Note: writing in hindsight sure makes things easier
It’s been almost three weeks since the announcement that Walmart will acquire Jet.com. The news came as a surprise to many, and turned Jet.com from a target of skeptical condescension into a classic case study. Some still doubt that a Walmart-Jet tag-team will be able to challenge Amazon in the ring of e-commerce, but regardless of the outcome there are a number of lessons we can glean from Marc Lore’s successful sale.
1. Speed is paramount (who knew?), but targeting is also important
Over the course of its young life, Jet has lived up to its name by taking flight and climbing quickly. The Company is adding approximately 400,000 shoppers per month, and after its first year is on track to sell $1 billion worth of merchandise annually. It’s the type of speed that everyone agrees is necessary, that everyone points to as a reason for success. But something else stands out, aside from the Company’s impressive growth: its targeting.
For the past few years, the mantra of every software startup in America has actually just been a quote from Ross Geller in an episode of Friends: “Pivot! Pivot! Pivot!” New companies know that in order to survive they have to respond to customer demands and quickly pivot their business model. But it’s easy to take this concept too far, to abandon the original thesis and settle for something more conventional. It would have been an understandable mistake for Jet to make, to shift away from their larger-basket-lower-price strategy and settle for a sliver of e-commerce market share. Heck, they’re still not profitable and they suffer no lack of critics. But Lore and company have been around this block a few times; they stayed the course, and have created a valuable business model.
2. Targeting the needs of larger players has the potential to make you very valuable
It’s easy to look at this deal after the announcement and realize how much sense it makes for Walmart. Jet has managed to do what Walmart couldn’t hope to do on its own. Walmart CEO Doug McMillon noted that the acquisition will provide the retailer with “access to a larger group of young, wealthy, urban shoppers,” and mentioned on a conference call that “Jet has been able to attract some brands we don’t have at Walmart.”
This isn’t an example of a high profile purchase of a smaller player with a similar business model. Jet operates in a way that is fundamentally different from Amazon and Walmart.com. While the latter two players focused on providing a difficult balance between price, convenience, and diversity of selection, Jet adopted a laser focus on price. The Company fashioned itself as the anti-single-unit marketplace, incentivizing consumers to purchase larger baskets of items by reducing prices. It managed to do this by optimizing shipping among its vast marketplace of sellers rather than building up its own inventory. Walmart and Amazon might never be able to successfully adopt this type of strategy given their current infrastructure, and they couldn’t dream of growing it at the speed that Jet has shown. By executing in a space that larger players couldn’t, Jet made themselves valuable to the people that mattered the most.
3. Don’t forget how “market value” is determined in acquisition situations
Speed is king. An experienced management team is crucial. If you’re confident in your thesis and you can stomach the risk, don’t pivot when the going gets tough. There’s a lot of value to be created by doing for larger players what they can’t do themselves.
The final lesson here is really just a reminder of how we should think about market value in acquisition situations. It’s tempting to use a “public market” or “stock market” mindset when we think about how much someone would pay for a company like Jet. “Jet is hemorrhaging money.” “They’ll run out of funding before they’re profitable.” “They need to pivot if they want to solidify their market share.” “Jet.com is a failed experiment in e-commerce.” If you listen to the cacophony of critics, it’s easy to think that if a lot of people don’t find Jet valuable, it must not be valuable.
Here’s the thing to remember: in a situation like this, the only thing that matters is what one person is willing to pay. It might not be an indication of inherent value, but it is the determinant of current market value. I might not think Jet is valuable. You might not think Jet is valuable. But Walmart did, to the tune of $3 billion in cash and $300 million in Walmart shares. Back in July of 2014, Forbes.com had the Los Angeles Clippers franchise valued at $575 million. In August of 2014, Steve Ballmer bought the team for a record $2 billion. And if the ex-Microsoft CEO wants to pay that much for the Clippers, guess what. The Clippers are worth $2 billion.