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Episode Date: October 9, 2023

Mobile shopping is expected to rule e-commerce this holiday season. (00:13) Asit Sharma and Deidre Woollard discuss: If consumer spending will remain strong over the holiday season. The impact of the rise of mobile shopping. Whether or not retailers can trust the supply chain. (13:27) Founders and investors sit on opposite sides of the table and they don’t always agree. Venture capitalist Jerry Neumann and serial founder Liz Zalman look at both sides in their book Founder vs. Investor. Access your Stock Advisor discount here: www.fool.com/mfmdiscount Companies discussed:ADBE, AMZN, SHOP, UPS, WMT, UBER, DDOG, OKTA Host: Deidre Woollard Guests: Asit Sharma, Jerry Neumann, Liz Zalman Producer: Ricky Mulvey Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Deidre, I'm doing well, thanks. Enjoying some crisp fall weather where I live. How are you? Good. Yeah, the weather has suddenly gotten crisp. It's not Halloween even yet, but the holiday season sort of kicks off this week with Amazon Prime Days. Adobe puts out an annual holiday e-commerce forecast. They're calling for 4.8% growth this season. On our show on Friday, Dylan, Ron, and Bill, they talked about consumer spending concerns. And the Adobe report talked about the use of buy now, pay later services. Should we be worried about consumers getting overextended? Maybe a little bit, Deidre. I'm not very worried, very concerned about this. But

there are some things to fret about. I mean, total credit card debt in the U.S. now exceeds a trillion bucks. On the other hand, consumer debt slowed a bit in the last month we have reporting for, which is August, it shrunk by $15.6 billion. That's a function of those higher interest rates finally kicking in. Also, consumers getting ready to start making student loan payments again. I'll note that there is still a very tight job market here in the U.S. We added 336,000 jobs in September. If you read the news, you probably saw it described as a blockbuster report or a stunning report. It is more than economists were expecting. The job market still remains very tight, robust. People are

finding work. They have disposable income, but they're stretched at the same time. As for the idea of buy now, pay later, I think the balance still is in the format of pay-in-for. When consumers are buying things online, they're choosing that no-interest option, which breaks the spend into four payments. As long as that's in place, I think it's okay to see some growth in this category. Where I start to get a little concerned, though, is the increasing optionality to take a longer-term buy-now-pay-later deal, which has interest associated with it and may stretch out for a year or more. That's pretty much like credit card debt. Yeah. I think there is a big concern there. You mentioned the interest rates keep

going up on credit cards. It is something that I worry about, but it's very clear the consumers aren't really ready to cut back. In the study from Adobe, the big headline was, this is going to be the first year that mobile holiday shopping is going to overtake desktop. I'm wondering, is this a tailwind for PayPal, for Shopify, for other fintechs? And are you shopping mobile, or are you still using the laptop for your e-commerce? I have this minimalist app installed on my phone to keep me from wasting too much time on it. I tend to shop on my desktop. But I know the trend is going the other way. My take is that, yes, it's going to be a small tailwind for companies like PayPal and Shopify,

etc., but they've been optimizing for this moment for years and years and years. PayPal itself has inducements to buy directly from merchants if you're on the app. If you're on their desktop experience, you really don't see that offer to go and get a discount at a merchant. That's in its partner network. And of course, it has been utilizing Venmo as an avenue to e-commerce with a younger generation, straight through mobile phones for some time now. We're going to see a leap this year. If you look at Adobe's report from last year, when the season was over, mobile had some

44.5% share of the total spend. What Adobe is saying this year is, the total pie is going to grow by 5%, and mobile is going to be at 51% of total spend. That means it's going to have a jump in excess of 10%. We don't know what the final numbers will be, but I'm guessing mobile will show growth in their report of anywhere from 10% to 13%. That is a significant jump. But then again, some of this just trades hands. Some of the commerce that, let's say, PayPal might have seen on desktop is going to shift to mobile, but it's the same consumer. It won't be a

major push. We're not going to see earnings reports come out where these stocks are jumping because PayPal suddenly had this surge in mobile payments. I think the other aspect of it, too, is the mobile experience is different. You have fewer options, and the retailers have fewer opportunities to prompt you to be interested in other things. So, I think for the retailers also, it seems like it's going to be kind of a little bit of a push to figure out how to not just be mobile-ready, be mobile-fast, but also still be able to push consumers to buy other things.

