Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
With a niche market and private money, an ex-Wall Street analyst is finding online retail uncommonly good.
A former retail analyst from Goldman Sachs, a gypsy-style artisan, a craft market and a conservative business approach minus venture capital money may seem like an uncommon combination for an enduring web business. But it’s a formula that is working for UncommonGoods.com, an online gift retailer that specializes in unusual, creatively designed products at affordable prices.
The company has survived the bloodbath of declining Internet companies and, further, has done so with only private investments. When the company launched its site in July 2000, the venture capital money that had flowed so freely in prior months had all but dried up. But New York City-based UncommonGoods was determined to bull forward. And not only has it survived, but it also doubled its planned sales for its first six months.
Praised by industry observers for its original content and exclusive, creative merchandise, UncommonGoods is maintaining its place among pure-plays who are likely here to stay. And CEO David Bolotsky says there are no plans to take the company public-or even to go outside the original investors for additional money. “The window for VC has slammed shut,” he says. “Our plan is to get to financial self-sufficiency before the cash runs out and I’m confident we’ll do that. We have enough cash to get through 2003 and we expect to be profitable by the end of 2002.”
More than just a good idea
With the demise of popular niche web sites over the last 18 months such as Garden.com, Lucy.com, Pets.com, Living.com and eToys.com, it seemed as if only mass marketers with the biggest sites could survive.
But figuring out what types of products could and should sell on the web, as opposed to products that would compete with those sold by brick-and-mortar-turned-web retailers, has been largely a hit-and-miss proposition. Not so with specialty gift retailer UncommonGoods.com.
Bolotsky’s UncommonGoods.com vision was born out of his first encounter with the Internet via a laptop in the early 1990s combined with his 14 years covering the specialty retail market on Wall Street. “When I was exposed to the Internet I thought it was a cool concept, but I couldn’t see a retail application for it at first,” says Bolotsky, noting that only a few years later Amazon.com would change the landscape entirely.
“One thing I’ve learned covering retail is that when everyone is running in one direction, it’s best to run in the other direction in order to make money,” Bolotsky says. Bolotsky was a managing director at Goldman Sachs and headed the U.S. Retail Research Division from 1995 to 1999. He spearheaded the firm’s Internet retailing research. In doing so, he saw the build-up and anticipated the inevitable downfall of new web retailers. He was leery of jumping on the web bandwagon, but he also was attracted by the counterbalancing notion that the Internet would become 15% to 20% of retail business.
Though he believed web retailing had wide-open possibilities, it was clear there was going to be a shakeout. “Don’t confuse brains with the bull market,” he says was one adage about the carnage of Net retailers, similar to the shakeout among VCR manufacturers years before who had seen 25% growth, expanded their businesses and then went bankrupt.
Taking that cautious approach, Bolotsky cast about for a web product that could be a profitable sell. “I tried to find a business opportunity that wasn’t a me-too category killer like pet supplies, but was a smaller market that was not terribly well-serviced,” he says. “I wanted to build a business that had slipped through the cracks of traditional retail and really leverage the web.”
The accidental approach
He found what he was looking for, and admits that some of what became UncommonGoods.com was planning and some was accident. He was planning to target the arts-and-crafts supplies market when he checked out a craft show at the Smithsonian Institution in Washington D.C.
It was not the arts-and-crafts supplies market he had expected. But he knew right away it was a perfect fit for a web business. What he witnessed was a generous cross-section of consumers who were seeking unique products they could not find in traditional retail stores. “I was blown away by the packed aisles of customers actually buying,” he says. “And in talking to them, I found these consumers’ needs were not being met by current retail channels. So we built the business to be a combination of artisan products-creatively designed, specialty boutique items and items that would be found at an international bizarre.” So much for selling material to the arts-and-crafts creators; he would sell their end products instead.
Because the arts and crafts market is so fragmented-consumers have to go to special shows or events to buy products-it translates well onto the web simply because the web provides one distribution channel. “The Internet is pretty efficient for selling these products,” says Bolotsky. And the people looking for such products tend to be the best web shoppers today: women. The common UncommonGoods’ customer is a 35-year-old woman making more than $60,000 per year, college educated, working professional, home owner in larger suburban or urban counties. On a broader base, UncommonGoods’ customers tend to be women 25 to 54 years old who like to express their individuality and creativity with what they buy for themselves and others.
Once the niche was developed, Bolotsky set out to fund the company. But in the three months before he could actually leave his post at Goldman Sachs, the tide for web startups had turned. While some people thought it was crazy to wait to launch the company in such a hot market, Bolotsky was patient. “My experience was that businesses were not made or destroyed because of a three-month head start or delay,” he says.