VCs to retailers: Learn to use social media

Brick and mortar business may always be the primary place where people shop.

But retailers who want to maintain a healthy business should get online and learn to use social networks right away if they aren’t already, according to four venture capitalists last week participating in the Retail Innovation & Marketing Conference in San Francisco.

The VCs, of course, have a vested interest in their opinions. All four—Peter Fenton of Benchmark Capital, Theresia Gouw Ranzetta of Accel Partners, Dana Stadler of Matrix Partners and Jeremy Liew of Lightspeed Venture Partners—have invested in companies that have either created social networks or have built online sites that take advantage of people’s connections to their friends or to a brand to push recommendations and deals.

For example, the VCs urged audience members to look at companies that have had some success, such as the airline Virgin America, which has compelled customers to track their flight updates on Twitter. That in turn helps promote Virgin America to other Twitter followers.

The VCs got no pushback from the conference attendees, which included representatives from some of the largest traditional retailers worldwide. Some of those in attendance said that they still have up to 80% of their advertising budgets invested in traditional media.

“There’s a perfectly good logic to spending on traditional ads, but there’s not a good logic to being in denial about social media,” said Fenton, as he addressed the audience. “Money will not solve your problem. You have to engage and get smart people working on it who can tap into the most vocal [online] advocates of your business, for good or bad.”

The VCs were in universal agreement on the trends that they think will drive online shopping in the future, perhaps because the group has invested in similar types of companies.

The most lucrative trend today, they agreed, and the one that’s most disruptive to traditional retailers, is social shopping, which includes such VC-backed companies as the following:

• BuyWithMe, based in Boston, raised $5.5 million earlier this year from Matrix to provide group-buying discounts online.

• Groupon, based in Chicago, offers discounted deals for group buyers in several U.S. cities, raised a $30 million round in December led by Accel with participation from New Enterprise Associates.

• Gilt Groupe, based in New York, raised $43 million in August from Matrix and General Atlantic to build a private online shopping community with a luxury brands focus.

• KupiVIP.ru, a Russian online shopping club, raised a $20 million funding round this month led by Accel.

• Ideeli, based in New York, raised $20 million in December for its luxury brands shopping website. Backers include Constellation Ventures, StarVest Partners and Kodiak Venture Partners.

• HauteLook, based in Los Angeles, raised $10 million in May from Insight Venture Partners to expand a shopping club featuring private sales that last 48 to 72 hours.

Ranzetta noted that some traditional retailers are trying to emulate some of the tactics offered by these startups. She said she’s received e-mails inviting her to exclusive private sales offered by department stores Nordstrom and Saks.

However, the biggest trend of the future, the VCs agreed, is in the mobile space, especially as more devices take advantage of increased memory and higher network speeds. But they expect all that to take three to five years, and they don’t think mobile phones will replicate the traditional Web for shopping just yet.

There’s no reason to replicate an online shopping cart on a mobile phone, Stadler said.

“We’re still waiting for the use cases for mobile,” said Liew, whose firm is an investor in Flixster, which launched as an online social network focused on movies. Today, he said, more than half of the company’s traffic comes from mobile devices.

“[People do recommendations] when they’re on the move, in the real world,” he said.

Younger users are more willing to share information about themselves online, Fenton said, which is an advantage to retailers, since it could allow them to target those users with ads based on where they’re located, perhaps in a competitor’s store.

The VCs also expect that Google’s Android phone will eventually outsell Apple’s iPhone, and that the iPhone will become a high-end device in the same way Apple’s desktop computers are often compared to a PC.

“Google is paying carriers to use Android, and with Apple it’s the other way around,” Fenton said.

Liew said that there is hope for traditional retailers who get savvy about social networking. Traditional retailers can learn to move online, but social shopping sites probably can’t become traditional retailers.

They will bring in online data that will overlay brick and mortar stores, he said.