Episode 274
October 7, 2022

The Shift from Growth to Profitability

What’s the biggest addiction in eCommerce and how in the world can it be solved? It’s discounting and couponing! Fondue has a solution that has been shown to increase revenue, boost profits, and create win/wins for brands and consumers. Oren Charnoff, Founder of Fondue, and Roy Rubin, Investor and Founder of Magento, join the podcast this week. Listen Now!

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Build the Castle Before the Moat

  • “Why do people do discounts? Because they are effective. They're also the best technology to make less profit.” - Oren
  • The situation right now is difficult because there are a lot of brands that are overstocked, perhaps as a result of overcorrecting the out of stock issues of the recent past
  • “Retailers are overstocked. They're going to have to move inventory. The issue of profitability and the ability to monetize and keep afloat is going to be real.” - Roy
  • Omnichannel doesn’t mean omnipresent with no differentiation per channel
  • Incredible companies are built around broad problems, not just around tech ecosystems or specific innovation that happens
  • Helping merchants convert more, retain more, and reach higher profitability is the focus when looking for strong teams to come alongside and invest in
  • More and more tools are being built in Israel, capable of handling remote teams wherever they are, and that is only going to continue to grow and develop
  • You have to build something worth protecting before you build the moat to protect it
  • “What if systems now, through AI and other technologies, can help us figure out what the right combination is based on the underlying data sets that exist?” - Roy

Associated Links:

Connect with Oren Charnoff on Twitter @OCharnoff and learn more about Fondue at getFondue.com. Connect with Roy Rubin on Twitter @RoyRubin05 and R-Squared at r2vc.com.

Have any questions or comments about the show? Let us know on Futurecommerce.com, or reach out to us on Twitter, Facebook, Instagram, or LinkedIn. We love hearing from our listeners!

Brian: [00:01:26] Hello and welcome to Future Commerce, the podcast about the Next Generation of Commerce. I'm Brian.

Phillip: [00:01:31] I'm Phillip. Today we have a little bit of the yin and the yang here with us today. We have a founder turned investor and investor turned founder, and I cannot take any credit for having come up witxh that intro. That's entirely Oren's doing. Oren Charnoff from a recently launched new startup called Fondue. Welcome to the show, Oren.

Oren: [00:01:51] Thanks. Happy to be here.

Phillip: [00:01:53] And dare I say legend.

Brian: [00:01:55] Legend is appropriate.

Phillip: [00:01:57] I think legend's appropriate. Legendary founder turned investor Roy Rubin. Welcome to Future Commerce for the first time.

Roy: [00:02:05] Thank you. Thank you. Always good to hear your voice, Phil. And glad to be here.

Phillip: [00:02:10] Yeah. Thanks. Glad to have you. Brian and I, I think we owe a lot of our careers to the things you've created in this world. So thank you for coming on the show.

Brian: [00:02:21] Absolutely.

Phillip: [00:02:21] So today we're going to dive into a little bit. We do want to get into Fondue a bit. That's what brings us all here. Roy put out this announcement and put out the call on LinkedIn that Fondue had come out of stealth. Oren and I had already traded a little bit of back and forth on Twitter over something that I thought was really interesting. We could probably get into that a little bit, but give us a little bit of the background on Fondue, Oren, what are you solving today?

Oren: [00:02:50] Sure. So super pumped to be here. It's a really fun group we've got together. So for Fondue, we solve discount addiction for brands. Discounts are the biggest money drain that brands have today, and we replace, for many brands, every discount or coupon code with a more profitable alternative called cashback. It's a post-purchase discount where it gets redeemed post-purchase as opposed to "Give it to everyone," whether they need it or not pre-purchase. And the shopper gets to choose the incentive best for them to wrap it up quickly and not to be too salesy. Brands that work with us simply convert more sales with this discount, about 15% more revenue, but we half discount costs. So this is both a revenue-boosting tool, but we're very focused on profitability. So we are here to solve the biggest addiction no one talks about in eCommerce, discounting and couponing, with something better.

Brian: [00:03:47] Discounting is something we've been talking about for a long time. Big fans of what you're doing, Oren, and back in January 2020, I wrote an article called "If You're Discounting to Keep Customers, You've Already Failed," and I completely agree with you.

Oren: [00:04:05] Ahead of the curve.

Brian: [00:04:08] Discount is a drug.

Phillip: [00:04:10] Yeah. Brian, this is it's 55 days to Black Friday/Cyber Monday. This is like probably the wrong audience to try to give your ideologically aligned spiel to.

