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Italic & a New Era of Online Retail

ACQ2 Episode

January 6, 2022
January 6, 2022

We sit down with Jeremy Cai, the CEO of new retail pioneer Italic, for a fascinating discussion of how they're upending the traditional manufacturer-brand-retailer model by taking the opposite approach of earlier DTC startups. Rather than elevating brand and cutting out retail, Italic cuts out the brand and lets the actual manufacturers (who you've never heard of but who make most of the actual products that J. Crew, Everlane, etc sell) market and sell direct to customers.

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We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
January 6, 2022

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
January 6, 2022


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
January 6, 2022

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
January 6, 2022

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
January 6, 2022

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
January 6, 2022

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
January 6, 2022

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
January 6, 2022

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
January 6, 2022

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Jeremy Cai, welcome to the Acquired LP show.

Jeremy: Thank you so much for having me. I'm so excited to be here.

Ben: It's been great. I've seen your name so many times in Slack where you've been an active member of the community, and so many other Italic folks have been to. So it's really cool to meet you in person for the first time.

Jeremy: It's really neat to hear both of your voices live for the first time as well. It matches the podcast.

Ben: Awesome. Jeremy, for folks who haven't followed your career, you're the Co-founder or Founder and CEO of Italic?

Jeremy: Yup, the latter.

Ben: The latter. You previously were the founder of a company called Not Pot. I think you also were the Founder and COO of a company called Fountain.

Jeremy: Yup, that's exactly right.

Ben: What were the two of those?

Jeremy: Fountain, it's still around. It's actually doing quite well. It's an enterprise hiring automation platform that a lot of the Fortune 500 used for hiring their hourly workers. Think of really, really large scale, high volume hiring and the software that you have to use to process, not individual hundreds of applicants, but in the millions.

Not Pot was a company that my girlfriend Kati and I started five or six years ago. It's really fun direct to consumer brands, so the exact opposite of Italic. But it's been fun to build that up, and that's been bootstrapped. Whereas Italic and Fountain were venture-backed.

Ben: And you were a Thiel Fellow before all this, is that right?

Jeremy: Yup, that's right.

Ben: Would that make you like one of the first class or second class of the Thiel Fellow Program?

Jeremy: I think we were the third class. My class started in 2015.

Ben: Super fun.

David: What was that experience like?

Jeremy: It was amazing. I have to say, I think it's really come up over the years. One, as an Asian kid with Asian parents, you need some justification to be out of school for some reason. That really helped a lot because very low acceptance rate, very prestigious name obviously helped me make the case to my parents. But I think on the flip side, if anything, being a young founder in San Francisco in that era still wasn't, I think, as common to go drop out and start a company like it is today, even in just five, six years.

I think, if anything, it provided a really great community of like-minded people who all lived around the Bay Area. Over the years, a lot of these companies that were started by those early fellows have gone on and done very, very well. It's been really great to have a community to grow up with as opposed to, I guess, a college frat, dorm, or whatever it is to have a group of friends. It was a great experience.

David: That's so cool. Yeah, it's been such a successful program.

Jeremy: Yeah, I think the biggest regret all of us have from the program is there was this one winter where Vitalik emailed the whole list and he's like, hey, man, you should buy this presale, and Bitcoin is dropping. I don't think [...] to be honest. There's a lot of stories like that. One thing we've learned is when you have a chance, it's more good than not to bet on a fellow fellow.

Ben: ​If you suspect you are fishing in one of the rightest ponds in the world, you should just have every possible line in the water

Jeremy: That's right. Was it DST that backed every YC company in a batch? I think that would have done pretty well if you did the same for [...]. They never took equity either. So that was very nice of them.

David: Was there any type of Founders Fund or any of Peter's investment vehicles, or was it totally hands-off?

Jeremy: There was a separate entity, the Thiel Foundation, and it was affiliated with Thiel Capital, which is a separate vehicle from Founders Fund, Taylor, Clarium, and so on and so forth. But all of them were in the same office building and one letterman over in Presidio. So we do events over at Founders Fund, bringing partners for us to learn from, and then eventually, a lot of us kind of partners with funds Thiel Fellow companies.

There's a lot of intermingling, but on the equity side, the Thiel Fellowship itself was really just a grant, which for what it's worth, isn't enough to live in San Francisco at that time. But I think it was an enabler to really allow us to get started, for many of us.

David: Gosh, it's more now, but YC originally was $20,000 or something. It's not about the money. It's about, mostly what you said in the beginning—just enough catalyst, prestige, and justification to go do something entrepreneurial really early in your life.

Jeremy: Obviously, it's a startup company. Nowadays, it's still not cheap to start a company as much as people would like to make it, in my opinion, at least. But programs like YC and The Thiel Fellowship, and the whole programming around the fellowship, specifically for me, was really, really helpful because you go into San Francisco. I didn't grow up in the Bay Area. I didn't know anything about tech. It kind of was a catalyst to fast-track you to meet the right people a lot faster. I did YC as well, by the way, six years ago. So I think both of those programs—

Ben: That's right.

David: Fountain was a YC company, right?

Jeremy: Exactly, yeah. So really, really helpful frameworks and communities.

Ben: All right. I want to transition us here to starting Italic. You started this in 2018. Just to give everyone a sense of where you are today, I think you've raised $50 million, just recently $37 million by a consortium of awesome investors. What is Italic? Can you take us through a little bit what the journey has looked like when you launched and where it is today?

Jeremy: Italic is a managed marketplace that connects high-end manufacturers from around the world directly with end consumers. For our manufacturers, we built a suite of products and services to essentially allow them to sell direct to consumer. So that includes our fulfillment network and we call it the Fulfilled By Italic, the FBI network, which ranges from some centers over in Asia to here in North America. Payment orchestration, something I love to harp on.

I really hope to build at some point is Stripe Connect, which is built for marketplaces and a lot of these big services like Lyft or DoorDash. There are no payment rails back into the biggest manufacturing hub of all China, so we've built a lot of that in-house. Then other things like creative services, data-driven merchandising, which we can dive into a lot further, really to empower manufacturers with the same set of tools that a retailer or brand does.

In turn, what they do is for the first time and oftentimes, a lot of these manufacturers' histories, these are like generational businesses that might have been around 30, 50 beyond years, they take inventory risk, which is a very different business model than what they're used to. But in return, because they're taking the inventory and they're selling directly on the Italic platform, they're able to access a lot higher yield on the existing production lines that they already have going without actually having to change or invest much in their own business.

Ben: It's fascinating thinking about these multi-generational manufacturers having 50, 80 years of experience manufacturing products and having never taken inventory before working with you.

Jeremy: The job of a manufacturer, for the most part—this is like a global phenomenon. Obviously, it's very prevalent in Asia. But if you talk to factories in Italy, France, South America, or even in the States, most don't have a distribution line or rail to sell directly to the end customer. Historically, as a manufacturer, you rely on trading companies or agencies to place you with brands or wholesale clients.

David: So these manufacturers, these are folks that might be producing stuff for Everlane, J.Crew, Gucci or X, Y, Z luxury brands, and consumers are buying them, but Gucci didn't make that stuff, these manufacturers did.

