Investment Partner at Fung Capital

Julia Raymond:
Hello, today’s episode of Rethink Retail features my guest, Janie Yu. Janie, welcome to the show.

Janie Yu:
Thank you. Good to be here.

Julia Raymond:
Great to have you. Janie is a partner at Fung Capital. It’s a venture capital firm with 100% focus on B2B tech companies that enable connected commerce and really improve supply chain efficiency in this digital age.

Julia Raymond:
Janie, I wanted to start off, I took a look at your background, and it’s really impressive. I know you earned your masters from Harvard and you worked with the well known consumer brand, Burt’s Bees with international marketing in the past and fast forward all the way to the today, and your role investing in retail technologies with Fung Capital. So I wanted to just hear from you a little bit about your background and what you do today.

Janie Yu:
Sure, yeah. My route to venture capital has been a very conventional route. Many people as you know probably start in investment banking, and they work their way to venture capital. But I actually started my career before Harvard, actually started my career in journalism and I actually often like to really appreciate my background in journalism where you really learn to peel the onion and discover the core of issues. And that actually really trained me to be somebody who’s good at asking questions, which is a core skill to have in venture capital actually. After I did a few years of journalism reporting for BBC, MPRI in China, I moved to the US for my master’s degree at Harvard and it was interesting time and I was very fortunate to have got the scholarship from the Fung family at that time. I actually didn’t know who they were at that time. And now fast forward many years now I invest for the Fung family at Fung Capital-

Julia Raymond:
Full circle.

Janie Yu:
It was absolutely full circle, and a lot of luck along my career as well. But after graduate school, I actually did consulting for a couple of years and then joined Burt’s Bees. And if you recall back in 2006, 2007 that was really the time when digital marketing had started, that was the first phase of digital marketing and at the consulting company, that’s really what we did. A lot of what we did for customers, for clients. And I joined Burt’s one because it was a very interesting company and two, it was starting its international expansion and because the company was based in the US and a lot of the international marketing efforts will be through digital means.

Janie Yu:
So Burt’s Bees was very much at the cutting edge of digital marketing. And that’s really where I cut my teeth in learning about retail technologies, marketing technologies in the digital age. I left Burt’s Bees in 2011, joined Fung capital investing for the Fung family. And fortunately that was also the time when Fung Capital was really transforming its investment strategy from investing, for many years investing in consumer brands and retailers, actually into investing in enabling technologies for the entire retail industry. So I’ve been doing this for the last eight years, have been having a lot of fun and time flies. And I have been very fortunate enough to work with a lot of very smart, intelligent and really hardworking entrepreneurs, that really is the best part of my job.

Julia Raymond:
Definitely. And it sounds like your early background in journalism and learning how to dig deep and ask the right questions probably helped at Burt’s Bees where you expanded your knowledge of digital marketing, international marketing, and really as you said, being really efficient with their budget to make the most of it. And then now Fung Capital for the past, you said eight years?

Janie Yu:
Yes.

Julia Raymond:
How have things changed over your time at Fung Capital? I know you said already that the focus has switched more from retail and consumer brand investments more towards retail technology. Do you see the retailers, I’ve heard retail stores are now a media channel, do you agree with that kind of thinking?

Janie Yu:
Well, I think overall, at least from our Fung perspective, our Fung has been around for 30 plus years. For the first 20 years, it was focused on investing the next Gap, the next J.Crew, looking for the next big retail brand. And that strategy worked very well for the first 20 years. But about 15 years ago, the retail landscape was changing rapidly, right. With really the introduction of eCommerce and when the barrier to entry to start a brand became very low. There are more and more brands and when you’re investing in early stage venture companies, it becomes harder to actually identify winners. Now the opportunity presented was the fact that you got more and more brands and more and more retailers, some of them might be eCommerce [inaudible 00:07:34], some of them may be multichannel retailers.

