modern business models he finds interesting [00:43:26] - What Not Pot is and lessons learned from building it [00:44:51] - Observations about consumer behavior in his managed marketplace [00:48:07] - The kindest thing anyone has ever done for him

This episode of Founders Field Guide is brought to you by Dell Technologies. This month is small business month, and Dell Technologies and Windows are celebrating your unstoppable drive. Save up to 45% on powerful PCs with Windows 10 Pro to work from anywhere, plus top monitors and docs for the ultimate business setup, all with easy financing options through Dell Financial Services. Speak to a Dell Technologies advisor who can help you find the right business tech, server, storage, and cloud solutions at 877 Ask Dell. That's 877 Ask Dell for small business month savings. As you listen to Founders Field Guide and learn from the best founders and operators about

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future of sleep and get $150 off your new mattress, go to 8Sleep.com slash Patrick or use the code Patrick. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. I believe we are all builders in our own way, and this series is dedicated to stories and lessons from builders of all types. Founders Field Guide is part of the Colossus family of podcasts, and you can access all of our podcasts, including edited transcripts, show notes, and resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect

the opinion of O'Shaunsi asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Jeremy Kai, founder and CEO of Italic, a subscription marketplace for consumer goods that works directly with manufacturers. I was introduced to Jeremy by my friend Blake Robbins and was dying to better understand the Italic business model. In our conversation, we discussed the business. model, the evolving role of manufacturers in supply chains, and the concept of building the next generations everything store. As you all know, I love learning about and discovering new business models,

and this was fun to dig into. Please enjoy my conversation with Jeremy Kai. So Jeremy, I've been so looking forward to this one. I came across your business through our mutual friend Blake Robbins and was sort of instantly obsessed with the business model. And maybe we could just start there on Italic. We're going to talk about a lot more than just Italic today, I think, but it's a great place to start. It's such an interesting business. Could you lay out the business model first? And then we'll talk a little bit about the product itself that consumers enjoy. We really have two components of the business. The consumer side is obviously what you see publicly. And what we offer is a membership that provides access to over a thousand products that we design and develop ourselves. And consumers pay

a membership fee to shop from our store. And the spin on it is that we went and found the same manufacturers as high-end brands. But we sell those products at prices where we don't really monetize. So typically 50, 60, sometimes 70 or 80% less than what product of consumer brands or traditional incumbents might charge. But what's I think more interesting and where we spend a lot more time is actually on the supply side. Not many people know this, but we actually run a very heavily managed marketplace model underneath the hood.

I come from a manufacturing family. It's a really bad business to be honest with you. It's very low margin, super competitive. You can lose clients in a second. But ultimately, I think the longer you spend in manufacturing, the more you realize, hey, I'm producing these finished products for someone else to ultimately sell for five, 10, sometimes 15 times what I sold it to them for. Business model for Italic is ultimately to essentially provide the infrastructure,

I call it private label in a box for these manufacturers to empower them to become merchants of their own. So specifically what that means is we actually, most times we will not buy inventory. And when we actually make these sales, we try to issue payouts typically two to three times higher in terms of profit margin than what these manufacturers are used to, but that's in return for them taking the financial risk. So really what we can provide is, is a way for these manufacturers to use our payment orchestration, our operational network, our distribution, our technology tools, access a global market of consumers, but on the flip side get significantly higher yield on

their existing production capacity without having to change a thing. So really those are the two core parts of our business. I want to spend quite a long time on supply chain, manufacturing as a business, everything you've learned there. It's kind of a new topic for me. But before we leave sort of the consumer value proposition, where does the analogy to Costco break down? Because it's a similar idea. You pay a membership. You know that Costco is effectively actually trying to reduce or drive down their own margins on the products themselves. They're not trying to make money on the products, really. They're trying to make money on the membership. So it's a convenient analogy, but I'm sure like all analogy, it's not perfect. What's the gap in the analogy? What might be different?

Yeah, so actually, I'm not supposed to compare the business to Costco anymore. We definitely, you know, have ruffled some betters there. But on the flip side, it's obviously the most direct analogy that I think most consumers are aware of. I think the fundamental difference, I would say, is that we have to really, I think, aggressively educate the customer online through good content, really strong landing pictures, so on and so forth. Whereas Costco, it's really driven by word of mouth, they famously don't advertise. Obviously, the counterpoint there is the store is the advertisement. Every time you pass Costa, you recognize it.

And everyone has a friend or a family member who's a Costco member, so you'll eventually hear about it that way. Whereas for Italic, because we don't have that presence, we have to hit you through every possible digital channel to really educate you on, like, hey, you're buying high-quality products at a price point that really other brands can't achieve. And we do that because we offer this, essentially this membership, which is a very, I think, unusual new value proposition to consumers. So there's a lot of education that I think has to go

into it first and foremost. The second thing I would say is, and we can talk about the membership component quite a lot, but I think what we found is the membership really for us was a noble experiment in many ways. I think it was Q4 of 2019 and there was a very well-known direct-to-consumer brand and it kind of went bust and their recap basically priced them at the same price that we were at pre-launch back in 2018. So I think the realization was like, hey, one, we didn't start this business to be essentially a direct-to-consumer business. I think the opportunity of what we're doing is substantially not necessarily larger than a brand, let's say 50 years down the line, but at least like we're trying to do something that's genuinely different in industry. And secondly,

