PODCAST

Episode 19: Jet

— ·47 min read

Brief

Walmart’s acquisition of Jet.com for $3.3 billion (about $3.0B cash + $300M in stock/retention incentives) and the decision to have Marc Lore run Jet and Walmart.com is the central subject of this episode. David traces Lore’s trajectory from founding Quidsi/Diapers.com (sold to Amazon for $545M in 2010) to launching Jet in summer 2014 with an aggressive fundraising and marketing strategy: roughly $220M raised pre-launch (July 2014 $80M; Feb 2015 +$140M), a July 21, 2015 public launch, a $350M round in Nov 2015 at a reported $1.4B valuation, and public metrics citing 2M active customers and $33M in revenue for Dec 2015 and $90M in revenue by May 2016. Lore explicitly pitched Jet as a Costco-like, price-first alternative to Amazon — $50/year membership (initially free for six months), heavy advertising, and incentives to bundle purchases that reduce fulfillment costs.

Ben and David dig into Jet’s product and unit-economics specifics: dynamic discounts that drop prices as customers add items that are co-located in the same fulfillment center, 1.5% back for using a debit card (sharing interchange), and discounts for opting out of returns — all requiring substantial tech and financial modeling. They recount Jet dropping its planned membership fee in Oct 2015 and debate why Walmart paid the price: access to Lore and his team, proprietary technology, and a different customer base (urban/millennial) that Walmart lacks. Both hosts are skeptical Jet can dethrone Amazon — invoking Ben Thompson’s Aggregation Theory and the idea that the best customer experience (price + convenience + selection) tends to win online. They frame Walmart’s move as an expensive but defensible hedge: Walmart buys talent, tech and scale capital to try to modernize its e‑commerce arm, accepting that success is uncertain but that the expected-value case (small chance of a very large payoff) justifies the spend. The hosts agree Walmart will likely run Jet standalone for a while to extract learnings but are doubtful Jet will ultimately become a lasting #1 competitor to Amazon without structural changes in the sector.

Cleaned source text

title: "Episode 19: Jet"

author: "Acquired"

source_type: podcast

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extraction_method: generic_website

Transcript:

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

Ben: Welcome to Episode 19 of Acquired, the podcast where we talk about technology acquisitions. I’m Ben Gilbert.

David: I’m David Rosenthal.

Ben: And we are your hosts. Today’s episode is the big news in the last few weeks – Walmart acquiring Jet.com.

David: I think this set a new record in terms of episode requests that I got, Ben.

Ben: Yeah, if you combine email, Slack, in person, Twitter, I think I personally saw north of 10.

David: We got to give the people what they want.

Ben: It’s true. Before we dive into it, I want to do a community spotlight. We have a listener. His name is Chris Laurent. And he has an app called Nowdue, invoicing like it's the future. So Nowdue is to do super fast invoicing for teams. It’s actually a Slack app powered by Stripe. And if you’re interested in doing some invoicing for your team, you should go check him out. They’re at Nowdue.ai, which I love those .ai TLDs.

David: Absolutely.

Ben: So listeners out there, let us know. Get us at

[email protected]

, on the website, on Twitter if you would like to be on the next community showcase, and we’d love to tell everyone what you’re up to.

David: Yup. Or on Slack. If you’re not in the Slack community, go to our website to join. Lots of good discussion from lots of people, not just Ben and me.

Ben: Acquired.fm. A breath of fresh air from David and I.

So, on to this week’s topic. David, do you want to do the acquisition history and facts?

David: As always. So, Jet.com blockbuster acquisition this month by Walmart. Over $3 billion for a company that was 2 years old but it had only been public for a year. But the story actually starts –

Ben: And not gone public but –

David: Or it had been launched publicly for a year.

Ben: Yeah, yeah.

David: But the story starts way before then actually. Back in 2005 when Marc Lore who is one of the co-founders and CEO of Jet founded another company called Quidsi which you may or may not have heard of, but you may know its main operating business which was Diapers.com.

Ben: Killer domain.

David: Killer domain name. And the Quidsi story actually starts even earlier than that when Marc started his first company which got sold to Topps, the trading card company, and he moved down here to Seattle to run this new division of Topps. When he was here in Seattle, he was thinking about going into e-commerce and starting Diapers.com. His daughter went to a private school here in Seattle that Jeff Bezos’ children just happen to go to as well.

Ben: Hey.

David: And so they met at like a school picnic one day and chatted about e-commerce. Little did they know the intersections that would be to come.

Ben: Wow. So this is 2001 before he started Quidsi. Jeff was obviously, what, 6 or 7 years in full force with Amazon.

