ModCloth and The New Generation of Online Retailing

by Josh Goldman

As an investor who spends a lot of time focused on leading-edge consumer e-commerce, I’m very pleased to announce our substantial investment in ModCloth, a company we see as one of the most innovative and exciting businesses in the industry. I’m truly honored to be joining its Board of Directors, and to have the opportunity to work with the remarkable founders, the impressive executive team and all of the talented employees as ModCloth embarks on this next phase of growth.

The ModCloth Story 

The story of ModCloth is very compelling, having been founded in a college dorm room by Susan Gregg and her then-boyfriend, now-husband, Eric Koger, as a way to showcase and capitalize on Susan’s passion for finding unique fashion items at small boutiques and thrift stores. Susan is the heart and soul of the company, creating and adapting its sense of style, overseeing its product selection and keeping that innate emotional connection with the prototypical “ModCloth Girl.”  Eric is the perfect complement, bringing a passion for innovative product design, operations management and finance systems together to fulfill the dream of creating this very new type of online retailer. With incredible vision in both the fashion and the retailing sides of the business, the couple soon turned the hobby into a full-time, and now large-scale, online retail operation. The extraordinary growth that followed has made ModCloth into one of the leading online fashion retailers in the world, reaching more than five million monthly unique visitors.

As remarkable as this growth and success have been, we believe ModCloth is just at the beginning of its rise into one of the next great retail brand names. For an investor, the combination of impressive year-over-year growth, strong financial operating metrics, a great executive team and a leadership position in a very big market is undeniably attractive. The story grew even stronger for me when we began to see the unprecedented engagement and passion of its users, the truly innovative use of social media, and the way the company harnesses the power of its online community for new types of operating efficiencies. In short, ModCloth has all the key ingredients that investors look for as they assess the probabilities of the company becoming a disruptive leader in its category and a highly successful venture investment.

Putting the “Social” in Social Commerce

Online retailers today are racing to adopt “social” strategies, seeing them as a key to a more engaged customer base, lower customer acquisition costs and higher brand affinity.  As retailers assess this opportunity, their hopes are that these improved methods of interacting with customers yield greater sales, higher margins, faster growth and increased competitive positioning.

While the industry is still trying to coalesce around a common definition of what “social commerce” really means, ModCloth has embraced the concept of social in a completely holistic and pervasive way.  At ModCloth, “social” is not just a way of marketing the company or getting users to recommend or comment on an item in hopes of influencing a friend.  Rather, “social” is a way of integrating the customer into the operations in virtually every area of the business.  It’s a way of letting customers help and talk to each other, but more importantly, it’s a way to let them truly have a dialogue with the company.  In establishing that valuable dialogue, ModCloth is showing that it can use this information to make smarter business decisions versus companies that don’t obtain this frequent and genuine input. More importantly, the company is showing that it sees the results of those smarter decisions in measurable improvements in its core operating metrics and financial results.

ModCloth has among the most passionate, supportive community of users that I’ve ever seen, especially in the rather fickle world of online fashion retailing.  With that level of passion and engagement from the community, ModCloth’s customers are demonstrably more loyal, more supportive of the brand, more forgiving of mistakes, and they truly feel invested in the company’s long-term success.  More importantly, this engagement with its community is indeed enabling ModCloth to make faster, smarter and more informed business decisions, and enjoy much healthier core operating metrics in everything from gross margins, to inventory risk, to acquisition costs to customer lifetime value… metrics investors and financial analysts put near the top of indicators for long-term success.

This may well be the first of a new generation of companies that are built from the very beginning to bring the “community” into virtually every aspect of business operations. ModCloth’s highly creative staff sees this effort not just as a marketing tool, but as a fundamental competitive advantage for the business… and by all measures, it’s working.

I’m proud to be involved with the incredibly talented and innovative team at ModCloth as the company continues this compelling journey.  Our investment represents a large bet that these innovative strategies will result in a fundamental shift in the industry and provide ModCloth with significantly better financial results than its peers.  The ModCloth story has been a good one so far, but we happen to think that the best chapters are still to be written.

_{In part two of this blog posting, I’ll go into more detail about how ModCloth is setting new standards in the ways in which it interacts with its customers, and embraces an ever-expanding world of mainstream and niche social media sites.   In part three, I’ll show how ModCloth embraces “community” and “social” in its internal operations, setting up virtually every part of its organization to take advantage of its unprecedented community engagement.  At ModCloth, the consumer has direct input into everything from the inventory levels the company will purchase, to the editorial content on the site, to the actual designs that will be sourced for new fashion items.}