my background's in technology. That's what we're excited about, technology and operations. We don't want to just be a marketing machine that just takes product that already exists and then marks it up and sells it out of profit. So I think for us, like the membership, we essentially came to the conclusion like, hey, we now have over thousands to use. We see sufficient purchasing behavior where it suggests that a membership is actually going to do potentially well. We tested it literally at the peak of COVID in April 2020, where I think people were starting to hoard a lot of groceries. And we figured, hey, this is when people are the most disciplined around what they're spending and the discretion in income. So when we launched, we saw what essentially was like a 10x

increase in purchasing velocity. So when a customer might order, let's say, two times in a year, which by most accounts in the categories that we offer, it's actually pretty good. We saw that actually accelerate to basically like four to six weeks. We dropped prices across the board to account for the membership change so that we would actually basically take effectively zero margin on these products, contribution margin, that is. It allowed us to really massively discount all of our products. And we maintained our supplier payouts so that they would still be satisfied with the model. But I think on the flip side, we thought that that would tank our AOVs, but in fact, it actually maintained. So people were purchasing more frequently and

deeper orders, so more quantities per order. So I think the membership has really been an interesting concept because for my perspective, it really allowed the cultural DNA of our business to shift from what is more traditionally retail focused into one that's more of a technology and operations business where we're providing a service to remember because that's actually how we monetize. But on the flip side, to the supplier, it's like, okay, well, we're just going to drive you a lot more volume. So technically speaking, like, you should hopefully give us better volume discounts that come with literal economies of scale with production. So I think for us, that ultimately created this virtual cycle where the more customers we're able to attract as a

member, the more leverage we had to go convince these manufacturers to join as our merchants. And the more merchants we have, the more products we can ultimately offer to our customers. And for what it's worth at the time, we were probably around like the thousand skew point. now around like the 15, 1600 and a skew point. So what we found is like when we actually introduced these new skews, it attracts a new audience of people who historically might not have been interested in italics. The closest comp to us offline and analog is definitely like the Sam's clubs and Costco's of the world. They have the advantage of being around for a long time. The flip side for us is, I will say, the membership alienated a lot of people. A lot of people

have subscription fatigue as it is. And it's not so easy to convince someone to pay $120, for example, front without really understanding what the business model is, seeing the savings up front like you would with Costco. And our membership fee is also double cost cases. So I think what if you could start a prime model or a Costco model today with the benefit of all the modern technology that's available to us? And also, frankly speaking, the private investment dollars that's available to really jumpstart these businesses as opposed to having to compound this growth year over year for 30, 40 years. I'd love to zoom in for a chunk of the conversation on the world of manufacturing. It sounds like in many ways, the manufacturers themselves are one of your key customers, if you

will, certainly a key stakeholder. Talk me through your original experience with this world. And maybe you could even pick like an italic product alongside the branded version of some similar product to tell the tale of how this world works. Where are these things getting made? What are the variables that matter. Manufacturing business owners' perspective, like what are the challenges, what are the opportunities? Give us a bit of a masterclass on this world. Probably the starting point is the fundamental concept of how product arrives to a customer. Let's take 100 years ago, like in the States, the manufacturer, let's say in North Carolina or somewhere in the East Coast would produce a product. A brand obviously placed that order.

So the brand purchased that product typically on like, let's say a 30-70 split of a deposit and then a payout. The manufacturer effectively needs the cash flow up front so that they can finance their materials, their inventory, the labor, their equipment. So that's what they do with the deposit, but oftentimes for the receivable, they'll factor it. These businesses are very cash flow dependent.

So they'll take that remaining 70% and they'll actually take like 80, 90 cents on the dollar for the remainder. The brand, once they purchase it, they finish production. It typically gets handed off to a distributor who then would place it with a retailer, who ultimately will sell it to a customer.

And between each of these, there's a logistics arm, trucking the inventory to a distribution center, getting the distribution to a retail store, and then the retailer obviously has their margin. Even in grocery, which is notoriously a low-margin business, there are still many, many levels of margin that's added on. And ultimately, by the time a customer buys it, you can see this, the actual value of a product, minimum tripling,

and let's say products in categories like CBG, from the actual cost of production at a manufacturer, to the end consumer. And in more traditional, let's say, quality goods sector, such as luxury goods, soft leather goods, betting, towels, textiles, these product values can effectively 5, 10, 15x from the actual cost that a brand purchased it from a manufacturer.

And the main reason for that is there's this concept that I think really harkens to the reason why we started Italic, which is whoever owns the inventory owns the upside. And it's just like an insight that I think the longer you look into and spend in manufacturing, you realize manufacturers never had a distribution channel whatsoever. They don't have distribution. All they do is they are reliant on these brands.

And this has changed a lot over the years. But the core is brands make money by buying inventory at a low cost and selling it to a consumer for a higher price. And that's very literally how a brand makes money. And what that incentivizes for is how can I charge higher prices and then also minimize my operating cost, the largest of which typically is marketing, but the second the largest of which is the actual cost of the unit. So I'm constantly placing pressure on my retailers, my distributors, my manufacturers, most importantly.

