Here is Why Non-Obvious Startup Ideas Can Yield the Largest Results

Amazon. It is a household name. It has become so synonymous with Internet companies that the French have invented a disdainful term including Amazon: “les GAFA,” which they refer to as Google-Apple-Facebook-Amazon to talk about American dominance of the Internet.

Try to imagine if you *didn’t* already know Amazon and the company walking into VC meetings telling people they were going to disrupt the selling of all goods starting with books but then extending into electronics, apparel, toys and so forth. It would hardly get a frothy reception for the first few years until it showed drones delivering the goods some 15 years later.

Amazon is emblematic of the sort of company that mostly disrupts industries *behind* the scenes. It wins through better distribution, logistics, inventory management, warehousing, customer support, merchandising, cross-selling and ultimately on price & scale. These are hard things to initially comprehend until you see them in full force as local retailers get wiped out due to their albatross of high real estate costs leading to either higher prices to consumers or lower margins on their p&l statements.

Thus Amazon’s market cap is $200 billion.

The obviousness now of how this retail fulfillment powerhouse dominated eCommerce in the US is precisely what excited me the time I heard the concept of MakeSpace except in reverse. Sam’s goal was to build a tech company fulfilling the need for storing physical items in the cloud and to build a nationally-scaled business that would be hard to compete against. I had a few VC friends who immediately saw the parallel but others were scratching their heads saying, “How is a physical storage company — even if you pitch it as “cloud” — really a tech company?”

Let’s start with some basics.

In the United States alone the self storage market is worth $24 billion in annual revenue and is totally fragmented with the largest player having around 10% of the total market. And let’s say this — they use zero technology today and I have yet to meet a single person who loves their self-storage provider. Not one. Most people who don’t know the industry well assume self-storage is just used in dense, urban cities like NYC but of course this isn’t the case with NYC representing just 3% of the national market and sub-urban markets like Dallas, TX being amongst the top 5 markets.

Many, many markets use storage and in totally different use-cases than you’d imagine. It’s not just big in Dallas but in San Diego, Phoenix and Sacramento but also Boston, Chicago, Washington and of course San Francisco.

How valuable are these legacy businesses? The largest in the US is worth $35 billion and several of the smaller competitors listed above are also valued in the billions.

And they have. Zero. Innovation. At all. The stocks are managed as REITs (real estate investment trusts) and their tenants are you skis, bikes and winter clothes.

MakeSpace set out to reinvent the whole category. We ship boxes to your house, you pack ’em and we pick them up for free. We photograph your items from an aerial view and provide you with a beautiful app that securely shows you your goods itemized by bin. If you want any individual bin shipped to you at any time we need 24-hours notice. So your tuxedo can be back in time for a wedding, your skis can arrive before your annual trip or you can swap out winter clothes as the flowers begin to bloom.

The value prop is pretty clear. Most customers won’t drive more than a few miles to a self storage unit making the incumbents essentially local retail businesses. They are essentially Blockbuster Video stores with their eyes in the headlights waiting for somebody with centralized storage cost advantages and logistics capabilities to render them outdated. Today’s asset — real estate — is tomorrow’s albatross. It is the classic “innovator’s dilemma” and we know how that ends. I have no doubt that multi-billion startups will disrupt this business with both a higher-quality product and lower costs.

And here’s the thing. The reason as consumers we buy repeatedly on Amazon.com is both price AND service. It’s an amazing experience to get your purchased goods shipped to your house in 1 day while at the same time having more inventory choices, lower prices and easy returns. It’s a no brainer.

How do people feel about MakeSpace after less than 18 months operational in NYC?

Simply put — if you give people an amazing experience in a market they would love to use but generally don’t due to the poor quality of experience you can build amazing brand loyalty. When you think about “disruption” in the sense espoused in Clayton Christensen’s great “Innovator’s Dilemma,” market disruption is nearly always led by LOWER costs, which in turn often INCREASE the market size and expand the number of participants. It’s what led me to my thesis that all great Internet companies are “deflationary” and what led me to invest in MakeSpace in the first place.

Here is the money chart …

42% of today’s customers would simply not store goods in a traditional self-storage facility. These are young, urban dwellers who don’t have the time, means or inclination to schlep stuff to an awful location on the outskirts of their city and pile their goods into a 6x6 box where 60 days later they’ll have no idea what they put in there and no easy means of getting it returned. And if you think 42% of our customers is a large percentage to increase the market just wait until we drive down costs, centralize nationally and drive up brand awareness.

Are the dinosaurs worried? Of course they are. They know they can’t beat startups on innovation so they’ve started taking ads in NYC saying, “don’t trust your stuff in the cloud.” Ha. How worried should they be? In just its first year of operations in NYC, MakeSpace captured > 2% of the new storage market customers in its target market with almost no money available for marketing or customer acquisition since we were a startup. It’s one thing for Blockbuster to have missed the trend but today’s self storage has more history to draw from and must know the weight that today’s assets will become around their necks.

Since we have about a 5-month payback on today’s acquisition costs and our LTV / CAC ratio is already > 4.5x — and increasing through lower CAC & higher LTVs both — we have plenty of room for growth once we decide to properly capitalize the business.

But, Mark. Ok, I get this centralization advantage. But can you really tell me MakeSpace is a tech company? Really?

Actually, much more than you know, which is why much of our last round of capital went towards building tech infrastructure that will enable us to differentiate from many of the copycat upstarts that we’re already starting to see. Some have literally stolen our website images, prices & messaging — as though somehow that is the magic. Try copying Amazon’s front end and winning!

What tech has our capital raised gone into? Driver routing systems, scheduling, inventory management & tracking, warehousing systems, photography automation, customer service applications as well as the obvious front-end apps such as our consumer apps for keeping track of your goods. We have an amazing team of W2 drivers in NYC, Washington D.C, and Chicago with regional warehouses in each territory and our technology makes it more efficient for them to do their daily pickups with least-cost routing. But as you can imagine we’ve also built technology to allow third-party drivers in markets where we don’t want our own vans. We have built UPS integration to allow a product called “MakeSpace Air” to allow us to do national pickups.

We are building a national business and a beloved brand in a category that is large, fragmented and universally hated. I know that storage sounds unsexy to most but in terms of disrupting a large market where competitors can’t respond? It’s a market made in heaven.

So I’ll leave you with one final thought. Imagine a market in which you store other people’s goods centrally & securely on a national scale. Imagine a market in which you have both your own vans and third-party drivers. Imagine a business that is a consumer or small-business product offering but with a revenue stream that is like a SaaS business. With all of these components in place — you can imagine the obvious tangental markets in which we’ll “move” in the future. We believe we can expand our TAM in the future from $50 billion to $75 billion in the US alone.

So if you ask me, I’ll go for teams building physical infrastructure technology businesses any day of the week. Our businesses will be harder to build but if we’re successful will provide more defensibility and more secure cashflows than consumer application businesses that are all the rage.

And we get to compete against dinosaurs with no tech skills and cash cows that must be protected while we are the barbarians at the gate.