Before they started the company that would eventually turn into Wayfair, Niraj Shah and Steve Conine were college roommates, friends, classmates, and co-founders two times over. In the years before Wayfair there was Spinners, spun out of an entrepreneurship course at Cornell University, and Simplify Mobile, which made software for mobile phones. After that, Shah and Conine surveyed the e-commerce landscape and predicted that online shopping for furniture would take off. They were right: Today Wayfair does big business—with a big surge during COVID-19, while consumers are home and shopping online more than ever. Shah outlines their methodology and explains how they find new opportunities, again and again.
The internet of niche-y things
As freshmen at Cornell, Steve and I lived three doors down from one another in the dorm. A group of us engineering students became friends, and eventually roommates; seven of us, including Steve, lived in a house together senior year.
“We were still pretty young, but that's when we realized we like the idea of betting on ourselves.”
During our spring senior semester in 1995, we took an entrepreneurship course and wrote a business plan around the early commercial internet. While researching it, local businesses in town started asking if we could build them websites, so we included a website consulting portion of the plan. Then we started building the websites, and fell into our first business, which became Spinners. After Steve and I sold it, we asked ourselves, what do we want to do with our lives? Start another company from scratch? Join an existing company that's already been figured out? We were still pretty young, but that's when we realized we like the idea of betting on ourselves.
Our original thesis for what would become Wayfair was that certain categories were already picked off. You couldn't sell electronics online, because Best Buy already existed. But there were niches of products that were hard to come by. Say you want to buy a TV stand. If you needed one, you could go to the furniture store, but it doesn't really focus on TV stands. They focus on beds and dining room furniture and living room furniture, and they might have a couple tucked here and there, but the options aren’t great. The big retailers didn’t care about TV stands, and that’s when we realized that TV stands aren't the only category like that. Back then you could get search count data for what people looked for online, so we went through product searches and found these categories that didn’t have obvious national retail solutions. We decided to build and run lots of different websites, each focused on selling a niche-y category.
The thing that surprised us was that while looking for things to sell, we came across all these small e-commerce sites that do $100,000, maybe $500,000 a year—companies people started during the dot-com boom in the 1990s, thinking they would get rich. Now they're using their garage and they've maybe hired one person, and it's been a hassle, but they’re still growing up to 40 percent a year. We realized that if companies with no real marketing prowess or technology can grow just because people want to buy stuff online, there's clearly an end market there. We thought that with bespoke technology and quantitative marketing, we’d be able to out-compete these folks.
Taking investment, becoming Wayfair
We were selling $250,000 worth of TV and speaker stands after four months of business. Our suppliers started proactively telling us things like, "You guys have become my biggest retailer of TV stands, but my other online guys sell more of my beds, or my desks," and so on. That took us by surprise; we assumed people would just go to the furniture store. So instead of sticking with just the niches, we started moving through furniture. Then décor. Then we got into home improvement. Eventually we had 200 different websites for each product category, and our company name was CSN Stores.
However, we had a problem around repeat business, because we didn't have a brand that people knew. Even if customers were happy with us, we didn't make it easy for them to keep us top of mind. We ran a survey, and 70 percent of our customers said they were unaware that we had any other stores. We came to the view that in the long run, these disparate websites weren't going to work, and that having a business that's purely transactional wasn’t going to economically work. Constantly acquiring customers is an expensive exercise. At the time, advertising was growing more expensive as more companies began to understand how to market online. So we either needed to sell it all, or create a destination that people know about. If people know your brand, and know you stand for something, then they give you a shot. If it goes well, they come back.
“We had $500 million in sales, so we weren’t exactly small. But we thought it was just the tip of the iceberg.”
Prior to launching Wayfair out of CSN, we never had a good enough use for investment money. The problem with taking outside money is that it’s super dilutive. I think some entrepreneurs view raising money as a mark of pride. But if you look at it mathematically, it's very expensive money. You shouldn't take it unless you have a use for it that really is transformative. So far we had grown the business out of cash flow, and hadn't been taking a huge amount of money out of it. But to launch a new brand, we knew we needed money. We’d need to market it. We knew we’d take a hit in traffic in the meantime. We had to transform from what we were. We had $500 million in sales, so we weren’t exactly small. But we knew it was just the tip of the iceberg. There was a big opportunity, but we knew we could only unlock it if we were a brand.
After consolidating our websites under the Wayfair brand, we started seeing good results. We saw the metrics climb. Because we had investors, we knew at some point they’d want liquidity. But at the same time, we saw certain benefits to going public, one being that it could raise our profile with consumers. Access to other kinds of capital gets easier if you're public, as well—like raised convertible debt. So within just a few years, we went public. We used a dual class structure for the stock, which was unusual back in 2014, but we did it because we didn't plan to change how we ran the company. This was a long run move—we're not focused on short term outcomes.
“People will buy anything online”
We made a bet nearly 20 years ago that home shopping online is just going to become bigger and bigger. Home goods account for 15 percent of sales online, but it’s ticking up every year. It's a one-way road. Plus, fashion and home goods are very large categories in which, fundamentally, everyone wants to own items that are different from everyone else. These are emotionally-driven purchases—in other words, what's right for you doesn't necessarily make it right for the next person. Product discovery has to be different than what you see for commodities like paper towels or batteries. For example, you probably buy Duracell or Energizer over and over, but you probably also know that at the end of the day they’re very similar. Besides that aspect, furniture also has unique logistics. These are big, bulky items prone to damage, meaning delivery is complicated and doesn't mix well with other shipments. Because of all those unusual factors, we realized, hey, we can be a specialist in this unique category.
All that said, we couldn't have predicted COVID-19, and a world of sheltering in place. But it did make people evaluate whether or not their home is as comfortable as they want it to be, and that pushed e-commerce along. Even people who hadn’t tried it are now buying online groceries and realizing that this is pretty convenient. I think people will buy anything online, frankly. Certain categories just get adopted earlier, and others need a certain caliber of merchandising. Now, the money people usually spend on travel and entertainment, they’re hanging on to that and focusing on the home. So on one hand, the volume of business is crazy busy.
"Entrepreneurs are good at being agile. The first thing you try isn't exactly the perfect answer. You just keep going."
But it’s brought on other challenges—we have 65 buildings in our logistics operation, over 16 million square feet of space, and had to change all our protocols overnight—simply because this is an age of tremendous uncertainty, and we don't know when this will end. But entrepreneurs are good at being agile, and taking in information and then evolving. Some things are maybe thrust upon you more quickly, but it's uncommon that the first thing you try, or the first idea you have, is exactly the perfect answer. You just keep going.
Wayfair: An e-commerce destination for homewares
Initial Partnership: Led the Series A in 2011
Exit: NYSE: W in 2014