A VC in Vacationland

Supply Chain Innovators: Amazon Redefines Warehouse Operations with Kiva

August 25, 2012

Image via CrunchBase

Many people have asked me why Amazon spent so much money to buy KIva Systems. I usually give them a short response, focusing on the ability of Kiva to reinvent pick and pack operations in their warehouses. And I usually get a blank stare as most people are not that versed in the history of warehouse automation in the United States.

Here is a well written piece by Steve Banker in ARC's Logistics Viewpoints that explains the rationale for the purchase in detail (thanks to my buddy Dan Dershem for pointing it out):

The New Amazon Distribution Model

Recently, Kiva Systems told its existing clients how its acquisition by Amazon would affect them. But the news also revealed something about Amazon's distribution strategy.

So here is the news: Kiva will not be selling any new systems to new customers for the next one and a half to two years. Instead, Amazon will be filling its new one million square foot distribution centers (DCs) with Kiva robots. In its second quarter financial statement, Amazon said that it had opened 6 DCs this year, with 12 more scheduled for the remainder of 2012 (17 were built last year).

I wrote a strategic report in 2009 titled "Warehouse 2025" (available to ARC clients only) that looked at the economics of the new generation of distribution robots.

Amazon appears to practice mainly pick-to-cart. Each cart has multiple totes. Its warehouses have mezzanine levels; workers often have to push their carts onto a lift to change levels. Once a tote has been completely picked, it is placed on a conveyor and transported to pack stations. Amazon's labor goals are roughly 160 picks per hour.

In contrast, Kiva Systems leads to higher productivity per worker. Workers work at combination pick/pack stations and the Kiva bots deliver the inventory to them to pick. The pick rate will depend on what is picked – if it is small items picked in multiple quantities, you might go as high as 1,500 items per hour; apparel is closer to 200 items per hour. In my report, I used 600 line items per hour as an average for Kiva empowered workers.

So what would this mean in terms of workers? My initial estimate was that Amazon would employ 45 percent fewer workers per DC. But one of the contacts I interviewed for my strategic report told me that number was too high; his warehouse employs 30-40 percent fewer people by using Kiva.

If you conduct a Google search on "Amazon distribution center," you come across announcements over the past year for DCs in Virginia, New Jersey, and South Carolina. According to these articles, warehouses costing roughly $50-65 million will employ 1,500 to 2,000 workers.

But then I came across an article about a new Indiana DC. This DC is costing $150 million and the company is only promising 1,000 new workers. Could this be one of the new warehouses that will be using Kiva? The employment numbers seem to add up. This DC will employ at least one third fewer workers.

The total cost of the new Indiana warehouse also seems roughly right. Kiva is sold as a system – robots plus their warehouse control system software. But if you take the total cost of the system and divide it by the number of robots, I estimate that the cost per robot is about $20,000-$30,000. There will be about 6 to 9 robots serving each station. With a two shift operation, and the understanding that the great majority of workers will now work pack stations, you can see how the Kiva robots would add $40 million to the cost of the new DC even if Amazon buys the robots for half of the purchase price of the general market.

Let's tackle that last assumption, that Amazon can buy the robots for half price. Part of that is based on the fact that Kiva Systems sells premium-priced, high-margin product, which Amazon will now buy at cost. But I also see falling unit costs based on a huge increase in production volume. Word on the street is that Kiva did about $100 million in revenues last year. Based on my back of the envelope calculation, one of Amazon's new DCs will require more than 80 percent of Kiva's total production from all of last year. If even half of the un-built DCs scheduled to come online this year use Kiva robots, we are looking at 5X production ramp.

Again, doing a little rough math, and depending on what you think a fully loaded warehouse worker costs and exactly how many workers become unnecessary, Kiva warehouses could save Amazon more than $20-35 million in wages and benefits per warehouse per year. If it implements Kiva at 6 DCs this year, and 20 more over the following two years, the company will get its payback for the Kiva investment.

There are some other advantages. Without buying Kiva and ramping production volumes, Amazon could never implement Kiva across its network of new DCs. Further, the company's backlog prevents other e-fulfillment competitors (that are not Kiva's existing clients) from copying what it is doing for at least a year and a half.