Brian: [00:04:20] {laughter} Well, hold on. Let me and Oren connect for a moment on this. I fundamentally agree with them. And as I think I agree time Costco Executive Member I really agree with this strategy.

Oren: [00:04:36] Yeah. So we love Costco. They educate the market for us but also the challenge with discounts is that they work. They really help with conversion. The challenge is you have no idea who actually needed that discount in order to convert. It's a very inefficient allocation of capital. And to your point, Phillip, it's about to be Black Friday/Cyber Monday. [00:04:56] Why do people do discounts? Because they are effective. They're also the best technology to make less profit. So we've got a solution where at this point hundreds of brands can enjoy having it all, the conversions and the profit. [00:05:11] And here we are evangelizing it to the world. But thanks for the opportunity to be here, guys.

Phillip: [00:05:17] We don't often get an opportunity at the early stage of a business to get both the founder and someone who wrote a check in early and someone who has had a couple of opportunities to help build the foundations of eCommerce, both from the platform perspective and sort of prolifically investing in the apparatus and sort of the third party growth of the ecosystem of eCommerce. Roy, what is it that you saw in the opportunity and Fondue to come alongside Oren and the team?

Roy: [00:05:48] Look, I think, we try to put ourselves both on the consumer side of things and also on the merchant side of things when we look at opportunities in commerce, and here was a real problem. We felt like there was a void in the market and tried to really solve this particular situation. Oren spoke about profitability and obviously, the costs continue to go up. Very recently, by the way, I don't know if you guys saw the news in the last couple of weeks, but retailers are overstocked. I think discounting is going to be something that we all see quite extensively in this new environment, which I think continues to amplify the opportunity for Oren and team and go and tackle this. But as an investor, putting ourselves on the consumer side of things as well, how addicted are we as consumers to discounting? It's absolutely crazy. I mean, a lot of the ways that we shop are influenced by our ability to source discounts, to source coupons. So we felt that there could be a disruption here. We felt like there was a team here in Oren and Will and the team that they've really brought to the table to really tackle this and try to create a new frontier to really align with the merchants to go solve it. This is a strong team, a big opportunity, and a space that we can add value to at R-Squared, our fund. So it was just a perfect mix of all three things that we'd like to see when we invest.

Brian: [00:07:21] I think it's really interesting. You're absolutely right. We saw the news come out recently that there's a lot of overstocking right now. Huge reaction to the out-of-stock issues we had a couple of years ago and perhaps a little bit of an overcorrection. It's an odd time for this to be happening given the inflationary market we're in. We're actually seeing prices rise significantly. At the same time, we're overstocked. We're going to have to discount significantly. What is the ultimate outcome of how this affects the market? Like prices rising but having to get rid of all this excess inventory. How do consumers... I'm curious how both of you feel about how consumers are going to be impacted by this. And then, Oren, how are you going to navigate this environment that we're in right now?

Oren: [00:08:17] Yeah. So, Roy, do you want to tackle this first?

Roy: [00:08:20] I'll just add one more comment. I spoke to a good friend who runs a lot of manufacturing in China for their DTC brand, and they also manufacture for other brands as well. And container prices now are down to about 3000 from a high of 20,000. She's getting calls from factories in China that are saying to her, "Just name your price because we need to keep the production lines going." So this is the perfect storm. [00:08:48] Retailers are overstocked. They're going to have to move inventory. Not all of them can actually maintain inventory for future seasons. And I think the issue of profitability and the ability to sort of monetize and keep afloat is going to be real. [00:09:06] And Oren, I'll let you take it from here. But I think this is a really prime opportunity for them to explore perhaps different models, Fondue being one, that will allow them to create a higher level of engagement while at the same time keeping as much of the margin to themselves as possible.

