Indie, explained
Since announcing Indie in the spring, I’ve had dozens of “explainer” conversations with potential investors, advisors, operating partners, friends, and even our own team. As in any early-stage venture, our ideas are still forming as the market provides feedback and go-to-market evolves as a result. But, in hopes of expanding that “Oh, I get it!” moment, here’s a deeper dive into my most frequently-asked-questions. Long live local.
What is Indie?
Indie is a ‘digital franchise’ platform for independent retail. I previously called it an operating collective and avoided the franchise moniker, but it consistently comes up in conversations, e.g. “Oh, so like a franchise but different?” Additionally, there are a growing number of market comps and theses around “digitally-native franchises” that resonate with us in terms of empowering local SMBs. Slice, a vertical SaaS platform for independent pizza shops, calls themselves a ‘reverse franchise’, with the important distinction that independent shops maintain their independence — the culture, brand, and unique style/preferences remain their own. Another example is Squire, a vSaaS platform for independent barber shops. These companies offer scalable tech & operational support reminiscent of the historical franchisor/franchisee relationship, but allow local SMBs to keep doing what they do best.
Traditionally, a franchisor like Domino’s offered national brand power, technology & operational efficiencies, build-out assistance, consolidated purchasing, supply chain ease, even marketing services or access to capital. Most franchisees pay significant up-front costs, a percentage of gross sales, and a split of net profits. Further, because the national franchisor is engaging in broader marketing campaigns (think State Farm, Taco Bell), franchisees also pay fees into a marketing bucket which funds the franchisor’s broader effort.
This breaks down in a few places: first, only high-net-worth individuals are typically suited to be franchisees. While owning multiple franchises may be a great strategy to build long-term wealth, these individuals don’t often work in their restaurant/retail environment, instead employing a network of general managers, assistant managers, shift leads, and part-time labor. This often dilutes culture & authenticity, but since these are predominantly national brands, customers don’t seem to care quite as much. You probably still want that $7.99 carryout pizza or late-night chalupa regardless of customer experience 🙂
On the other side of the coin, the Main Street American retail & restaurant category is primarily fueled by single-operator, independent businesses. These are our fellow neighbors, friends, and community members that have committed their lives to establishing a product or service within embedded communities. They add lifeblood to our social fabric, connect us by creating common spaces, and fill an incredible need to the consumer. We all have favorite local businesses, places we’re delighted to visit that provide a unique experience specifically catered to our neighborhoods.
When it comes to implementing business technology to streamline operations and attract customers, or creating Amazon-or-DoorDash-like convenience, these operators have mostly been left to their own ingenuity or self-implementation. Services like Shopify or Square are largely DIY when it comes to running a small business, and many SMBs feel overwhelmed by navigating the complexities of inventory management, customer acquisition/loyalty, e-commerce enablement, and financial discipline. Of course, there are existing services that operators can use to solve problems, but most owners piecemeal solutions from a number of software/service vendors that gradually create headache after headache. Try telling a local toy shop, for example, with over 10,000 SKUs that they have to add their products to Shopify themselves. I’ve talked to dozens of SMBs who have tried the standard array of DIY software, but revert back to their old ways due to the impossible navigation of figuring out what to do, when, and how.
Importantly though, the decisions of local owners trickle down to the customer experience, over time diluting the business’s ability to attract more sales and grow their business. Ilir Sela, a co-founder of Slice, has stated that the average independent pizza shop grosses ~$500k in annual sales. Domino’s, however, averages $1.2m. This delta illustrates the “power” of the franchisor, and why franchisees say yes.
Brian O’Malley, a partner at Forerunner Ventures, writes: “While the rise of DIY software tooling has made it easier to start and manage independent businesses, solopreneurs and SMBs have had to make major tradeoffs at either end of this spectrum. They can optimize for control of their business, but end up largely on their own. Or they can get assistance running it, which largely means one is beholden to the whims of the platform. This has also resulted in highly uneven value distribution between solo workers and the tech businesses that serve them. We propose a middle-ground, a play on the historic franchise model, but reinvented with digitally-native platforms where solopreneurs can grow their own businesses, but get software-driven tools, structure and support to drive success.” [source]
This is where Indie enters the market to offer a compelling local platform — part technology, part operations — in partnership with new-or-existing SMBs, formed & built from operating our own growing, profitable small business.
What’s the tech product?
We have built a (still growing) range of tech & operational services we believe will be vital to modernizing small shops to meet customer demand. They are: e-commerce enablement, a ‘retailOS’ workflow software (i.e. a robust point-of-sale for all in-store processes), inventory efficiencies like consolidated purchasing/replenishment, SKU analytics & sales trends, and on-demand services like marketing, fulfillment, and financial reporting.
