Reinventing Partnerships Between Brands to Revolutionize the Way Ecommerce Acquire Customers

Our investment in Sqwad

We are very happy to announce that Samaipata is leading Sqwad’s $3m Seed round, alongside top business angels from the industry. As we welcome them to the Samaipata family, we wanted to share this note about our investment thesis on Sqwad.

What is Sqwad?

Sqwad is a platform that rethinks partnership between brands and revolutionizes the way e-commerce acquire and retain customers over time. They propose a collaborative system to help brands to diversify their acquisition channels and reduce their dependency on online advertisement (i.e. Google and Facebook/Instagram ads). Mutual help is the foundation of commerce and Sqwad wants to help brands to sell better together.

Why we invested in Sqwad — TL;DR

While historically digital brands have relied heavily on paid marketing on e.g. Facebook and Google, rising acquisition costs are pushing merchants to adopt alternative, down-the-funnel acquisition strategies in their growth mix . This trend appears to be structural, and not a temporary outcome of Covid. As a result, digital brands of all sizes have strong incentives to adopt a cross-sell solution such as Sqwad, providing the underlying acquisition performance of this new channel is clear to them. Sqwad will thus play into a large enough market opportunity in the medium term (in revenue terms) to become a fund returner. In the end, Sqwad’s main moat & long term ability to monetize will come from their large and proprietary network of brands in the face of increasing competition. And we believe the Sqwad team is the best positioned to build such a network in Europe as they have demonstrated a strong speed of execution & growth mindset, combined with a genuine customer-centric product DNA.

1. Rise of CAC is becoming problematic for brands and e-commerce.

The number of Direct-to-Consumer models have exploded in the last 5 years. Consumer businesses have gone fully digital thanks to the increasing penetration of tech enablers (e.g. CMS, fulfillment-as-a-service platforms etc.) drastically reducing the costs of starting an online business, and to a shift in consumer behavior linked to the Pandemic. As a result, Shopify counts 1.8 million merchants in their network now, growing +52% year on year.

Digital brands of all sizes rely heavily on paid marketing to grow. According to Influencer Marketing Hub, in 2021, between 30–40% of the website traffic of eCom. businesses came from paid search and display. Market feedback has indicated that brands roughly leverage 5 different channels when it comes to paid marketing: 1. Paid ads (mainly on Facebook and Google), 2. Affiliation (with e.g. blogs and marketplaces), 3. Influencers, 4. Email marketing and 5. Partnerships.

However, the market has recently seen a steep increase in online costs of acquisition. There are two main catalysts for rising CACs:

• Monopolized acquisition channels (i.e. Facebook and Google) flooded by billion- dollar marketing budgets of consumer conglomerates such as Unilever and Procter & Gamble.
• Proliferation of small DNBVs powered by Shopify and other CMS, lowering entry barriers.
• Declining targeting and attribution performance driven by a sharp decrease in accuracy and measurability; the efficiency of targeting with third party cookies on Chrome has dropped 50% within the last 6 months; and the increasing penetration of iOS 14 and GDPR restrictions are also adding more limitations to campaigns.

All in all, the growth in ads “inventory demand” combined with a flat supply and new policies around the end of 3PC and of automatic user data tracking opt-in on iOS has drastically increased costs, opacity and performance of customer acquisition overall. And all market stakeholders whom we spoke to are of the opinion that rising acquisition costs are a structural trend and not likely to decelerate in the coming years.

As a result, we are currently witnessing the following evolutions in the D2C landscape, with digital brands generally more open to test new acquisition strategies and more eager to collaborate.

Brands are shifting from a CAC mindset to a LTV mindset: growth is not only driven by resources allocated to acquisition but also to loyalty and conversion down the funnel. As a result, while brands will always be price takers when it comes to digital media and CACs, merchants are increasingly realizing the power of leveraging existing customers as an acquisition channel: it’s within their control to turn their best customers into marketers for their brand. Consequently, loyalty programs are increasingly popular.

Secondly, brands are also increasingly interested in collaboration. As an example, a large majority of Criteo’s clients are now subscribed to their Data Coop product (i.e. mutualization of audiences up to 10% of a merchant’s customer base) since iOS14 has been launched.

Third, we are also seeing a prevalence of solutions leveraging 1st party data (vs. 3rd party cookies tracking) to comply with the main platforms’ setting and GDPR privacy restrictions.

All in all, market feedback has indicated that brands are getting more creative in their marketing mix. Partnerships have always been seen as unscalable (ad hoc & custom) projects driving brand awareness rather than performance. Yet, as in B2B, with the right approach, they could become key in this cookies-less brave new world.

