Weekly Thoughts


Weekly Thoughts: Chenheads

Here is something that caught our eye this week:


Turning obscure markets into scalable businesses

Back in 2015, we wrote a piece about the sneaker market.  As a reminder, some of us think of shoes just as… well, shoes, while others get pretty passionate about their footwear. (OMG, that is a great pair of Air Jordan 3 Retro OG Black/Cement!!!)

Since a key component of this market is that supply of new product is limited by the manufacturers, a healthy second-hand market exists for people  mostly self-described “sneakerheads”  to buy and sell sneakers.  When we first looked into the market, this trading activity was spread over a highly fragmented marketplace, with a high level of ebay-esque activity and an unknown number of Foot Locker employees who could easily obtain sneakers to resell to their personal network of sneakerheads.  As a result of this dispersion, most (including ourselves) thought of the space as a cottage industry:

“The broader point is that across industries, scale is often inversely proportional to the attractiveness and breadth of the opportunity set. Moreover, this institutional friction creates opportunity for those willing to step into the void. While we focus on small businesses, the reality is that niche investing can take many forms, and this week we were interested to read more about the market for secondhand sneakers.”

Turns out, the opportunity was much larger than we realized (whoops).  A recent (perfectly named) New York Times piece titled Buy Low-Tops, Sell High-Tops, outlines the success of certain online reselling marketplaces, all of which have raised substantial amounts of venture capital and garnered large valuations: one company, StockX, is valued at more than $1 billion. From the New York Times:

“The rise of these online marketplaces is now pushing sneaker retailers and brands to rethink the potential of resale sites — once deemed a quirky niche for enthusiasts — as serious distribution channels.  In February, Foot Locker invested $100 million in GOAT Group and said the companies would ‘combine efforts across digital and physical retail platforms.’ And the luxury site Farfetch acquired the LVMH-backed Stadium Goods for $250 million in December.  The fervor for sneakers has been fueled by ‘sneakerheads’ and others who regard the shoes as investment assets. ‘The internet and eBay made reselling into a cottage industry,’ said Matt Powell, an analyst at NPD Group. ‘Platforms like StockX made it into a business.'”

This evolution from an easy-to-disregard cottage industry into a surprisingly large opportunity reminds us of a podcast conversation between Reid Hoffman (LinkedIn co-founder) and Brian Chesky (Airbnb co-founder), about the paradoxical nature of scale, which is “in order to scale, you have to do things that don’t scale.”  

The argument is that the magic of scale happens by first creating hand-crafted experiences for a devoted base of enthusiasts and then figuring out what part of that value proposition can scale.  Chesky highlighted how this process worked for their “Airbnb Trips” service offering: The first step was to find one normal traveler and create an extraordinary travel experience for that person, and then ask “can we develop a technology that scales and do it 100 million times?”. Based on that individual trip, Brian then distilled that magical experience to a “list of essential ingredients”:

“When you first go to a city you need a welcome event within the first 24 or 48 hours where you’re around people. When you land, you need to get acclimated to the neighborhood. By day two or three you need to have a challenge out of your comfort zone. If you do not leave your comfort zone, you do not remember the trip. If you can belong out of your comfort zone and something new happens to you, then there’s going to be a moment of transformation where the person you were in a small way dies and a new better version of yourself is reborn. Now this is the narrative of every movie you’ve ever seen. A main character starts in an ordinary world. They leave their ordinary world. They cross the threshold to new, magical world where all these obstacles happen and they overcome something. They call it the hero’s journey.”

But of course, it starts with creating an experience for one person. For Chenmark, this resonates as we see opportunity far beyond any individual small business.  Our chosen market is fragmented, and it’s easy to disregard our lack of scale.  Internally however, we see ourselves as working on creating a unique experience for small business owners looking to transition their company, and subsequently, a governance platform and shared set of values for a community of small businesses.  So, right now, a lot of our day-to-day is in the trial and error of hand-crafting that experience on a per-company basis.  But we continue to believe that one day, our efforts on the unscalable work, will “suddenly” result in a scalable platform that will appeal to all sorts of ‘Chenheads,’ even if they don’t know it yet.

Have a great week,

Your Chenmark Team

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