Oren: [00:09:29] Yeah. So I look at it from the shoppers' perspective and then from the brands' perspective. So from the shoppers' perspective, people are going to seek value. If the economy is just going to get tighter, they want to find value. Like we said, value-oriented shoppers exist in many ways. So rather than giving many shoppers a tiny bit of savings with the pre-purchase discount, you can give them the choice of how they want to get these savings post-purchase. Do you want to claim that as cash? Or if you love the brand or you love the best deal, the brand can sweeten it and incentivize you to take a site credit that's worth more than what that cash would be. So if you're seeking value, this actually just gives you more money in the shopper's pocket if they choose. And for the brand, because shoppers get to self-select, do they want the saving, and what type of saving do they want at all? You get to efficiently allocate capital. You get to do more of these full-priced sales and you don't discount to everyone. Meaning for those who don't need it, they simply won't claim it. You got to believe that people who care about savings will do this and we see that they do. So what I would say is for those who are seeking value, they can get more value with cash back. Because it's more profitable, brands can actually increase the amount of cashback value that they're offering to a shopper, like 20% back instead of 10% off. So you can get more shoppers who, because of their demand curve, just want to get there. And then for the brands, it's just strictly more profitable so they get more value per deal sold as well. So hopefully we found this nice little triangle that we can give it all to those who want it and need it, as opposed to inefficiently allocating to those who don't.

Phillip: [00:11:06] I think that it's very spiritually aligned with something Brian often talks about because I think it's a yes/and. I don't think it's really a trade-off of channel. I do think that there is a certain type of shopper who will opt into the membership aspect and opt-in to post-purchase cashback post-purchase sort of value return, and they see a tremendous value in that. But they're going to shop in other channels, too, because that's the world that we live in now. And so I think having differentiated strategies [00:11:44]... This has been the challenge of omnichannel for the better part of five or six years now. We're running the same playbook in every channel and we're just trying to be omnipresent without really differentiating why that channel exists and how it could align with certain shoppers' values. And so having an opportunity to exist on Amazon with one discounting strategy or one merchandising strategy and existing your direct to consumer with a completely different strategy is, I think, a much more holistic way of trying to reach more consumers with more opportunities to align with the way that they want to emotionally connect with your brand. [00:12:24] And that I think is what's sort of missing right now is we sort of have this clone stamp strategy based on channel, and we think of it as channel affinity. And I think it's actually much more nuanced and much deeper than that.

Oren: [00:12:40] Yeah, I totally agree. You also have something called like map compliance, which is you have to have standard pricing across all your channels, but we actually don't do anything to adjust your pricing. You can sell the same way in multiple places. And just on your site, you give the shoppers that post-purchase kicker. So it actually enables you to do this compliantly across all your channels as well.

Phillip: [00:13:03] Now, let's shift the conversation a little bit because I think that there's a bit of brain trust here when you're thinking about this moment in eCommerce, Roy, I have to believe that there's a bit of uncertainty about what the next stage of growth looks like for eCommerce. I've heard a lot of people sort of forecasting a pullback. I might be one of those. But I think that there's sort of a natural regression to the mean. We're definitely seeing that happen. But overall, I think a lot of consumers are still looking at digital first for a lot of their purchases. What's your outlook on direct to consumer as a viable growth channel in 2022?

Roy: [00:13:52] It's really interesting and I find myself thinking a lot about that, and I don't think I have the answers because it's challenging times. I think we're seeing macro environments become more difficult. I think we're seeing some of the repercussions coming out of COVID, obviously, an acceleration and now pull back a bit more. Reverting to the mean resonates as well. And I think that's what indeed we're seeing. I've always believed that we have an opportunity with online commerce to do more on the experiential side of things and create experiences on top of that. Whether that's offline or online, those bridges and those moments of contact I think are interesting. But you're right. It feels like things are indeed reverting to a mean. They're slowing down a little bit. And as much as I want to tell you that I have the crystal ball and kind of have it all figured out, I'm honestly sitting on the sidelines looking at this as well and trying to figure out what's next. I know there are a lot of smart people thinking about it. And we take a lot of those calls and we try to listen in. But I haven't really kind of found that magic bullet quite yet.

Phillip: [00:15:02] Is there a style of deal flow that you're seeing these days? Is B2B SaaS as prolific as it was for some of that early-stage investment or what is some of the deal flow that you're seeing today?

Roy: [00:15:15] So I would say over the last couple of years, I think the growth in Shopify and the app ecosystem, the enablement ecosystem has led to a lot of companies kind of starting and latching on to this tailwind that the Shopify ecosystem has really enabled. We really haven't pulled the trigger on any of these per se because what we're looking for is something more broad. We're looking for real companies that sort of have a much broader spectrum. B2B SaaS, we've seen a few, but not a whole lot, to be honest. Headless has been a constant area of investment and opportunity. And we've seen quite a few of those over the years, but just haven't pulled the trigger as well. Yeah. I think we see across the board, really interesting models in companies form. We're just, again, trying to connect the dots and figure out what's right, where the opportunity there is, and where we can add value. The most important thing for us as investors is to be a value add. That's how we position ourselves. It's hard to pinpoint what the trend is and what that next growth curve may be. Yeah, it's difficult.

