In 2020, the tech entrepreneur is an established icon in the mythos of American business culture, with the Zuckerbergs and Bezoses of the world standing shoulder to shoulder with presidents and movie stars in their celebrity. However, the path to entrepreneurial success was, until recently, something young innovators would need to blaze for themselves.
Entrepreneurship was only just starting to become enshrined in academia, and in the collective American consciousness when Niraj Shah and Steve Conine were studying at Cornell University in the early ‘90s. The university had only one course in entrepreneurship — today, there are more than 300. So it makes sense that they didn’t expect to become entrepreneurs straight out of college.
Shah and Conine were simply curious about entrepreneurship and thought they could learn from a class on the subject. But, when they were asked to put together a business plan as a class exercise, they came up with an idea that would set them on a trajectory towards becoming billionaire co-founders of a company that has helped to drive a global transformation in retail.
Wayfair co-founder, CEO, and co-chairman Niraj Shah shared his story and his insights on our current moment and beyond with Bloomberg Television’s Scarlet Fu, during an online talk on November 23, 2020, as part of the Cornell Tech @ Bloomberg Speaker Series.
Embracing the long tail
The duo started a small IT services firm called Spinners, based on a business plan they put together for the class assignment. In the process of conducting research for their business plan, they received an opportunity from Time Warner to develop some websites.
Spinners grew to employ 40 people, and was sold to the global tech firm iXL in the heady days of the dot-com boom. Running Spinners served as an opportunity for Shah and Conine to expand their knowledge of the web as it exploded into the mainstream. Shah and Conine went on to found Simplify Mobile, an early developer of software for mobile phones. They sold this startup to a telecommunications company, but the experience left them hungry for larger opportunities.
They eventually decided their bigger opportunity wasn’t so big. In fact, it was rather small: birdhouses. Shah and Conine were seeing niche businesses popping up across the web. These humble mom-and-pop shops were growing steadily in an environment where confidence in online retail had bottomed out following the collapse of the dot-coms. The term “long tail” was yet to be coined about products that lack mass appeal, but represent a sizable market on a global scale. It wouldn’t have made sense to set up a brick and mortar shop that only sells birdhouses, but when you have access to the entire world as a potential customer base, a birdhouse shop can make a tidy profit catering to that long tail.
CSN Stores, their first online retail startup, was founded in the summer of 2002. The company established a roster of more than 200 niche e-commerce sites with names that seem outlandish in today’s formalized e-commerce landscape, including HotPlates.com and AllRoosterDecor.com. Each site merchandised products based on a narrow theme, like TV stands, grandfather clocks, and stamps. Shah and Conine applied their years of experience with the web on products that other e-commerce sites were largely ignoring.
Finding their Wayfair
“One of the things that allowed us to be successful,” says Shah, “is that we had the service mentality you need to have as a retailer, but also we had the technology and quantitative skills to basically make sure that the website was very functional, well designed, and easy to navigate.”
They used paid media tools from Google and Yahoo to advertise against very specific keywords, track where traffic was coming from, and make judgments about what was working and what wasn’t based on incoming search data. These analytical tools were fresh at the time, allowing them to make data-driven decisions where traditional retail competitors were flying blind in comparison.
Their use of customer surveys revealed an opportunity for consolidation. Building a strong singular brand would allow for more repeat business, as customers unlikely to buy a second hot plate might be interested in buying some rooster decor instead. While setting up distinct brands for niche product categories was working well, they realized that long-term success lay in establishing a powerful unified brand identity.
Over time, the company gradually shifted to fill gaps in the market that they found in furniture, and then decor, home improvement, and housewares. Their many niche categories slowly congealed into a single mega-category: “home.” They shedded categories that didn’t fit within this new brand. In 2011, the consolidation culminated in the birth of a new home goods brand: Wayfair.com.
Distinguishing hiccups from trends
When discussing the history of Wayfair and it’s progenitors, Shah talks about how the dot-com bust was a boon for the company because it cleared out a lot of the competition. When he references the 2008 financial crisis, he takes a sunny view as well. Though the furniture industry as a whole contracted from $100 billion down to $70 billion over the next two years, Wayfair actually grew during that period.
“We came to realize that customers were increasingly getting comfortable with online [shopping]. And during periods of kind of severe dislocation, they’re more willing to change their habits than they are during times when things are good,” Shah says. “By growing through that period, a lot of our suppliers who had had challenges ended up realizing that e-commerce is a real opportunity, because they were going through that period with us while some of their other customers contracted.”
Shah emphasized the importance of distinguishing between long-term secular trends that affect entire markets or economies over long periods, and short-term speed bumps and boosts that affect businesses from time to time. It’s difficult to try to estimate the lifespan of a new industry segment or category, or time the vagaries of market crashes and recoveries, so Shah recommends that entrepreneurs instead try to think about the services they use, think about what’s possible today with existing products and services, and to see if they can improve them somehow. The only areas to avoid, he says, are crowded spaces where the clear winners have already been established.”