Janie Yu:
They all need tools to build a brand, to engage with the customers, to have efficient supply chain, right? And they all had to rely on technologies. So we thought, instead of trying to pick winners at early stage amongst so many different retailers and brands, why don’t we actually invest in tools and shovels, right? To actually help all brands big or small, to compete in this environment. So essentially that was the investment strategy and has been working really well. If you look at our investments over the last 10 years, we’ve done great investments in eCommerce enablement, in in-store technologies, in supply chain technologies. And they prove to be very meaningful tools for their customers. I know you have a lot of interesting questions about Celect. That’s a great example in how a technology solution would be able to add value to their core customers.

Julia Raymond:
Absolutely, and it sounds like you guys were almost a little ahead of your time in that switch to focus on the platforms and the technologies, because I have heard a lot about, Wall Street does not think a lot of the big well known D2C brands right now look great. At the same time they are still getting investment, but it’s hard to value them.

Janie Yu:
Not only is it hard to value them, it’s really hard to scale these brands. Right. Julia, let’s say if you and I have a great idea about building a next shoe brand, it’s very easy for you and I to start a company, right? We need to use Shopify to start a website, use all different marketing solutions to advertise on Facebook and Google to get the initial core set of customers. We can work with a small supply chain provider to have the shoes made. So it’s easy for us to start that brand without very much investment. We can probably just use our own personal credit cards to get the company started. Right?

Janie Yu:
And it’s very easy to today with platforms like Facebook and Google to identify the first core set of customers. So it’s very efficient to acquire these customers using data. You know exactly if you want to target millennials between age 18 to 25 who live in Florida, New York, San Francisco, LA, Texas. If we know the customers that we’re trying to reach, it’s very easy to reach them, it doesn’t cost very much.

Janie Yu:
Now, from there, you’re able to generate good initial traction, and you raise money from venture capitalists. Right? Now you reach, let’s call that $10 million in revenue and it’s fairly easy to get to 10 million. But how do you grow from 10 million to 50 and to 100 million? You would have to really expand your customer base. Now you’ve tapped out your core customers at this point. So you have to expand, you have to spend more with Facebook and Google and the customer acquisition cost becomes higher because these customers are less likely to be interested in your brand and your products. So you have to spend more and do more marketing, do more branding with them, right? So your customer acquisition cost becomes way higher and all of a sudden, and probably at that point your return rate of customers probably has got higher as well. So all of a sudden, the unit economics got completely upside down after you reached, say the first $10 million in revenue.

Janie Yu:
But at this point your company has, or probably in this environment, has already been valued as, call that 50 million or even $100 million, right? You’re trying to raise more money, but your unit economics are upside down. You don’t know how you can possibly run this company to profitability or find an exit. Right? That’s when a lot of companies at this point just drop off the corner of the Earth and won’t be able to scale. So it’s easy in this day and age with all the data and technology platforms out there, it’s very easy to start a D2C brand, but very hard to scale a brand like that, which makes it hard for, obviously Wall Street analysts look at profitability and essentially be able to run a sustainable business. And it’s really hard to come to find proof points and evidence to see companies like that.

Janie Yu:
There are companies like this obviously, right? But it’s probably one out of a thousand or 10,000 versus in technology solutions, doesn’t matter if you’re a brand that’s able to make it or you’re a brand that’s still generating only $10 million in revenue, you will still need technologies and you’re all buying technologies. So from our Fung perspective, we find this to be a much more reliable investment strategy versus doing blind bets.

Julia Raymond:
Right and it’s more predictable, right? With the business models that [crosstalk 00:00:12:58].

Janie Yu:
Absolutely.

Julia Raymond:
Well what is the secret sauce, do you think there is, I mean you said maybe one a thousand make it, we were talking about shoes so I thought of Allbirds as an example, but is there anything in particular, do you think it’s just excellent digital marketing? Because I’ve heard that put forth before as why some are successful and some aren’t.

Janie Yu:
So I think there are two core differentiators in building a great D2C company today. One, obviously you have to have a great product, right? The product has to work, if the product is suboptimal in quality then that’s not going to work, right? So first of all, it has to be a great product. Secondly, it has to be a really authentic brand. If you think about Allbirds and Rossi and these brands, right? There’s a real story they’re telling. They’re telling that the materials are from recycled plastic bottles. The materials are… This shoe is washable. You don’t have to wear socks, right?