Brian: [00:18:21] I do think it's interesting. You said you're not investing in companies that are sort of necessarily built around a specific ecosystem but are more focused on solving a broader problem. I find that really interesting. There was a tweet, Phillip, that you responded to recently about how innovation... There was like criticism about the old adage that innovation happens in a downturn and the best companies are built in the downturn.

Phillip: [00:18:50] Harry Stebbings.

Brian: [00:18:51] Yes.

Phillip: [00:18:52] A prolific podcaster, nay investor.

Brian: [00:18:55] And I thought, Phillip, your response to that was really, really interesting, actually. Yes. Really, [00:19:02] really incredible companies are built around broad problems, not just around tech ecosystems or specific innovation that happens. [00:19:16] And so Roy, as you've invested in a few of these opportunities like you said, you don't necessarily have the answers. And I think that's really wise. And I think it's tough to know what's coming next. But you have made some specific investments. What are some of those broader problems that you've invested in and are hoping to solve that you're really excited about right now?

Roy: [00:19:42] Yeah. So take Oren's problem. So profitability for merchants. That is a common thing that we see across the board. That's one example. Along the same lines, we also invested in a company called Just that is really helping merchants handle chargebacks in a much more efficient way. Also around the theme of profitability. So we try to look at these big themes, especially in the commerce space, that really we can understand that merchants have a pain point that we see strong teams that have not only great execution skills but are very data-driven. And we have high conviction that these teams can actually put out a great product in the market. That's the first thing that we really look for. Can these teams really execute well and create an experience that is really second to none? By the way, another company that I'd like to mention is a company called, well, did they just change your name? Oren, do you remember with the new company name is?

Oren: [00:20:53] I thought it was...

Roy: [00:20:54] Look it up because...

Oren: [00:20:55] I'll do a quick Google.

Roy: [00:20:57] It was changed but...

Oren: [00:21:00] Kipp.

Roy: [00:21:00] Kipp. That's it. So they just changed from Kenbi to Kipp. And what Kipp does is helps merchants work with card issuers to approve more transactions. So in cases where there are not sufficient funds, in cases where there is a decline of the credit card, it could be for various reasons. Kip comes in real-time and basically says to the issuer on behalf of the merchant, "Hey, what additional margin do you need to make that risk go away to approve the transaction that you would have otherwise not approved?" So again, in the theme of helping merchants convert more, retain more, and reach higher profitability, those are things that I think are top of mind for us, especially on the commerce side. And that's where we like to invest in strong teams.

Phillip: [00:22:03] On the idea of team here, there's been a lot of like sort of conversation around remote culture, especially in the last couple of years. Once upon a time, Roy, I think building locally in certain regions was a differentiator. I think prolifically being LA Tech or Eastern Europe Tech I think was a way to concentrate talent in a certain place and sort of flag that this is who we are and where we're located. Times have kind of changed. But I think, Oren, you have a very specific viewpoint on that. I mean, you're building your company. It's an American company. But I think you had said preshow that you feel like building tech in Israel and having a footprint in Israel is a real differentiator for you in the business. Oren, what's your philosophy there? How does remote play into that?

Oren: [00:23:03] Sure. So any Israeli company has been doing remote for forever. Most Israeli companies are selling to markets outside of Israel because it is a tiny economy. So be it living the lifestyle of working around the clock or having teams in other locations, all over the states primarily, working remotely is nothing new. What I will say is, from what I've seen across Israeli tech companies, I'm based out here in Israel. We're legally a US business. I'm American born and raised, an Israeli immigrant, an immigrant to Israel, rather. And what I'd say, I think actually, Roy, you can correct me, but all three companies that you mentioned Just, Kipp (AKA Kenbi)... These are all Israeli tech companies where the core of the team is based out here in Israel. The best Israeli talent wants to come into the office still. So you may have sales, marketing, biz dev in the States, but the core of the company is going to be based in Israel generally, and it is the best time to be building eCommerce tools out in Israel. We are in the second generation of eCom infrastructure in Israel, where we have a precedent of first-generation, massive companies that both have talent that you can get as they graduate and look to start or join something new, or that we see a precedent that you can build a huge business serving brands online, serving the eCommerce and commerce market. We have all of that available today. You have companies like Wix, Riskified, Forwarder, Yotpo, and Globally. Outside of Forwarder and Yotpo, I mean these are all billion-dollar mostly publicly traded companies. So now you get that institutional knowledge of eCommerce understanding how brands can operate. You have folks who are building tools on top of Roy's platform, Magento, and now onto Shopify and everywhere else that can talk about what our platform shifts like, as like the big trends in commerce. But also all three companies that Roy mentioned: Fondue sitting in creating a new discount type. Just focused on chargebacks. And Kipp about issuance acceptance. These are all fintech and eCommerce. These are huge new categories where you're seeing Israeli founders flocking to. So you want to be building these things in Israel. So that's why my co-founder is based in the States. But I'm out here. I've been here for five years. Our business is a year old. You're going to continue to see more and more tools being built in Israel capable of handling remote teams wherever they are. But the core of the companies will be in Israel, I think. I know that was a long-winded answer, but I'm pretty passionate about this point.