Jeremy: Right. For what it's worth, nowadays, there has been a little bit of consolidation on the luxury side of the world. So LVMH, Richemont, they've started buying direct factories, and really that's to reserve production capacity solely for their own brands. But that's still, by and large, a very, very small percentage of the overall production portfolio of these brands.

For the most part, you're right. A really high-end, expensive luxury brand can be produced one line over from a really mass-market, low-cost version. Of course, the craftsmanship and material will ultimately influence the cost that the brand pays, and then ultimately, mark that up and flip that to the consumer for 5, 10 times what it actually cost them to make, but the customer doesn't know that.

I think what we do on the consumer side is exactly like you said, David, we go to the same manufacturers as high-end brands, but we essentially empower them with our platform and tools, and our customers get to shop for the same quality of the product for 50% to 80% lower than the equivalent quality brands.

If you want to buy the brand, you're always going to buy the brand. But for value-driven purchases, I think it has struck a chord. Then this has kind of happened in the background of ecommerce as a category growing tremendously, but at the same time, what I think isn't talked about as much as private labels have grown tremendously as well. Target has over 10 $1 billion brands of their own in their portfolio. Amazon Basics, obviously, has taken a lot of market share.

Jeremy: I think value-driven purchasing as a segment has been growing quite a lot, and this is across all income segments. On the lower-income side, Dollar Tree is like the fastest-growing retailer in the US, and then on the high-income side, direct to consumer brands I really do think represent that same shifting of purchasing habits.

So really for us, we call it a B2C model where on the B2B side, we really want to build the tools to empower merchants or manufacturers who've never frankly digitized or sold online before, and then on the B2C side, it will deliver a great customer experience and product offering. Because we have a lot of products, our margins logically can be a lot lower than brands, which I can get into, of course, and we also don't pay for inventory for the most part.

David: The manufacturers are holding the inventory.

Ben: As a clarifying point, I think you started by explaining that Italic is a managed marketplace, which is funny because that is describing how these manufacturers interact with you. But the consumer experience seems to be that you're a retailer. Every single thing that is sold on your managed marketplace, I just go by on italic.com and it looks like Italic is selling me something.

Jeremy: Yeah, that's exactly right. We essentially want to offer the same quality of product, customer experience, fulfillment, everything that you'd expect to buy from a great brand or retailer just for a lot lower prices. The way we do that, of course, is one, by not taking inventory risks so we can have more leverage to get clever, I guess, with pricing, and then two, really by trying to build a portfolio of products so that you're not coming back for a one time purchase, but rather, we're building a lifetime relationship with our customers.

We really think about the flywheel quite a lot. I know this is like the most tired business concept of all.

David: I feel like it's like the Lindy Effect in business concepts. The longer it's been around, the more likely it is to be worthwhile.

Jeremy: Yeah. I think there's something to be said. Obviously, everyone studies Seven Powers, but I think for us, the whole concept of economies of scale was from manufacturing and retail. It is very literal to say the more volume you run through a production line, the lower cost each unit gets, the more efficient everything gets. So I think for us, the more customers we have, the more leverage we have to convince manufacturers. The more volume we can drive to them, the more manufacturers that we have as merchants, and then the more products we can offer.

We can trace this ultimate data, but the more products we can offer, the more customers we can acquire or retain. Our purchasing frequency and our customer demos have really changed to prove that to be true. But of course, we're still very early. We only have a couple of 100 SKUs.

Hopefully, we'll continue down that line, but we found that the model is very applicable both geographically anywhere in the world. Also in product categories, we sell anything from beauty to dumbbells. It's quite a variety.

Ben: I want to unpack the value chain here a little bit because we've used a lot of different words. There are manufacturers, brands, distributors, and retailers. I want to keep going back to my consumer experience because—a little spoiler alert for listeners, I just had a consumer experience on Italic because we partnered with you guys to do a little thank you gift for some of our recent guests. That was super fun to go through the experience.

I am still unaware that I did business with manufacturers. My consumer experience is such that I did business with you, Italic, as I don't know if it's a brand or a retailer. What's the traditional value chain look like? Who are all the players and how does it flow? What does an Italic value chain look like?

Jeremy: That's a great point. It's something we've debated endlessly internally. But also, I think, as a concept, it’s really interesting because the idea of a brand or retailer is a very much retail-specific term. But I think if you abstracted away, the concept of a managed marketplace over the past 10 years really applies to iconic companies and that's Uber and Airbnb.

When you actually book a place on Airbnb, are you actually booking an Airbnb place or are you booking it through Airbnb? Same with an Uber. Are you booking a ride with Uber or are you actually—so I think for us, we have started to think a lot about that. The brand itself that you interact with, of course, it's going to be Italic. There's no way to get around that, of course.

Italic is a consumer brand. There's a lot of loyalty and trust that we have to earn from our customers to convince them to shop from yet another consumer brand in the wide ocean that is retail. We've started to try to introduce this concept into the consumer experience more by showcasing our merchants. That's been through really showing like, hey, you're buying this handbag from the same manufacturer as Prada.

That builds the justification in terms of like, hey, why is this a high-quality product? There is why. But the price point that you're purchasing it at is meaningfully different both from the legacy incumbents such as those bigger brands, as well as the smaller, newer direct consumer brands.

Direct to consumer retail, for the most part and I know we talked about the value chain, I think it has really reverted back to the old brand model. I know there was a popular narrative a couple of years ago, which was that Facebook and Google have effectively become the retailer or the rent, which is actually true.

In the older generations of retail, what the job of a retailer was was to acquire the final customer for the brand. There is distribution, and even prior to the retailer—this is going several decades ago aside from CPG, which still predominantly uses this—the value chain would look from manufacturer to brand, brand to distributor, distributor to retailer, and then retailer to customer.

David: This was television advertising, newspaper advertising, and magazines.

Jeremy: Yeah, exactly right. The retailers were actually the ones doing that. It wasn't actually oftentimes the brands. The retailers oftentimes actually had the highest margins. Then with the direct to consumer digitization of the retailer, it became just as easy to buy from brand XYZ versus the same product of the brand from retailer ABC.

The direct to consumer really removed the retailer, but then it still has the same issue of like, okay, well, we still need to get a customer. You actually start to pay the same price more or less. So prices are basically the same, quality is basically the same. But I think the original intention of online commerce was to remove middlemen.

I was talking to an Amazon executive. He was a VP of prime for 10, 20 years. He brought up a funny Barron's article, which was from the 2000. I think it's 1999 or 2000, but basically, it's like Amazon.Bomb. It's like a very famous [...].

David: Yeah, so famous.

Jeremy: I think the thing that he said that stuck with me was actually, there was a little bit of truth. I think internet cycles—I know everyone says, oh, it's immediate, things change overnight. But I think in terms of consumer adoption behavior, it can take a very long time and a great example of that, obviously, is pets.com, with the equivalent of Chewy nowadays, or Webvan and Instacart.

I think on the retailer side, what he said on the Amazon.Bomb article, there's a very specific quote, which is the concept of Amazon won't work because what they're doing is still introducing merchants, which have middlemen. The merchant is the middleman. They buy the inventory from an international manufacturer. They sell it at a markup to the consumer. The whole point of online commerce was to disintermediate those middlemen.

I think there's a lot of spirit there that we've wanted to inherit with what we're doing with Italic. We've seen this globally, not just in North American or Western commerce. So for us, the value chain is really the core, it's not a problem but optimization that we are trying to improve upon.

Retail is one of the biggest industries in the world. It's unbelievably archaic in so many ways, despite what I think you might see online. Ecommerce, obviously, everyone knows the penetration is still very, very low. It's a $4 trillion market in the US alone. There are so many interesting things that are still going to come.

Ben: What are we at, at 15%, 18% penetration right now?

Jeremy: Yeah, and that is largely just accelerated from COVID. It's not to say online, ecommerce doesn't have a place to play in offline or retail, but that's obviously going to continue to grow. In China, it's like 30%, 40% any given year. I really do think there's a lot of interesting lessons to be taken from that ecosystem.

Ben: I would synthesize everything you just said as you're sort of both the brand and the retailer. You're working directly with manufacturers. So in the old world, there would have been a distributor. There's just no distributor at all on this model. You cut out the distributor, and you are the brand and retailer that works directly with the manufacturer. Does that sound right?

Jeremy: That's about right. We basically want to offer the same experience, quality, and design as a consumer would expect from a brand or retailer. But on the flip side, the pricing as if it were coming straight off, basically the wholesale price that a brand pays for a manufacturer, and we want to provide that to a customer. Really what we are is like bridging the two with our name, which to your point is like the brand.

Ben: So because it's your name, is everything on your site, in a way, Italic's private label? How do you think about that? Because when I bought these thank you gifts, it was a very generic descriptive name by Italic. It told me that the manufacturers had manufactured some other high-quality brands in the past, but I didn't even know the name of that manufacturer. Do you think about all of these as Italic private label?

Jeremy: The reason why we don't actually share the manufacturer itself is one, what I found, and we've spoken to a lot of people in the industry on this, the customer doesn't actually care who they're buying from. They care more about, am I getting a good deal on this? Is this not going to break the first time I use it?

What we've done more importantly on that specifically is we provided a pseudonym for all of our manufacturers. They are essentially like private labels on the Italic platform. The reason why we don't use the real name is we obviously want to protect the client relationships that they have so they don't get in trouble there, while still making sure that we can use these factual claims.

David: I would imagine, if I'm one of your factory partners, maybe eventually, they do this but not overnight they're going to stop working with Prada, Gucci, and Everlane. That's still a big part of their business. This is just also coming off of their lines now.

Jeremy: Yup. The way we think about it is twofold. One, it's yield optimization. If you are making $1 per unit producing for all of those brands, if you take inventory risk, you can double or triple that to make $2 or $3 per unit, which when reflected to us consumers is meaningless. It's like nothing. But when it comes to a manufacturer, you're literally doubling the margin you're taking off of that existing production capacity, which you by the way have to maximize at all times.

Anytime you have a line that's not running, you're losing money on it. I think that’s one side of the equation is the yield optimization. The second one really is controlling your own destiny in a more direct way. As a manufacturer, if one of those brands leaves you, okay, you got to go fire a bunch of people, you're going to miss rent, you got to fill that space again. Really, there's no other way a manufacturer makes money besides getting more clients or expanding the business they have with existing clients.

Costco is obviously a company that many people look to, but for us, we take a lot of inspiration on the merchant side, specifically. As a supplier to Costco, your margins are zero. There are other companies like this. In China, Xiaomi famously does this. I don't think it's true because I know that's not true, but they used to say, hey, we don't take more than a 5% margin on top of the products that we buy from manufacturers.

The reason why manufacturers do that is it makes the business. If you are one of the 4000 SKUs in Costco providing a cup or a wine-specific variety, Costco is going to make your business overnight. We want to get to that point where, okay, if you are part of the Italic network, we can basically automate everything from telling you make this product and this style with this quantity delivered by this date to this facility in the network, we'll take care of the rest, and then pay you out higher margins. So really automating the retail side and the merchandising side is going to be longer until components of the manufacturer value prop.

David: We talked about this in a lot of our work on China companies over the past year in our crossover episode with Tech Buzz China. So many manufacturers are becoming much more sophisticated now and are doing their own designs. The product design front, how is that working? Are you guys just finding stuff or going to manufacturers and saying, we trust that you're going to make great stuff, put it on the platform, or are you telling them what to do?

Jeremy: That's a great question. Actually, this is something that I think if you live/work in non-manufacturing countries, you just don't realize this. But in apparel, for example, as an apparel buyer in one of these brands, I will go to a factory, I will look in their showroom. This is literally every single brand. Take a style off the shelf that I like or think would do well with my target demo. Some brands are more sophisticated than that. More or less, tweak it, okay, that's my style now.

That's true in almost every industry. Electronics is a great example too. We don't sell a lot of tech accessories yet. But if you go to the battery or charging block suppliers of mophie, Belkin, Apple, and Google, yes, they will have design elements, but really, it's a deep partnership with a manufacturer and trust with them to deliver against that.

The other thing that I think manufacturers have an edge on is they see where the market is going 6, 12, 18, 24 months in advance of all of their clients individually do because they have the portfolio to look at. So I think when we go to them, in some cases, it's like, hey, we see this trend, can we chase into that? In other cases, actually, they'll come to us and say, hey, this is going to be hot in six months, let's do this.

David: Tungsten cubes are going to be super hot.

Jeremy: Who would have thought?

Ben: They're going to knock your house over.

Jeremy: Yeah. There's something to be said about the agility that manufacturers can work with. This is a bad example, but if you remember, the Indiegogo fidget spinners from 5, 10 years ago, by the time that that campaign had finished, there were manufacturers that had already produced final production quantities for those products before the original campaign even finished.

There's a huge advantage to being able to have R&D, actually, outsource from the brand perspective. Also, from the manufacturing side, it's actually a really great value-added service that allows you to retain clients better, but it's something that very few people will know unless you work in the industry that the job of a brand or retailer nowadays is to acquire the customers. It's actually not so much to design the exact product.

Ben: And they're really just tweaking. They're taking an off-the-shelf like here's your standard 15-liter backpack, we want it with these modifications in this zipper.

Jeremy: Yeah, I think that's the big secret in direct to consumer. I'm sure anyone who listens to this who works there won't be happy that I'm saying this, but I think there is a playbook. You go to an industrial design agency. If you really want something custom, they will create a CAD bottle. They'll give it to a factory that they've worked with in the past. The factory actually does the final modifications and tweaks.

By that time, the factory will probably take over the R&D and deliver the product to you. In that whole time, all you're doing is working with a branding agency, working with a media buying agency, and then you launch, PR, okay, you're off to the races. That's what a brand launch really is nowadays. There's nothing wrong with that. Obviously, the more founders that can be minted per se from Shopify and this ecosystem, the better, but on the R&D side, it's very limited.

Ben: From a business model or value chain perspective, do you take more inspiration from American companies? You've mentioned Amazon, you've mentioned Costco, or do you take more from Chinese companies?

Jeremy: I think it's a bit of a false dichotomy, personally speaking. It's not one or the other. I think a lot of American companies do take inspiration from Eastern counterparts and vice versa. So the whole craze with live shopping right now is a perfect example where every single fundraising announcement you see on that is like, look how big it is in China. We're building that for the US, okay, it's working.

On the reverse, there's obviously a lot of direct to consumer brands. Historically, this might be an interesting segue for the China conversation, but the direct to consumer brands that are built in the US over the past 10 years, there was a very strong aversion to selling on third party marketplaces. You always had to go first party. The whole narrative is own the customer relationship.

A lot of redundancy happened. A lot of data piping, data models. Ecommerce experience was siloed within these individual brands. I think that's just the reality of the American ecosystem. There's Amazon and then there's the Shopify ecosystem, the whole armed rebels movement.

Something that never quite happened in China, a couple of great examples are when Allbirds launched in China, they didn't launch on their own site, they launched on, it was like Tmall. When Gucci tries to go to China, they don't launch on gucci.com.cn, they launch on whatever Alibaba was selling. So the vendor lock-in on the consumer ecosystem is actually way stronger in China.

The strength that Tmall has over Chinese customers is significantly higher than what Amazon does, which is surprising to a lot of people. I think in terms of taking inspiration, for us, there are a couple of companies in China that I think there's a lot of parallels to American companies. I mentioned Xiaomi and Costco. They don't seem like natural comparisons, but they're very, very similar. Xiaomi is not just like a phone company, they sell everything under the sun including apparel, home goods, electronics like Peloton competitors.

Ben: They've invested in hundreds of the companies that they bring in under their brand.

Jeremy: It's a really strong lock-in. The same thing that Costco has over their merchants is also true for Xiaomi, which is if they leave your business, they could basically devastate you and kill the business overnight. So the lock-in is very, very strong. I think for us, we don't want to be so heavy-handed, of course. Our whole mission is to empower these manufacturers as opposed to whip them around with these really high volumes and low margins.

I do think there's something to be said about actively having the discipline to maintain a low margin over the course of, in Xiaomi's case, 10 years over the course of, 20, 30 years in Costco's case, and not budging from that. Because it's very tempting to just, okay, let's increase prices and take that margin because you can do a lot of interesting things with volume.

David: In both of those cases, I think you may know better than me—my thinking may be outdated here—but both Costco and Xiaomi, I believe, the whole strategy is we don't make our profits from the physical goods that we sell. We make our profits from software, services, memberships, in Costco's case.

Ben: Zero contribution margin to their overall profits from the actual retail items on shelves.

Jeremy: That's right. The funny thing about Costco, I don't know if this is a widely agreed upon topic, but the common narrative is, okay, take your margin to zero and monetize to the membership. I don't actually think the membership is 100% contribution margin product. I actually think it's very, very low. I actually think it's through interchange and the credit card networks that Costco has. The travel services, the car services, the affiliate network they have, a gas service.

I listened to the Meituan episode. I think there's actually a lot of comparison between Costco's business on the offline side and Meituan's on the super app per se, like movie booking, florals.

David: We should do an episode on Costco.

Jeremy: You should. That'd be great. I'd love it.

David: We absolutely should.

Ben: Do you know in broad strokes what the Costco-AmEx deal looks like? Of that, whatever it is, three-ish percent interchange, how much does Costco get?

Jeremy: I don't know the specifics, but I know that they have arguably one of the best deals in credit card history. That was part of the deal to switch to AmEx. I don't know numbers, but I know it's a very powerful hidden revenue driver. Unless you work in the top branches of Costco, you're probably not going to know how much they actually make money off of that segment, but they disguised it all through the GMV and in their case, revenue and membership fees.

David: That's brilliant because if that is a profit driver for them, then the more payment volume that they have going through Costco, the more profit they're going to make from that. So taking the contribution margin down to zero on all their other suite of services or as close to it as possible.

Jeremy: That's right. We could talk about Seven Powers all day, but really in retail, there's only one and that's scale. Nothing else matters. This is the same for Amazon. It doesn't matter if you've ever made money on a single site from an Amazon transaction on the marketplace or whatever. What matters is actually just the volume going through the network because then you can do so many more interesting things.

I guess, to Ben's question earlier in what we take inspiration from, we don't really want to make money on—I might get flagged for saying this, but it doesn't matter so much to me that we're making X margin or X contribution margin on the actual items that we sell. That's also why we don't want to take inventory risk because we don't actually want that on our books. It's more important that we actually build out a stronger fulfillment network because the more orders we ship out, the cheaper that it gets. The more payment volume we get, the more we can actually make on cross-border payments.

There's a lot of interesting things that just scale unlocks in retail that until you're there, frankly, you're always going to be making money through the standard retail model, which is buying low and selling high, which is one way to go about it, but I think there are more interesting things to do.

Ben: You recently changed the way that you do the membership model. So I'm curious if you can articulate what your history with membership has been at Italic and your rationale behind changes when you've made them.

Jeremy: Yeah, absolutely. For context, Italic for the past year and a half or so was members only. We offered essentially our digital equivalent to a Costco membership. Costco legal never likes when I make that comparison either. So please, close your ears during that part.

I think there are three factors to it. The biggest reason of all was scale. Again, economies of scale is very literal. It's not a concept or theory, it's very real. When you hit these volumes, prices drop here, and they can drop pretty dramatically. In our case, we were starting to do enough volume where the drop in unit costs offset the margin that we were actually losing.

Originally, on the membership model, it was just like Costco. We never made money on the product sales, we only made money through the membership fee so we can maintain these very competitive prices. Then we got to a point where in order to maintain those prices and make money, we actually didn't need the membership fee to justify it. One reason was we can maintain very competitive pricing without needing to make it back somehow.

The second reason was, going back to the flywheel, we essentially were shooting ourselves in the foot, in a way, on the first lever, which is customer volume. We're artificially constraining the total volume of buyers, I guess, the denominator of people who would purchase the new product. In this case, opening the marketplace essentially just allowed us to acquire more customers and bring more volume to our merchants.

I think the third one is just going to our mission. We want to essentially make quality affordable to as many people as possible. I think the notion of if you want to buy something good, it has to be expensive. If you want to buy something cheap, it's going to break. I don't think that's actually true.

Expensive things are actually at the point of origin when they're created, or actually in a CPI index, very affordable for most western consumers. The issue of affordability actually comes from the brands who mark it up 5, 10 times. I think for us, it was a combination of just principle, volume, and that flywheel that we wanted to spin. That was the main reason for the shift.

We finally got to a point around mid-year in 2021 where we looked at the numbers and we're like, hey, we can do this now. Yeah, we just did it last month. So far, so good.

Ben: Do you have any stats that you'd be willing to share on anything that changed overnight in terms of your funnel widening or something when someone comes to the site and converting to be a paying subscriber versus now suddenly, just uninhibited purchasing a good?

Jeremy: Yeah. Actually, one other thing that I'll mention is, I think there is a lot of subscription fatigue in the US right now. I guess the better way to put it is we don't want to play the game of free trials or gamifying the experience to get you to become a member. As a personal customer, it always sucks to jump through these holes. I think on our side, for Italic, we basically wanted to create an experience that was good enough to earn the right to convert you to a member.

Membership still exists. It essentially upgrades your shopping experience with a number of different members-only experiences and you also get credits. You pay $60, you get $120. This goes back to the notion of—

Ben: Free money, I love it.

Jeremy: Exactly, right.

David: Infinite product-market fit for selling $1.50 cents now. Restoration Hardware does a similar thing, right?

Jeremy: That's right, yeah. The difference with restoration is they still make money on margin, which is a slightly different play than value. I guess to Ben's point, we literally, overnight, 10X'd the customer. October when we launched it, I kid you not, 10 times bigger in terms of new customer adds than September, so it was a pretty big unlock. It allowed us to get a lot more creative, which was what we can do with customers.

Once we get you as a customer, how do we upsell you into a membership? We're still working on that. We're still very early on that process. But that conversion, frankly speaking, on freemium software such as Spotify is 14%, 15%. That's where we want to get to. We're not quite there yet, but so far, it's looking pretty promising.

It becomes a little bit of a more complicated customer play on a business model because instead of just selling a single hero product which is the membership, you need to sell 500–1000 products, and deliver the customer experience to convince them to join the software margin membership play. I think over the long run, it'll pay off.

David: To your point too, in the long run, you'll have other ways.

Jeremy: Exactly, right.

David: Just like Costco, to make money too. It's so funny. I'm smiling so much through all this. Literally, to get meta for one second, I think all four of your points (let’s see if I can remember them) apply just as well to the big change we just made to the LP program at Acquired.

Ben: David's 100% going to take it here.

David: Ben was like, I know exactly what David's going to do. We're like an old married couple. But yeah, like all of those, it's so...

Ben: I think we even use the phrase, shooting ourselves in the foot in locking up great episodes like this forever.

Jeremy: We probably could’ve shared notes going into this.

David: And it's the same thing too. This conversation we're having used to be limited to so few people. We love our paying LPs and we're so appreciative. They'll get to access this first, and that's one of the perks you get from being a paid member. But this should be accessible to everybody, and that's better for you, that's better for us, that's better for our listeners too.

Ben: Especially for the single transaction people. In the Italic world, it is the people who come and they're like, I don't know about this Italic thing, but I want this backpack. Whereas in our world, it would be, you share this episode out after you're on the show, and someone's like, oh, I got to get that insight about how the ecommerce and D2C world is changing. But what the heck's this Acquired thing?

Why would I pay $100 a year? I don't know if any of this other content's good. I don't want any of it. This is ridiculous. No, I want this one specific thing.

Jeremy: I think what we all realized is on the media side—I think you guys mentioned this on the Alibaba episode and Pinduoduo is the same way. Advertising is a pretty good way to make money. It's like a great business.

Jeremy: I think on our side, we were chatting with one of our investors who did a lot of the biggest ecommerce success stories globally. We're just saying, hey, this is like the same model that every single big ecommerce company does. We should probably just do that and not get too clever with—

David: Shoot back to Amazon for a sec. They're $10 billion-plus (probably more) multiple tens of billions revenue run rate on their advertising business.

Jeremy: Yeah, it's amazing.

David: That's something that only comes with scale.

Jeremy: That's right. I think the realization, again, goes back to in ecommerce, the only thing that matters is getting big. It's also, in my opinion, the most competitive market on earth because you're literally, by default, competing with everyone when you sell a black T-shirt or whatever it is.

Ben: Speaking of black T-shirts, as I was preparing for this episode, I wrote down a list of pseudo obvious questions and I was like, I should make sure we hit these at some point. It seems like you started in fashion and soft goods, where I haven't heard any single thing you've said about your mission around fashion, clothing, or backpacks. Why did you pick that stuff to start and why haven't you done things like electronics?

Jeremy: To be totally transparent with you, I don't know if we made the exact 100% right call there. I think fashion is arguably the hardest market to do because it's design-centric, it's brand-centric. People are willing to pay a premium for the brand and logo. I think on the flip side, it's a category that I felt like, if we can get right here, we can expand to basically any other category because it's a lot less fast-moving. It's a lot less seasonal, it's a lot less trendy.

The things that we had built and learned in fashion, which still to this day is predominantly like the majority of ecommerce sales. Amazon specifically he has not cracked the code on. I think there's a lot that we can benefit from that experience. The very simple way to say it is I think fashion is the biggest ecommerce market today. It's a place where people care about the price very clearly and that you can see this with Shein and Fashion Nova on a value segment, and then even on the premium segment, which is where we play.

It trades very well which is by the same quality as these top brands that you know and aspires to, but for a price point that's actually a mass market. If we can unlock the merchandising model, design, and playbook, and do it in fashion, my gut is that we can do that in any other segment. We've branched out since then.

Ben: So you gave yourselves a hard challenge. We do it here, we can do it anywhere.

Jeremy: Yes, that was exactly right. I think the team probably would have been happier if we started with something easier and then work towards that. But the other thing that I think is unique in ecommerce is there was a narrative a while ago, which was like, if you're a direct to consumer brand, you start with the hero product, and then you branch into other segments.

That, in principle, has never worked. You've seen this in so many different brands. I think it's because you get pigeonholed into, if you are buying from Allbirds, you're buying shoes. If you're buying Warby, you're buying the glasses, so on and so forth.

Ben: I was just in the Away store and I was looking at all these other things that they're selling. I was like, I would never buy any of this stuff from Away. They make that one sort of hard-shelled suitcase.

Jeremy: Yeah, it's a great product, but it's very hard to branch out from that. I think that was our intention with the marketplace model, which is like, hey, before people pigeonhole us into selling handbags or we are a fashion company, let's go and launch a whole bunch of other stuff to make sure that the consumer notion is not there. Of course, it's not like throwing spaghetti at the wall. We need to be fairly data-driven about this.

Ben: All right. So what was the logic then behind the backpacking tent that I just saw?

Jeremy: Actually, that's a great point. I live in Utah. Here, I think we all saw the pandemic boom of outdoor products. Going back to the flywheel, if you were to ask that same question a year ago, the Italic assortment would not have appealed to someone who probably lives here and is into that type of lifestyle. But that customer who brought volume from buying a black T-shirt or whatever it is, to the merchant network actually allowed us to go and convince more merchants to join, even if it wasn't from the same category.

I'm abstracting here, but the volume from all of the other products allowed us to convince more merchants to join. This is a [...] category for us, so it's still very much TBD in terms of whether this is actually a category that we want to really triple down into. That's the advantage of the inventory asset-light model where we don't have to take large capital risk by testing these things. So far it's been promising, but it is still very early. Surprisingly, actually. I didn't really know what would happen, but I think that's also the beauty of the marketplace model.

Ben: Before I jump into some of these others like, you have to ask these questions, you mentioned Shein. What is going on with that company? What is the scale that they're operating at? How are they similar to Italic? How are they different?

Jeremy: People in tech don't realize there is a retail company, which all tech investors like [...], that is bigger than SpaceX, Stripe, so on and so forth valuation-wise. The scale that they're operating on is bananas. I think it’s an environmental travesty, but as a business model, you cannot get better from a retail business than what they're doing. I talked to a number of the merchants, Shein is not a retail company. They are a data company. There's no better way to put it.