And the way I do that, of course, is by saying, hey, I'm going to take up more and more production line, larger and larger quantities so that I have negotiating leverage with you to bring down costs, let's say, 20% from where they were last year and another 20% the following year. So you can imagine being both in the business of a brand is not easy because you're constantly having to sell to another person and you're taking the financial risk of owning inventory. What I would argue is even a harder business is actually the manufacturer. where you're constantly getting pressure from, even people who are supposed to be on your side, your clients, constantly giving you pressure to bring costs down. And a great example is what these

very large businesses like Costco or Sam's Club do for these manufacturers where you're going to take a razor-thin margin. But the reason why you take these orders is you're taking like a 5% margin on like, let's say a massive order that can make your business. This has changed a lot. Historically, the margins are 15 to 20% more normally on top of cost of goods and labor. So it's very razor thin. If you think about it, like, actually tracing the numbers, it's let's say a shirt cost $15 to make 20% on top of that. Let's say, like, they actually sell it very conservatively and pad their margins for $20 to a brand. They're making $5 margin there.

But the brand is ultimately going to sell that at the end of the to a customer for $100, like normally speaking. So on $100 consumer sale, a manufacturer is making $4 to $5, even though they actually produce the finished goods for a brand. And the consumer, obviously, in that case, like people are supposed. nowadays than they were about the supply chain 30, 40 years ago, but they're paying what is literally like five times what a product cost to make. So I think there's a lot of interesting things that have happened over the past decade, specifically in the past 20, 30 years as distributors have largely lost a lot of power. Groceries and food distributors are still very, very entrenched in the ecosystem for a good reason. They're almost like mafia members in the ways they operate.

And a lot of other industries outside of grocery, you know, distribution has largely been actually on the retailers themselves to place orders directly from brands. So they've gone direct in that sense. And obviously, the incentive there is getting better pricing for their consumers because the retailer has to flip the product from a brand to a consumer. And typically consumers over the past 34 years have shopped from retailers, not brands. And then more recently, I think in the past maybe 10 to 15 years, the whole wave of online commerce has happened. And this is a topic I'm pretty passionate about because I think the notion of online commerce in itself should be very exciting to most people. You should be getting higher quality product at a lower price point faster than if you had to go

shop from a store. Amazon refers to this kind of as the Holy Trinity. And I think for these online brands, the original reason to exist was we're cutting out the middleman. And that's the narrative that has like, I think, really devolved a lot over the past decade because it's no longer the case today that there are many middlemen in between. So ultimately, consumers are paying what is essentially the same prices for the same goods, but being told this story, which isn't true at the end of the day. But I think the original notion, and there's brands that I think bonobos in 08 and Everlane in 2011, when they started, I think it had this like really strong, it almost had this like, guys with consumers. And mainly because it's like, oh, I can get like

pretty good stuff online from a vetted. I don't recognize this brand because it's new, but like, I trust it because the story is so compelling of cutting out the middleman. And I think at the time is a very strong value proposition that consumers could get behind. And originally, the thesis was on the brand side, we're effectively taking off one more layer of the supply chain, which in that case, okay, the distributor's gone. The next layer is the retailer. So if we remove the retailer, typically we should unlock 30 to 50% savings for a consumer

because that's what the retailer was taking. I think in the beginning that was actually true. The advantage that the early brands had was that they didn't have to sell these products. They sold them on Facebook and Google while it was still cheap. Obviously, we all know what happened since then. Thousands and thousands of brands have flooded the market. Facebook and Google have gotten extremely competitive and quite saturated and very hard to compete in.

So it kind of goes back to the brand model, which is the brand has to make money through markups. They buy inventory for a price and then they have to sell it to a consumer at a price where they make a profit. And obviously, your incentive there is higher prices, lower costs. I guess this all kind of brings me to today, which is as a manufacturer, maybe 10 years ago, this is different. but let's say you're in Italy, your margins are 20 to 30%.

You don't care if it's XYZ traditional incumbent brand, legacy brand buying from you or XYZ direct-to-consumer brand buying from you to them. It's just a client. You're making the same margin on both. And then to a consumer, I think people have gotten a lot savvier nowadays where they recognize, hey, if I buy like a product from a directed consumer brand, I'm not doing it because it's a good value anymore. I'm doing it because I like the story.

I like the brand. Ultimately, you're buying it because it's a brand. And I think a lot of these direct consumer companies have masqueraded as tech companies for a long time and traded at similar multiples. And I think obviously that story has ended up. Going back to ultimately what matters, which is the consumer, I think they realize now, like, when I buy something, the rational reason to buy it is for value. The way I kind of architect, it's like values, the quality that you can get for the price that you pay. And then on the manufacturer side, like, all I'm optimizing for now is just getting more clients. but I'm still making razor-thin margins.

If I become wholly dependent on a client who drops me, I'm out of business. So I think that's kind of the perfect storm. If we actually look to Asia, this is where a lot of the inspiration for Italic came from. I bring this up because I spent a lot of time there growing up. Up until I would say like around 2015, the Chinese econ market looked actually very similar to the Western economy market today. You had major players such as JD, which is actually the equivalent of Amazon here. and obviously T-Mall and Ali.

But I think what happened from 2015 onwards really changed a lot of how e-commerce looks and the fabric of that in Asia. The most notable player here is Pindodua. The exciting thing that they do, obviously besides the group buying mechanic, which I think it's very hard to replicate here, is that they actually source straight from factories.

And the difference with Pindodua was that they source from basically like everyman factories. So you're not really caring about quality. In that case, you're caring about price point. But beyond Pinduodou, there was a lot of things. a number of Chinese platforms that have come out that have similar notions to Italic, which is, hey, we're going to actually find not crappy manufacturers, but actually really legit, established manufacturers and actually bringing that manufacturer online.