Phillip: [00:25:49] No, I think it's a really astute answer. I mean, Roy, you sort of have the reverse story. You built your company in the United States, I think, having immigrated from Israel. Is that right?

Roy: [00:26:03] Well, yes, I did. But I immigrated from Israel at a very young age. So I started fifth grade here in the United States, and I spent three years in the military in Israel in between. But most of my life has been here in the United States. Back when we started Magento, which really was founded from a consulting firm. While I was at UCLA, I started a consulting firm. I'm old enough, Phil and Brian to remember the days when we didn't call it remote, we just call it we had to get the job done and we hired people to get it done. So it's kind of funny how it's become obviously a whole new category on its own. But back when we started Magento, it was Yoav and me, two Israelis living in the United States both having immigrated at certain points in life. I'd say that we had only a very limited number of Israelis working for us in Los Angeles. And I think one over the years we hired in Israel itself. But most of our technology was built by our team sitting in Ukraine, where we felt obviously a very strong connection and bond. And we saw them as part of the team. We had three offices in the country. It felt very natural to us. For me, Kiev always felt like Tel Aviv. Honestly, I landed there and felt very comfortable there from the first minute. And it and it works. I was always a big believer in it as an operator myself. And by the way, I invested in a company back in the day called TaxJar, started by Mark and Ryan, Mark Faggiano and Ryan Thompson. Ryan was with us at Magento before leaving to join Mark and spin up TaxJar. And at the time that they sold to Stripe, I believe Stripe put up a press release that it was the largest remote company acquisition ever. And TaxJar was remote first.

Phillip: [00:28:06] Famously remote from the beginning.

Roy: [00:28:08] So full circle there. But I've always believed that I never really had a problem with it. I think you do get some scale and advantages by being in the office. It works really well in Israel because the psyche, the DNA is a little bit different. I think once you're in the country in Israel, you sort of understand just how powerful being in the same room really is. And I'm sure it's like that abroad, of course, as well. But there's something magical about that environment. But I'm a big believer in it. Yeah. And it seemed to work for us and many others.

Phillip: [00:28:45] I mean, correlation is not causation, but Mark at TaxJar, we were the first podcast that he ever sponsored over on MageTalk.

Roy: [00:28:55] Oh, no way.

Phillip: [00:28:55] I'm just saying, it's a very successful exit there. I feel like their early growth could... I shot him an email, and I told him as much.

Roy: [00:29:04] I'll spread the word.

Phillip: [00:29:05] Yeah, please. {laughter} Hey, we're doing well enough at Future Commerce. We're growing leaps and bounds. If you're a growth marketer, give us a call. We have our own sort of thesis. We're really about, I think we're very principled and very ideological about the way that brands are built. I don't think that you can do that in a hurry. I know that we have a couple of capital allocators here. I feel like capital is one part of a smaller part of a lot of things that have to come together, a lot of which is probably just luck and timing, which you don't have a ton of control over. But capital definitely can accelerate some things. But I think really enduring brands grow slowly over time and it takes a long time. Oren, I'll start with you. I've heard a lot about the cost-saving aspect of the thesis and helping profitability. Do you think the growth era of eCommerce is sort of coming to a slowdown and now we really need to focus on how we win over the long term by focusing on profitability and margin? We've sort of stabilized as a channel now to where we've gotten all the growth we really can now. It's going to be really slow going over time. Is that the thesis at its core?