David: Yup. Sometime between 2001 and 2005 this happened.

Ben: Wow. Okay. So e-commerce was a thing. Amazon - they were not a startup anymore. This was a very real company. It’s not like they were both ideating that maybe e-commerce will be a thing together.

David: No, Amazon was a thing. Public company. And Lore was thinking about jumping into the fray. Which he did in 2005 when he started Diapers.com. And there is a great history of Diapers.com. It would make a good episode for us someday, but it’s already been covered very well in The Everything Store which is the fantastic book about Amazon. The punch line is that after a protracted negotiation during which Amazon tried to basically clone and then compete with an undercut on prices for everything, Diapers.com and all of their other Soap.com and many other properties. Amazon ended up acquiring the company in 2010 for $545 million.

Ben: Do you know why that didn’t work? It seems like Amazon would have the resources to continue to, you know, deep discount went on price and that eventually put them out of business.

David: They would. But there is an important other player in this story, which we will see comes back again the second time, that Walmart was also interested in acquiring Diapers.com.

Ben: Oh, wow.

David: And had made a bid for the company.

Ben: I see. So Amazon’s strategy maybe was working but –

David: And very defensive for them. Literally in The Everything Store, Brad Stone writes about that Bezos gave direction to his corp dev team like do not under any circumstances allow Walmart to buy this company.

Ben: Wow, yeah, super interesting.

David: Super interesting. So Amazon buys Diapers. Lore and the many employees of Quidsi go and work for Amazon. Quidsi was established in New Jersey, actually in Hoboken. So, Marc moved.

Ben: And as was Jet, right? Jet’s space –

David: As was Jet. So, Amazon much like they did with Zappos left Diapers alone. It’s still an independently operating company full owned by Amazon. Lore continues to run it for a couple of years and two years later in 2013, he leaves and he starts thinking about what he’s going to do next.

Ben: Was that on good terms? Do you know how he left?

David: Well, it’s interesting especially now that the Jet acquisition has happened. As chronicled in The Everything Store and elsewhere, the negotiations and the tactics that Amazon used in acquiring Diapers were aggressive. Lore was not a fan of Amazon and especially after having worked there.

So when he leaves in 2013 which is pretty quickly, we don’t know what the terms of his retention package were but I got to imagine it was longer than sort of two-ish years that he stayed there. He’s kind of got a chip on his shoulder and he wants to gun for Amazon and Bezos kind of with a vengeance.

Ben: Yeah, and I think he rips on when he was starting Jet or talking about the reasons behind starting Jet, he rips on Amazon’s culture a little bit. He’s talking about among the many ways that he wants to compete with Amazon on Jet being – well, I’ll leave you to tell the business strategy – but he wanted to create a place that’s not such a cutthroat culture.

David: Absolutely. I’ve got the quote right here. He gives a quote in The New York Times after he leaves Amazon and as he’s starting Jet. He says at Amazon, “I saw that it didn’t matter how you treated people. You just paid them enough so you didn’t care if you burn them out, and then you got new people and burn them out. It was an environment of very short-term thinking.”

Ben: Wow. We talk about Amazon all the time on the show and we praise them for their incredible long-term thinking.

David: Yeah, I don't think of Amazon as an environment of short-term thinking, but we’ll get to that.

So he starts Jet in the summer of 2014. The vision, the idea that he has is that Amazon obviously is very, very good at what it does. But Amazon’s core customer is not your average American. It’s wealthy individuals, upper middle class, people who actually care. They care about price but they also care a lot about convenience and selection – Amazon’s holy trinity, which we will come back to. And he thinks there’s an opportunity to compete directly with Amazon and to compete on price to be the low priced discount retailer on the internet. The model that he has for that is Costco.

Ben: Another great Seattle company.

David: Another great Seattle company. The intersections are just amazing here. So another quote that he says as he’s starting the company in this interview is he says, “There’s this huge middle class of people that are going to be spending more and more dollars online and for them, it’s going to be all about price. They’ll be willing to trade off convenience in selection versus price.”

So he has this big vision he’s going to win the core middle class of America away from Amazon. And he’s not going about this small, he goes big. So he raises a seed round from NEA, Excel, Bane, and WTI as he’s starting the company. So this is July 2014, one year away from launch, just starting the company, raises $80 million right off the bat.

Ben: Wow. Yeah. I mean anybody who’s going out and raising a seed now and knowing what valuation you’re getting, like there are a small handful of people in the world that could do a seed a like that and instill enough trust to say, “Yeah, you know, my seed venture…” you can have what, 20 to 25 percent of something for $80 million?