Finally, as Adrian Gonzalez pointed out in a recent posting, Amazon appears to be on a quest for same day deliveries. Kiva robots provide a blend of automation and flexibility that traditional forms of heavy automation cannot match.

What at first glance looked like an absurdly high acquisition price for Kiva Systems becomes completely rational. But the success of this investment will depend on how quickly and successfully Amazon can ramp the production.
Managing Your Start-up: Creating a Killer Value Proposition

August 18, 2012
Value Proposition Exercise (Photo credit: groop_lab)

Dave's on vacation this week, so here's a neat piece on creating a killer value proposition for your startup which originally appeared in Xconomy on May 29, 2012. The author, Michael Skok, is a general partner at North Bridge Venture Partners. His investments include Apperian, Akiban Technologies, Acquia, Unidesk, and Demandware (NYSE: DWRE).
On the surface, value propositions seem incredibly straightforward. I’d argue that this is why, in practice, they’re often given such short shrift.

In reality, getting a value proposition right requires some focused thinking and structured analysis, some of which I’ll preview here. Given my particular background, much of what I recommend will have a bias to B2B startups — though, in many instances, I think that you’ll find applicability to virtually any endeavor.

I recently lectured to a group of students and aspiring entrepreneurs as part of my series of talks at the Harvard Innovation Lab (feel free to use the presentation slides). For this particular session, we examined the DNA of a value proposition by stripping it down to its foundational elements and reassembling it, workshop-style, around a variety of new business ideas.

But before we dig in, let’s define a value proposition.

In its simplest terms, a value proposition is a positioning statement that describes for whom you do what uniquely well. It describes your target buyer, the problem you solve, and why you’re distinctly better than the alternatives.

One of the classic mistakes of building a value proposition is diving headlong into the solution definition phase before really understanding the problem you’re looking to solve. To understand whether it’s a problem worth solving, I recommend exercising four U’s:

Is the problem unworkable? Does your solution fix a broken business process where there are real, measureable consequences to inaction?

Is fixing the problem unavoidable? Is it driven by a mandate with implications associated with governance or regulatory control? For example, is it driven by a fundamental requirement for accounting or compliance?

Is the problem urgent? Is it one of the top three priorities? In selling to enterprises, you’ll find it hard to command the attention and resources to get a deal done if you fall below this line.

Is the problem underserved? Is there a conspicuous absence of valid solutions to the problem you’re looking to solve? Focus where there’s whitespace, not scorched earth.

Problems worth solving yield a decisive “yes” to the majority of these questions.

Next, ask yourself whether the problem is blatant and critical. Problems that are blatant and critical are far more acute that those that are latent and aspirational. Blatant and critical problems stand in the way of business. They put careers and reputations at risk and whiten knuckles. Latent problems are unacknowledged, which means they often require costly missionary selling. Aspirational problems are optional, which is the hardest of places for a B2B startup to sell. Though in B2C, they can be drivers as people look for things like status or fashion.

Now that you’ve determined what problem you’re solving and validated its criticality, it’s time to define your solution. The most urgent question to ask is: What is your compelling breakthrough?

Think of 3D. What unique combination of discontinuous innovation, defensible technology, and disruptive business model are you bringing to bear and what makes it truly compelling — not just to you and your colleagues, but to your most skeptical customer?

Discontinuous innovations are the opposite of marginal improvements; they offer transformative benefits over the status quo by looking at a problem differently. Defensible technology offers intellectual property that can be protected to create a barrier to entry and an unfair competitive advantage. Disruptive business models, which are discussed in depth here, yield value and cost rewards that help catalyze the growth of a business.

Groupon is a good example of a disruptive business model that has changed the face of price-based promotions by using crowdsourcing principles to aggregate demand around deals.

As an investor, I look for non-disruptive disruptions — that is, technologies that offer game-changing benefits without requiring any modification to existing processes or environments.

When VMware popularized the hypervisor, it did so with a non-disruptive disruption—all benefit without much in the way of adoption hurdles. The same is true for Akiban, one of my more recent investments that’s innovating in database technology to yield 10-100x improvements in the speed of relational data access without any changes to applications or risk to data. That’s a non-disruptive disruption.

Non-disruption is critical because the gain you deliver will be discounted by the pain of adopting your solution, plus the inertia of vendor risk that every startup levies by virtue of being small. This means that you must deliver an order of magnitude improvement over the status quo to make the cut.