I think so, Deidre. One of the solutions that many companies have been examining is the use of generative AI to be able to understand where those offer points could be. Generative AI is pretty good at analysis. There are some companies that are studying this. You only have so much information, as you point out, how do you make that interface ready to entice somebody at the right time, point of sale? We're not going to see a lot of this in this holiday season, but fast-forward to a year

from now, that might be a technology you see employed more and more to hit Deidre or Asit or anyone listening, their vulnerable point on their mobile phone. The other part of this is that flatter-for-longer season. Retailers have been destocking, the inventories have put down. That was the big story in 2021-2022, too much inventory. Now, they're waiting, being more patient. One of the things I'm thinking about is, how do the shippers deal with this? Totally. It's been such a hard year for shippers. We could go back 18 months.

The macro picture has been one of drag and uncertainty. This has been very pronounced for FedEx in particular, which had a great business while conditions were favorable, and then saw its volumes decrease and became a company that's optimizing the way it ships. We see this change in narrative, where FedEx and UPS are offering discounts to customers. They used to up-price during the holiday season, but the industry has become fragmented. There are more third-party shippers around with great technology. smaller and smaller shippers can work with different retailers. Also, Amazon is ever-present. They have actually the largest logistics network in the world. They're a competitor. We've got

this consumer, which, as we've discussed, has money, but it's a little stretched. To entice that, both companies will try to be competitive this year. But you'll note what they're seeing on the ground, which is less spending, particularly in goods that have to be shipped, is contradicting what Adobe is seeing, that this will be a season of 5% growth. I wonder if some of that is the expression of what you were talking about just now, Deidre, that increasingly we see experiences on sale that don't have to be shipped. You can buy a travel package during the season. I wonder how much of that is in play here. Yeah, I don't know. The other thing I'm thinking about, too, is that we went from having just-in-time was very important.

We had just-in-time inventory holding, and then we went to just-in-case, which is, you know, having a lot of inventory ready. Now it seems like we're getting back to just-in-time. So it's really, it's been this sort of back and forth in terms of how much companies are trying to hold and how much they are now sort of like being, we'll wait and see. We can wait a little bit longer if we don't have to worry about the supply chain. When I look at companies like Walmart, I feel like that's a little bit of what they're doing. They feel confident enough about the supply chain. They don't have to put everything in the stores. They know that they can get more fast if they need it. I think retailers and even manufacturers who hold inventory would love the good old days to come

back where the shipping environment, the supply environment, the commodity environment, all that was very stable, so you could just focus on the right amount of inventory to optimize your profit, bring it home to the bottom line. But the fact is, we live in such a volatile world now, even post-pandemic, we still see small disruptions into supply chains. Look what happened over the weekend in the Middle East. It is a world with a lot of chaos. You can wake up any day and there's an earthquake somewhere, a natural disaster, war. I don't know if we'll ever return to a scenario where retailers and manufacturers can optimize solely based on profit. There's got to be some thinking of how externals can come into play.

It's super interesting for those who nerd out on supply chains and ordering patterns. Yeah, yeah, absolutely. Yeah, that is an important point is that, yeah, we never know what is going to happen next. So the other side of all of this e-commerce is, of course, the returns, which is a big part of the e-commerce thing these days. Uber announced last week they're going to be doing returns for packaging, which packages. I think this is really interesting because it's not a big part of the business. It's going to be like a $5 flat rate.

I think it's $3 for Uber One members. And basically, you can just have your packages taken back to UPS or Postal Service or FedEx. But I'm wondering, why is Uber doing this? Because it doesn't seem like a big jump for them. But I'm wondering, is this either A, a step toward the super app, or B, is this somehow going to be connected to their Uber freight business, which kind of needs a boost? So I'm wondering, what do you think of this move? What are they trying to do here?

Well, Deidre, I really like both of those suppositions. and I think they're both in play. The first is at a $5 price point, and I think a $3 price point if you are a premium subscriber to Uber service. This is not going to be a hugely margin-additive exercise for Uber, but it is one more step to make them more and more part of your life wherever there's a delivery concern. They can certainly give up some margin in order to do that, to plunk in one more piece into the super app puzzle. Now, about this freight thing, there is a huge business around the world in reverse logistics, because we buy so much stuff online now, and we return so much stuff. There's a company that I follow, I'm very interested in,

GXO. This is a company that specializes, among other things, in automating reverse logistics. So, when you think about the global flow of goods, and how much we've become dependent on having goods come into the home, and then having the ability to send them back. Uber Freight, which is a logistics company, it's dealing with shippers, those who need to ship rather than potentially you or me, has a part where it could connect to our doorstep. And maybe this piece is a test case to start playing in that reverse logistics market, which is an expanding market. It's a lucrative market. I hadn't thought of that, but in the notes leading up to the show when you suggest that, I thought, hmm, that makes some sense.

