The Future of Commerce with Josh Payne of OpenSky.vc

0:00The key thing for all brands that I didn't say earlier that I probably should have is retention. it. It's great that people are getting those orders at Amazon now. They're getting that customer acquisition, which is nice. But if you're not seeing the flow through and the repeat, then it doesn't really matter.

0:20Today, I interviewed Josh Payne. He has founded several very successful companies and businesses around the intersection of content and commerce. One's called Stack Commerce. The other one's more recent. It's called Onward. And you can think of these as B2B software SaaS that helps brands. And Josh and his business partner also invest in similar types of companies and CPG products through their early stage fund called OpenSky. And if I were to say Josh was focused on one thing, it's really the future of commerce. And we discuss a lot related to that. The changing habits brands have for customer acquisition, the supply and demand dynamics of shopping malls and Instagram ads.

0:59And towards the end, Josh has some very candid advice for founders. So if you're anywhere in the e-com world, I think you're going to win a listen to this one.

1:11Hi, Josh, how are you? Good to see you. Good, good. Doing great. Thanks for having me. We're recording this shortly after Cyber Week, Cyber Monday, Thanksgiving. I hope you had a great holiday and shopping season. And I want to ask you about that. I want to talk today a lot about the future of commerce. OpenSky, maybe you can describe that, your company, but invests in companies that think about the future of commerce. So as you reflect on the busiest shopping time of the year in 2024, what trends are you looking at most closely this year? For brands and retailers, it really still continues to be about customer acquisition.

1:51Years ago, the main channels were mainly Facebook, Instagram, so meta-driven stuff. And you're sort of seeing that flatline to decline or just become not really consistent. And so I think the trend is that brands are becoming less and less dependent on one source of traffic, which typically in the past had been meta. So they're diversifying, right? They're really investing in Amazon, I would say, is probably one of the biggest channels we're seeing. And that's been a huge shift in the last year or two that I think Amazon is probably one of the biggest. And then we're seeing a lot of wholesale and retail happening, distribution through grocery and larger wholesalers as a big channel.

2:35I think before everyone was really all about D2C and now it's more of an omni-channel approach. And then even within D2C, that customer acquisition and advertising has sort of evolved. So one big name we keep hearing over and over in the past couple of months is AppLovin. So it seems like people are using AppLovin as a big acquisition source and channel right now. So yeah, those are some of the trends that we've kind of seen. When a brand is, quote unquote, investing in Amazon, what does that mean exactly? Well, first of all, it means selling on Amazon. I mean, three, four years ago, I would say greater than 50 % of brands weren't selling on Amazon.

3:14I don't know what the actual number is, but I think the majority of the people that we talk to, especially younger brands, are now selling on Amazon. So just having a presence at all was a big deal. I would say one or two years ago, maybe three years ago, a brand would be on Amazon, but sell sort of what I call off-market SKUs. So they wouldn't sell their primary products. They would sell old stock from a year ago. They would sell sort of a diminished product, not their core product. Now we're kind of seeing people just put the full suite of products on Amazon. And I think we just live in a world where a lot of shoppers only shop on Amazon.

3:56So if you're not living there, you're probably missing out. Now, I do think it probably eats up some of your D2C sales. But every brand is a little bit different in terms of that to net win. I think what I'm hearing is that it is. Um, but yeah, it's different for everybody. That was the question is, is, uh, selling the majority of your products on Amazon. Is that going to kill your margins or your competitiveness? But you said the focus everybody has is on customer acquisition. So it sounds like the most forward leaning brands are thinking about a customer acquired through Amazon that might always, uh, buy on Amazon still has, uh, a ton of value through word of mouth and other ancillary benefits to that.

4:44Why do you think that Facebook, Instagram meta are plateauing? Man, if I knew that, I'd probably be pretty rich at this point. I think every brand marketer in the world is asking themselves that question. I don't have an answer. Obviously, what Apple did a couple of years ago, changing the rules around data obviously had a big impact, but that was sort of 2021, I think. So we sort of recovered for the most part from that. I think why is it happening again now? I think the markets are just really efficient. I think there are more sellers than ever. And when I say sellers, I don't just mean brands.