Manufacturing, even to this day, is an incredibly offline business. Like, if we talk about ecom penetration in the U.S. or China, it's like, we're making a lot of progress there. Manufacturing as a whole, aside from the ecom players that are small mom and pop merchants on Alibaba, no legit manufacturers on Alibaba. They're all offline. We work with five or six publicly listed manufacturers by now. None of them have a website that is all relationships who you know past clients. So it and so bills of lading, like do your research. So I think what we've found is from 2015 onwards, there were a number of Chinese companies that they started this concept called like Z2M customer to manufacturer. Effectively what they did is they went and found the same manufacturers as high-end grants, which is what we do as well. They convinced them to essentially like digitize their business by investing into inventory. for the first time. And you have to, I think another thing that I kind of pass this off, because I talk about this every day, but the interesting thing here is a manufacturer can be around for 40, 50,

sometimes like 80 or 100 years. And never in that entire life cycle of a business have they ever invested into their own inventory. In this case, these companies effectively convince these really legacy manufacturers to produce product for them, but then secondly, pay for that product that they're making for someone else, which is a very kind of like counterintuitive example of how inventory works. But I think the reason, again, is like, whoever owns the inventory owns the upside. So if these manufacturers could list on the platform where they could double or triple or even quadruple, their profit margins of 4 to 5%, which to a customer isn't really that much, but to manufacture hugely impacts their bottom line, that could be a really exciting model. So, Xiaomi has a marketplace

called Yoking. There's net use actually has one as well called Yenhan. JDS as well has one. There's a special store and T-Mall dedicated for this service as well. So C2M, I think, is the trend that at least in the West, it's extraordinarily hard to replicate for a number of reasons. I know you had Ryan from Flexport on the show as well, and we're huge fans of Flexport over here, but I think it largely has to do with the logistics ecosystem. Logistics in most Western countries now, because we've essentially globalized most of our manufacturing is wholly dependent on getting inventory from overseas to our domestic DCs. Whereas in Asia, because the manufacturers are geographically located very close to the consumers,

There's drop shipping, which has a really negative connotation in stigma in the West, is actually a really great experience. It's super, super cheap. You can get one to two dollars per shipment, sometimes three to five dollars max of most orders delivered to you in one to two days. So it's almost like an Amazon level of experience for everything that you buy. And I think the difference for Italican really where this kind of bridges into the Western ecosystem is, you know, in Asia, most of the ecosystem is drop ship with the exception of JD, where manufacturers will essentially, they can do the pick and pack. so they can actually store the inventory and then pick and pack and fulfill the order to a customer. And the customer will get it in one to two days or they'll ship it to a local DC. And that takes like a week.

For most Western supply chains, we're talking like maybe six to 12 months for product development. And then another, let's say two to three months for production and then another month for ocean freight. And let's say 14 days for receiving. So by the time a product from the time that a PO is placed to actually arriving at a customer, it can be like 18 to 24 months. So I think for Italic, our goal is. is to build that infrastructure. And that's why I think we have such a heavy focus,

which isn't so obvious today. Most of our efforts haven't actually been on consumer at all. We have a really heavy focus on technology and operations, mainly because this infrastructure, believe it or not, like really doesn't exist for cross-border commerce. We need to get inventory from Asia and Europe. We need to provide the technology for manufacturers to kind of have insight into when to replenish,

when to place orders, you know, so on and so forth. So that ultimately they can digitize their existing problems, catalogs. And then for us, our job is to somehow like very quickly get it into the hands of the customers as quickly as possible because for manufacturers, it's just sitting in inventory and the sooner we monetize it for them, the stronger our boat gets with the manufacturer. But on the flip side for a customer, they're constantly looking for new things. So how do we satisfy that demand? There's a lot that I think could be really interesting to talk about, like whether that's logistics or consumer behavior or more manufacturing topics. Before we get to what you are building

specifically, which I want to cover. I'd love to understand a couple questions from the manufacturer's point of view. So two most specifically. I totally get, this is kind of like your margins, my opportunity type story where there's so much markup happening after the manufacturer produces something. This is effectively a way for them to earn higher margins and have their own inventory risk and be better business models themselves. Right now, it sounds hard. I have two questions. One is on financing of inventory and the second's on design of product. So on the financing side, you mentioned they're factoring their receivables because they're so cash strapped. Where in the world are they going to get the financing or the cash to be effectively managing their own inventory

versus taking that cash from a brand? A lot manufacturers, this will not work, mainly because it's exactly to your point, it's like their cash strapped businesses and cash flows everything. For manufacturers that have become established, do have cash reserves. Or on the flip side, you could also make the argument for manufacturers where minimum order quantities aren't in the tens of thousands, but instead could be in the hundreds or thousand to two thousand. They have a lot of excess materials sitting around. They have a lot of excess labor. What the game of a manufacturer really is, is optimization around production lines and capacity. So if you have a sitting production line that is not producing anything for a given client, that is literally money burnt because

you're paying for that labor, the equipment is being financed. So it's not being productive whatsoever. It's really all an optimization. And I think for businesses like I tell like the financial reason is, hey, I could get triple the yield from an existing line that is otherwise going to be producing for someone else. It's very appealing pitch from a consumer seat to say, I'm going to make up a brand, but I get to buy a bag that is also the exact same factory where like this $10,000 Chanel bag is getting manufactured and the materials are the same. And it's very similar, but I get to pay a fraction of the price. I don't get to show off the brand name, but I care more about the utility and the quality. That makes a huge amount of sense.

