Investor Spotlight - Sugar Capital
Brian Sugar is a founder and partner at Sugar Capital. Along with his wife Lisa Sugar he founded PopSugar, a female-focused lifestyle brand with over 32 million fans and followers. He is also the president of Group Nine Media, which was acquired by Vox in February of 2022.
We recently sat down with Brian to talk about the current state of ecommerce, and his thoughts on the most important shifts happening in the industry today:
Introducing new paradigms for product discovery
The rise of Affiliate 2.0
Promising use cases at the intersection of ecommerce and Web3
“There are a lot of companies out there who have a vision for new, personalized, and targeted ways to discover brands. But…they don’t yet have the plumbing to connect them to online merchants. Violet is in a perfect position to provide that plumbing.”
Brandon: I want to kick off by framing, from your perspective, what about the commerce ecosystem is fundamentally broken right now?
In ecommerce today, I’d say three main things are broken:
Supply chain: This is part of a more macro-trend with COVID-19: people are questioning what labor is worth their time for how much money and we’re manufacturing heavily overseas. As we’ve seen in the past two years, those two trends together have revealed just how direly the supply chain needs modernizing.
Discovery: I don't know how many new brands come around every month on Shopify, but getting that word out is a whole new ball game. The signal-to-noise ratio is such that reaching your ideal customer is now incredibly difficult. It's to the point where it’s not even cost effective to pay for discovery.
Performance marketing: This is related a bit to discovery, but with Apple’s App Tracking Transparency feature and more regulations with cookies and online browsing, running a successful marketing campaign is really tough right now.
Brandon: Related to those last two, let’s talk a bit about Violet, and the problem we’re trying to solve with product discovery and purchase. Can you talk first about your own experience dealing with the problem firsthand? What was it that initially intrigued you about Violet?
Several years ago, we had a business called Shop Style, which was a fashion search engine driving close to a billion dollars in GMV. We were already an effective hub for product discovery, but then had no relationship with customers after they clicked out to the retailer’s site. To address that, in 2015 we built Shop Style Checkout. We even had about thirty five merchants on it. But at the time, there weren’t a lot of headless merchants operating independently of larger marketplaces like Amazon. So we couldn’t get the scale. We ultimately paused it and sold it to Rakuten two years later. But I think the world has changed since then.
Today, we have a much bigger opportunity in what I call the two-sided marketplace:
On the one side of this marketplace, you have millions of online merchants with stores on Shopify and other ecommerce platforms. That’s the supply side.
On the demand side, you have all kinds of emerging channels for product discovery. There are a bunch of really cool startups that are solving for this problem–startups like The Fascination or Pop Shop Live or Super Great. There’s a lot of innovation happening here that’s very exciting.
But what these two sides are missing is the plumbing to connect them. The problem is this: if you’re a developer with a CS degree from Stanford or CMU, you’re not going to work for Everlane or Olive in June or Glossier. Likely now you’re going to Web3. And if you are a developer at Gap or Everlane, you’re looking for technology partners who can provide that plumbing. You need that Checkout solution like we built in 2015, but you need it at scale for millions of merchants and channels. We need a Plaid for ecommerce.
Because I had built a checkout solution myself, and was working in this two-sided marketplace firsthand, it was clear when we met Violet that we had found the missing plumbing. Violet’s API is the missing piece of the tech stack that connects merchants with channels.
Brandon: You mentioned a few emerging channels like The Fascination, Pop Shop Live…Thingtesting is another that comes to mind. What are their pain points that are still left unaddressed right now, without someone like Violet coming in? Obviously, they're attempting to solve for discovery, what else are they trying to solve? Is it acquisition? Retaining people's attention? Or inventory? Checkout?
We’re entering a phase I call “Affiliate 2.0.” The cookie windows and attributions that emerging channels used to use to monetize are no longer enough to make a viable business. They need to own customers, and start thinking like a marketplace. This means investing in acquisition, retention, lifetime value, etc. Because of that, they need a tech stack that’s more robust than just a URL with some query parameters. They need to own the customer relationship and provide the entire ecommerce tech stack.
Violet’s an essential piece of that tech, and helps solve for all of those considerations you mentioned: acquisition, retention, inventory, CLV.
Brandon: We were talking to Taylor Brandt from Headline recently about step changes in the ecommerce enablement landscape. To go with that plumber analogy, do you think Violet’s API signifies another step change for the ecommerce landscape?
Absolutely. I think if you look back there are three main phases in recent years where plumbing like Violet has kicked off a step change in the landscape:
Phase three is where we are now, which is all about discovery plumbing. There are a lot of companies out there who have a vision for new, personalized, and targeted ways to discover brands. But as I mentioned, they don’t yet have the widespread plumbing to connect them to the supply. Violet is in a perfect position to provide that plumbing.
Brandon: On this subject of plumbing, earlier when we were talking you mentioned that once in a while you'll invest in brands, but the real, outsized value will come through the enablement in infrastructure. Walk us through that thesis.
I look at investing in brands as something akin to customer acquisition for investing in infrastructure companies. Because when you’re meeting with a founder, you need to be able to present your value. So when I say that I can introduce you to Everlane, Olive in June, Starface, Kinship, or any one of our portfolio companies, those are revenue-generating partnerships that the early stage companies we invest in need. It’s worked really effectively. We just made our first investment as a Fund 2, and I imagine about 90% of our investments in that fund are going to be the infrastructure side.
Brandon: I'm curious for your thoughts on the intersection of Web3 and ecommerce: what are some of the use cases that you're particularly excited about?
For me there are three big buckets of opportunities where Web3 and ecommerce intersect: community, ownership, and loyalty, each with their own set of use cases.
Community: There are a lot of DTC brands that want to create gated areas of their sites for VIP customers. For a company like Everlane that does early drops for VIPs, something like tokens would be really useful. Unlike URLs, they can’t get leaked or compromised, so the tokens really enhance the experience of being in a VIP community.
Ownership: There are also companies today interested in giving away NFTs to accompany a purchase, as a stamp of authenticity. For example, when you buy a luxury good on the secondhand market, you would get a digital certificate with it that verifies it’s legitimate. Whenever you resell the good, it comes with that digital certificate.
Loyalty: Web3 also has the potential to add a lot of flexibility and ease to things like loyalty programs. I don’t know if you’re wine people, but wine lists are a great use case here. It can take five years to get on a wine list, which is just too long. And of course, as most people discover, when you finally get on the list, before too long the excitement has worn off and you’re sick of the wine. That membership you waited five years for is now useless. Web3 would allow you to sell your membership, as an NFT, to someone who wants to get on that wine list earlier, and hop the five year wait.
These are just a couple of examples, but it’s still so early. In two to three years, there’ll be new use cases we can’t even imagine today. That’s why a company like Novel is so exciting: they’re taking Web 2.0 companies and providing the bridge to Web3. The more companies make this transition, the more we’ll see innovative ways Web3 can unlock new possibilities in ecommerce.
Brandon: Can you talk a little more about the gated storefront use case, and how it might work with infrastructure like Violet’s?
We’re not there yet, but in the future, we'll have a whole bunch of APIs exposed for NFT creation and buying, and I think that should be plugged into the overall Violet world. If there's a channel that wants to be able to do NFT commerce, they can have the pipe right into Novel. That’s a beautiful potential partnership in my view, and a great new horizon that Violet opens up as Web3 evolves.
Brandon: That’s a great place to end. Thanks so much for chatting.