Janie Yu:
These are great conversations starters, really great for building a very authentic brand. And that’s core as well. And if I may add a, third differentiator is a very efficient supply chain. So to deliver the quality, you have to be able to have full trust in the supply chain that are making the products. And in today’s day and age, you also need a very responsive supply chain. So you don’t have to wait, plan your next season 12 months in advance. With data today and the change of consumer tastes, the supply chain has to be much more responsive than that. So the lead time, probably we’re looking at more like three to six months versus 12 months. Right. If you can shorten that lead time even more, I think you will be able to have a whole lot more flexibility in running a very efficient operation. So it is about great products. It is about a great differentiator, authentic brand. It is about a efficient supply chain that can deliver very efficient and flexible operation.

Julia Raymond:
And I love those three differentiators you provided because if you think about it, some entrepreneurs get around this by just going through Amazon, right, they could order their products don’t have to be amazing and their brand doesn’t have to be that authentic. And the supply chain Amazon has is great. So, that’s a way I guess to get around it. But if you’re serious about building a brand from scratch, yeah, I imagine how hard it would be to really nail all three categories.

Janie Yu:
Yeah, I mean, that’s the dilemma of entrepreneurs, right? On the one hand, it’s very appealing to sell on Amazon, right? Because you’ve got the volume, but if you’re a early stage brand, you’ve completely lose the ability to be able to build a brand that connects with your core customers. If you sell Amazon, but then of course the revenue is very attractive, right? It’s definitely a dilemma. I see the more successful brands in today’s digital age tend not to sell Amazon in early days. Once they have a brand, right? A very iconic, well known national brand, somebody like Levi’s, then you can sell on Amazon because it delivers the volume to you, right? In terms of inventory. But even Levi’s does not sell all merchandise, all SKUs on Amazon. Only the SKUs that deliver the core volume to them. But for currencies and products, I would imagine somebody like Levi’s probably still doesn’t sell them on Amazon.

Julia Raymond:
Right. And Levi’s still has to have their own supply chain. They can’t just rely on Amazon’s like you said, because they don’t have all skews on there anyway. But for convenience I could see that being a big factor. So you’re really involved in the supply chain technologies that are out there. Is there anything that’s really exciting for you and you’re like, “Wow, this is going to help retailers compete better with Amazon,” or just in general when we talk about supply chain tech?

Janie Yu:
Sure. Yeah. When I think about supply chains, I think about a couple of core solutions. One is the workflow to actually have the product’s made, right. That’s pretty table stake. If you’re making anything at all, you need supply chain technology to actually design and have the product made. So that core technology is called product development technology or in today’s words, product life cycle solution. So we invested in a company called Centric Software. They provide the next generation product life cycle management software for a lot of brands like Burberry and Christian Louboutin and many others. They work with hundreds of brands. Two years ago the majority of the company was acquired by Dassault Systemes, which is a large French conglomerate and they really brought a lot of the supply chain collaboration in today’s Cloud age.

Janie Yu:
If you think of the last generation of technology, if you think about product development it is a very much a collaboration process, right? Any product is not made by one person. It’s a collaboration between designers, brand managers and supply chain team as well who are actually making samples and making products, right, to the specs of the brand team, the marketing team and the design team. So it is a very collaborative process. But in the old days that collaboration is by email. And maybe fax and maybe phone calls because it was not supported by Cloud and today when technologies like Centric are able to bring that collaboration process on the Cloud, everything is real time. So you can imagine that brings a whole lot more efficiency in the product development cycle. It really shortens the cycle from say, 10 years ago any product lead time could be anywhere between 12 to 18 months and now at least for, let’s say fashion footwear category, we’re primarily looking at, fast fashion aside, we’re looking at probably anywhere between three to six months, right?

