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Six months ahead.

Crosslink Capital

Another Niche E-Commerce Company, Jack Erwin, Takes Off

erwinVCs must be hearing a lot of pitches from companies that want to be the next Warby Parker, the chic discount online eyeglass vendor, whether it be high-tech wine gadgets, fitted shirts, or dress shoes for men.

If the market is getting saturated with these new brands, you wouldn’t know it. In fact, this morning, another new shoe company called Jack Erwin is announcing that it has raised $2 million in Series A funding led by Crosslink Capital, with participation by Shasta Ventures and Menlo Ventures. Yesterday, to learn more, I reached Lane Gerson, one of the founders of the six-person company, at the startup’s Brooklyn-based offices. Our chat has been edited for length.

You’ve worked as a CFO and a controller. Did you know anything about retail? And why shoes?

My friend and cofounder [Ariel Nelson] was shopping for shoes for a wedding and just wanted dress shoes, and they were all either too [fussy] or too expensive. We wondered if we could find someone to help us make a pair of shoes for $100 that we could then sell for $200, and we spent three months talking with everyone we knew, and each was a dead end. As it happens, Ariel went to a two-seat barber and wound up sitting next to a [product manager of footwear] at Ralph Lauren, who was dealing with buyers and suppliers. We all went for drinks a few weeks later. That was August 2012; he just came on full-time in January.

You have five core shoes in a few different colors. Where are they being made?

In Portugal, at a third-generation factory. We’d talked with factories in Brazil and Portugal and received a bunch of samples and this one had the best quality leather shoes. So we worked with a designer, they sent us samples, we corrected them, and we placed our first [purchase order] in May 2013.

You make it sound so easy. Where are the shoes shipped?

They’re warehoused in a third-party logistics center in Brooklyn, less than three miles from our office.

What’s your return policy?

Free shipping, free returns. We want people to try them on and then hopefully they’ll enjoy and keep them.

What percentage of your customers return the shoes?

About 25 percent, but the data is inconclusive right now. We launched the company publicly in October and we’ve had tremendous demand — so much so that we’ve sold through or initial order and are left with broken sizes. So people are buying sizes that aren’t the right size, and they want exchanges that we don’t have. We raised the [venture] money almost purely to buy inventory.

Is that supply-demand balance hard to manage? What’s been the biggest surprise so far?

It’s all been really positive actually. We’ve learned there’s an appetite for people to buy new product and I think people like a new story and are wiling to give us a try. And if you can give them a product that meets their expectations and you’re responsive to them, you meet great people. We’re discovering that just being nice goes a long way.

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The Case for the $250 Million Fund

$$$As you may have noticed, there aren’t a lot of independent, active venture funds in the neighborhood of $250 million these days. Many of them, raised in the late ‘90s, failed to produce the returns needed to raise another pool of capital. Meanwhile, most of the successful firms that once operated in that range – think Kleiner Perkins, Institutional Venture Partners, Greylock Partners — went on to raise far larger funds as LPs emerged from all corners, their checkbooks in hand.

You might not think it matters, particularly given today’s booming private markets. But a dearth of mid-range venture funds could have fairly serious repercussions, according to Jim Feuille, a longtime venture capitalist with Crosslink Capital. I met with him recently at the firm’s 22nd-floor Embarcadero Center office in San Francisco, where we discussed the incredible shrinking venture market.

Here’s Feuille’s thinking: Years ago, Crosslink, which is in the process of raising its seventh venture fund – in the $250 million range – used to have a number of syndication partners. That’s no longer the case, he told me. “In [the year] 2000, there were 1,000 firms in business,” he said. “Today, 350 have a shingle out, but probably closer to 80 firms are doing more than two deals a year. Now, let’s say half of those 80 firms are doing more than five deals a year, and of those 40, some have to put $30 million, or $40 million, or $50 million to work [in each deal] because they have a $2 billion fund to invest.

“Five years ago, and in the 20 years before that, you could syndicate a pretty capital-intensive deal, like a hardware or a semiconductor deal that would require $50 million to get a product to market,” says Feuille. Because the number of partners available to do such deals has “really shrunk,” the “only people who can get these deals done are the megafunds,” he adds.

Crosslink has adjusted its investing strategies to deal with this shortage of syndicate partners, preferring to back companies that are generating revenue rather than those that are still in the product development stage. It’s far from alone; according to Ernst & Young, the share of investment going to revenue-stage companies jumped from 56 percent in 2006 to roughly 70 percent by 2012.

Still, it could be bad for the U.S., says Feuille, noting that with rare exceptions, you “can’t start a semiconductor company here anymore; no one wants to buy a partially developed semiconductor product” by a company that has run out of capital. “I don’t follow biotech and medical devices, but you can imagine a similar kind of problem,” he adds. And when it comes to developing any hardware device that’s relying on a custom semiconductor chip, good luck. “It’s going to cost you $100 million bucks” to develop the product.

“We [as an industry] are funding a lot of innovation in terms of the Internet, and media software and so forth,” notes Feuille. “But we’re no longer funding innovation that’s manufacturing-driven and more capital intensive and could potentially employ more people or a different kind of people.”

Such innovation now has to happen in big companies – the Intels and Broadcoms and Googles of the world. That might not bother a lot of people. But maybe, suggests Feuille, it should.

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