5:26I mean, there are people from all over the world advertising on Meta now. There are big retailers, there are small brands, and then there are individual people who are just individually just advertising. And I think it's become such the norm to be advertising on Meta that there's just competition, right? There's just so much competition. So in order to pay to get the eyeballs, it's costing more for these sellers, for these advertisers. And I think that's why, right? I just think there's not enough inventory. You need more ads to convert a user and there's just not enough ads, you know, compared to like how many sellers there are, or maybe the ads are getting less effective.

6:10You know, that could be it too. There could be fatigue from the customer. That makes a ton of sense to me. I mean, I remember in the early days of SEM, search engine marketing, you didn't have to have a super tight funnel in order to be in order to be profitable now the markets um the market's so efficient like you say that uh every part of the of the buying process for the consumer has to be really tight or somebody else is going to be able to pay more for that user than than you are so yeah that does make sense to me that it's happening on facebook ig meta you know i wonder i wonder also you know how consumers are thinking about what to trust.

6:54You know, it used to be when I would see someone recommending something on Facebook or IG, it was very novel. Now, you know, now it's not as novel. Everybody's sort of recommending everything. And so, yeah, I wonder if that is cutting into conversion rates. I know that you work with a lot of emerging companies and emerging brands, but I wanted to ask about the role of in-person or brick and mortar commerce for companies that are growing. I went to the mall on Black Friday with my daughter, not knowing what to expect. The mall was packed. There was a line to get into Sephora, which once you got into Sephora, you couldn't even move.

7:36There were so many people in there. And it felt like, I'm not sure if people were buying, but I don't know if they were buying as much as they were seeking inspiration for what to ask for or what to buy online. How should brands think about brick and mortar in person these days? Or is it only relevant for bigger brands like Sephora? No, I don't think it's just relevant for bigger brands like Sephora, bigger, large enterprise retailers. I think my opinion is that if you are a brand running in this sort of 50 to, about 50 million a year in revenue, I think there's an opportunity for you at retail, right?

8:20I think below that, I'm not sure how much sense it makes sense to have a lot of stores. I think maybe like a HQ store near your headquarters or something. But from what I've heard is that these stores do have a halo effect, that when you put a store in a particular place, that you see an increase in online sales in that area. So it's not just about measuring how much revenue comes from the store, but what is the delta? What is the difference between the average amount of transactions and revenue in that area, in that city, before and after that store comes in and out? So I think you got to take the full measurement.

9:04I think the fact that there's more traffic in the mall, like, look, there's less malls. There's less malls, there's less stores. So it's exactly the opposite of what I said about earlier. Like there's so much supply, there's so many sellers that the competition is fierce. But in the malls, there's less malls, there's less stores, there's less retail. And so people are still craving that in-person interaction. I know that for me, I was just talking to one of my favorite brands. It's called Faraday. And it's a clothing apparel brand. They have a store here in Nashville. And I never buy online from them now.

9:43If I want to buy, I want to try it on. I want to touch it. I want to feel it. It's frankly more of a hassle for me to return something to the post office than it is for me to take 15 minutes, go on and try and make sure something fits right. In my opinion, I'm a little bit old school. But yeah, I think there's a clear place for retail, I think it is for what I would call like brands that are a little bit larger, right? So I wouldn't say S &Bs. I definitely believe in wholesale, which is getting your product in other retailer stores, Nordstrom, or maybe smaller niche retailers. I mean, that's a great way to get yourself out there.

10:20But yeah, I'm personally a fan of retail for growing brands that are well-funded, that are prepared to take on some initial losses, uh, to fund some stuff for down. Another one of my favorite brands called Buck Mason is really big in retail. I know that I'm, from what I understand, they're doing very well. Um, you know, uh, and they have a retail strategy as, as an example. I wasn't quite thinking about the fact that there were fewer malls I can think about where I live in, in Seattle. You know, you have, uh, you have a mall on the, on the East side across the lake, and then you have a mall near the university of Washington, but, but downtown Seattle also used to be a really big shopping hub for the types of stores that you would see in the malls.