Janie Yu:
So it’s not perfect, but it’s a much more efficient process compared to a decade ago. So that’s Centric. Now Centric today, they work with a lot of large brands and that doesn’t necessarily meet the needs of a lot of S and B’s, digital native brands, right, who don’t have a lot of production volume, but you still need the same collaboration tools, right? Because it doesn’t matter if you produce 10,000 SKUs or 100 SKUs, you still need all the collaboration, a design brand and supply chain team. So companies like Backbone, which is also a product life cycle management software, primarily focuses on digital native brands. They work with companies like Stitch Fix, Everlane and many others. And their product footprint might not be as comprehensive as a Centric, right? Working with a larger brand, but it’s so easy to use and it’s completely real time and very responsive.

Janie Yu:
And that time saving and cost saving is so important to the digital native brands versus the very comprehensive product features, right? So you start to see in the market today, different innovations happening in supply chain, in terms of the workflow. Now supply chain has got a whole lot more efficient over the last couple of decades, in terms of processes. Now that we’ve got, let’s say the processes to a good place, how can you make supply chain even more efficient? And what we see that’s really missing in supply chain today is data and intelligence, right? I mean that’s a different way of saying AI, but AI is so overused today. But how do you inject data to make supply chain more intelligent, smarter, right? In the past the forecasting is done by people, right?

Janie Yu:
You and I, if we’re merchandisers, we think, okay, for this dress, a similar dress we sold 10,000 units last year, this year we think it will still be on trend. And let’s forecast another 10,000 units or maybe 8,000 units. Right? A lot of it is guesswork. A lot of it is intuition. Very little data has gone into supply chain. So we have a very strong investment thesis around bringing data into supply chain. And that’s exactly why a few years ago we actually invested in Celect, very much about using data and machine learning to be able to bring more visibility and predictability into supply chain forecasting and allocation. And the results of Celect has been a great asset for all the shareholders and it’s a really successful story. I think it really illustrates the importance of data in supply chain.

Julia Raymond:
I love how you said the predictability because it, like you said in your example with the dress, Oh, how many did we sell last quarter or last year? And then let’s forecast it out. And it’s interesting that the supply chain has maybe not been invested in as much as it needs to be when it comes to something like predictive analytics because it seems like supply chain is so core, it’s such a core function for retail.

Janie Yu:
Yeah. I think for the last call that five years, a lot of the focus in retail, at least in terms of retail tech has been more customer experience, right? Because the consumer shopping behavior has changed so quickly in the last five years, five to 10 years. So a lot of retailers were playing catching up. So a lot of it was more about how do we reach the consumer online? How do we reach the customer on mobile? How do we bring technologies in stores that we can deliver a more seamless experience to the shopper across different channels? I think it was absolutely the right thing to do, but because of the focus on the customer experience, lots of retailers definitely fell behind on investment on the supply chain side. So all of a sudden they realize, okay, I’m at a pretty good place in terms of customer experience.

Janie Yu:
Now, I need to actually deliver the products to them, right? The products need to be great quality, great price and great value to the customers. And they also have to arrive on time. You cannot miss the holiday season. And if it’s buying on an eCommerce site, you have to deliver it to the customer’s doors. Right? So a lot of the supply chain capabilities become really critical in delivering the right customer experience. So, I actually think it’s not because of the lack of interest in investing in supply chain as a matter of priorities, right now, I think it’s absolutely right time for the retail industry to start thinking more about supply chain technologies and capabilities.

Janie Yu:
And if you think about a lot of the bankruptcies happening in retail in the last two, three years, right? A lot of the retailers go bankrupt because they have too much debt. They borrow too much because they need the money to run their operations and the lot of the money is tied up with inventory. You have to buy products first, right? You have to have the product manufactured, you have to buy the products, you have to buy the inventory and when you forecast the wrong inventory. When you produce the wrong products with the wrong design or when you don’t have the right forecast for the inventory level, when you allocate the inventory to the wrong channel, to the wrong stores, what happens is you have excess inventory. When you cannot move the inventory, your cash is tied with your products, your inventory. And you can’t get money out and you can’t pay, service your debt, you go bankrupt. It’s a very simplistic way of looking at bankruptcy obviously, but it’s a huge cost of cash issues in retail organizations. So you absolutely have to get your supply chain and your inventory right.