If you can’t deliver a 10x promise, customers will typically default to “do nothing” rather than bearing the risk of working with a startup. That’s the harsh truth.

Now that you’ve defined the problem you’re solving, evaluated the gain/pain ratio and discovered a problem truly worth solving, you’re in a good position to build your value proposition.

At the center of that value proposition is you. What problems do you understand uniquely well? What can you deliver uniquely well? What sort of disruptive business model can you bring to bear? Be true to yourself and play from a position of strength. A little self-awareness can go a long way in crafting a value proposition with power.

Credit is due to my colleague Adam Berrey for his thinking on the importance of segregating needs.
Supply Chain Innovators: Amazon joins the Rent-a-Textbook crowd

August 11, 2012

Image via CrunchBase

The old days of going to the bookstore at the beginning of a semester and buying 20 pounds of expensive textbooks and supplements is fast disappearing. And with it is a complex and expensive supply chain.

Although numerous textbook rental startups have emerged over the last five years, no major players have entered the market. Until now.

Amazon has announced the launch of a new textbook rental service. Called Amazon Textbook Rental, the service enables college students to rent textbooks at up to 70% savings, according to the company.
By signing up for Amazon Student, users can also receive six months of free two day shipping, plus offers to receive four years of Amazon Prime at 50% off.

Even more innovative players are also appearing. According to Xconomy, Boundless Learning, a Boston based company,which started in early 2011, has redesigned its free, open educational content platform for college students, in its public launch just ahead of the new school year. Beset by lawsuits from the major publishers, which accuse them of stealing their content, Boundless is challenging the traditional model of professors choosing a textbook and forcing students to use them.

What’s also interesting about Boundless is its progress in the rapidly moving field of ed-tech. Its new site looks cleaner and easier to read and navigate (see left), at least to this reporter’s eye. Boundless now also offers materials for introductory courses in history, sociology, physiology, and writing—beyond its original subjects of biology, psychology, and economics.

Students can go to the site, type in their assigned course textbook, and if there’s a match, Boundless will present alternative course materials. The text and images come from open educational resources, U.S. government sites (such as NIH and NSF), and independent sites that use Creative Commons licenses (like Wikipedia and Encyclopedia of Earth).

“We don’t create content, we curate,” saya Boundless co-founder and CEO Ariel Diaz.

Also new on the site are design features intended to make it easier to do things like see where you are among various units of content (via a sidebar); jump to pieces of content you are looking for (via search and a table of contents); and keep tabs on your progress and note-taking (via a Facebook-like activity feed). Boundless is also working on social features to take advantage of the peer-to-peer learning aspect of the community it is trying to build.

All of this points to a future beyond traditional textbooks—though the transition will probably take years. “Our view is much more modular, much more sharable,” says Diaz. Physical textbooks are constrained by their weight and linear design, he says, and the first wave of e-textbooks are just digital representations of the same thing. But by using open Web materials, he says, “you can go as deep as you want, go as broad as you want, and we can surface the right information at the right time.”
Managing Start Ups: What Startups Should Do Before They Get Into The VC’s Office

August 4, 2012

English: The City of London skyline as viewed toward the north-west from the top floor viewing platform of London City Hall on the southern side of the Thames. In the foreground: Dixie Queen and Millennium Time at Tower Millennium Pier. This is a 5 segment panoramic image taken by myself with a Canon 5D and 24-105mm f/4L IS lens. (Photo credit: Wikipedia)

Here's a great post by Eze Vidra, Head of Campus London, Google’s dedicated startup space in East London housing accelerators and cowering spaces. He tweets at @ediggs and blogs at VCCafe.com.

An experienced VC would have heard thousands of pitches in his day. The good ones would tell you that they have developed a “pattern recognition”. After a while, they are able to determine (at least in their own minds) what startups would succeed or fail in a matter of minutes. There’s obviously lots going on in a pitch – verbal and non-verbal communication, chemistry etc. In this post, I will outline both platforms and tools startups should consider to improve their pitching success, before they get into the VC’s office.