11:04And a lot of those stores have closed. So you're right. I wasn't really thinking about it from that standpoint. Also, with Verity, you gave that example. I wonder how you discovered that brand at first. Obviously, you're buying direct from them now. Maybe you always did. But did you find or interact with that brand in some other way prior, whether it was Amazon or through Nordstrom or through something else. I'm pretty sure I found out about that brand, Farity, through a marketplace called Huckberry. Huckberry is an online men's store. They are a curator of men's products and tastemakers, if you will, right?

11:46And so I think I found that brand, I mean, man, it must've been 10 years ago. And then obviously had different interactions in store and online. And now I feel like I'm a direct Farity customer. What should brands be doing? Yeah, you should be getting yourself out there through as many channels as you can because you need to go where the customer already lives. Huckberry is and was a pretty big marketplace. And so if you're a nascent brand, yeah, getting listed there, partnering with them, even if your margins are a little bit lower through that channel, to me makes a lot of sense because it's about building that awareness originally.

12:22The key thing for all brands that I didn't say earlier that probably should have is retention. right and so it's great that people are getting those orders at amazon now they're getting that customer acquisition which is nice but if you're not seeing the flow through and the repeat then it doesn't really matter when you're talking to brands that are trying to think about that are they investing in in loyalty programs are they investing in like the experience of of being a customer? How are brands trying to think about the ones that you're really most impressed with or thinking about loyalty or retention in a really novel way?

12:59Yeah, I mean, I can give you a self-serving example. I actually started a company a couple of years ago called Onward. And Onward is a B2B SaaS company that helps brands with retention. And we try to do it in a pretty innovative way. So originally, the idea for Onward was to look at memberships. So in the same way that Amazon Prime is a membership for Amazon customers, we wanted to bring that to the Shopify seller, sort of what you would call the mid-market type of brands. And our initial research and my initial research concluded that most medium-sized brands and definitely the smaller ones cannot support a membership, meaning there's just not enough demand from their customer bases to get people to opt into these programs.

13:47And the main reason that we heard from users is that users don't want recurring subscription fees, whether it's an annual membership or monthly membership. They just don't want to be dinged automatically year after year. And so what we did with Onward was we said, hey, like these the idea of membership perks is great. Right. Like, hey, 10 percent off your next order, free return shipping, protection against porch piracy, you know, all sorts of stuff like that. And so we brought all of those benefits into a one-time fee. So as you're checking out, you have the ability to, we call it like upgrade your order with these benefits.

14:25And one of the big ones, one of the things that we like the most is the idea of, we call it cashback credit off your next purchase. Or it's essentially like a reward credit or loyalty sort of store credit. And so with the merchant, we have the ability to set that at a certain percentage, 5, 10, 15, 20%. And then we communicate that discount with some win-back reminder emails over time, 30, 60, 90, 180 days later. And it's pretty remarkable results what we've seen. So we see when people do redeem the cashback, they spend about five to six times the redemption amount. So it's a pretty potent way of bringing people back.

15:08We've had some people say, well, I have to pay for the cashback. So then I have to, you know, it's costing me money to get these people to shop here. But what, you know, what I'm able to convey to them is like, well, look, you're going to pay something to get these people to come back no matter what. Right. Like another Facebook ad or, you know, some other methodology. People just are rarely coming back to your store without an incentive. And as far as ROI goes, you know, a 5x ROI is a pretty incredible ROI. That type of return on ad spend would, you know, beat what you're going to do on Facebook typically.

15:40So we think it's been a good thing. And yeah, it's grown really quickly. We have a couple hundred brands using Onward now. And it's been really exciting. Yeah, a lot of that really makes sense to me. I mean, even when you're going to your same store over Black Friday, you're going because there's a deal of Black Friday. There's been a holiday to do that. That totally makes sense to me. So you founded Onward recently. You also are a GP or a founder of OpenSky. Maybe if you don't mind, talk a little bit about the investment thesis of OpenSky and where you plan to invest over the next few years. So OpenSky is an early stage venture capital fund focused on investing in, we say, the future of commerce.