And then there's this divergence where like part of the appeal there is, oh, it's the same. It's interesting because a brand is engaging them, but the brand is involved in design of the product. A manufacturer is fulfillment of that design. And design then becomes this interesting aspect of like the product process that matters to a consumer. And maybe for something super generic like a bathrobe, like there's not a lot of design decisions or something, but for others there is.

So how do manufacturers think about their role? in design as this model is successful. So if they're going more manufacturer to consumer, part of that value prop is design. How do you think about that? I've spent a lot of time over the years, I think thinking about this, both from a brand side as well as a consumer side.

But first on the brand, I think you have to go back to what is a brand. And ultimately, I think like what I believe a brand is, it's a stamp of consistency. It's like if I buy this product from XYZ, I'm going to get the same thing every time, if they launch something else, like I generally know what that will look like or feel like based off what their other products are and what the brand stands for. And obviously,

brands evolve over time, but I think at its core, that's what it is. And I think the way that brands manifest that is by having a consistent design philosophy or having like consistency across aesthetics and copy as well. So I think it was a big realization when I started having these conversations with literally over 150 manufacturers and we visited them on site as well. but something has changed in the past probably like 15 years to 20 years where manufacturers started in-housing a lot of the R&D. So take apparel, for example, which is one of the most design-centric businesses, if you actually go to a manufacturer today, oftentimes you won't be making like specs from scratch anymore. Instead, you'll walk into a manufacturer's showroom of like, here's our assortment, what we believe will do well.

And we'll pick and choose two, three, four, five styles and then make tweaks on them. and then call it ours. And obviously, like, that's a very simplified version of what that is. But we're not talking about like super high fashion in this case where it's made from scratch. And that's by and large how a lot of these brands operate, at least when adding these views. So these manufacturers, I think what that means is two things. Like one, they have to get very sophisticated around consumer insights.

And they're getting constant feedback not just from one client, but from maybe a portfolio of, let's say, 20 or 30 clients who are basically placing orders from them. So they should be a centralized source of truth for here is what's actually going to be in trend next season, the following season. The flip side, I think on the brand, what that really entails is, okay, if my job is to deliver a consistent experience or set of products to my customers, and they expect this from me, my job is to less so build things from scratch, but actually more to curate or to develop things that I see promise in and to things that we think can actually go to market on the consumer side. So I gave the example in apparel, but this is true in many different regards. cookware, for example, there's thousands of stainless steel pots on the market made by a pretty centralized set of maybe, I'd say 30 or 40 manufacturers, mostly in China. And this is for the esteemed like Swiss or German or Nordic cookware companies. A lot of it is frankly made in China,

but they are not creating new casts or molds for these pots from scratch. It's like an assembly of here's a handle and here is a pot and here's a surface and here's a color that I think looks well and we'll vote well for our customers. And then they'll stamp my logo on it and say it's mine. So I think on the design side, it's changed a lot over the years. And then the second point, I think on the consumer side, I think ultimately the role of the brand again, is consistency. I know there's this concept of like brands are losing consumer loyalty with the modern age and new generations. And I think, of course, like to a generational change, that's true. But I think on the flip side, I actually think brands are more powerful today than ever before.

And I don't think they'll ever go away. Instead, I think customers are significantly more educated on their purchasing decisions. So when it comes to purchasing XYZ product, if I'm making an emotional purchase, I'm probably going to pay for a brand because I want, it's a status symbol. It's like it could be anything from like grocery to like a handbag in your example, which is probably the most extreme. And in both cases, I think consumers will have to make the decision to either purchase emotionally, which is, again, buying from brand or rationally, which is optimizing for value. And in the case of value-driven purchasing decisions, I think that's why you see such a large surge and private labels doing well from retailers is you actually don't care about who makes it

or what branded is. You just want to make sure that it's like high quality, well designed, and at a great price point. What we really appeal to is a sense of rationality and value in the market. Obviously, to someone who wants to buy like that Chanel handbag will never win them over. You're always going to buy the Chanel handbag, even if literally the same product was without that logo for like $9,900 less, right? You're going to buy the logo. And you see that with Supreme as probably a great example of this.

But I think on the flip side, that same Chanel customer might actually want great betting or great cookware. And they don't care if it comes from Alclad or comes from frate. They just want to make sure it's good. And in that case, it's a value-driven purchase. And I think this is true for people across most parts of their lives where some things are emotionally driven and some things are irrational. So that same, you can make a kind of argument, which is someone who really cares about cooking and being a great home chef, they'll buy cookware. But they might actually not care about having a logo on their handbag. So they'll buy the Italic version, Everlane version, the Keanu version, so on and so forth.

It's fascinating. And it's a good excuse to ask now a bit more about the infrastructure and technology that you're actually building. I don't know how stale this is, but I thought it would be fun to read the Italic master plan in five steps. And you can tell us where this has changed or where it's the same. But it allows me to ask some of the interesting questions about what you're building. So the plan is step one, build the supply chain to empower manufacturers to become merchants. We've talked about that. Use a supply chain to build a brand.