Julia Raymond:
That makes a lot of sense. And is it flipped though? Like would you say if retailers spent more time investing into some software solutions that would help offset the cost or is the inventory problem going to exist regardless?

Janie Yu:
Well, I think software and data definitely will be able to help optimize the supply chain and the forecasting, the predictability, right? But nobody’s able to get the forecasting perfectly right. You don’t know. You might be able to predict with great accuracy, but not 100%. That’s just not possible. Right. So there will always be excess inventory. So, hopefully with software and data you will have less of excess inventory or on the other side of the spectrum, the out-of-stock situation, right, where you have lost opportunity. So I think software and data are definitely going to help, but excess inventory is inevitable. So that creates obviously a whole set of opportunity for other startups that are trying to solve the excess inventory problem.

Janie Yu:
Excess inventory is a very interesting problem. In the past, excess inventory was primarily caused by inefficient supply chain or not intelligent supply chain. Right. You have the wrong forecast. But today, with the consumer behavior change, you and I probably return more, I don’t know about you Julia, but for me I return probably half of the stuff I buy online.

Julia Raymond:
Yeah. Online definitely. I just returned a pair of pants two days ago.

Janie Yu:
Yeah. Especially for the trousers and jeans category, the return rate is crazy high. And so, with the consumer behavior change, we’re also trained to return. So there’s also this return problem. Once you have return products, you have different steps to try to recover the value of the returned products. Right. Some of them can be restocked, but many of them will be simply liquidated. But now, how do you use data and technology to actually try to maximize the value recovery of the returned products, which also is lumped into the excess inventory pile. Right. So that becomes an interesting challenge as well.

Julia Raymond:
Yeah, and as you said, it’s opportunity for other companies trying to solve it even if they’re resale companies that absorb your excess inventory.

Janie Yu:
Absolutely. Which is why actually, reverse logistics is a such a hot area right now. It’s definitely a strong investment thesis. Our firm, we’re actively looking for interesting software solutions that are able to really help retailers or anybody with excess products, excess inventory to try to get maximum value recovery from those products.

Julia Raymond:
Okay, so that’s definitely on your radar then.

Janie Yu:
Absolutely.

Julia Raymond:
That’s good to hear. And I wanted to ask just about one other technology because I probably don’t speak about it enough. Customer experience is such a huge buzz word, but I don’t think that post-purchase is really a topic that we cover enough in general. I just don’t see as much content on that. And I was wondering if you could tell us a little bit about what Narvar does to help solve that.

Janie Yu:
Yeah. I think, one, first of all, kudos to Narvar, they really started this whole category of post-purchase management, right? Post-purchase optimization. Before that we all knew it was there, but it wasn’t really a proper category, not where retailers were actually investing. So they all thought, “Well, why do I need to track my packages? Why do I need to invest in my own software to track packages for customers?” Because you can track your package on fedex.com, on ups.com anyway, right? But of course, as consumers now we see the difference. With Narvar, the tracking experience is many times better. So that really improves the loyalty with the consumer as well. But what’s really more important is now with tracking, the next frontier to solve is return management, because the return issue we just talked about, right?

Julia Raymond:
Right.

Janie Yu:
Now, if you think about return, traditionally when you return something, that product goes directly most likely to a central warehouse somewhere, maybe in Tennessee, maybe somewhere in Nevada, right? And because of that inefficient process, a lot of the products ended up being directly going into the liquidation pile. So even for products where you probably actually recover, if not 100% but 80% of the value, now all of a sudden you can get 10 cents on the dollar right. Now with Narvar, the idea is that well, I’m able to help deliver a better return experience to the customer. Meanwhile, I can collect a whole lot more data for retailers as well, right? So with the data, now I can help optimize that return. The return could go back to the central warehouse. It might go to a different warehouse where you have higher chance of recovery, sending the products again to consumers or the product could go into a store, right?

