DoneGood (October 2018)

Deal

https://www.seedinvest.com/donegood/seed

Decision

Not yet.

Calacanis

CheckPass/Fail
1. A syndicate lead who has been investing for at least five years and has at least one notable, unicorn investmentFail: No syndicate lead or investor who fits this bill.
2. A startup that is based in Silicon ValleyFail: No, this startup is based in Quincy, MA/Boston area.
3. A start that has at least two founders (with two, you have a backup in case one quits)Fail: No. One founder and four VPs. 
4. A startup that has a product or service that is already in the market (you’re not qualified to invest in startups that haven’t released their products—and frankly you don’t need to take this risk.)Pass: No revenue in 2016, $2,950 in 2017. 
5. A startup that has either (a) six months of continuous user growth or (b) six months of revenue.Pass: They tripled their user base in 2018 so far.
6. A startup that has notable investors.Pass: Matt Stinchbomb, one of the cofounders of Etsy is an advisor.
7. A startup that, post-funding, will have eighteen months of cash remaining, commonly referred to as runway (ask the founder and syndicate lead how many months of runway they will have post-funding)Pass: Yes, $30k in burn a month, $630k raised, so 21 months of funding. 

Why Investing

  1. Boston metro area based company, investing in home team and possibility of supporting with local network.
  2. Strong user base growth, has over 180 vendors that he can monetize.

What the Risks Are

  1. Do I think DoneGood’s market (conscious capitalism consumers vendors and consumers) is going to grow enough alone or grow big enough to take on Amazon? Hard to say. 
  2. The founder focuses too much on the ethical side of this business to make the unit economics work in a market for competitive capital.
  3. I use sites like Honey, and various chrome extensions related to e-commerce: haven’t seen them take off besides niche communities looking to save money and bargain hunt. 

What has to go right for the startup to return money on investment

  1. The e-commerce play has to become greater than the chrome extension. This has to compete against and win against smile.amazon.com
  2. If this business is essentially an affiliate marketing business, then gaining access to a very favored distribution channel is key. Otherwise margins are not high enough to support aggressive marketing spend.
  3. Vertical integration where DoneGood starts offering their own goods/there are unique advantages to using the DoneGood platform (e.g. DoneGood prime, DoneGood perks, etc.) 

Thiel

Seven Questions Every Business Should Answer:

  1. The Engineering question: Can you create breakthrough technology instead of incremental improvements?
    • So far the technology is not 10x better.
  2. The Timing question: Is now the right time to start your particular business?
    • Founder argues yes because of conscientious consumer. Personal feelings believe that this market is expanding with modest, steady growth, instead of the venture sized returns normally needed.
  3. The monopoly question: Are starting with a big share from a small market?
    • “Our typical user is an affluent, college-educated woman aged 30 to mid-40s. She has a successful professional career, lives in a major city, and is a socially active single woman or is married with 1-2 young children. She’s politically progressive, especially on women’s issues, and is highly politically active.”
    • I am not the market, so I have no sense of market penetration. I asked someone who was part of the market, and using her group as reference, this drive doesn’t seem very high. 
  4. The people question: Do you have the right team?
    • Reasonably talented tech team. This company appears to be founder centric as he is the only team member speaking. Has a background in politics and communication, which may make him a good communicator with less operational experience.
  5. The distribution question: Do you have a way to deliver your product?
    • DoneGood has grown through widespread media coverage, influencer relations and word of mouth. 
  6. The durability question: Will your market position be defensible 10 and 20 years into the future?
    • Amazon.com already has smile.amazon.com and I am unaware of the platform in terms of Shopify (Shopify for Good? Shopify Social?) Etsy pulled off a two sided market place for socially responsible goods. 
  7. The secret question: Have you identified an unique opportunity that others don’t see?
    • DoneGood’s hypothesis would be that conscientious consumerism is on the rise, and enough to make a giant platform. 

The Only Rule

This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

At a valuation of $5MM, DoneGood would have to grow to $50MM to ten times and $250MM to return the fund. 

  1. Proprietary technology: it’s hard or impossible to replicate your product(e.g. Google’s search algorithms); aim for 10x better any substitute in some key aspects
    1. As noted before, technology is so far indistinguishable from other e-commerce plugins and website platforms.
  2. Network effects: your product becomes increasingly useful as more people use it (e.g. Facebook)
    • Fits the bill in that this is a two sided marketplace.
  3. Economies of scale: a business gets stronger as it gets bigger; the marginal cost of producing an extra unit is negligible (e.g. Software startups)
    1. Definitely has economies of scale.
  4. Branding: creating a strong and powerful brand is the best way to grow a monopoly (e.g. Apple)
    • Uncertain, I’m not the customer.

To achieve growth and create a monopoly:

  • Start small and monopolize: it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. In practice, a large market will either lack a good starting point or it will be open to competition, so it’s hard to ever reach that 1%. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competition means your profits will be zero. Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets
    • Founder definitely spoke with the grandness idea at first instead of niches. This should not be held against him, is merely observation.
  • Scale up: once you dominate a niche market expand to adjacent markets (e.g. Amazon and eBay)
    • This is among the hardest—how does DoneGood compete against Etsy and Amazon?
  • Don’t disrupt: directly challenging large competitors will totally reduce your profits (e.g. Napster vs U.S. recording industry)
    • DoneGood is going about this the right way in terms of starting (verifying and recommending goods instead of directly manufacturing or selling them.) 

Updates

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

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