Oren: [00:30:28] Yeah, except where I challenge that and say people want it all. It's not good enough. People don't want trade-offs. People want it all. The marketers are still going to be very growth-oriented and that comes in conflict with the finance business owner, who isn't. I would say, and Roy can attest to this, but investors, I think, care a heck of a lot more about profitability. Buyers of brands, buyers of SaaS products, that was not a word when we started this business that was top of mind and now it is. So I think the overall key metric if you intend to exit a company will be you have to explicitly address profitability and not just a path towards it, but people want it all. People don't want trade-offs. You will see this conflict now. "Oh, you actually can't increase your discount value because it hurts margin too much," as opposed to "We're optimizing for our CAC or some other number that we actually see can be a fairly vanity metric. But I do think that people want it all.

Brian: [00:32:41] It's interesting the type of solution that you have, the opportunity for growth, I think, potentially comes from working with your existing customers' angle. Because discounts, so you've talked about how eventually you have to look at profitability but also churn is a huge problem with discounting. So when someone goes in and makes a purchase because of a discount, they may never make another purchase unless it hits that price level again. There's been a lot of focus on loyalty and retention and growth of existing or customer lifetime value. How has that sort of thinking played into the products as well? And what do you expect Fondue is going to do to CLV?

Oren: [00:33:43] So the first thing where it begins is the initial transaction, which is you say to the shopper, instead of 10% off, you can get 20% back. And some shoppers simply don't claim it. And that's totally fine. It means they didn't need the savings. And if you are value-oriented and you want to build LTV, it goes to the brand. Instead of giving them $10 back as cash, how much are you willing to juice up site credit? What we're seeing right now is we are turning 20% of discounts into gift cards. That's called LTV right there. It's decreasing the amount that you're paying out on discounts and you're turning one out of five discounts into site credit, which, again, the brand can specifically market those site credit holders, encouraging them to use it, not needing to tell them a discount because the shopper feels like they have value. Or the brand may choose actually not to encourage that shopper to use it. It depends on what the brand is optimizing for. Is it LTV or is it for margin? It's totally up to them. But what we're seeing is this is a great opportunity for those who want savings you give more and for the brand who wants re-engagement, turn a discount into more valuable site credit.

Phillip: [00:34:55] That's what I love about this solution in the marketplace. And by the way, you know I'm a big believer in abiding by FTC rules. If this was a sponsored episode, I would have called it out at the beginning. I just like these guys. But I think that there is a really interesting model here in that like, you don't need a SaaS app to do this. You could roll your own. People do this all day long. You could go out and build this. It would be significantly harder for sure. And the operational cost of doing that internally and sort of internalizing this part of the culture of how you build your business, you really can't fail because the things you would have to build to make this work one off I think would be a pretty large investment as a team. What I'm concerned about, and I'd love both of your takes on this. What I'm concerned about is that Shopify has turned the modern commerce operator into a consumer and that they try something and if they don't see CLV move in Triple Whale within 30 days, they deactivate it. So they're samplers as well. So the business operator is no longer committed to the long-term investment in technology as a differentiator. What they're doing is they're just throwing things at the wall and it's sort of like it's fashion now. So in fact, Triple Whale's out of fashion now too. Now it's Northbeam. We're just going to move from one thing to the next because that's what we do. And I think that ease and that lack of barrier to entry of having to invest in technology over the long run makes us really like schizophrenic in the way that we approach strategy in solving an actual problem. Roy, do you agree with that?

Roy: [00:36:41] Yeah, I think discipline is important, and I think that in an era... Look, we've just had two, three years, two-plus years of growth at all costs. Interest rates were low. The ability to raise capital was much lower. Companies could simply throw money against a wall and see what worked, at all costs. And that era is over. So we're in a different chapter today than we were the last two years. And that is that now merchants and brands are going to have to start to look at the bottom line because they can't fund this top of funnel growth anymore. To the same extent that they've done so over the last two years. So now I think we're going to get into an era of higher discipline. I love that you said this schizophrenic by just moving around tools. I totally agree. And it's got to be sticky. Churn has to be low, especially when looking at these tools. If the barrier of entry is too low, that's a problem. The question is, what is the moat? All these things, I think, resonate for me as an investor, but I think for a merchant as well how do you create a disciplined environment without moving around like crazy to try to just test everything? Because once you do that, you just don't have the right data? I think that's the reality. You kind of lose focus. So, yeah I totally understand your point and it's a good one. And I think that this is an area of discipline.