On the other hand, a big innovation in an established product category can still win out.
“I can’t imagine that there’s an angle to launch meal delivery today and be the winner,” Shah says. “But perhaps you have an idea that would allow you to do that, so that’s what you’ve got to decide. Google was the last of the major search engines. There were quite a few that preceded it.”
Passion for product
It might sound like Shah and Conine stumbled into selling home goods, but Shah is quick to dismiss this notion that they were only interested in the category’s market potential.
“I actually think that you really do need to be passionate about the idea. I think the challenge is that every idea — there’s the good days and there’s the tough days and not everything is always easy and simple, so that passion is what keeps you going when things are tougher. If you just get into an idea because you think it’s a good business idea, or you think it’s lucrative… it becomes very hard to have the same degree of passion and excitement to keep moving.”
For Shah, this passion translates into empowering Wayfair’s suppliers with more insights into customer behavior than they were getting through traditional retail. Unlike a brick-and-mortar shop, Wayfair tries to get out of the way, even as it maintains an intermediary role between the supplier and the end customer.
“They’re entrepreneurs too,” Shah says. “And they want to be able to control their destiny.” Shah bets that if Wayfair can provide these suppliers with the best logistics and analytics around, suppliers will be able to focus on making the best products. Logistics and analytics for online retail may seem par for the course in 2020, but Shah and Conine helped to innovate what sellers now expect as baseline features. Before e-commerce, suppliers had relatively little visibility into how retail customers were reacting to their purchases.
“We spend a lot of time just trying to make sure that suppliers understand all the tools that we have on our platform,” Shah says.
The vast majority of Wayfair’s corporate staff are working from home right now, and the company continues to grow despite the pandemic’s disruption. But Wayfair’s Boston roots remain a strong part of the company’s identity, so don’t expect the headquarters to go geographically distributed any time soon. While they don’t have close access to the banking sector of New York nor the strong technology ecosystem of San Francisco, Wayfair benefits from being located in a well-loved, affordable city. The quality of life that Boston affords, as compared to bigger tech hubs, enables Wayfair to attract and retain talent, especially more seasoned professionals with families or those looking to put down roots.
“It’s a great town,” says Shah, citing Boston’s renowned healthcare institutions and strong academic heritage, with two of the top ten universities in the world, and over 100 colleges and universities in the metro area. Wayfair recruits heavily from these institutions. There is a fair amount of technology innovation coming out of Boston as well. “Over the last decade, after Silicon Valley, Boston’s had the second most successful series of tech outcomes. Pandemic aside, Shah is bullish on the appeal of cities like Boston to attract ambitious people.
Shah is trying to maintain his focus during the pandemic and its attendant quarantines and lockdowns. While 2020 has been difficult for brick-and-mortar retailers, e-commerce sites are well-positioned to provide customers with convenient deliveries. On top of that, Wayfair sells products that enable people to make their homes feel homier.
“We actually saw demand start to rise right away,” Shah says. “Things that you use for cooking, like refrigerators, freezers, cookware; things that you’d use for having kids at home, like kids’ desks, kids’ furniture, trampolines, swing sets; and things that you would use to work at home, like desks and office chairs.”
In a matter of weeks, this new demand spread into other categories. Ultimately, increased demand has been sustained, but as the initial spike subsided and COVID-19 brought large-scale shutdowns, the business faced tremendous uncertainty.
“We couldn’t tell how the economy was going to fare, didn’t know what type of stimulus was going to be there, didn’t know what economic support was going to be there,” Shah says. “And so, the fear wasn’t so much that we weren’t seeing a demand spike, the fear was just around the durability of it and what was to happen next.”
Shah admits that, to an extent, there’s not much that companies can do to prepare for a disruptive event like the COVID-19 pandemic, and the demand spikes and dips that might result from such a disruption. He credits the company’s consistent growth for its ability to withstand unpredictable events. Wayfair has been public for six years. In 2014, the company’s retail sales climbed above $1.1 billion. In 2020, Wayfair is on track to sell between $13 and $14 billion. Going through the process of scaling quickly has enabled the company to better deal with demand shocks.
Even with this cushion, Shah opted to take private equity investment to the tune of $535 million in April.
“I don’t think that we could have accessed traditional debt in an easy and fast manner, and our view was that, if we’re going to raise money, we want to do that quite quickly. Waiting is not a good move, because if you end up needing the capital you won’t be able to get it,” Shah says.
When discussing businesses that he respects, Shah’s first answer is unexpected, for a tech CEO. He admires Warren Buffett and Charlie Munger for their steady steering of Berkshire Hathaway, and how they sustained substantial growth over a long period of time by sticking to their core principles.
“I tend not to get too wound up with things that come up too quickly or go down too quickly,” he says. He is more impressed with companies that are in it for the long haul rather than tech darlings that experience massive, quick growth, which might turn out to be a flavor-of-the-month. As Wayfair enters its 19th year of business (counting the CSN years), it’s clear that this mindset has served the co-founder well.
You can watch the entire discussion below: