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An Investor Tries to Explain Why It's Not Insane to Give $220 Million to a Yet-to-Launch Startup's staggering funding is raising new questions about whether we are in a tech bubble.

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Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

Many people thought Marc Lore, co-founder of, was crazy when he said he eventually wanted to raise $600 million for his new shopping site, Then he went ahead and announced a new $140 million investment last week, pushing total funding to $220 million. Did I mention hasn’t launched yet?

Hearing this, it would be understandable for any rational person who hasn’t become immune to the frothiness of today’s venture capital environment to ask: How the hell could this be a good idea? How is this not the surest sign yet of a tech bubble? Jet isn’t trying to put a human on Mars or cure a disease. It’s a shopping site.

But it’s one with big ambitions. As I detailed last month, Jet hopes to eventually have the product selection of Amazon, but with the lowest price on the Web. Always.

To do this, the company says it will make its profit exclusively from the $50 annual membership fee Jet shoppers will have to pay. That model, Lore says, will free Jet up to take the cut of sales its partner retailers give the site and return it to shoppers in the form of discounted prices. Jet is also building a pricing engine that it says will add additional discounts in real time to customer orders when shoppers buy stuff that happens to be located in warehouses closer to them, bringing down the shipping cost for Jet’s partner retailers. Additional discounts will be added when a customer forfeits his or her right to return an item or pays with a debit card instead of credit.

Still, it’s hard to make sense of a company that has proven very little so far being able to secure such a massive check. So I decided to ask Scott Friend, managing director at Bain Capital Ventures, which led the $140 million funding with a $20 million investment and also contributed $5 million in an earlier round, to explain this decision to the world.

The interview with Friend, who was previously the co-founder of a retail analytics and pricing company called ProfitLogic that was acquired by Oracle, has been edited for length and clarity.

Re/code: It’s hard to think of any company that has been successful when raising anywhere close to this much money before opening up to the public. What makes you think Jet will be different?

Scott Friend: When you describe the amount of capital and the context of it being pre-launch, it sounds absurd. But you have to think of it in the context of the team and the market opportunity the team is going after. So as I sat there way back when we invested $5 million in the first round, it was rooted in the idea that commerce has not been innovated on in a long, long time. Amazon has a disproportionate share of the market and many, many others continue to grow. But we haven’t seen a real type of disruptive innovation in e-commerce after 20 years of massive growth that started when Amazon started.

The best analog we can think of was when Walmart appeared to be eating the world of retail and here comes this little company called Costco with the club format … there was enough market for both of them. We definitely think there’s a similar opportunity here. No one really has done the club format online in a way that can deliver on what the brick-and-mortar value proposition truly was.

Except Costco makes you buy a gallon of ketchup.

Right. The downside of that format is the product selection is limited. But what if you had a blank sheet of paper and could design a system for digital that operated more like real-time bidding for advertising? And, in doing so, build transparency into the market so consumers didn’t pay through the nose for inefficient shipping if they didn’t have to? That’s Marc’s dream.

I come from a [pricing] background, so I had some real affinity for the concept he was proposing, but when you add to the mix the need for a unique person who has to not just be great at execution, but great at recruiting and fundraising — that’s Marc. Because this is an idea that takes a significant amount of capital to get out of the gate.


The big retailers have some scale advantage over the little guys. The scale advantage kicks in at about $1 billion in gross merchandise volume. At that level, you can have three fully operating warehouses and be within three days of everyone with ground shipping. But you have to get to that level. And getting to that level is just math. We know what it costs to get a consumer to try the service. That’s just money. Next is the question of will the consumer experience be delightful and get people to want to come back. That’s the bet.

A huge bet. But Jet is just handling warehousing and order fulfillment for consumable goods. For all the other products, Jet is essentially leaving the order fulfillment and shipping part of the shopping experience in the hands of other retailers. Isn’t that risky?

I think you’ve hit on the key core issue. It’s actually one we were talking about yesterday. And here’s how I wrap my mind around that risk. Yes, it exists. But there are two important things about why Jet has a good shot at overcoming that [if] they’re actually not controlling delivery from the merchant to the customer.

First, other than those of us on the coasts willing to pay a premium for two-day shipping with Amazon Prime, people in general like to save money. A big part of the U.S. will be excited about shopping with Jet because it means always having the lowest possible prices. That may surmount any reality that it’s still the same box coming from the same merchant they would have bought from anyway, but now they’ll be saving 10 percent.

Number two: If you think about the shopping experience, from what you decide to buy, to placing an order, to what payment method to use, to perhaps dealing with customer service, there are about 10 steps in total. In the 10 steps in the shopping mission, only one of the 10 is UPS or FedEx bringing it to the door. The other nine things are where Jet interactions are going to dominate. There’s the experience the consumer is going to have on the tablet and mobile and desktop with Jet, and the follow-up, and the feeling of savings that’s going to overwhelm the experience.

Marc is the first tell you, it’s a matter of nines and 10s. Every consumer rating needs to be a nine or 10 going forward.

Would you have invested in this idea with a different CEO?

There’s another online shopping club model and we decided not to invest in it a year ago or so. But what you’re dealing with here with Jet is that Marc is a guy a number of investors have very long-term relationships with. Ours is newer, but we’ve known Marc and folks on his team since, when I tried to recruit several members into our portfolio companies.

There are certainly some other entrepreneurs in the universe as talented as Marc, but he happens to be the one human being with his level of talent to think the big picture, be able to sell the dream, and also to be maniacally into the details, which is a rare skill as it applies to online retail.

If we talk five years from now and Jet didn’t pan out, what will be the reason why?

It’s really about execution at this point. If the system doesn’t work …

Are you talking about the pricing system that helps determine which discounts which shoppers will get?

I’m talking about that exactly. Every other aspect of business, it’s hard to imagine why even if we make mistakes, we can’t improve over time and recover. Customer acquisition, we know how that works, for example. All of that stuff to me is blocking and tackling. The differentiation to succeed is delivering savings: If it works in real time like we say it’s going to work.

I reported a few months ago that Lore said Jet could have a $500 million marketing budget over the next five years. Is the majority of funding going to that budget?

I don’t think that’s 100 percent right. There’s a portion going toward branding or marketing, but not all in the traditional paid marketing vehicle.

A lot of the funding will go to support a very, very large customer service staff, tech staff. And then very, very large marketing aspirations.

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