Maybe this is a test case. I think that's the fascinating thing about studying e-commerce in general, because it's not just the retailers. It's the logistics. It's everything. It is this global movement of goods and services around the globe. I think it's fascinating for me to nerd out on, too. Totally. And I do want to, let's touch base after this holiday season and see what happened with all this conjecturing we're trying to make. Absolutely. Thanks for your time today, Asit. Thank you so much, Deidre. At Motley Fool Money, we love talking stocks and looking for the next big thing. That's why we bring analysts like Asit Sharma on the show.

By day, Asit is also part of a team picking stocks and providing coverage for the Motley Fool suite of premium investing services. If you're looking for investing ideas, we're offering Motley Fool money listeners a discount on our flagship service, Stock Advisor. With Stock Advisor, you get two stock recommendations per month, access to analysts like Asit Sharma, our members-only livestream, Motley Fool Live, and Stock Advisor's full scorecard of stocks generating market-beating returns. To learn more, head to www.fool.com slash MFM discount.

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to go out there. Most of your investments don't work out. There's a larger pool of founders you have to meet with. How do you become a better sifter? I mean, everybody wants money, but maybe not everybody should get money. I think the basics of sifting are pretty well understood. You're looking for companies that can scale for great founders, for a product that customers will actually pay for. Those things are pretty well talked about. I think for me, there's a couple of things that are different. One is, I'm looking for people who have a bigger mission than making money. Making money is great. Everybody wants to make money. That's your baseline. But unless you have a bigger mission, you're not going to build a big

company. There's just easier ways to make money than to go and start a startup. And then the second thing is, I'm looking for people and companies that can go all the way. I'm not looking for a company that will be built and then sold. I'm looking for a company that, in some scenario can eventually go public, and the person who's running it can be the person running that company when it goes public. That doesn't always happen. In fact, it rarely happens, but that's what I'm looking for. It's kind of a shoot for the moon, land on the roof strategy. Once in a while, it works. Sometimes it doesn't work. But if you're looking for small exits, you're going to get small exits or maybe no exits. If you're looking for gigantic exits,

you'll get some gigantic exits and a few small exits. Yeah, that makes sense. So for Liz, for you on the other side, searching for funding kind of becomes an additional full-time job if you're a founder, you're out there presenting, going through meetings, all of that stuff. How are you able to kind of narrow the funnel as you start that process? It's a common mistake that many founders make where they just sort of go out and they're talking to everybody. And to your point, it just becomes this this morass. I think it behooves the founder to create that funnel from the start. So my my subject matter, my area of expertise is B2B enterprise software. And so if I'm going out to raise a Series B and I have a B2B enterprise software company and specifically an infrastructure security, there are a finite number of firms that make sense to write that check. And so the first thing that I do is I say, who are those people? I go to Crunchbase and I create the list of VCs. It's probably no more than 50 or 60. And then I figure out who the right partner is to talk to. And I rank them based upon who I most want to work with. And I typically put sort of the lower tier firms first and the higher tier firms later.

And I do a wave of VCs a week. And so I'll probably do 10 a week or 15 a week because you want them all to hit and offer you term sheets or partner meetings at the same time. That's how you create the fear of missing out, the FOMO. And the beautiful thing about putting the folks that you don't necessarily want to work with earlier and the ones that are much sexier later is that by the time you get to their first wave, you've already gone through all of the objections you can possibly get. Your data room is full of the most beautiful graphs that anybody could ever ask for. And you are ready to go. And

you're just crushing every single call. And then I think finally, founders can get into this loop of diligence and one more call. And let me talk to one more customer. And I want to get to a no as quickly as possible. And so if I'm going into four or five calls with a VC, I actually pick up the phone, I call the partner and I was like, there's some sticking point somewhere. What is it? Because let's, let's just put it out there. And if it's a no, that's okay. You can move on with your life and I can move on with mine. No's are good. Yeah. It's one of the things that I've noticed in the book too, is that there is this dance and there sort of seems to be a lack of frankness to some extent. Jerry, what do you see when you're sort of interviewing founders? How do

