The Art of Keiretsu

Transforming Trillion Dollar Value Chains

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As a firm, we are obsessive about the industries that we invest in. We do an immense amount of work to study how these industries operate and develop a POV on how they could operate in the future. Where we get most excited, however, is when we see an opportunity for the companies we partner with to create those futures — to make the theoretical possible.

Each of the markets we invest in is trillions of dollars in size, in the US alone. For one company to move an industry value chain of that magnitude is a herculean task, possibly an impossible one. For an industry to change, it requires more than a disruptor; it requires a movement — a collective of like-minded visionaries working together to accomplish something that is bigger than what they could independently.

As we evaluate the potential for industry transformation, we’re searching for the magic of these collectives. Make no mistake, we are looking for the greatness of individual founders building individual companies. But rather than sitting on idle hands waiting for opportunities to fall into our lap, we develop a roadmap for what that potential future could look like — a blueprint for the industry’s new value chain that envisions how companies could work together to build a future that is made possible only by their collaboration. Ideally, we’re an investor in those companies as well.

We fell into this practice, but by no means did we invent it. A few years ago, my colleague Ali (who recently returned to the firm after selling a vertical SaaS startup he founded) sent me a post from Aashay Sanghvi at Haystack, saying “sound familiar?” I had never heard of the practice of Keiretsu but it immediately resonated. The concept was largely commercialized in the Japanese conglomerates of the 80s, where management would seek to find synergies and linkages between multiple companies within a value chain. These companies would not only buy and sell from each other, but also coordinate with one another on business development, co-marketing, industry advocacy / lobbying and other mutually beneficial activities. Rather than verticalizing into a single entity (which had become the American model for scale), each of these players would focus on becoming surgically proficient at their individual slice of the value chain, maximizing market share, efficiency and (most importantly) margin.

As I dug deeper, this model not only existed within conglomerate structures, but shared parallels with how John Doerr and KPCB invested during its days of dominance. Across themes like ecommerce, network infrastructure, consumer hardware and the consumer internet, KPCB would invest in several companies within each of these themes, develop resources and knowledge bases for them to share, promote business development efforts across them and even facilitate M&A across them. This collectively enabled their companies to work together to accomplish what was a quantum leap in technology productivity (and some really amazing returns for KPCB). While I don’t know whether this practice was formally modeled after Keiretsu, it was highly successful and shares many similarities.

As we practice our Prepared Mind approach at Equal, we seek ways to practice Keiretsu across our four core sectors. Below is a graphic from our “Unbundling of Retail” post we wrote last year that illustrates how we put this into a play. While we place far greater detail on the capital flows and connections between these players, I hope the graphic below helps conceptualize the relevant key players in the retail enablement value chain. Each of these players helps facilitate the distribution of goods and at any time could be competing, collaborating or simply co-existing.

Per our system of Keiretsu, we have a strong preference for collaboration. Within this particular value chain, we have two publicly announced investments (Leap and Ghost) and frequently partner with a third (Outerspace). Each of these companies is the leader in their respective categories, each frequently partners with the best brands and each of them is philosophically aligned with our point of view on a digital future for the retail industry. We’ve actively partnered with several others in the value chain to help further increase the collective influence of this group. Together, these companies have become partners — sharing networks, opportunities and learnings together to accomplish that digital future. We’ve since made subsequent (unannounced) investments in the retail value chain, which will further propel the future of retail by collaborating with other players across this value chain.

As shareholders, we’re incredibly fortunate to have economic interests in several of these companies. As partners to these companies, we’re even more fortunate to learn from the immense industry knowledge of this network of companies. Their knowledge enables us to generate insights on markets before they are discovered by the broader market and we often get the opportunity to test/validate hypotheses with these companies before making an investment. This cycle perpetuates, creating an ecosystem that not only makes our companies stronger, but (selfishly) makes our firm stronger as well.

We advise founders to think along the same pathways and ask how they can leverage partnerships with other key players in the value chain to monopolize their category. For better or worse, it isn’t always the best product that wins the market opportunity. I recently spoke with the CEO of a decacorn vertical SaaS company and he astutely pointed out that all the value created by its platform was in the strength of its connections to other partners in the value chain (he referred to this as “lines,” opposed to the narrow vision of his company as tightly fitting in the “box” of that product category). As a founder, you need to find a way to make other partners in your ecosystem as reliant on you as possible — to make sure as many “lines” as possible come through your business. These “lines’ create a flywheel (much like ours above) for your own firm. In retail, a sector dominated by monoliths like Amazon, partnerships that enable these “lines” can enable a young company to operate with far greater capabilities than its scarce resources could normally afford.

We often say “it takes a village” and never is that more true than in the transformation of trillion dollar industries. As a firm, we believe that the villages that we help coalesce in a value chain can accomplish more together than they would independently. Collectively, these companies can accomplish truly incredible things together and we consider ourselves extremely fortunate to be partners with them as members in their village.

Phone lines are open for those looking to join our village. :)