Phillip: [00:38:09] You said moat, and I'm triggered now. [00:38:15] So many people are building moats these days. They've never built a castle in their life. You have to have something to actually protect before you actually go out and try to protect it. [00:38:23] And that's the problem, I think, at its core. Oren, you were going to say something.

Oren: [00:38:27] I was going to say a few things. The first one is that Shopify has created an incredibly efficient market for both tools and for brand operators to discover new tools and use and measure them quickly. That is a good thing. That's number one, I think. Number two, Shopify to me represents two things. The first is it's an incredible laboratory to measure net impact a product can have per brand. The level of effort to go live on any other eCommerce platform, be it a home built one or the Salesforces or the Magentos of the world, it's a fair amount of work and you need a developer involved generally to do that. And so actually the bar of level of effort is quite high, so the expectation of that impact is really high. So Shopify is great because it's a sufficient market where discovery is fast, it can be schizophrenic, fine, but you do get that test nonetheless. You can measure the net impact per brand and then you can make a business decision where do I go to market? And Shopify is probably among, if not the most important, go-to-market, but then you can decide if the net impact is high enough do I have Shopify product market fit or eCommerce product market fit? Because you could add an app, and I don't want to diminish what these tools are to apps, but these tools may add a couple of basis points each. And what's beautiful about Shopify as a brand operator, is you can add 20 apps that collectively add a lot because it's so easy. But to go on to another platform, you can take the laboratory of Shopify and say, "We add this much margin for a brand." Or Fondue, "We decrease discount cost by 50%, and we did it for these hundreds of brands. Here's why you should put in that increased level of effort elsewhere." It is hard to find a guinea pig when they have to do a lot of work. Shopify is, the efficiency of their market enables everyone to test in an effective way for all of eCommerce. And if you don't do well enough, you will be stuck addicted in the Shopify ecosystem to the schizophrenic type of operators perhaps, but you could still build a fine business doing that, but not necessarily a category business.

Brian: [00:40:43] I do wonder. So we've been in the DTC era for a while now. This is a few years now that we've seen this huge momentum towards this and it actually has a lot to do with what you were just talking about, Oren, where there was the opportunity to go to market so quickly and efficiently. We are seeing now some winners and losers actually kind of start to pop up out of this. And as you see some of these DTC businesses, I'd love to get... Actually feel free to hop in and react to this, any of the three of you, because, Phillip, I have not floated this idea to you yet either. But as these businesses start to mature out, the person that founded them or maybe a couple of the operators, they had to pick tools that were naturally easy to work with because they were doing so many jobs that they didn't necessarily have specificity of roles.

Phillip: [00:41:44] Maps to maturity. Yeah.

Brian: [00:41:46] Yeah, exactly. So as they've grown and become more mature in their business, perhaps right now, actually what we're seeing is a little bit of a tipping point where the people who originally ran the business are actually coming up against a skills wall and they're having to specialize now and take the next step in their business and make investments, to your point, in things that you can't get schizophrenic about. You can't jump around. You actually have to make an investment because it becomes a career unto itself. And so I wonder if we're seeing right now, just a maturity of something that started a few years back, and now their toolset has to shift and the roles have to get more specific.

Phillip: [00:42:36] Well, let me jump in here because I think I have a way to like bridge it over to Roy. I think one of the chief's criticisms, not to adjudicate Magento ten years hence, but one of the chief criticisms of Magento was or has been that people bought into the ecosystem who weren't ready to run custom software in dedicated hosting environments. And so they bought into something that was sort of above their pay grade. Now, I know I've been part of a lot of growth stories in Magento, and a lot of them grew into it. I think a lot of people realized that they kind of maybe bit off more than they could chew as well. Is there an operational map to maturity on software? Is that why we have so much stratification of software these days? Roy, do you believe in that?