16:26And so it's a unique fund in that we invest in both consumer and B2B. So about two-thirds of the fund, we invest in B2B software that helps brands. They're online software tools for brands. And the other third, we do invest in consumer brands themselves. So CBG brands, direct-to-consumer brands. It is unique for a fund to do that, but we're doing it for two reasons. Number one, my background is in e-commerce enablement, B2B SaaS. And then my partner, Josh Resnick, my VC partner, he has always been a direct-to-consumer and CBG guy, investor and operator. And so we said, hey, let's just do both.

17:10And so there's this really mutually beneficial thing where the brands we invest in use a lot of the tools that we've also invested in and they can become customers. So it's a really nice thing. But yeah, that's kind of the high level of what OpenSky is doing. What's the profile of a CPG brand that gets you most excited? We're really looking for things that are playing in a big market, right? That are doing something fairly disruptive or different or unique that is just going to take this market by storm or going to kind of be a wake up call. Five years ago, you could create anything that was considered to be better for you in a category.

17:52And that was disruptive. Nowadays, it's not just that. You can't just slap a really cool brand on something and say it's better for you and it's going to work. It's investable, but it's not like a given. Like, oh, hey, here I am. Give me money. We have a really good-looking brand. Five years ago, that kind of did the trick. Five or 10 years ago, and that's just not the case anymore. So I think we also look for repeat founders, people that have had experience in this space, domain experience, people that are incredibly passionate and kind of driven and willing to go the extra mile. And I think those are all soft skills.

18:33I think on the harder skills, I would say pretty high margin products with a high repeat purchase rate. So just inherently within the product usage. So things that are selling into habits, so coffee or vitamins, supplements, that type of thing. It's interesting. You mentioned sort of a consumer trend about, about, you know, people wanting to buy things that are better, better for you, better for your health, but you know, better for your wellbeing, et cetera. Are there any, any other consumer trends that you're picking up on that are, that are interesting, like better for the planet, sustainable, something else, anything that you're sort of popping up for you?

19:15At least from what I'm seeing, there continues to be this movement towards premium, just really premium offerings. Everything not only better for you, but higher quality as well, which kind of makes me think there might honestly be a room for not lower quality, but just at a price point that is really interesting to people. You know, there's a lot of emphasis on on fast fashion, if you will, both, you know, both on the pros and the cons of fast fashion. I could see that having something that's that's that's premium that you're going to wear that has all those kinds of qualities and there being a response to that.

20:02There does seem to be there are so many different audiences that you can tap into now that if you find an audience that's big enough and a margin that's big enough, you can you can do something really special. When you're investing in B2B software that helps brands, what are some of the, I don't know, I didn't want to say buzzwords, but I can't think of a better word. What are some of the things that gets you really excited, the big opportunity spaces there in your mind? Well, look, I mean, you're not going to escape AI today. So AI is the number one buzzword in the space. And when we created the fund a year and a half, two years ago, we did not set out to be an AI-driven fund.

20:41But today, I would say the majority of things that we're investing in on the B2B side have an AI component. One, because that's where the people are building. And two, that's where the most interesting innovation is happening. And so I think, without a doubt, AI is sort of everywhere. You can't get away from it. outside of that um i'd say it's all over the place um there's there isn't in my mind a real consistent theme that i can think of other than ai uh because it's just so dominant right now and there's so many problems that uh that brands have that there's ample room ample room to address those you know we've talked a lot about about brands so far but uh you founded a company more than a decade ago called Stack Commerce.

21:30I think you're on the board now. And the vision was helping publishers and brands kind of connect. When you think about the publisher side of the equation, what do you think is the biggest problem right now or the biggest issue that publishers have? And maybe one that Stack Commerce addresses, maybe one it doesn't. But thinking about the publisher side of the world. Well, the biggest issue that publishers have is audience. I mean, And they just don't have as many people viewing their sites anymore. Why that is, is they're probably better at telling you than me. But I mean, I think the platforms have just overtaken market share, right?