Fundraising tips for startups

1) Put your startup on AngelList – if you’re on to something solid, you should have no problem getting noticed by the top guys. Best way to get noticed is to be referred by a member – let me know if you need help with that (angel.co)

2) Spend $19 and treat yourself to this course on raising capital for startups and what to include in your pitch slides. This online course consists of 8 lectures and over 6.5 hours of content (including a sample pitch deck) . Speakers include Naval Ravinikant (co-founder of AngelList), Dave McClure (500 startups) and Adeo Ressi (founder Institute) providing different angles to the pitch. It’s cheap coaching to nail the structure you need in any fundraising presentation.

3) In his class CS183, on startup conception, launch, scaling, and growing of a successful tech company, valley investor Peter Thiel referred to two different decks for the same company. A good deck and a bad/traditional deck, explaining the relevant differences. Access the “good deck” on Blake Masters’ class notes posts (converted to PDF thanks to Andreas Klinger)

4) Look at other pitching examples – recently launched PitchEnvy has over 20 recent pitch decks that
raised money!

5) Create an intro video as a teaser – while it’s risky, creating a video can be cheaper than you think, and it can help establish the concept of your startup in a clear/clever/fun way for users and investors alike. I found Startup-Videos to be an excellent resource for seeing what’s out there. There are some platforms out there like PowTown If you’re going to do it yourself, you better get some training. Crowdsourced education platform Udemy comes to the rescue with How to Create an Awesome video demo for your startup. Animation platform PowToon, an Israeli startup, is another free tool to help.

6) Equity Crowdfunding – I’ve covered the different types of Crowdfunding on the post Startup Equity Crowdfunding grows in Europe. In a nutshell, equity-based platforms like FundersClub (US), Seedrs (UK), and CrowdCube (UK, mostly non-tech) and others, enable anyone (not just accredited angel investors), put small sums as little as $1000 towards an equity investment in a startup. The sector is yet to be regulated and there are concerns about alignment of investors, but nevertheless it is a viable way to get the first bucks to build a product.

7) Donation Crowdfunding platforms like Kickstarter, Rally and IndieGogo are essentially early-sales platforms, which works especially well for physical products. For example, Pebble was able to raise $3.4 million in 3 days for its smart watch, which grew to over $10 million in one month from 68,000 backers, without losing a single percentage of equity in the process. People who pledged money towards the project got in return units of the product, or the ability to choose a color for their Pebble watch depending on how much they paid. Another example is Ze Frank, who raised $146,000 from 3,900 people since March. He included several ‘awards’ for different levels of fundraising including “I will whisper words of encouragement into a small jar, label it, and send it to you + One black on black fuzzy duck t-shirt” for people who pledge $250. It doesn’t work for everyone, but is certainly a channel worth considering, for the right product.

Crowdfunding on kickstarter proved to be a great fundraising technique for Pebble after traditional investors turned down the company

8) Get on accredited lists – this is a bit of a chicken and egg. You need funding, VCs like traction. If you can show you have traction, it will be easier to get funding. One way of doing that is getting ranked by industry accredited lists. Associates at VC funds will regularly go through lists like Deloitte Fast 50, Telegraph 100 to look for hidden gems. If your startup was ever on one of these lists you probably received unsolicited phone calls asking for meetings. Another way of accomplishing the same effect is to sign up for visible pitch competitions like the Startup Bootcamp’s Tech Allstars (a competition for startups in EU who were part of accelerators), or LeWeb’s pitching competition.

9) Get media/blog coverage before you launch – staying on the traction point, any prospecting investor will do its due diligence on the company, product or team. Since there aren’t too many data points in the early stages of a startup, getting featured by a reputable media outlet (ideally national, but niche works too) will create another entry point for people to find out about your product or service. A friend of mine got featured by Wired, GQ and BBC before he went live with the product because he was focused on a ‘sexy’ area. The result: oversubscribed angel rounds and a long waiting list of beta testers for when the company is ready to flip the switch. Of course if you aren’t ready for publicity it’s better to wait before you attract all that attention. A ‘soft’ way of getting noticed is answering questions on UGC sites like Quora or LinkedIn, submitting a guest post on your area of focus without being too salesy and starting your own blog, to establish your voice within the community.

10) Get on stage – practice your pitch as much as you can. If you live near a vibrant startup community, there should be plenty of opportunities to do pitch practice. From community meetups to university clubs, getting on stage will not only improve your confidence, but can also produce valuable feedback before you get on to the real thing.