how do you kind of get past the hype part where you're each kind of trying to present your best face? You know, there's a joke in venture capital that you go to your first board meeting and find out what you really invested in. And it's true. I often tell, I teach a class on entrepreneurship at Columbia university. And I, and I tell the people in my class, don't go out there with your, your conservative business plan. Don't go, don't pitch somebody with what you're sure, what you are sure is going to happen, go out there and tell them what you want to happen, right? What the best case is here. Now, don't make things up, but if everything works, here's how well we can do. Because when I look at your business plan, that's what I'm assuming

you did. So if you show me some, oh, this is a conservative estimate, I'm going to be like, all right, this is the best they can possibly do. So I don't believe, I think if people are lying to me, that's disqualifying. But if people are telling me what they really want to happen, their aspirations, that's great. That's what I want to hear. I want to know the best this company can do so that, A, I know that that's the best this company can do, but also, B, so that when the founder is running the company, I can go back and say, hey, you said you're going to be a billion-dollar company. What's the holdup? I want them to tell me what they want. I think it's really important to find people who want to build and run big, great companies.

Which is true. But also, that's one of the things you talk about in the book, which is the total addressable market thing, because it's one of the things I noticed as an investor. People have this total addressable market that seems like it's the whole world. And sometimes that can seem a little bit too large. How do you consider that? If you're looking for someone to shoot for the moon, do you want that big total addressable market, even if maybe it's not quite believable? No. I mean, yes and no. So, I want to have a big total addressable market, but I don't really believe it. And also, I think the problem with markets that are really big and really well-known is that you have a lot of competitors. So, there was a wave a few years ago of delivery companies, people starting delivery companies to deliver food to people in their homes. And it's obviously a huge market. It's an enormous market. And everybody could see that it was an enormous market. There were literally hundreds of people trying to enter that market. Even though one or two might be successful, the chances of me investing in that

one or two that are successful is pretty low. I want to find people who are going after a market that may someday be big, that they can grow and make big, but that isn't big yet. This is the kind of, it maybe sounds like a catch-22, but I need people who are going to grow a market who can figure out a way to then become dominant in the market they've grown. And in that case, they are, you know, they have a barrier to entry where delivery companies just don't. Well, Liz, you kind of had a different take in the book. You called out total addressable market as a little bit of a fiction, especially in a fundraising deck. So how do you look at it? Well, I think it's funny that Jerry just said, you know, and I don't believe it.

It was one of the first things he said. So thank you for that, kind sir. I mean, the theory is that if you have a large number and there's one slide, it says total adjustable market. And I always just put a giant number on it. It's 70 billion or 80 billion or 50 billion. And the idea is that if you capture even 1% of that, then you're an IPO ready company and you're just making oodles of money. I think that part of the deck, like most parts of the deck, you're storytelling. And what you're trying to do is check a bunch of boxes for investors, for the partner to go back to their partnership and say, hey, I think this company's checked all these boxes. And TAM, total addressable market, is one of them. The example that I gave in the

book had to do with birthday candles. Everybody in the Wi-Fi decided to start a birthday candle company. Everybody in the world has a birthday. And so my total addressable market is how many people in the world now? 13 billion times 80 years of life. It's just incredible. In fact, my last company was a database company. And, and so when I went to create the total addressable market slide, I was like, wait a second, everybody in the world has a database. And so everybody in the world is going to need access management for databases. It was an incredulous number. I didn't understand why we needed it. But the problem is if you, I've been doing this 25 years, I've looked at hundreds and thousands of companies, I suppose, very few of them do what

they set out to do, right? Even of the companies I've invested in, 100 or so companies, maybe two have gone to do what they told me they were going to do initially. And I think in both cases, it was probably an accident. If you don't tell the story, then you're not going to say anything. Nobody knows what's going to happen. But I want to see how you think, right? What your ambitions are, who you think your customers are, right? If you don't build up a TAM, then I can't know any of these things. And if you can't build a TAM like that, then maybe you don't know these things either. Liz, I want to bring up something that you talked about in the book, which is, you know, it's not just getting the money, but it's also what you do with it. You've got two