Roy: [00:43:29] So let's map this back now ten years, right? And so Magentο came on the scene in a pre-cloud world where existing toolsets were largely either open source or enterprise commercial. There was nothing really strong in the middle. And this was an era in which I think merchants ultimately wanted differentiation. There weren't any SaaS platforms around that could give them, I think, an all in one box that could simplify their life. And I think it came at a price point of open source and free that allow them to have access to really great software with very low friction. So at the time it was the right product, which ultimately led to a great ecosystem and community and I think helped sort of a lot of the merchant base that was using the product kind of elevate. Shopify comes around and simplifies that or SaaS platforms, but Shopify, of course, being the lead. They come around and they say, "You know what? None of this headache that the merchants really had to go through as far as infrastructure and security and upgrades, etc., etc., are things that really are critical to their core. We're going to commoditize that and we're going to be able to provide them value add layers of apps on top of it so they can really focus their time and on infrastructure things, but on applications and ways to create more conversion, retention, acquisition, etc.," which makes total sense. Now, in the last couple of years, headless folks came around and said, "Hey, we think now the front end needs to have a lot more flexibility. We want to create experiences that are faster, that have more functionality. They're able to stand out, that create differentiated abilities from all the rest because a templatized, if you will, quote/unquote system can only give us that much of an edge." We're sort of constrained in the way that the front end works. So, I mean, I see this as kind of cyclical, right? You look at Magento, a lot of work to do up front, heavy lifting, and a lot of maintenance issues as far as infrastructure and access to developers and resources. Shopify probably has taken that down significantly from an overhead perspective. Headless now we're back to some version of that, depending on the platform. The question is, what is next? Actually, this goes back to the first question you guys asked, which is "What does the future look like?" And I've long advocated for how does a data-driven commerce product... We're using a lot of data across all the different layers where we're making decisions based on data. Well, how much of that can actually power the eCommerce experience from end to end? And I think [00:46:22] these next evolution of commerce products will take a lot of the decisions as far as what apps to use, what converts, instead of us being schizophrenic and trying to move around and select the apps that are actually going to materially make a difference, what if systems now, through AI and other technologies, can help us figure out what the right combination is based on the underlying data sets that exist? [00:46:47] So while I started and said I don't have a crystal ball, I'll tell you what I do know. I do know that data will be a big part of how we make our future decisions, and that's going to translate across the board to how we serve our customers, to what technologies we use, and to how to continue to optimize. Those are all things that I think are going to be meaningful. So I'll pause there, but I wonder if that even answers your question.

Phillip: [00:47:16] I mean, it absolutely did. And I'm sure that there's someone out there who's screaming why we would use the M word on this show so many years later when you've certainly gone on to another prolific stage of your career. I think it's worth noting the times they are a changin and we're in a different phase. We're now two generations removed from what eCommerce was and say 08/09 to where we are today. And that's where I think that you have this idea of an ecosystem all trying to gain some sort of maturity together is I think is inherently fascinating. I think at its core and Oren, I'll give you the last word. At its core, we're measuring things that we call lifetime value, CLV, Customer Lifetime value. I'm sorry, but a customer lifetime should be longer than 90 to 180 days. So the window by which we measure that sort of attribution is already wrong in name at least but potentially flawed fundamentally in that the rate of return or the expected horizon of return is so much shorter than what I think a customer considers their relationship with the brand to be on a longer time scale. Last word, Oren. What do you think?

Oren: [00:48:42] Everyone's a little bit down on what the market looks like. I think if you're like an early-stage founder, be it of a brand or be it of a software for brands, you really don't care about the macroeconomic condition that just speaks of short and medium-term valuations, and that is hopefully fleeting in the scheme of things. What Roy can attest to is Magento was bought and sold a few times and it was a great outcome constantly because they had a really, really big vision and R-Squared, Roy's fund, will invest in companies really all over. They just have special access to deals in Israel, but they invest also in the States. And it's not often that if you're building something in commerce that you can have a founder of a leading platform, Magento, and also a founder of a leading e-gifting business, which was sold to Roy's partner whose name is also Roy, that they're great folks to connect with. And the Internet is an amazing place where Phil and I, we just met online on Twitter and he wound up doing a podcast on something that I suggested and Phil introduced me to Brian, and we're totally going to do business with Future Commerce. It is such an awesome time to be building things in commerce right now. There's a ton to be pumped about. It's just mostly talking about short and medium-term valuations.

Phillip: [00:50:01] And we got to get through the near term to get to this dreamy dreamscape future. Insert the image. This could be us if we all knew how to pronounce Chipotle. This would be us if we all understood how to build equitable and sustainable businesses. Hopefully with tools like Fondue and with investors like R-Squared, what an awesome time. Highlight of my year. What a way to kick off Q4. Awesome. Thank you so much. Thank you guys for joining us on the show.

Roy: [00:50:34] Thank you, Brian. Thank you, Phil. I really appreciate it.

Brian: [00:50:36] Thank you.

Phillip: [00:50:36] Best of luck.

Oren: [00:50:36] Take care.

Phillip: [00:50:37] Thank you, guys.

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