David: They're like the ByteDance of retail.

Jeremy: You put it better than I could. The volume that they're doing, I'll say this, it's in the tens of billions. The margin on that is, let's say, 30%, 40%.

Ben: You're doing tens of billions in US dollars of revenue.

Jeremy: Yes. The growth on that, they've doubled year-over-year. They've continued that growth into this volume and scale. I think they've really unlocked something that whether you or our friends would buy it or not, which probably would never be the case, they really unlocked something that I think is true, which is fashion works. It's the biggest ecommerce segment. It's a high repeat purchase if you can get the design right.

The price point matters a huge amount. People are willing to give that a shot online to a brand that they've never heard of, let alone, care where it ships from. But I think the lesson for Italic for us is one, again, it always goes back to scale. I think, specifically on the supply chain side, I think what Shein has done, and to the point of David, you brought up ByteDance, which is really interesting.

TikTok and Shein are based in China. There are obviously US teams now for TikTok, but they were started there. You can actually scale a lot of the work you put into data models compounds over time in a way that by doing it manually or through humans, they launch 2000 SKUs a day. You simply cannot do that manually.

I think for us, one, really investing heavily into supply chain technology and making that in a way where yes, we can have humans in the loop, but eventually, we want to make it as little human involvement as possible. I think on the second point, all of their volumes cross borders. This is something that I think people don't also realize because it comes to you with this shipping code from the US, but all that volume is shipped out of China.

I think that the ecosystem has matured quite a lot, but this goes back to the siloing point. A lot of that isn't routed through third-party providers that are universally SaaS, and B2B is still relatively small as a percentage of the tech ecosystem.

David: This is insane, just to give people a tangible to feel Shein here. We did this on the Tech Buzz China crossover, but we'll do it again here for people who haven't heard that. I’m on the Shein website right now. This is insane. Designer-type sweatshirts, button-downs—I’m in the men’s section—sweatpants.

Jeremy: The funny thing is you and I probably would never have shopped on Shein or heard about it if it weren't for tech people...

David: For the valuation.

Jeremy: Yeah, exactly.

David: Here we go, okay, $6.49 for a designer sweatshirt, $7.90 for sweatpants, $8.90 for cargo pants. This is insane.

Ben: Jeremy, you said they're a data company. At the end of the day, someone needs to design, manufacture, and ship all this product. How is it that they can launch 2000 SKUs a day? Who makes it? Who takes the inventory risk? Who designs it? There are actual physical, real-world things that need to happen to enable that.

Jeremy: I'm glad you asked that. They are the most verticalized retail company that uses data to make every single decision. This is the biggest point of inspiration for us. When I say data, Shein is actually an orchestration company. The software that the factories used to run the production lines is Shein's WMS, [...], and ERP. That's all proprietary.

The data that the marketing team is using to decide what models to shoot, what poses to shoot, what ethnicity of model we need to shoot this on, that's all fed through just recursive models that they've built that get better with scale too, especially when you're doing the volume and launch philosophy that they're doing. I think that the orchestration is really something to be impressed by because the thing that is probably the most impressive is that Shein wasn't the only company doing this.

There are quite literally millions of Taobao shops that did the exact same thing. They just did it better than anyone else. It is the most competitive category, and the most competitive country and market in the world. So you can imagine what type of company that produces.

David: It's exactly like the Meituan story, right?

Jeremy: Exactly.

David: There were 5000 Groupon clones?

Ben: The thousand Groupon war.

David: The thousand was understating it.

Jeremy: When you verticalize the technology to that extent, you can essentially launch a style in seven days based off of signals that you see today. Zara can even hope to achieve that.

David: So those SKUs I was just looking at on the site, it said estimated delivery times about two weeks from now. I'm assuming maybe this is optimistic on my end in terms of their capabilities, but I'm assuming probably a lot of that stuff isn't even made yet. If they verticalized to an extent where they know what to put in front of me, they could be putting that merchandise up. It's not even been made yet in volume, but it's coming out, and then it's going to, within that two-week period, go from non-existent except on the website to in my hands.

Jeremy: You're probably right. I don't know, but I wouldn't be surprised.

Ben: All right, one other Shein question for you, Jeremy. Do they own all their own factories? What does their manufacturer relationship look like? Do you share any manufacturers?

Jeremy: We don't share any manufacturers with Shein, predominantly because of the quality. I think we're looking for a slightly higher type of quality manufacture. There's a lot that we could talk about there. The question directly is, no, they don't own factories. But to the Costco point, Shein is 100% of those factories' volume. So it is a vendor lock-in, to another degree.

They also don't consign inventory like we do or run the marketplace model. It's wholly retail. When you buy inventory, you better be sure this is the right inventory to buy, the right quantity to buy, and the right time to buy it. Because if you don't, you're stuck with it. This is how so many retail companies die.

That's how they've been able to have those strong margins. The short answer is they don't own factories, but they control them. Also, the software enables them to control them, which is fantastic I think as a business. It's also good for factories. Then I think on the flip side for margin, because they buy inventory, they're able to accrue slightly. Even on that $6 designer sweatshirt, they can take margin on it, so very impressive.

David: You said an offhand comment. You think it's a travesty from an environmental standpoint. Is that just because they're producing so many goods that are not necessary?

Jeremy: For what it's worth, I don't want to get in trouble for saying this. I think Shein has a better model than Zara where in retail, there's always lag in what you launch and sell-through. If inventory is leftover, what do you do with it? It goes to the landfill, gets discarded, or gets marked down if it doesn't sell.

Whereas in Shein, because you're digital-first, you have a natural speed advantage in terms of signals in terms of reacting towards fast-moving SKUs or new launches. Then on the flip side, you also have a much stronger incentive to move the product and launch in the exact right quantity. Because if you don't, the same issue happens with the legacy of fast fashion, but to a slightly lesser degree because you're having it in your warehouse and there are other things that you can do with it.

My point with that comment is really more so towards the purchasing, but it's not actually a Shein issue. I think it's more like a consumer behavior issue of when you're unable to buy whatever you want at these prices, you're just going to buy it. You don't care if it doesn't fit you.

David: Right, like disposable clothing, essentially.

Jeremy: Yeah, exactly. I think the whole value prop of Italic is, okay, we can offer you quality products that will last you for a while. Yes, we'll never match the prices of Shein, but to a consumer who cares about quality in addition to price point, it's a perfect match. Whereas in the Shein case, it's like, I care about the design and I care about the price point, but the quality doesn't actually matter. Both will always exist. I think it's just serving two different types of customers. That's the reason why I made that comment.

Ben: How do you find these manufacturers? These are super high-end manufacturers that work with the most coveted brands in the world. It's not like they have websites, right?

Jeremy: No. That's one of my favorite parts about this business. It's a very high barrier to entry, frankly. A lot of these manufacturers are so offline and reliant on this legacy model of either going to trade shows to get clients or going to trading companies to get clients. Really, the only way to meet them is through really offline relationship building.