examples of successful companies, Okta and Datadog. And what is the difference that made those companies successful and get to IPO versus some of the other companies that were raising money at the same time? Yeah. So in the example that I gave, I think Okta's main competitor at the time was OneLogin, also in the single sign-on space. And Datadog, I think, had a few competitors. I picked Loggly. And so I think in the cases of both of these companies, they won the market and they won it for, in my opinion, a few reasons. Because in each of these cases, these companies started out at the very same time. They raised their seed round at the same time they raised their Series A, and then the paths diverged. And so in the case of Okta and Datadog, both of them

had, I would argue, the top product in the market. They did a very good job of deploying capital quickly. So they executed better than the rest of the market. But then the downstream impact was as the funding paths diverged and Okta and Datadog went to raise a Series B, a Series C, however far they went, because they were raising more money and they're the best product and they're deploying capital quickly, they're entrenching by raising the next round. They're entrenching their space. They're cementing their space as the top dog. And nobody wants to invest in number two. So actually later rounds of funding, from my perspective, sucked the wind out of everybody else's tails. And they all became number two, number three, number four, and Okta and Datadog,

they were runaway trains. That's really interesting because you're absolutely right. You've got that moment where all of a sudden nobody does want to invest in number two. Everybody wants to invest in number one. So if you're number two, it kind of puts you, you don't have the money to get to the position that you'd like to get to, it sounds like. It's exactly right. And even sitting internally at a company and watching my competitor raise a hundred million dollar round, you can see it on everybody's faces. Folks just get dejected. They say, oh, no, what's going on? Their bodies get small, like a somatic representation of their depression. All of a sudden, it's just suddenly come on because of a funding announcement. That psychology is real. Yeah, it's frustrating from a venture investor point of view, because I've had companies that had real products, good products that customers liked, and then some big venture capitalists invest in a competitor who has a worse product. And it makes it really hard to compete because

customers also see that. They see that, oh, this company got a big round from some named venture capitalist. Maybe that's the one we should use. And then the company that didn't do that has a much harder time. Other venture capitalists may shy away from the company that didn't get that big round saying, well, you know, their competitor already has a ton of money to compete with them. How are they going to compete? It's frustrating because the people who are investing are often wrong. But it's still a little bit of a self-fulfilling prophecy. Let's talk quickly about a board of directors. Liz, I know you have some opinions on this. I'd love to find out from you. What's the best thing you got from having a board of directors?

Well, I could say nothing, and that wouldn't be inaccurate. it. As Jerry rolls his eyes yet again at me. Look, I think the challenge with the board of directors is that at its core, it is designed to be a governance mechanism, which means investors sit on it and say, hey, how's the company doing? And founders sit on it and say, hey, how's the company doing? And my experience is that in reality, that doesn't happen because investors are looking for return. Many of them are interested in their ego and they're the only ones talking in a meeting and sort of arguing against the founder perspective for a moment. Founders and especially founder CEOs care about their job and they care about retaining control.

And in both instances, the company is what suffers. And so my reality has been over my two venture-backed companies that these board meetings have honestly been, they've been a waste of time and folks haven't always been interested in the business. I, on neither of the boards of directors that I've had, and there are many storied firms on each of those boards, none of them has ever cared enough to spend five minutes with me to see what the product does. It's just not the type of meeting I want to be in. I, do you want me to rebut? Of course I do. You know, I mean, starting from the last thing first, it's not my job as an investor to tell you what product to build, right? That's your customer's job. So, giving me a demo and showing me what the product

does, I mean, I usually know what the product does. I think it's interesting what the product does, but who cares what I think about your product? I'm not a product guy. I'm an investor. So, I think the problem then becomes, if you don't understand what the board meeting is for, if you want to go in there and give product demos to people who are like, look, I really want to know the metrics so I can judge how the company is doing, not how good your product is, which I can't judge, then you're running the board meeting wrong. And in the end, if your board meeting is useless, it is the founder's job to make the board meeting useful, right? It is their meeting. They're always, at least in this system, the chairman of the board. They get to decide the

agenda. So, you know, make the board meeting useful. But keep in mind that it is a governance mechanism that the investors want to know whether or not you should be the person running the company. So keep that in mind. And also, they want to know how their investment is doing because They need to know that. At the end, I often refuse to invest in companies who won't set up a board of directors, even at the earliest stages, because to me, it says they just don't want to be accountable. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have form of recommendations for or against, so don't buy or sell stocks based solely on what you hear.

I'm Deidre Willard. Thanks for listening. We'll see you tomorrow. Thanks for watching!