Use the brand to build a membership. use the membership to build a marketplace and use the marketplace to build a suite of business services. So when you had started to tack this problem, what did you learn needed to be built first with the idea in our minds that these manufacturing businesses are or were extremely offline businesses? First of all, thanks for doing the research and sharing our secret plan publicly. It kind of goes to the point that I made earlier, which is a lot of the infrastructure for cross-border commerce does not exist today. And that might surprise a lot of. lot of people because you could argue, like, I buy something that's made in Vietnam or made in

Italy, like, how does it not exist? I'll give you a perfect example. Stripe Adyan, brain, you can name, like, whatever it is. Do you think of them as global businesses that have won it all, at least in the tech world? And Stripe doesn't have a China office. You literally cannot pay using Stripe Connect or any of their services into China. They had a Hong Kong team, that a Singapore team. That function does not exist. And that's the same for pretty much every Western service provider. And believe me, if it existed, we would use it. It's kind of crazy to say, but in 2021, we have to build our own payment orchestration service to calculate payouts and remit payment into our Hong Kong entity, which then pays into our China entity, which remits finally

to the vendor. And that, to me, is pretty crazy. Other things that might surprise people, like, yes, logistics services are starting to be digitized. And I think there's a lot of investment being poured into that, ocean freight, air freight, trucking, train, whatever it is. Generally, you can book that through a digital broker today. Fulfillment services, on the other hand, Apple, for example, they fulfill most of their order straight from China. So if you order from, let's say, Chicago, where I am right now, they would actually pick and pack in Asia and then ship it directly to me.

That sounds counterintuitive because you would imagine, like, oh, that's actually probably super expensive for them and what have you. It's actually not, it shouldn't be that expensive. It's much more expensive than like ocean freighting it and stocking a large reserve here, which obviously they do for their stores. But to a large degree, it's actually pretty economical when you see up to scale. So I think for Italic specifically, I need to use an Amazon term. It's very much as still like day one here where a lot of this infrastructure simply doesn't

exist from, I would say three core verticals. Technology, Shopify is not servicing marketplaces. Asian marketplaces, for example, you need an ICP license to operate any software whatsoever or any domain in China, and you have to have an Asian entity for that. So there's a lot of technology that currently might surprise people, like really does not exist for this cross-border marketplace type of model, even though it's like an extremely prevalent business model. Secondly, operationally speaking, one of the biggest operational blockers to brands starting

up today is it takes a very long time to produce, but then also to ocean freight or air freight and then fulfill in order to a customer. They can take anywhere from like even four to six months to replenish a product that's out stock that's already designed and everything's ready to go. So operationally speaking, a lot of this infrastructure doesn't exist quite yet. For at least it does, but it's extremely offline provided by like very small service providers who've only popped on to the cross-border commerce market. Then lastly, I would say is payments and financial transactions. It's not hard to remit payments from the U.S. to Asia. Obviously like millions of people do that on a data basis,

but a lot of the automation and one more layer of sophistication beyond just like remitting a payment, especially if you're a marketplace business and you rely on these APIs to exist, simply do not exist. So transfer wise, which is pretty well known, like you can't pay to businesses using transfer wise either in China. So there's a lot of technical, operational and financial work that has to get done. And there's great companies working on this. But I think for the most part, like we've literally spent by now like three years trying to find these service providers and they really don't exist. So we have to build them from scratch. And all of that is really in service of essentially enabling a manufacturer to onboard as a merchant. Once we have them on board, then we can actually

start the fun part, which is producing product and then making sure we can actually sell to a customer. But all that is kind of like foundational. You can't operate italic without that existing, if that makes sense. So really all of the tempting Western analogies and questions like Shopify or Costco or Amazon, aggregator versus platform, are in many ways really not appropriate questions here because those are all services that sit in between manufacturer and customer, usually representing some brand. The model is different.

Those questions are not appropriate, I guess, is how I would summarize it. The way we think about it internally is our vision is to essentially build the next generation everything store. And if you think about it, every generation really has had one, like in the 1800s, there was Tiffany's and Sears Brobok with the first catalogs. I'll skip ahead all the way to Walmart, you know, being the first like superstore and then Costco being like the first generation shopping club in many ways, all the way to Amazon with, especially with Prime really opening it up to a mass market.

Prime, I think is an interesting case because even with Amazon existing, which was able to really capture a large portion of the audience, Chewy has done phenomenally well with different verticals, Waifer has done quite well, Etsy has done well, so on and so forth. So I think for Italic, the goal is like, how do we carve out room to show to customers like, hey, you can buy really high quality products from a really great manufacturer. And the reason why you do it is ultimately because it's a very rational, smart decision to make. You're getting a high quality product that are basically an unbeatable price point. Even in Amazon's case, for example, or any of the providers I just shared,

ultimately you're still buying from a merchant who buys from a manufacturer. Amazon merchants are merchants in the traditional regard where they'll buy inventory from a manufacturer. Their job is to Ocean Trade it all the way to Amazon. And then when you actually buy as an Amazon customer, you're not actually getting like what a manufacturer is paid. You're getting what the merchant paid for the manufacturer plus their own margin, which is typically three, five, ten times. So I think that's really where we see ourselves in the market. It's like it's a full stack ecom layer of providing these services for our merchants. So akin to Shopify in that regard, but also providing the storefront for our customers.