We have had boots on the ground in Asia, Europe, and in the states on the product side and the sourcing side since day one. That's one of our edges. One of my favorite stats, and I say this a lot, but we work with 8, 9, or 10 publicly traded manufacturers now. Of that group, I'm pretty sure all of them don't have websites. It's just to show the level of digitization that has happened.

We talked about this right before the show, but I think the lower quality manufacturers, which there's a lot of them, from a production capacity side, they probably do less than these big guys, but on the quality side, it is probably a little bit lower. Those have predominantly been digitized over the past decade first by Alibaba, then by AliExpress, then Tmall and Taobao, and then later by Pinduoduo. Of course, there are Western counterparts to that as well like Wish, Oberlo, and so on and so forth.

On the higher-end segment, it's still the same model that they were running for the past 50 years. That's why I was personally excited by this Italic opportunity. The way they do things is still very old school. On the flip side, it's extremely efficient the way that these manufacturers are run and just by the function of having to make a margin.

To put it in perspective, the average manufacturer margin that we work with is typically between 15% to 20% on the cost of goods. I know we had the TSMC podcast. It is the complete opposite of that. No leverage, zero margin. A lot of that margin goes straight to deposits towards equipment, labor, rent, and materials. A lot of times, you run it at breakeven, and you have to because you just need that volume to run the line.

I think for Italic, it should really run again, like optimizing those yields on the existing production capacity, and then again, having a more controlling your own destiny type of experience with running your company as opposed to being wholly dependent on a set of clients who can leave you.

Ben: All right. If these companies are so hard to get in touch with, what's the entrepreneurial story behind your first manufacturer relationship?

Jeremy: It's terrible. Polo is our first sourcing manager and employee. He and I visited, I kid you not, this is basically one every other day—150 manufacturers in 2018 in 9 months. Actually, no, sorry, we launched in November. So that happened in literally six months. We would do multiple factory journeys a day.

David: Is this mostly in China?

Jeremy: It was in Italy, China, and the US. The first two were in China that said yes. I think the crazy part about manufacturing is like a naive kid coming into the factory floor, meeting with the owner, and he's telling you, hey, make stuff for Italic. We're not going to pay for it, and we're only going to pay you for it after we sell it in six months.

David: Real great pitch there. Way to go, Jeremy.

Jeremy: That's essentially what it boils down to. These are factors that have made money through. I take a deposit, I put that towards my people, rent, materials, and then I'll get paid after the production line is done at the end of it. I think the only reason why they said yes was on the lower end side.

We can talk about Pinduoduo, AliExpress, Xiaomi, and so on and so forth. They have seen the rise of ecommerce in Asia. Really, they don't benefit from it whatsoever. I think the way I like to frame it to investors, for example, is that it doesn't matter as a manufacturer if you're producing for Everlane or for J.Crew. It's the same thing. It's like one and the same client.

It's just production volumes and you take your cost plus margin, essentially, which I know we talked about, as well. It's actually a really bad incentive in this case because in the traditional manufacturing case, as opposed to government contracts, your client has a natural incentive to come to you and negotiate those costs down every single year. Then on the flip side, they're also trying to increase their margins because customer acquisition gets more expensive every single year.

They're raising prices, which is bad for the customer. They're squeezing the manufacturer, which takes that 15% to 20%, down to 10% to 15% every single year. It's like a death spiral, and eventually, you have to be like, hey, guys, we got to get out of this client, and then you got to find a new one. I think there's a lot of pent-up demand for this type of product on the manufacturing side that I think we were able to activate. A lot of this 150 actually ended up working with us, but we didn't have a site yet. So I think we needed some proof points first.

Ben: When you say pent-up demand for this, it sounds like the savviest business owners want this because of a certain business principle that I've heard you say in the past. I'm curious if we can go into a little bit of detail on it. Whoever owns the inventory owns the upside. How does that work? How are they coming to that realization?

Jeremy: As a manufacturer, you essentially just are producing products for someone else to buy from you. Let me frame it in numbers. Let's say I'm talking about this sweater that I'm wearing. Materials, labor, et cetera, it costs $16 all in for the factory to produce. They take 20%.

Let's say they sell it to XYZ brand for $20, they earn $4 per unit. Not that the brand takes that $20, and in a legacy retail sense, they might sell it to a retailer for $50. Okay, the brand takes home $30, the retailer sells it for $100, so 5X. It's actually pretty conservative.

Retailer takes that $50, and of course, they have to run their ads, bring in their customer acquisition, but more or less, that's the retailer margin. So on a $100 transaction, $16 is the cost, $4 goes to the manufacturer who actually made the product, $30 goes to the brand who attaches their name to the product that, frankly, was made and designed by the manufacturer, and then the retailer makes $100.

Okay, that's traditional. Direct to consumer, maybe nowadays, like Facebook is super expensive. We take that consumer price down to $80 and the brand owns the majority of the margin, but they have to pay for acquisition. Okay, still the same thing, $16 cost, $4 to the manufacturer, and $60 to the brand. I think as a manufacturer, eventually you're like, hey, this sucks. I've been doing this for 80 years and all I make is $4 on this $80 shirt that they're selling.

A lot of these manufacturers have actually tested consumer distribution. It's not for lack of effort, but you have to also think about it from the manufacturer's side. Their competency is not in marketing, branding, design, and consumer, it's in optimizing production volume. I think that's why the division of responsibilities is actually very helpful because Italic does this and they do that, same with the Shein example that we talked about.

They've tried to sell on Amazon, they've tried to sell directly to retailers, they've tried to sell directly on domestic ecosystems, whether in Italy, China, Japan, or Thailand. I think by now, I have personally spoken to well over 1000 factories. I've seen it work like twice ever. It's just not in their wheelhouse.

I know the demand is there. Especially the second generation, third generation, or fourth generation owners, they grew up with the internet, they grew up with ecommerce. They’re like, oh, it'd be awesome to be able to play in that. I have a bunch of friends who have family businesses similar to mine where the family business was in manufacturing. They went to school in the US, they launched a direct to consumer brand essentially as a consumer wrapper against their family business.

It did great. There are betting companies that I'm sure don't want to be mentioned here and there are furniture companies that have done really, really well. All they really needed was the distribution side to unlock that next segment of growth because as a standalone entity, that's only done B2B for 80 years, 50 years, you're not going to be able to do that for the most part.

David: Does your family have a background in manufacturing?

Jeremy: Yeah, that's how I got into Italic. It's kind of funny. You grew up always thinking you're never going to do what your parents do, and then here we are. The quick story with Fountain was like, I knew very quickly, hey, enterprise software is not for me for five years in. A lot of kids don't drop out of school to work on HR software. I had started thinking about what I wanted to do next.

I think I spent quite a lot of time with my family during that time traveling to Asia. They've been in manufacturing for 40, 50 years. It was what I knew growing up and what a lot of those dinner conversations were. I'm sure quality control is a very popular topic. This was around the same time as the second generation of direct to consumer.

Companies were starting to pop up like Glossier, Away, as opposed to the first crop of Everlane and [...]. I think on the manufacturing side, when we started speaking with them, just on a friendly level, not even pitching them, it's like, have you heard of Everlane before? It's like, yeah. But what shocked me was they didn't know or let alone care that it's ecommerce or not. It's just like another client.

