It’s all in the Genes

Genes are made up of something called Deoxyribonucleic acid (DNA), which is the informational molecule that houses the genetic code of all living things. Basically, a gene is an instruction manual. Genes form chromosomes that define the structure and function of the human body, and those chromosomes are determined by the sequence of DNA. So when you see a frog or a goat or a tall guy with black hair, you’re seeing the end product of about 4,600,000,000,000,000 strands of DNA at work. At a molecular level, the body is a pyramid of complexity in a constant state of flux. From the very conception of life forward, every second of every day, cells are replicating, dividing and repairing themselves.

Ok, so what’s the point?

The same phenomenon exists in companies. They all are formed and defined by a corporate DNA, which is vital to identify if you want to truly understand what makes them tick.

Take Federal Express, which was started in 1971 and currently employs around 300,000 people. FedEx is made up of the trillions of interactions between its employees, managers, customers and suppliers. Every idea, policy, theory, lesson and experience is a gene in the helix of FedEx’s chromosomal culture. As a result, the company we see today is the embodiment of more than 40 years of activity. Changing the “genetic” makeup of FedEx, or any large company for that matter, is no simple task because it requires tearing apart and rebuilding practices that have been reinforced millions of times over.

To see this in action, you don’t need to look any further than the fact that the largest offline retailers have completely failed at recreating their dominance online. As such, Amazon is the Wal-Mart of the web, and yet Wal-Mart is not only still around, but it’s thriving with more than $400 billion in annual sales.

The five largest retailers in the U.S. are Wal-Mart ($453B), Costco ($89B), Kroger ($85B), Target ($69B) and Walgreens ($68B). Of this group, only Wal-Mart can count itself among the ranks of the top five e-commerce sites. Many sources say only one percent of their total sales are from the web, meaning that Wal-Mart might actually do less business online than Groupon – which didn’t even exist four years ago.

So why haven’t the big offline guys been successful online?

In my opinion, they simply lack the necessary corporate DNA. To build a successful e-commerce company, you have to build a successful Internet start-up. You need all of the same ingredients: entrepreneurs, risk-takers, innovators, engineers, online marketers and so on. You need people who understand how to reach customers on the web, when they’re using their smartphones and when they have a free minute between meetings on their iPads. You need to create a culture that is willing to take chances and pivot when a solution doesn’t resonate with a target audience.

And you have to be willing to disrupt yourself, because true innovation inevitably cannibalizes the traditional business models that make up many companies’ DNA.

Basically, to win online you need all the stuff that is found in high concentration in tech start-ups and low concentration within Corporate America. Because of these gaps, we’re now seeing the traditional model of commerce disrupted one vertical at a time. Amazon, eBay, Groupon, Fab, Gilt, The Fancy, One Kings Lane, Zulily, Diapers.com, Beachmint, Zappos, drugstore.com and others have all played a role in disrupting established business models.

In fact, the rise of e-commerce and the tsunami of customers who abandoned physical shopping is so extreme that many retailers announced they will match web prices in stores this Christmas season. Other big box retailers are even furnishing their locations with tablets so customers can browse online while they’re in the store. As more and more consumers become accustomed to shopping on the web, they actually find the physicality of the store to be limiting. Imagine that.

Most traditional retailers are just not equipped to handle the changes that are afoot. They lack the necessary DNA.

Consider private label fashion. For years, large brands dominated independent chains and department stores. Big brands served as anchors to bring in customers attracted to labels like Levi, Gucci, Polo, Armani, Liz Claiborne, etc. Then as retailers grew, they realized they could begin launching their own private label brands to compete with the very designers they carried. Household names like Kenmore, Kirkland, Cherokee and Craftsman were born, and entire retail chains emerged around single brands sourced in-house, such as J. Crew, The Gap, Banana Republic and Trader Joe’s.

Even the largest of offline retailers seem to have missed the e-commerce bandwagon, and now a new crop of private label e-commerce companies is emerging and gaining traction; names like Bonobos and Warby Parker.

We recently got to know one of the most promising contenders for this space through our investment in Frank & Oak, an online menswear brand.

Our investment in Frank & Oak wasn’t a clear-cut decision. A rule that we’ve had for quite some time is to avoid companies that rely on physical inventory. We don’t just stay away, we tend to run away. Not only do private label e-commerce companies have to contend with inventory, they also need to attract customers and scale in order to source effectively and offer their customers value. Without virality, it’s very expensive to attract customers on the web.

So why invest?

Because Frank & Oak has the necessary corporate DNA to win online. The company is led by two extraordinary, young entrepreneurs named Ethan and Hicham, who are their own target customer. They live and breathe the product. Here is part of their cultural chromosome:

They know the average man wants to look great, shop efficiently and not break the bank. So they’ve built a brand that curates a limited number of styles affordably by cutting out middlemen.

They know their metrics and have had some early success with online customer acquisition by relentlessly testing and iterating. If you wake one of them up in the middle of the night and ask how their cohorts are performing, you’ll be hit with a plethora of CAC, LTV and behavioral stats.

But perhaps most importantly, in the past they have failed together trying to start an online company in the same industry. They were honest with themselves and weren’t afraid to change direction when the business didn’t work.

Frank & Oak has the ability to disrupt men’s fashion and build a world-class online private label brand. They’ve mutated their genetic code in the past to become the success they are today. And despite the fact that they’re competing with larger retailers with far more resources, their chances of coming out on top are disproportionately in their favor.

Because it’s all in the genes.

-Eric Lefkofsky