COMING UP FAST - HOW VALLEY CULTURE PROVIDED A SPORTING CHANCE - After a successful US launch internet 'e-tailer' Fogdog is moving into Europe. Rhymer Rigby looks at how an online entrepreneur hopes sports goods will make him the next web billionaire.
In a single rented office, opposite the station in leafy, suburban Richmond-upon-Thames, is a man who wants to build the next amazon.com.
Twenty-eight-year-old Brett Allsop is international president of Fogdog, an online retailer from Silicon Valley which hopes to do with sporting goods what amazon has done with books. Brett has been here for a couple of months checking out the woefully underdeveloped (by Californian standards) European online market. Today he is a 'little bleary-eyed' having been at a party at the Tate Gallery last night: 'You've caught me just as we were entering the European market,' he says, 'But to be honest, I don't even know if we're going to be based in the UK.'
Right now, his gut feeling is it will be Britain, although Germany is a contender. He is here because we have high (for Europe) internet penetration at just under 20%. 'And the UK is very similar to the US in terms of how a lot of people think, at least the people I've spoken to. Culturally, it's not hard.'
Allsop is in Richmond because it lies between the City of London and the high-tech businesses along the M4, and also because it's handy for Heathrow and a pleasant place for his wife and son.
Fogdog is a what is known as a 'single source' for buying almost any sports or outdoor equipment - anytime, anywhere, if you have internet access. By the end of this year, the company expects its US range will be equivalent to a shop four times the size of Harrods, devoted entirely to sports goods. It has recently completed a $20 million ( £12.5 million) round of fund-raising, its web site 'hits' are running at about 200,000 a month and, says Allsop, starting from zero in November, sales have risen 'to millions per quarter', although he is cagey about just how many millions.
'We are in the high growth zone, and the start of major mainstream advertising means that it's going to grow even more dramatically.' Of course, the company doesn't make any money yet but, as the joke goes, if an internet business actually started to turn a profit, investors would run a mile.
The company had its beginnings back in 1994, a lifetime ago in internet years. After graduating from Stanford University, Allsop, Andrew Chen and Robert Chea founded a business called Cedro Group. Over the next couple of years they built about 100 web sites for sports companies. By 1996, they had decided that the real money was in owning their own retail site.
During this time, says Allsop, he benefited from the unique 'mentoring' culture in Silicon Valley. 'There, you have three generations of people who have gone through the (high-tech) start-up process. So right out of college, I was taught by a gentleman called Dr Bob Maxfield, who had sold his company (the one responsible for voicemail) for $1.25 billion. He literally spent thousands of hours with me, teaching me how the venture capital community worked. When I was ready, he started introducing me to venture capitalists and angel investors.' And there are a lot of these around. While not everyone is Bill Gates, there are numerous older CEOs in the Valley with fortunes of about $20 million, a couple of million of which they usually invest in start-ups:
'It's as much fun for them as anything else, but without them you wouldn't have Silicon Valley. When Fogdog goes public, I'll be expected to take on the mantle of mentor and investor.'
In 1997 Allsop and company approached Jerry Wang, the founder of Yahoo!, with the idea of selling sports gear online. Attracted by the web advertising that this could generate, Wang, already a serious internet figure, persuaded representatives of leading sports companies to meet them. He spoke and Nike et al listened. Yahoo! chipped in and a pilot site - Sportsite.com - was launched early last year. Allsop, in explaining Yahoo's apparent benevolence, says: 'The attitude among internet companies is one of 'co-opertition'. Yahoo! helped us kick off but they've benefited from sports advertising, and now we're Yahoo! customers.'
Sportsite achieved its goal - it proved the concept would work. Armed with the test results, Allsop managed to raise $5 million between June and February 1998. The original name was ditched in favour of the catchier Fogdog - a 'fogdog' is a whiteish spot sometimes seen on foggy horizons - and the new web site was launched in November last year. In the company's second round of fund-raising early this year, the business picked up some trophy backers such as Intel and Sprout. After that, Allsop came over to the UK and started looking at Europe where Fogdog, without any promotion or, indeed, even prices in local currencies, already makes 15% of its sales.