David: And he’s not done. He doesn’t stop there. February of 2015, we’re still months away from launch. They haven’t sold a single thing. The website isn’t live anything. He raises another $140 million. So before they even launched the company, launched the product, he’s raised $220 million.

Ben: Wow. And I remember hearing about this when it was going on and everyone that had been burned in the late ‘90s talking about oh my God, the bubble is back. This company, it doesn’t have a great plan to make revenue. They hadn’t launched their product yet.

David: Pets.com all over again.

Ben: Yeah.

David: Well, needless to say there was a lot of hype when they finally launched on July 21, 2015, so just over a year ago as we sit here today. When they launched, they spent a ton of that money on advertising, customer acquisition. I remember I was in New York City last fall shortly after they launched and Jet had bought out/felt like half of the subway is in New York City. And there are billboards all over the place, all over the country. They did not play small ball here.

Ben: Yeah. I think they had a pretty successful organic invite campaign too where they gave people 6 months of free membership. I think it was called the Jet Insider Program. Yeah, I have it here. And referrers were given up to, yeah, that’s it, 6 months of free site membership and they got almost 400,000 people/350,000 people that signed up for their early membership programs. So I mean that’s pretty incredible to be able to build a base of 350,000 users pre-launch.

David: Yeah, absolutely. They did it by, as you mentioned, giving away free membership for 6 months. So we mentioned a minute ago that the model for how Lore and Jet were going to compete with Amazon was they’re going to use the Costco model. So the idea was that Jet was a membership site and it cost $50 a year to be a member.

Ben: Half of Prime.

David: Yep, half of Prime. And that the company – Lore was super explicit about this – that much like Costco if you actually look at Costco’s financial statements and you take the amount of money that they make from membership fees and you look at their net income, like it’s basically the same thing. They make no money on everything they sell in the store. The only money they make is from the membership fees. And so that was what Jet was going to do.

So again, this isn’t us talking. This is straight from Lore here, a quote he says, “The bottomline is we’re basically not making a dime on any of the transactions. We’re passing it all back to the consumer.”

So they weren’t going to charge membership fees for six months. If you’re part of a Jet insider, you didn’t have to pay for six months but then there were going to charge $50 a year.

Ben: Which really is only a $25 value. For those of us who are no longer price sensitive to a membership fee like that because we’re used to paying $100 of Prime a year, like giving me $25 toward that, sure, like that’s interesting but it doesn’t seem like a huge reward and it doesn’t seem like a huge barrier to keep me away from signing up either. Like the convenience afforded by fast shipping and I guess they weren’t quite doing as fast shipping, but free shipping, it seems of course worth a Prime membership, or in this case –

David: Well, so then it comes down to like okay, so what was Jet actually doing and the whole idea, again, was that price was most important and so they had a goal that everything that you would buy on Jet would be 10 to 15 percent cheaper than you could get anywhere else online. And by that, they meant Amazon.

So they actually built a lot of tech around this and the whole idea was to incentivize customers to buy more than one thing at a time. So like the default behavior that Lore saw with Amazon and that I definitely fall under this category, I don't know if you do, Ben, too is well, once you’re a Prime member, you’re like, “Oh, I need this. I’m going to order it like right now one-off. I’m not going to wait and order a bunch of stuff.” Whenever I need something, I just order it and it comes.

Ben: Right. And they’ve slipped away from that a little bit with things like Prime Pantry or add-on items where I no longer feel like –

David: Subscribe and save, which they got from Diapers.com.

Ben: Oh, interesting. Yeah, with those kind of mechanics, I’m a little bit less confident in Amazon actually than I was, call it 3 years ago, before those things when I would just be like, “Oh, I’ll just Prime it. I’m sure it will get here and I’m sure I’ll be able to get it free in right now.” When that’s the promise for so long and then you have a couple of these things where it’s like you need to buy something else to get the free shipping, it does actually sting you a little bit.

David: It does, it does. So what Jet did, a couple of things, you had to hit minimum order amounts to get free shipping. But also as you added more items to your cart, and particular items, they would surface these items and incentivize you to do it, that were physically located in the same fulfillment center –

Ben: So it cost less.

David: So it cost less to assemble this package and you could send it all in one box. They would then drop the price on your items and your total order as you were basically doing these behaviors that they were incentivizing.

Another thing that they did and still do, I believe, is if you use a debit card instead of a credit care, you’ll get 1.5%.

Ben: Or they give you half the interchange back.

David: Yup, they give you half the interchange back. This is super interesting. If you waive your right to return anything, then they’ll give you an extra discount. If you waive your right to return certain items, they’ll give you a discount on those items.

Ben: That’s so interesting. I mean all these things are like wildly ambitious, very interesting. They’re intuitive.