I love how you're abstracting ways so much difficult stuff in the background of what ultimately becomes a managed marketplace as you've described it. What lessons have you learned most building the business itself, business building lessons that have been surprising to you in the italic journey so far? The biggest one I would say is a lot of founders have to make up the story around like why they're excited about their business. And a lot of times I know behind the scenes they like fell into place, meaning like they started a company for the sake of it. or thought it was a good financial opportunity and had to be pretty disingenuous about that. And then like innovated until like, oh, wow, there's actually a lot of financial interest in this model. Like, I'm basically stuck in the driver's seat. And I know a lot of founders who are in that case, I think for Italic, it was exciting because when you weave,

what is legitimately personally exciting about a business and also a really potentially large outcome, I think that's kind of the secret sauce where you're both personally legitimately excited about it and also the business outcome could be large. So I think that's probably the main thing for me on a personal level is just when you're jazzed about what you're doing. It changes everything in the world. Second thing I would say is we've operated as a distributed company from day one. So we have full-time employees in Shenzhen and Shanghai and Manila. And obviously in the States, we have New York, L.A. and S.F. And I think operating a distributed company has shared a lot of knowledge specifically from the China market.

The way they do things there is so different than the way we do things here. I listened to the podcast you did with Brom as well. I wouldn't categorize it as always being better. There's a lot of things that I think the Western style of work is actually much better suited for startups. But at the same time, you cannot dispute the work ethic. You can't dispute the competition. One of the really great advantages of having a cross-cultural team is that you kind of get to pick and choose what you perceive to be the best parts of both. The third, I would just quickly say, it never gets easier and it never feels like you know what you're doing.

It's more like if you're building your own category or you're trying to do something that's like legitimately new versus. is operating an existing playbook. You really have to think from first principles. In this case, the logical decisions in all of these were take margin at the outset, build that into your business model. Whereas for us, like, we're actually definitively trying to take our margin down. Two is use services and tools that already exist. Well, we searched for a long time and we try to build on top of them to a point where

we realized, like, oh, this would have been easier to just build it ourselves in the first place. You strike me as someone that's thought deeply about business models, generally speaking. I've even heard you sort of dive through a whole bunch in a fun conversation. I can't remember what podcast it was on. But the question I have for you next is, with founders as friends, starting companies yourself, what are some of the most interesting modern business models outside of italics that you've observed? And what's interesting about them to you? I would say three things that I bring up right now.

One is I do think there's a lot of opportunity to manage marketplace services. I really admire this company. It's called Pilot. They provide essentially like bookkeeping as a service. If you think about the traditional model of these service providers, it's always centralized to people who are under payroll of a certain company. Whereas I think what could be more interesting is actually if you take these service providers and actually abstract them into a marketplace model where you have a number of, let's say, like bookkeepers in this case, actually Flexport is another great example. Like in the beginning, they're booking freight for their clients on a number of different existing players, but instead they're the consolidated view for a user to engage with a user, interface on. I think one that provides scale advantages because it gives you pricing power.

The more business you drive to a player, the better prices you should get. And then you can pass that to a customer. And then secondly, it's a much better customer experience. So I think having a singular interface for a managed marketplace is really great. Uber and Airbnb are the great examples of that where it's kind of a testament to like they've passed our screening tests and generally can deliver the service to you. So I think that's one that I do think there's still a lot of room in the business world, less so in consumer where I think a lot of managed marketplaces have verticalized quite efficiently. I think secondly is infrastructural businesses, the Western world. It's mostly been around the 3PLs,

so providers like ShipBob or Shipmunk or Flex, and what they offer is essentially like a centralized service of fulfillment of individual orders. But I think there's a whole lot more into the supply chain that currently is not bundled and provided as a tech service. Basically, in supply chain, when you think about anything in supply chain, like 1% of the supply chain, client chain is we're talking about like billions and billions of dollars. So if you find these verticals and make them super efficient with technology or at least like bundle the players through technology, I think you can build really exciting businesses in them. And then I think lastly, this is just from like a personal investment standpoint, but I love API businesses. I think there's

still endless applications for these, especially I think a lot of the first layer protocols and APIs have been played out over the past five to 10 years. But I think there's a lot of second level, I guess lower level API providers that could be really interesting. I guess a better way to put it is what are the APIs that software businesses need to rely on that don't exist yet? And I think there's still countless examples of that. Yeah, basically core functions like payments and messaging are the obvious ones. It's almost like no business is too niche on the internet. It's like no API is too niche. Like there's often a lot of people using even if it's something that seems super specific, I think is the point you're making. I've gotten surprised. Every time I think an API

business isn't going to do it. It's always surprised me. No, lesson learned. Tell me what not pot is and what lessons you've learned from being a part of building it. Oh, man. I say it's an American wellness company that my girlfriend, Katie, and I started five years ago or so. And I say American wellness because we sell CBD products and it has such a bad stigma in market by now. But if you think about it like five years ago, that wasn't the case. It was still very much great area at the time.

Like, it wasn't federally approved like it is today. So I think probably two things that have been really interesting. So Italic is a very classic example of a venture-backed business. We raise quite a lot of money for it. And it takes a lot of work and people to get it to a point where we can actually go to market. Whereas for Na'apot, it's the exact counter example where all the tools exist for it. You don't really have to innovate on the supply chain. It's really like, hey, let's build a brand, buy product, and then sell it at a market to a customer in a way that drives value to them.

And also it's good for us and we can take a profit. But what I like to say at least is like I've learned a lot that I shared knowledge between both. Payments is a great example. Stripe, Brintry, so on it, PayPal, they still don't accept payments for CBD businesses. So you really have to kind of go and look beyond what is currently available. And actually, there's a lot of great providers that actually offer just as good, if not better, rates than a lot of the bigger providers do. You just have to kind of know where you're looking.

