A VC expert explains why companies like Casper, Bonobos, and Glossier will continue to thrive against tech giants like Amazon

• Amazon has ventured into every product and service category imaginable, but even this tech giant can't squash the potential of digitally native vertical brands.
• DNVBs have five major benefits working in their favor, including lower costs of production and better brand awareness and advocacy.
• VC expert Nihar Neelakanti weighs in on how companies like Casper, Warby Parker, and more can continue to thrive in the ever-growing e-commerce market.
• Visit Business Insider's homepage for more stories.

I was in Denver not too long ago when I walked past a Herculean-sized billboard in front of a mom and pop shop that screamed "Amazon … Shmamazon. Buy Local."

It got me thinking: As Amazon crosses $850 billion in market cap and is entering virtually every product and service category (including house cleaning), who can compete? The accessibility, affordability, and variety this tech giant offers is nothing short of spectacular.

At the same time, I couldn't help but notice how many of my online purchases  -  the ones that got me really excited  -  never came off of Amazon. For example, my Casper mattress or Warby Parker sunglasses. The products that I bought almost compulsively and with deep admiration were all part of this category popularly known as digitally native vertical brands.

You've heard of them. Digitally native vertical brands (DNVBs) such as Bonobos, Casper, Glossier, Warby Parker, and Allbirds are all positioned to compete with Amazon because they offer consumers an experience equivalent to visiting a boutique or brick and mortar store. Amazon simply can't create the one-to-one experience that people today, particularly millennials and Gen Z, obsess over.

The US Department of Commerce estimates that the US e-commerce market crossed $500 billion in 2018. In a future where mass merchants like Amazon become the Walmart of the internet (with all the same assortments), how will DNVBs differentiate themselves? I believe they have a few distinct advantages that allow them not only to compete with but also thrive in the face of the tech giant.

1. Vertical integration unlocks supply chain efficiency

Traditional retail models incur huge middlemen costs, which in turn causes the product to often be significantly marked up by both the distributor and the retailer. Naturally when you're a direct-to-consumer company you're shaving those costs off and distributing the value back to the consumer. However, when you cut out the middlemen, you're also cutting out the value they provide such as risk distribution, rapid scaling, sales expertise, and pre-existing relationships, all of which can help push your product out to the market faster and give it strategic exposure upfront.

Fully vertical, digital brands can unlock a tremendous amount of cost savings in the supply chain, but will need to make up for the loss in value that a distributor traditionally provides  -  and many DNVBs have found interesting ways to do so. Some may augment customer service beyond the general FAQ or help desk. For example, Casper offers 100-day free returns and Allbirds offers a 30-day trial - a highly uncommon move for a shoe company.

2. Shorter feedback loops allow DNVBs to react quickly to the consumer

DNVBs own the entire distribution channel, from supplier to point of purchase, which means they're able to acquire a significant amount of data about their customers. This allows management to make smart decisions and react quickly to changes in the marketplace. As a result, they can experiment with:

• Customer channel optimization to drive down customer acquisition costs
• Product changes to meet marketplace demands
• Brand narrative messaging changes to connect with the hearts of customers

3. DNVBs are masters of storytelling - and it acts as a product differentiator

One of the most visceral ways of connecting with consumers is through stories. As humans, we adore the narratives that encompass our beliefs and ideals. DNVBs are exceptionally good at storytelling because that's exactly how they're born.

Glossier was built on the idea that every woman should become her own beauty expert  -  a message that young women deeply connected with. Likewise, Glossier would not have discovered this insight had they not been born on the internet. Customers view brands as an extension of their personalities and the embodiment of their aspirations. Pricing aside, the narrative behind the product is one of the most compelling competitive barriers you can have  -  after all, you can't just copy a story.

4. Channel ownership creates personalized, one-of-a-kind experiences

Brands know that millennials crave experiences more than material things  -  that's why the way the product is discovered, purchased, and ultimately unveiled is central to the success of DNVBs. Because digitally native vertical brands have full channel and distribution ownership, they're uniquely able to mastermind the perfect experience. These e-commerce brands meticulously craft the messaging, story, design, purchase experience, packaging, post-purchase follow up, and customer support in a way that makes the customer feel like they truly are the center of the universe.

5. Cult followings lead to massive growth

Social media as a discovery and distribution channel allows customers to become digital ambassadors for products. DNVBs, more so than traditional e-commerce companies, are able to build communities of these ambassadors and equip them with the promotions, advertisements, and marketing necessary to create word-of-mouth promotion and acquire more customers at a marginal cost. If the DNVB is in a category that can give existing customers a sense of "social proof" and generate insider phenomenon (think fashion, gaming, entertainment - categories that lend themselves to effective social media buzz.), the brand has created the perfect environment for FOMO to emerge.

This growth strategy is precisely what allows paid acquisition to become scalable through network effects. For traditional retail channels, companies have to continue to pay fixed costs for shelf space over the lifetime of the business, while a DNVB can see their customer acquisition costs go down to the point where some of these brands can achieve SaaS-like margins - and even SaaS-size exits.

Ultimately, I believe great DNVBs create products, services, and end-to-end experiences that provoke passion in a way that Amazon never can at their scale.

Nihar Neelakanti is an investor at Kauffman Fellows Fund, produces The Arena Podcast, and writes the Journal Newsletter by Kauffman Fellows. The firm's investments include Zoom, Carta, Tally, Groww, One Concern, and Catalog DNA. Previously, he was an analyst at Correlation Ventures, a venture firm out of San Francisco that has invested in notable consumer companies such as Casper, Cotopaxi, and Imperfect Produce. He also co-founded Vendima Bags, a direct-to-consumer luxury bag startup.

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