Janie Yu:
I like to use an example. For example, I live in San Francisco and in the summer here as you know, it’s very cold. I might need to buy a down jacket in June here in San Francisco. Right. And I decided I don’t like this jacket, I wanted to return, in the past the jacket will probably go back to a central warehouse somewhere, probably getting liquidated. But if you return the products actually back to a warehouse, East coast near New York or even going to a store coming September, down jackets are actually on the store shelf, on the shop floor. Right. And the consumer are actually thinking about purchasing a down jacket for the upcoming winter season. So the chance for that jacket to have full value recovery is way higher if the product goes back to a store. Right. So with the post-purchase management and the data you’re collecting on the returned products, you are able to deliver that level of optimization for the retailers.

Julia Raymond:
That’s amazing considering how it used to be.

Janie Yu:
Of course, you think about the shopping journey for consumers like you and myself. Shopping does not end at putting the product in the cart, right? And just getting an email confirmation, now you’ve bought these products. We track our products, we track our packages, we return products, and when we return we get refund, we might purchase more, right? So it’s a continuous cycle and you absolutely have to deliver optimal post shopping experience in order to really make sure that the customer stays loyal with you. Right?

Janie Yu:
In this day and age as consumers, we have so many options. We have so many choices in the market. So if any part of the shopping journey gets disrupted or we have a bad experience, we don’t have to go back to Nordstrom. We don’t have to go back to Sephora. Right? So I think for retailers and brands today to absolutely own their customer loyalty, they have to not only look at customer acquisition, customer convert, customer acquisition before the shopping journey, customer acquisition during the shopping journey, they really have to focus on the customers after shopping as well. It really is actually the larger shopping journey.

Julia Raymond:
Sure, and to be able to use that data in other areas to basically predict how many things will be returned and why based on the customer’s profile.

Janie Yu:
That’s absolutely right. And that data can be fed back into the supply chain as well. Right. So if you truly do it right, if you can do it right, that data goes back to the supply chain, that influences your forecasting and your merchandising as well.

Julia Raymond:
That’s really great. Like you said, if you can do it right, if you can connect the systems and get that holistic view, that’s amazing.

Janie Yu:
Yeah. But obviously nobody’s doing all this the perfect way, right. That’s the theoretical way. But we definitely hope that more retailers, either your established or more traditional retailers or your digital native retailers and brands. I think everybody recognizes that technology is key in building a sustainable brand and a business that’s going to continue to in many ways survive for many retailers and thrive in the future as well. Right.

Janie Yu:
I think technology and data is absolutely core part of that. Going back to the Celect story, I think that’s the very reason why Nike decided to pay significant amount of money for this company, right? Because data and technology becomes really a foundation for the retailer of tomorrow. So, Nike has been around for many years and they want to be around for many years to come. They really have to reinvent themselves, they’re a great brand, a great retailer today. But yeah, if they want to be around for another hundred years, they have to be driven by data, by technology to deliver that great brand, that great customer experience. So they are aggressive in that pursuit and paid up for a technology company.

Julia Raymond:
Exactly. I would bet that even in some cases for those larger brands, it’s harder to develop your data capability versus a smaller brand.

Janie Yu:
Yeah, absolutely. Right. Even if you have the intent and determination, right. When it comes to hiring, if you’re a great data scientist, you probably want to work at a startup or Google, Facebook, many technology companies, right? It’s just not that sexy to work on the data team in a retailer. So retailers really have to one, have the determination to become a data company. Right. And they have to have the guts to be able to do these significant acquisitions, not just for the technology but for the talent as well.

Julia Raymond:
Mm-hmm (affirmative) and betting on the future. Like you said, the future of all great brands will be data-driven.

Janie Yu:
Yep. Yeah.

Julia Raymond:
Janie, it was a pleasure having you on the show today and hearing all of your insights and little bit about Fung Capital and what you guys are doing in the space. So I really enjoyed having you on the show.

Janie Yu:
I enjoy very much talking to you, Julia. Thank you for having me.