I’ve had many investor conversations about finding the “wedge”, or the lowest-friction point of implementation in local shops. My belief is that, similar to other vSaaS platforms, e-commerce enablement is the first step in the B2B customer journey. Indie can launch your store’s e-commerce experience within days, and can also provide a custom iOS app. Following e-com launch, the friction-point moves further-in to needing accurate product, inventory & customer data from your POS system, which then leads us to introduce our own. We’re currently working on ways to import existing Shopify products directly, fetch product metadata from UPC APIs, direct integrations with wholesalers/distributors, utilize new advances in AI, and as a last result, employ a small network of overseas data specialists to improve product accuracy. We often think of product metadata as the ‘fuel’ that drives an omnichannel experience: what are the products you have, where are they, and what’s the lead time for store pickup or local delivery? Once a store is using our e-com and POS system, a “shared path” option becomes accessible for both parties to enter an operating agreement toward a true partnership to unlock sales growth, membership, faster fulfillment, and profitability together.
What’s the revenue model?
We have varied sources of revenue, as different shops need tailored assistance. First, we charge a $99-199/mo fee and a small % of sales for e-commerce orders, whether web or mobile. Second, we monetize the standard 2.6–2.9% card fees from in-store payments through our ‘retailOS’ workflow system via a partnership with a payment facilitator. Third, in the event we’re providing inventory & purchasing services, we collect a 2–5% COGS arbitrage as we drive deeper wholesale discounts for retailers. Fourth, we provide opt-in marketing, fulfillment, financial reporting, and data analytics services to help stores acquire customers, ship orders, track fins, and inform sales trends. And finally, we prefer to participate in ownership — around 25–30% for existing stores, or 75–100% in the case of new stores or acquisitions, establishing a partnership agreement that incentivizes Indie & local partners to increase sales & profitability. If you deconstruct Indie’s growth model, we expect that ~30% of corporate “income” comes from B2B fees, and ~70% from net profits of owned/shared stores.
Is this only for bookstores?
Small bookshops are experiencing a local renaissance, and we’ve been shocked at the existing software tools in the market, many of which were apparently written in MS-DOS... Most are still “seat-based” licenses, which only install on one store computer at license fees of $2–4,000 per year + monthly fees for web shops. The owner of one of the most well-known bookstores in the country recently said: “Wait, so my team can access this remotely?!” To begin, we are focused on growing the number of viable independent Main Street bookstores (because “a town isn’t a town without a bookstore”), but may eventually expand into other bedrock categories of local retail: home, baby, gift, sporting goods, toy, grocery, etc.
Is this a SaaS business?
Yes, but with a caveat. We believe that because most existing small shops are ~$500k in gross sales, we’d have to reach massive scale to make a SaaS-only model sustainable. If we estimate our fees as 2% of sales + $199/mo & 5% of e-com sales, the average $500k store would pay ~$15k in annual fees. To reach a $250k run-rate, we’d need 15–20 stores; to reach $1m, we’d need 75. On the contrary, if we participate in ownership, even to varying degrees, we need 3 stores to reach $250k, and as little as 8–12 to reach $1m. We also expect our stores to grow aggressively, as a result of our operating model, membership and tech-enablement tools, so participating in ownership allows us to share in the upside of the sales growth we help create. If other stores follow the growth path of our first store, Little Professor, we’d be able to reach $1m within a couple years with just 4–5 stores.
What’s the growth expectation?
By YE 2023, we expect to have three stores totaling around ~$3m in annual sales @ ~$250k net income + ~$100k in software fees. Two are wholly-owned and one is a 50/50 partnership store. Additionally, we expect to onboard 2–3 existing stores as software-only partners, and more specifically identify the friction/bottlenecks of implementation. By focusing on both the operating stores & software-only expansion, we’ll be equipped to better forecast & plan for 2024 growth. Per our financial model, and the contribution of profits vs. software fees from different stores, Indie hopes to grow from 3 to 12 partnership stores in 2024, and also add 15–20 software partners to collectively generate ~$10M in net revenue.
What do you think Indie becomes?
We are still very early in this mission, but we desire to become an operational & software partner for thousands of local retailers to modernize Main Streets. Starting with bookstores enables us to open hundreds of community anchors around the country, generate sales & membership traction, continue to prove-out the core operating model, and build hyperlocal trust with consumers and businesses alike. Yet, the total retail book market is ~$9B, so we want to eventually expand Indie to other product/store verticals to increase the addressable market. Because ~80% of consumer discretionary spending happens within five miles of home, we remain optimistic that local businesses of all types will thrive for years to come, particularly as the 65% of ‘boomer-owned’ SMBs are passed to younger operators with modernization expectations. Within the next few years, we’d like to reach 100 stores, and find the right capital-efficient mix of category expansion, vertical-SaaS, profit-sharing partnerships, and corporate-owned shops.
So like a local-focused Amazon, starting with books?
😉