***
NOTE: Any of these techniques is most likely to work best for kick ass teams with experience and products that tap big and growing markets in a scalable way. No harm in trying, but don’t put the cart ahead of the horse!
Supply Chain Strategy: Apple Stores restock 74 Times per Year

July 29, 2012

NEW YORK – OCTOBER 14: People shop in a Apple store on October 14, 2010 in New York, New York. Riding on the success of the iPhone and iPad, shares of Apple Inc. climbed $1.60 to close at $300.14 on October 13. It is the first time in the tech company's history that the stock has topped $300. (Image credit: Getty Images via @daylife)

If you visit an Apple store once at the beginning of a week and again at the end of the week, chances are you’re seeing a completely new set of inventory. Impressively, the company turns over its inventory every five days, according to a new study.

Analyst firm Gartner, in its 2012 Supply Chain Top 25 study, says that Apple restocks its shelves 74 times a year, beating out companies like Amazon, Dell, and P&G for most inventory turned. Amazon, which is famous for its quick shipping times, only turns its inventory 10 times a year. Dell has a slightly higher refresh rate at 35 times a year, and P&G falls at five times a year.

Apple’s numbers are actually closer to fast food chain McDonalds, which turns its inventory 142 times a year. Apple turns its inventory like a food retailers, whose products actually have an expiration and have to be swept clean by law. In Apple’s second quarter earnings call of 2012, the company announced that it had sold 35.1 million units of its iPhones, which was 88 percent higher than the year before. It also sold 11.8 million iPads, 151 percent higher than last year, and 4 million Macs, seven percent higher than last year.

Of course, the phenomenal popularity of Apple products helps keep inventory turns high. Fast turns helps with a variety of supply chain metrics–obsolescence is minimized as products are not overstocked at the retail level, inventory holding costs are lowered as fewer, expensive products reside in the channels, and pricing power maintained as gluts are minimized.

Other companies can learn a lot from Apple and its supply chain strategies. It helps that Apple has a top down view of strategy, with senior executives very supportive of efforts by supply chain professionals to run lean operations, instead of stuffing the channels using overblown sales forecasts.
Supply Chain Innovators (update): Waze Surpasses 20 Million Users

July 23, 2012

A screenshot of Navit posted on http://wiki.navit-project.org/ (Photo credit: Wikipedia)

According to Xconomy, Waze, the Israel-based social navigation and traffic service, announced that it now has over 20 million users. That’s quite a milestone for any startup, but what makes this number so impressive is that the company also announced that it added half of its users in the last six month and continues to grow quickly. Just in the last month, the company said, it added 1.8 million new users to its community. All of these users, said Waze, have used the app to drive over 3.2 billion miles so far. Waze has received funding from a number of prominent Silicon Valley funds (including Kleiner Perkins) and Horizons Ventures Hong Kong. In total, Waze has raised about $67 million since its launch in 2008. The company is clearly on a roll right now and given that it depends on its users to collect traffic data, having more users is obviously a boon for anybody who uses the service (though, as usual, Waze is happy to report the download numbers, but that obviously doesn’t mean it actually has 20 million active users). Just two weeks ago, Waze announced a number of new features, including the ability to see real-time fuel prices in the company’s mobile apps. Earlier this year, Waze also added a hands-free feature to its iPhone app that allows users to just wave their hand in front of their iPhones to start Waze’s voice-recognition mode to report traffic conditions while driving. The company, unlike most of its competitors, also makes the source code of its apps available to anybody who would like to take a look and modify it. Still, with the arrival of built-in turn-by-turn directions in iOS6 (and with Google already offering this feature on Android), it’s hard to predict the future of Waze. The company apparently provides some data to Apple and chances are Apple is paying a fee for this data, but it remains to be seen how quickly the company can continue to grow after Apple releases iOS 6 with its built-in turn-by-turn navigation.

The need for real-time traffic data will continue to grow as congestion gets worse worldwide, but who will be the winner? In the consumer space, Waze has a chance, but needs to be more than a one-trick pony.
Disappearing Supply Chains: Amazon’s print on-demand technology

July 14, 2012

Amazon-New-Detail-Page (Photo credit: kokogiak)

Will publisher's relinguish control of book supply chains to Amazon? Of course, the technology already exists (and Amazon owns it) to print books at an Amazon fulfillment facility and send them off to customers, with the same delivery times as exist today. Using an industrial strength printer and a digital book file, the task is easy.

But major publishers are not even agreeing to let Amazon have digital files of their back list books, fearing that this would be the proverbial "camel's nose under the tent" and that best sellers would be next on the list for on-demand printing. From Amazon's perspective, they would like to free up hundreds of thousands of feet of warehouse space now dedicated to books in their fulfillment centers, not to mention the labor involved in picking these books.

The principal reason? It's all about money. With best sellers going for perhaps $30 plus (and hefty profit margins), why split only $10 or so in Kindle revenue with both Amazon and the author. And Amazon already owns a print on demand provider, BookSurge (now called Create Space–clever name, huh, when you think about those books taking up warehouse space?). CreateSpace offers small publishers on-demand printing options and the results are as good as using a regular press for paperbacks.

From the publisher's point of view, they have spent the last 100 years building up complex supply chains, involving printers, warehouses, distributors and retailers to reach consumers. Often, these supply chains are now way too expensive to justify, given availability of today's on-demand technology and the huge amount of unsold books that must make their way back through reverse logistics. Publishers offer authors a wide range of money making services attached to this supply chain, including editing, printing, storage and distribution–all used to justify them keeping the lion's share of high wholesale prices. Amazon's on-demand printing threat eliminates many of the "value-add" and expensive services.

Other start ups, such as On Demand Books, offer similar services, but with only a few bookstores using the technology ($100K per machine) and only a few publishers making any part of its catalog available–generally only books out of copyright.

Many smaller publishers, especially of frequently updated technical manuals, have seen the light and begun using on-demand technology exclusively. But it will be many years before the major publishers are willing to chuck out their old-fashioned supply chains and embrace the new technology.
July 9, 2012

Excellent post by Fred Wilson on leveraging partners in growing your start up

http://www.avc.com/a_vc/2012/07/mba-mondays-leveraging-your-partners-to-grow-and-develop-your-team.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+AVc+%28A+VC%29
Supply Chain Innovators: Freight Farms–beat those old containers into…urban farms?

July 7, 2012

local food madness (Photo credit: Mike Gogulski)

Well, I admit it, this is not really a supply chain company, but Freight Farms does solve a problem–recycling those old ocean containers who blot our landscape into urban vegetable farms. Take one well used 40 foot container, add plastic-and-foam growing channels on the walls, an irrigation system on the ceiling and LED grow lights and voila! you have an urban greenhouse for year around crops of lettuce, tomatoes and peppers.

The founders, Brad McNamara and Jon Friedman, hope to sell the produce to local restaurants and the fully equipped containers to other restaurants who want their own food production capability. Some restaurants already use their rooftops to grow food and many others have their own gardens, like Arrows in Ogunquit, Maine. Freight Farms is one of several start ups (see also Lufa Farms and Higher Ground Farms) looking to bring food production to the heart of the city by leasing space to grow food on a commercial scale, selling to distributors, restaurants and consumers. Cheap natural gas is also leading to a boom in year around greenhouse operations, such as Backyard Farms in Madison, Maine, who focus on serving regional markets twelve months a year.

Such local food production options do have significant supply chain benefits for consumers–lower transportation costs, less pollution, and less waste since spoilage can run up to 60% in long haul supply lines. Ideal locations might be bakeries, who produce a lot of waste heat in the baking process that can keep the containers/greenhouse warm in the winter.

Freight Farms has raised over $30,000 on kickstarter from 98 "investors", using the money to build the proof of concept container. They plan to sell a basic container, fully equipped to grow food, at around $40,000, with Freight Farms providing a remote monitoring service and growing advice from gardening experts.

Of course, addressing local regulations, satisfying NIMBY neighbors and finding strong rooftops are all issues that must be overcome before one can install a rooftop or parking lot container farm. Trish Karter, founder of Dancing Bear Baking Company and now CEO of LightEffect Farms has spent many months looking for a site, only to have the neighbors veto the farm container on the roof of a car wash.

But I love the idea of locally grown food. New Englanders relish summer because that is the only time we can eat tomatoes that were not "strip mined in Texas". Local, year around farming is a trend that will continue. Whether anyone will make any money doing it is another question.
Twillo’s Nine Things–Corporate Culture at it’s Simplest

June 30, 2012

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