I think on the manufacturing side, there's a disconnect from the consumer in terms of the product that they're making. The same timeframe when we started Fountain, that was also in the true golden days and heyday of Uber and Airbnb coming up. The whole narrative around where Airbnb is the biggest hotel chain in the world, doesn't own a single hotel. Uber, biggest taxi fleet, no taxis.

It's a significantly more infrastructural challenge. That's why I think the management of the managed marketplace component for retail is much more centralized than a decentralized network like Uber or Airbnb where it's peer to peer. But regardless, I think that was kind of the notion that, I guess, started the idea around Italic. It's exactly true, which is, whoever owns the inventory owns the upside. When you own it, you get to charge whatever you want, but only if you can actually sell it to a customer.

Ben: Fascinating. All right, the closing question before we ask for your parting words. Can you tell us the story of how you made the decision and how it's gone for you as a company to list this manufacturer, also manufacturers for these brands you've heard of right there on the site on the product page? Because that shocked me the first time I saw it. I was like, what, they can list that?

Jeremy: Essentially, there are three things happening for the consumer. We're taking a lot of what is very common in trade and bringing it to the consumer. I think the advantage we have is that consumers nowadays are more educated and informed about what they're buying than ever before like there are Reddits, there are forums.

This wasn't actually as much of a shock as I think it would have been like 15 years ago. It's actually funny. The most common problem we have to overcome is like, this seems too good to be true. What's the catch? We won copyright and trademark.

On the copyright side, almost every one of our products, we either designed in-house or directly in collaboration with the manufacturer. The only cases where we don't, we bring in a contract designer or use one of our in-house networks on the product side to design a product if we need to, and that's fairly rare.

Ben: You're not taking a shirt that's identical to the J.Crew shirt and saying, this is the Italic shirt made by the same person that makes it for J.Crew.

Jeremy: Yeah, exactly. Then on the trademark side, one, it's a factual claim, two, it's comparative advertising. We all grew up seeing those Pepsi and Coca-Cola ads on TV. This is the truest expression. It is the most literal interpretation of that marketing law, which is like, a factual claim, this is the same manufacturer as XYZ, we're not using the logo, we're not using any likeness of the brands that we're referencing.

Again, if you work in a trade, one, we're essentially offering the wholesale prices that brands pay to manufacturers to consumers. Then two, anytime a brand evaluates a manufacturer, they're always going to want to know about the client list, and they'll always find out about the client list. But of course, they're not going to advertise the client list because those are direct competitors.

David: Also, to our earlier conversation, J.Crew didn't design that T-shirt anyway.

Jeremy: Yeah, that's true. I can't say that without factually assuming it, but more often than not...

David: The T-shirts that J.Crew is selling, they didn't design.

Ben: Are you disclosing a detail of a confidential contract?

Jeremy: No. One, we want to make sure what they say is true. It's not just, hey, we produce for XYZ brand. We actually want to make sure, go in, and verify, yes you have a contract in place, and this is a real thing. Then two, nowadays, I think manufacturers have more leverage against their clients. For example, one of the reasons why [...], and this is my opinion, but one of the reasons why they verticalized these factories was to avoid competition, also securing production capacity with the same manufacturers.

Our principle is these are merchants. There are merchants on the Italic marketplace. We'll do whatever they want. If you want to say brands, sure, that's very helpful for conversion. If not, okay, that's totally fine, we'll take it off anytime you want to.

There have only been two cases ever where that has happened where the merchant came in and said that. Those were cases where a brand was controlling 40%, 50% of that merchant’s volume, so we wanted to be very careful about it. But more often than not, it's been something that I think has helped them and they appreciate.

Frankly, we lawyered up very aggressively in anticipation of these being issues, but really, it hasn't been. For the most part, we've been around for about 3 ½ now. We'll get letters once in a while. We never, I guess, have acted on any of them. Mainly because going to the trademark point, comparative advertising, and factual claim.

David: To go back to China, the Chinese ecommerce landscape for a minute. One company we didn't talk about as much, but I'm curious your thoughts on, is JD. What are they doing in upscale goods? Is it anything like Italic where they're part of an inspiration for you guys? I feel like I don't have a good handle on JD's place in the ecosystem, and I’m curious if you do.

Jeremy: I think you guys talked about this before, I think it was the Pinduoduo episode, but Alibaba is not Amazon. JD is actually Amazon. The reason why it is is because of the verticalization of the supply chain and the infrastructure that they provide to the brands and merchants that list on JD as opposed to Alibaba, which is predominantly peer-to-peer, which is more like an eBay and why I think the advertising moniker makes a lot more sense for that model.

For one, I think all of the major Chinese players have essentially adopted—by the way, the industry term that I think has started the crop up for what we do, which is straight from manufacturer like commerce essentially is C2M, customer to manufacturer. It should be M2C, but don't blame me.

JD launched their own C2M segment. Xiaomi has a platform called Xiaomi [...], which essentially, is exactly what we do. Alibaba on Tmall has a segment as well. NetEase has one. Every single big letter—

David: Really, NetEase? Wow.

Jeremy: Yeah, NetEase is a pretty big player on this now. I think the interesting thing was, with the exception of JD, all of these other ones were predominantly fulfilled straight from the manufacturer, which is a very different model than in the US because dropshipping in the US is a terrible experience, whereas dropshipping in China is amazing because it's one to two days shipping, it costs $1, and it can arrive at your door.

The only exception to that is JD, who actually is like, no, let's warehouse this. Let's run all of our fulfillment operations directly, direct to door, direct to store, or direct to a pickup location. I think for us, we have to adopt the JD model. There's actually no way to drop ship to a customer straight from the factory that delivers a good experience.

There are ways to do it better, but for the most part, we prefer a consolidated verticalized experience because the cross-border fulfillment has to rely on that for a good experience. Most of our inventory, for what it's worth, is still in North America, but that is a learning lesson we've taken from them.

Ben: All right, Jeremy. Parting words for listeners, and where can they find you on the internet?

David: Besides the Acquired Slack.

Jeremy: That's right. It's a great Slack. You should join. The biggest thing I've learned, at least, in this is, I still feel like we're very early on the C2M wave. Not many people on the tech side know about this, but it's the fastest-growing segment in retail by far. It's not the things that might be hot in the VC ecosystem right now, but it's huge.

I think it's going to continue to grow. I don't think you should invest in our competitors. I think you should come and speak with me or join us instead of trying to start something. But regardless, I will say that. I think one thing that longer term, what we're really thinking seriously about is taking a page out of the AWS playbook and actually offering our infrastructure up to other providers and operators as well. That's like a whole nother topic.

Parting words is don't sleep on retail. It's still one of the biggest markets in the world. Italic.com is where you can go and shop from the store. I think we offer some great products. Hit me up. If you want any codes, just, I guess, try it out. I'm @jjeremycai on Twitter.

Ben: Awesome. Thank you so much, Jeremy.

Jeremy: Yeah. No, thank you so much for having me. It was a lot of fun.

Ben: Listeners, we'll see you next time.

David: We'll see you next time.

Jeremy: See you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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