Unbundling Amazon: How ShipBob Is Revolutionizing the Fulfillment Layer of E-commerce
E-commerce has given millions of entrepreneurs the ability to launch new businesses. However, in recent years, it’s started to feel like Amazon has won the battle for e-commerce, commoditizing merchants on top of its monolithic stack. Amazon’s bundle offered to merchants (through access to its millions of customers and turnkey fulfillment options) is simply impossible to pass up. In search of an alternative solution, we set out to look for companies unbundling the Amazon stack.
When we looked at the largest cost drivers for merchants trying to sell independently, and ultimately where customer experience fell furthest behind Amazon, fulfillment was the clear choke point and bottleneck. After meeting with dozens of companies trying to innovate how products are delivered to consumers, it seemed like no one could match or beat Amazon’s fulfillment network and game-changing two-day shipping. That is, until we met Dhruv and Divey from ShipBob.
ShipBob’s vision is to give every merchant an Amazon-like experience where you can delight your customers with fast shipping. And unlike Amazon, you can control your own brand and destiny. Dhruv and Divey shared Menlo’s thesis that, despite Amazon’s dominance, merchants could survive, thrive, and outcompete Amazon. They believed that to do so, you had to break down the Amazon stack into component parts and layers, allowing merchants to pick and choose the best providers to handle everything from logistics, to payments, to customer communication. We led ShipBob’s Series C in 2018, and over the past three years, they have become the gold standard at the fulfillment layer for merchants that want to remain independent. And now, three years later, we’re excited to double down on our initial investment and co-lead their Series E alongside insiders Bain Capital Ventures, Hyde Park Ventures, and Softbank.
Today, it seems obvious that the best merchants would build their own e-commerce stack. But rewind a few years, and ShipBob was taking a bit of a contrarian bet. Even with the success of companies like Stripe and Shopify, Amazon is still a beast. As I write this article, its current market cap is $1.7 trillion, up 450% from when Forbes asked, “Is Amazon Killing Small Businesses?” in 2015. And since 2017 alone, the company has nearly doubled its e-commerce sales from $246 billion to more than $400 billion (Statista). Such rapid growth must be a harbinger of doom for our favorite independent retail brands, right? Not so fast. While Amazon’s amazing economies of scale have allowed it to transform how consumers buy everything from books to groceries, its dominance has also forced everyone else to up their game in order to compete.
Amazon is an attractive place to sell products for many reasons. When you sign up and use FBA (Fulfillment by Amazon), you’re presented with a powerful bundle of services that can turbocharge your business, from warehousing and fulfillment, to hosting, customer support, reverse logistics, and more.
It sounds like an amazing deal, and for many, it is. But plugging your entire business into FBA can be a Faustian bargain. Cost aside—and FBA isn’t cheap, running the average merchant north of 26% of GMV—there are serious drawbacks to relying on Amazon to drive your business. Holistically, the biggest risk is that you and your product are a commodity; there is little you can do to own or control your brand inside Amazon’s digital walls. Edge cases of this are rare but scary—for example, because Amazon commingles products regardless of seller, your customer might receive a shoddy knockoff instead of your product.
Other times, Amazon will capriciously freeze your inventory inside its FCs if you accidentally violate their terms of service. But the biggest problem is that you are always in competition with Amazon. Whether you sell batteries, trail mix, coffee, baby food and diapers, men’s dress shoes, Bohemian-style women’s wear, or even connected speakers, Amazon has likely launched a competitive product that it’s promoting—likely at a lower price, thanks to their deep data and scale. When you own the store and can see what products are selling, it’s easy to cherry-pick the products that you want to private label and sell yourself.
For years, it was impossible to compete against the Amazon death star. You would need two-day shipping, access to millions of buyers (á la Amazon Prime), and a toolkit for handling customer communication, inventory management, payments and financing options, and hosting.
The high bar set by Amazon forced others to innovate and find efficiencies, spurring an ever-evolving new e-commerce stack. This stack not only hives off layers of the Amazon monolith, but improves on them.
As an investor, the innovation in response to Amazon creates exciting opportunities. Our belief that not every business wants to sell on Amazon has driven Menlo’s investments in companies like Signifyd, DTC brands like Warby Parker and Stance, and marketplaces like Poshmark. But the hardest piece of Amazon to replicate is their fulfillment network. Regardless of how well-designed your APIs are, or how user-friendly your software is, moving millions of packages from point A to point B is not trivial.
And these layers only proliferate when you dive into marketing tools, pricing optimization, tax management, and more. Heck, go onto the Shopify Appstore and you’ll find thousands of options for any task you can imagine. The upshot of this is that merchants have all the tools they can dream of to run their businesses both independently of Amazon, and competitively against them.
At the time of our investment in ShipBob’s Series C, we were struck by the long view of co-founders Dhruv Saxena and Divey Gulati. They knew they had to do two things concurrently: build a hyper-efficient and lean fulfillment business that, from day one, could help small, independent merchants move their products anywhere in the US, while simultaneously creating the skeleton of a software-defined network that would allow third-party fulfillment centers and merchants to onboard easily, with zero overheard or asset outlay. Without nailing the first—optimizing every path and workflow—there is no way to start spinning the flywheel on the second. Both were mission-critical to match the speed and efficiency of the trillion-dollar behemoth.
When we first invested in ShipBob, Dhruv and Divey were running five fulfillment centers, strategically located across the country to ensure the fast delivery of goods. But, rather than buying off-the-shelf software to manage and run their warehouses like the other third-party logistics companies had for decades, ShipBob built their own end-to-end systems from the ground up. They relentlessly fine-tuned their engine to strip out every ounce of fat. This dogfooding of their own product has enabled them to infinitely scale the ShipBob network. With zero capex, they are able to quickly switch on new fulfillment centers by using their software and workflows to completely unblock the supply side of their fulfillment network. Whereas most fulfillment networks are asset-heavy and can’t grow demand without simultaneously growing capex, ShipBob’s software-defined fulfillment network enables them to scale infinitely. And, with each new merchant and fulfillment center that joins their network, their business benefits from increasingly powerful network effects.
Now, Menlo is co-leading a Series E round to help ShipBob spin their flywheel even faster. With dozens of fulfillment centers rapidly joining their network and thousands of merchants using ShipBob for the most fundamental piece of their infrastructure, we are proud to be on the team’s journey as they bring balance to the e-commerce galaxy. With millions of entrepreneurs launching new businesses each year, we’re excited to continue our investment in fundamental e-commerce enablers like ShipBob, Netlify, Signifyd, 6 River Systems, Righthand Robotics, Fox Robotics, Bread Finance, and founders who are working to provide independent entrepreneurs with the tools they need to survive and thrive in the age of Amazon.