Sports might seem an odd choice for an internet entrepreneur - after all, you don't have to try on a book - but Allsop believes the business will be even bigger than the stack of books by which all online businesses are measured. 'People always peg apparel and footwear as hard things to sell online. Actually, the number one sales category for AOL (the internet service provider) is apparel.'
And it makes sense, if you think about it. In the US, some 8% of a $70 billion sport market is mail-order. Here, with companies such as GUS, the share is higher: about 12% in a market of roughly £3 billion.
A report by Forrester Research forecasts that American online sport sales should rise from $56 million this year to $1.9 billion by 2003. That makes the potential market bigger than books and, what's more, the margins are higher. Moreover, in the US (and to a lesser extent here) the market is very localised. Alex Rosen, vice president of Sprout, says that one of the main reasons his company chose to back Fogdog was because of its 'clear leadership in a large and fragmented market'.
The inability to handle or try on items is not as thorny a problem as it might appear. Sports clothes are not couture: they come in small, medium and large. And with footwear the big plus is that of choice. 'Footwear is very hard for bricks-and-mortar stores to carry from a selection point of view,' says Allsop, 'For every shoe on the wall, you need 12 to 14 sizes out back. Consumers get hooked on a brand and shops never stock it because they rotate stock.' As for sizes, he adds that manufacturers tend to use the same last for years, so once a Nike eight, always a Nike eight. But Tom Hunter, the Scottish entrepreneur who recently sold the 'bricks-and-mortar' Sports Division for £250 million, is a little less bullish. 'With clothing and, to some extent, footwear, there will be sizing problems,' he says, pointing out that a high rate of product return is a traditional difficulty with apparel mail order. But he agrees there are thousands of people who would like to buy sports equipment online.
'Buying over the internet will be huge. That is the more immediate opportunity. Clothing and shoes will follow. The most successful 'e-tailers,' he believes, 'will be those who blend a high street and internet presence, so customers feel that they have somewhere to go if they have problems, and are more comfortable about giving their credit-card details'.
But at Fogdog, it's full steam ahead on the web. The vast range, Allsop says, will allow him to achieve 'multisport loyalty'. Since customers will be able to buy everything in one place, they will eschew other retailers in order to rack up thousands of loyalty points.
Internet shopping, he says, has had a dramatic effect in several markets already. 'Traditional retailers are shutting up shop and going bankrupt. That's how most people buy cars now. Electronic shoppers don't have to deal with pollution, crime or traffic, or even leave their homes or work, which is nice.'
Allsop needs to build a base here - now. He will either buy a British 'e-tailer', form partnerships, hire organically, or a mixture of the three - unless, of course, he finds a more attractive German route. Next he needs to sort out his supply chain: 'A company like mine can enter the market very easily. Most companies entering the UK are selling through a distribution channel and have to convince retailers and train people, whereas I don't have to do that. I just need suppliers - they're much easier to pick up.' From there it is a simple matter of Anglicising part of the web site and then advertising heavily on TV, radio and posters.
'By early 2000,' he says, smiling, 'we will be advertising on your telly at night. That's what gives these companies such huge growth rates. It's purely mathematical: how much do I have to spend to get you as a customer, and how much will you spend over a lifetime? I do believe there's an enormous window of opportunity here at the moment and, in the next 12-18 months, that window, will start to shut.'
THREE STEPS TO BEING THE NEXT JEFF BEZOS OF AMAZON.COM
- Decide what you want to sell. It has to be suitable for internet retail, but many things are which are less than obvious. In the US, cars and houses are routinely sold on the net.
- Look at what is going on in the US, as the business there has a couple of years on us. Learn from the US, but also try to understand how the UK and European markets differ.
- Develop a mentoring group which can lead you to finance and instruct you on how to build an internet company. You are likely to find that people who know the finance side of business won't know anything about the internet, and vice-versa. Set aside a small percentage of the company for the best mentors and advisers that you can find. Call on them for regular advice in exchange for the equity you give them.