And it also kind of gives you a sense of like, when should you build versus buy? And then I think for not thought as well, it's given a sense of like, well, this is how a really well-running, super-efficient bootstrapped business can do this with like one or two people. How can we abstract that and have the same efficiency with a much larger org in Italic? So it's been an experiment that took off never quite died and it's an incredibly efficient business now. So I'm thankful for Katie, who I suppose my partner in life as well as in the business. What building Italic have you been surprised to learn about consumer behavior?

You mentioned the idea that paying a membership 10x their order. the revenue per user or whatever measure you use. So that's kind of a surprising finding or interesting one. What else have you learned? Are there interesting patterns to what people buy on italic relative to your expectations? What else have you learned about consumer behavior? Yeah, I think there's probably two things that stand out to me. One is when we actually got going, our prices were typically 15 to 20 percent less than direct consumer brands. And the realization was like, that is not enough. These brands have poured basically all of their money and all of their time into building stories and communities around a specific vertical. And for some anonymous new

company to come in and say like, hey, it's 20% less. Like you should try us out. That is not enough to sway a die hard or at least like to compete against a brand that has like poured everything into that into a specific product or a vertical. And I think the nuance there is like when we do pricing sensitivity to us, when we actually got to a 50% threshold, that's when we actually saw a lot of switching occur where, okay, it's enough for me to actually give this a shot or at least. like buy it over the direct-to-consumer counterpart. And I think the pleasant surprise to them is like, hey, even though it's cheaper, it's actually not worse, sometimes better.

So I think that's one is pricing is like the dark horse that like people don't really talk a lot about in consumer brands, but it's so important. No one wants to be the cheapest option, but it's also a very good spot to be in if you can play it well. I think the second one is that there was a notion maybe three, four years. If you operate in the whole direct-of-consumer world, you'll observe these things that are popular for a year and then not the next. So for example, in like 2016 and 2017, there's probably like using micro-influencer marketing, 2017 to 2018. Everyone poured money into offline experiences,

building stores, and you saw huge rollouts across the board. Two years ago was probably podcasts. And then now it's TV, which is a really new vertical. Another notion that I think was popular, maybe 2014 to 2016 was like, hey, I'm going to start with like one hero product and then use that to branch off into more vehicles and cover more of our customers lives. And the reason for that is a lot of these transactions are one-time things. So in the case of, let's say, mattresses, for example, it's great when you're the only player and you can take really large margin that historically was paid out to a retailer. And you keep that and you pay your Google and Facebook fees. It's not so great when you have like a thousand competitors in the same vertical that you were alone in just five years ago.

The natural narrative there was like, okay, let's actually introduce a whole suite of products around that. And I've seen it maybe succeed like one time or two times in all of the brands that I've looked at or spoken about. Most times it's like is really large investment, both from investors because it's like, oh, if it worked here and mattresses, it should work in like the next vertical over. And very rarely does that actually apply. I think if you want to be multi-category, you have to do that from day one. So for Italic, that's why we've operated with such a high velocity and focus on product speed and getting products to market is as soon as consumers pigeonhole you to one vertical, or as soon as you have the assumption that something's going to do well,

you don't know that unless you actually test it with the market. People are very different when they say they're going to buy things versus when they actually buy something. So I think for Italic is important that we became verticalized as quickly as possible across as many categories as possible. Well, it's been so cool to hear about what you're building, the simple notion that every generation has in everything store and that the way you're building things with yet another degree of disintermediation may represent that next everything store is It's really exciting. I know it's always harder that it looks from the outside and will continue to be,

but it's been fascinating to learn about what you're building at Italic. My closing question for everyone is the same, which is to ask, what is the kindest thing that anyone's ever done for you? Can I say two things? Of course. Okay. I think the first one I have to say is being a partner to a founder is really, really hard.

And I know that from personal experience, as well as having a lot of friends who are founders. So I'm very thankful for, you know, Katie who stuck it out with me through. six, seven years of startup experience. I know it's not like a single thing. I can't debate the fact that it's really tough to be with the founder. So it's oftentimes like a free co-founder with no equity. So that's one. And then I think secondly, I have the classic Chinese immigrant story where my parents moved here from China. They escaped. Actually, I can't even say this. They like willingly moved here to chase the American dream at the time. And to be honest with you, like they probably

would have been financially better off they stuck in China looking back. But I think on the flip side, like they took me back every year. And I think even though it's not, they probably wouldn't recognize it as being like kind whatsoever. I think that experience actually really showed the growth of the country and like all the technical change that it's gone through over the past 20, 30 years. So even though they might not realize that it was kind, it's like that actually was what directly directly. That actually was what directly directly. The founding of Vitalik is spending so much time in the ecosystem there. So yeah, I think those are probably two that come to mind immediately. Really nice, fun, unique example, I think traveling with your kids and showing them the world is a really cool one. And I've so appreciated your time here today. I've learned a lot every time we've talked with each other. Thanks for doing this. Hey, thanks so much for the opportunity. I really appreciate it. This episode of Founders Field Guide was brought to you by Dell Technologies. Dell Technologies and Windows can help you upgrade your business tech with these small business month specials. Save up to 45% on PCs with Windows 10 Pro plus business docs, monitors, and more.

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