22:12X, Facebook, Instagram, Snap. I mean, across the board, TikTok. TikTok probably being one of the biggest, you know, time spent on those apps has shot up. I think that creators on those platforms have gotten really good. the amount of, you could even kind of argue that the amount of research and journalism, if you will, on some of the bigger media sites, at the same time that independent creators have gotten more sleuthy and do more research, some of the content that you're seeing from some of these big players has been AI driven, or it's been outsourced to different parts of the country or world and the quality of that content is potentially, I would say, maybe kind of come down.

23:00There's a lot of... I won't get into the idea of legacy media versus new, but I'm definitely in the bucket that I think some of the best content that I would say 98 % of the content, I assume, is on the platforms. I can't remember you know intentionally going to a legacy media site in a long time when you search for you know search for a review of something I don't even know if you do but where would be the first place you would go would you go to a a Gemini would you go to would you go to TikTok would you go to where where would where are you shopping for that information yeah you know that's a great question it's changed a lot even in the last six months if you think about it I I don't I still don't use ChatGPT to search or whatever for my initial questions.

23:50I think Google has done a good job of keeping me on Google with the AI summarized results that I get. And I don't know where that content comes from. Obviously, they must be scraping it from Wirecutter, from all these other sites. So I guess as I'm thinking about this out loud, I would say I still have a lot of inherent trust in Google. So Google has continued to innovate enough with AI to keep me there. I would say I used to go to Wirecutter as a great place for reviews. I think in the past five to 10 years, kind of what you've also seen is a lot of the review sites, hard to understand what their incentives are on the back end of some of those reviews.

24:34So I do think they lost a little bit of trust. But not that if they get paid, that's a bad thing. or that, I mean, because that's what we did at Stack Commerce, right? We would make sure that when people did write that content, that they should get paid for it. But just saying, I think as a consumer, just making sure you trust all the methodologies that things are being put out there in. And I think what happened, but pre-AI, there was a lot of automation around that that sometimes resulted in watered down results, if you will. right and i think sort of just making sure that quality barrier stays high is important but uh yeah for me again i've google has still been great i yeah i think searching twitter searching tiktok searching instagram um have been things that i would do you know the other thing that google has done is they've really really pushed up reddit so i think i think anytime you search anything on google i think there's a reddit thread within the top two or three results.

25:37It's pretty wild. That's a big change. And I would say because of that, I've used Reddit a lot more, you know, not, not intentional. I still don't open the Reddit app. I only go into Reddit whenever Google presents a search result. Yeah, no, no doubt. And the SEO world has been turned, been turned upside down by a lot of what you're talking about. Google reacting to AI content, promoting its own AI content, investing in Reddit, showing Reddit, Reddit results. All those things are super disruptive for, publishers getting an audience. Maybe I'll end here. One more question is probably a lot of the audience or some segment of the audience are people that are creating the types of companies that you or others might want to invest in.

26:19What advice do you have for founders now? And it can be anything, whatever your pet peeve is, whatever the area of opportunity is. What would you say to founders, maybe either in segments that you invest in specifically or otherwise? It's really tough. I would say I've been building in tech and startups for over 20 years now. And 20 years ago, there was way less competition, which made it easier. But it was way the tools were not there. It was way harder to build. And now the opposite is true. There's so many people building. There's so much noise. You can create a product so easily that. I would say creating a product is not the goal.

27:03It's actually worked really hard to get that first customer to make that first dollar and then go to investors after that. The bar is so low today in terms of creating a company. It doesn't impress me when you create a company. You know, come, oh, I have this idea. Look, I created a deck. Look, we have a website. We have, you know, it's just like, okay, like how many customers do you have? Like what's your traction? Like what's the response rate? Like, oh, we're waiting until we raise money to do that. It's like, well, no, we need you to do that first. And then we'll talk about raising money, right?