2. Sqwad plays in a large CMS-agnostic market with strong tailwinds.

Incentives for brands to adopt a product like Sqwad are strong across the entire spectrum of D2C brands. First, as explained, brands are increasingly eager to drive growth outside of Facebook, Amazon and Google. Sqwad is essentially rethinking partnership as a new distribution channel: thanks to their win-win value proposition powered by their credit system, they are shifting the nature of partnerships from short-term, messy campaigns to a long-term, mutually-beneficial customer acquisition channel. It has now become clear that in order to grow exponentially (vs. linearly), brands have to nurture their customer base and “trading” their loyal customer base with other similar brands will allow all parties to grow more sustainably. Smaller brands can contribute their small, yet very qualified client base, while larger brands can bring a much larger audience, while sometimes still being under-represented in some specific segments. In other words, small brands will be interested in traffic generation and brand awareness, whereas large brands will be driven by retention and AOV increase.

Moreover, DTC brands are often lacking in cohesive, widespread data analysis, and thus typically relegate acquisition and discoverability tasks to larger platforms like Amazon. Building out this concept could be a game-changer for a network as efficiently interconnected as what Sqwad can become in the future.

Sqwad’s current product induces very high click-though-rates and conversion from click-to-purchase (3 to 10x the current benchmark on other acquisition channels), through a smartly engineered product workflow.

On top of that, their next product, a pre-purchase widget allowing merchants to sell other brands’ product to their clients, turning them into decentralised marketplaces, acts as a new distribution channel for brands likely to sell their products together.

All in all, they play in the very large market of CMS-powered online stores, Shopify-powered accounting for only a share of it and already making up close to 4m stores worldwide, 3x what it was 2 years before.

3. Sqwad’s model natively embeds multiple network effects, conferring a strong defensibility at scale.

You’ve probably already heard about our love for Network Effects. On that, Sqwad’s model is one of a kind. First, they are planning to develop many solutions across partner brands: more active merchants will thus increase the utility of their solution. Additionally, the more brands they have on their network, the more “prints” they will get, the more they can monetise their merchants’ GMV on other features. Second, Data Network Effects (c.f. our article) will also be key: they are planning to use the onboarding declarative data, the cross-sell data produced on Sqwad as well as social media data to create and improve a recommendation algorithm using reinforcement learning. Their engine will learn from each customer purchase and predicts the best products and brands to suggest in the Sqwad pre and post-purchase carousel. Finally, they are also planning to grow a “partner” network around their community of brands.

Beyond network effects, defensibility will also come from their product stickiness. On top of their current products, they are planning to gradually develop other products across the entire acquisition funnel, eventually generating up to 35% of brands revenues.

Obviously, similar models already exist in the US such as Disco or Canal. However, we believe that this type of play will not become a winner-takes-all at a global level. Following the Node Saturation Strategy (c.f. our article), some players can cohabit across the globe, with some nodes that will be saturated by one player or the other (e.g. Green x Millennials x Europe x Shopify).

4. The team has the right approach to build a category leader in Europe.

In this space, we believe a winning team needs to have two strong USPs: they need to be able to grow their network of merchants rapidly, while having a customer-centric DNA to be able to ship a killer product.

On the first one, the way the team have looked at acquisition, betting on a strong inbound funnel on a very focussed go-to-market strategy (going for “sqwads” on thematic nodes with a pre-determined sequence) that triggers virality, in addition to a strong outbound sales machine with specific lead scoring criteria and a healthy funnel, has convinced us that they have the right mindset to crack the network building play.

On the second one, the founding team is highly customer-centric and seems to have the right Product & Tech mindset. The 3 of them are engineers with top notch academic backgrounds and have spent several years namely in Product management on Adtech products (Criteo), Data science, and strategy consulting applied to consumer goods and retail (Kearney). On top of that, they have a strong sense of urgency and have acknowledged many times, the importance of being first to market in Europe.

All in all we can’t wait for what’s ahead of them and we are super bullish on i)the e-commerce market and the CAC rising trend, ii) the Sqwad model that is likely to trigger strong defensibility/value at scale thanks to embedded Network Effects and iii)a stellar team who know all the secrets to build the future of brand partnerships.

If you are a digital brand or an e-commerce business and you want to open a new high-performance acquisition channel, join your Sqwad at https://joinsqwad.com

At Samaipata we strive to partner with early-stage founders and to support them in taking their business to the next level. Walking the capital structure journey is only one of many fronts in which founders can receive valuable support from us. Check out more ways in which we can help in previous articles.

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