How An E-Commerce King Is Conquering Korea

When I was working for Altos Ventures, a SF-based VC firm focused on investing in Asia, one of our portfolio companies was Coupang, a social commerce platform in Korea. Back when they first started off, they were latecomers into the industry, but our partners saw their vision and how organized their team was, and decided  to go with the investment.

Three years from their initial investment, the company is valued at over $1 Billion, becoming the first +$1B company in e-commerce business in Korea since 2010. One interesting fact is that they actually moved away from the group purchase business like the ones at Groupon and decided to take the Amazon model.

Similar success stories such as Coupang has sparked the interest in the startup scene in Korea, and various firms have taken interest in investing in the country, seeking similar success stories such as Coupang. However, as Groupon's stock performance shows, it is crucial to evolve your company from a cash-burning customer acquisition monster into a sustainable business model. Coupang's performance in the next couple of years will show whether they can prove they have something more than simply attracting a large number of customers into their platform.

http://www.forbes.com/sites/jjcolao/2013/08/14/how-an-e-commerce-king-is-conquering-korea/2/

When Groupon GRPN +0.18% hit the cover of FORBES in 2010 as “The Fastest Growing Company Ever,” it spawned a global gold rush. There was ClanDescuento in Chile and Kolektiva in Croatia. Filipinos got their daily deal fix at Ensogo, while Vietnamese shoppers chose from 100 different copycats.

And within the brick walls of Harvard Business School, BomKim got an idea. What about Korea? With the U.S. market already crowded, Kim saw Korea, where he was raised, as an obvious target. “The biggest point of friction in e-commerce is the time it takes for an item to get to you,” he explains. In Korea that time is minimal since 50 million people live in a country the size of Indiana.

The result was Coupang, which broke even on sales of $650 million last year, just two years after launch (we estimate $130 million went to the company). And while Groupon fueled its blockbuster growth through local vouchers–selling a $20 restaurant credit for $10, for example–and saw its business model implode (shares dropped 90% from a 2011 high*, and founder Andrew Mason was fired earlier this year), Kim quickly transitioned to selling actual things and insists this makes a big difference.

Today the company hawks everything from fresh cherries and Samsung phones to used cars and underwear, all with free two-day delivery. Kim, 34, wants to be more Bezos than Mason, pushing Coupang to take on inventory, limit flash sales and speed up delivery times. “Our model isn’t even close to Groupon,” he argues, noting that local deals make up just 10% of the company’s sales, compared with 60% at Groupon. “If anything, we’re closer to Amazon.”

Koreans enjoy the fastest Internet speed in the world, and two-thirds own a smartphone. Shopping is a national pastime. Ebay EBAY +0.56% acquired the top Korean e-retailer, Gmarket, for $1.2 billion in 2009, while TicketMonster, a Coupang rival started by another Korean-American, sold to LivingSocial for $350 million in 2011. Groupon entered the country that same year but remains a laggard behind native rivals.

Coupang has cruised by the competition, perhaps because entrepreneurial energy is so rare in Korea. Western capital flies by en route to bigger opportunities in China. The local VC crowd is still wary to seed early-stage companies, and Korea’s cultural aversion to risk and failure further dampens the appetite for new ventures.

Searching for office space, Kim found his real estate broker’s attitude typical. “You speak English. You know you can get a good job at a big company, right?” the broker said. “That’s the attitude here,” Kim says, mystified. “You only start a company in Korea if you can’t find a decent job.”

He grew up in Seoul and moved to Massachusetts at 13 to attend exclusive Deerfield Academy. (His father, a general manager at Hyundai, and mother split time between the U.S. and Korea.)

At Harvard he started Current Magazine , a nonprofit current-events sheet. (Newsweek took it over in 2001.) He raised $4 million from Atlantic Media’s David Bradley to help him launch 02138 , a magazine for Harvard alumni, in 2006. It folded in 2008.

Kim headed off to Harvard Business School, where he grew fascinated with Groupon and flash sales sites like Gilt Groupe–and was convinced he could transplant the idea to Korea. He raised $2 million from American investors, including hedge fund billionaire Bill Ackman, and dropped out of school in 2010.

In Seoul he persuaded a local developer to build the website in his spare time. He hired unemployed candidates from online job boards. “In the beginning there was no way I could attract people with decent jobs,” he remembers. Early on Coupang–a combination of “coupon” and “pang,” Korean onomatopoeia that Kim describes as a “fun pop”–copied Groupon, offering restaurant vouchers, spa treatments and other services at discounts.

When the site launched in August, 7,000 customers signed up that week. The company raked in $5 million by year’s end. In all, he’s raised $60 million, with Altos Ventures, Maverick Capital and Greenoaks CapitalManagement taking stakes (Kim remains the largest shareholder).

Kim expanded to travel packages and fresh food that winter; customers bought in droves. Merchandise now accounts for 80% of sales (travel and local deals account for the rest). The allure is simple. The largest Korean e-commerce players, like 11street and Gmarket, run eBay-like marketplaces. Customers wade through hundreds of different sellers hawking thousands of products of varying quality. Coupang, in contrast, keeps things fun, curating sales and customizing home pages for each customer.

“Compared to marketplaces, they’re much more focused,” says Young Bae Ku, the founder and former CEO of Gmarket. “And there aren’t the quality issues you’d find in a marketplace.” A team of 350 Coupang employees vet product offerings, while 500 more address customer complaints.

That focus is hard to see. Coupang will sell nearly anything to make a buck (one recent item: belly-button-lint removers), but Kim insists the site is eclectic by design. Through surveys he learned that customers like to be surprised by oddball items. “We said, ‘Great! We’ll sell everything, then!’?” he laughs. The company relies on volume to extract discounts from 50,000 suppliers, then takes a variable percentage of gross sales. On high-end electronics Coupang takes less than 10% and for fashion items 30%.

This means that Coupang’s revenue can be misleading. The company counts gross sales as revenue, though most money gets paid back to suppliers. Since Coupang is the primary obligation holder, responsible for pricing, refunds and returns, Kim argues this is appropriate. Coupang won’t disclose how much it keeps, but FORBES estimates it could be as little as 20%.

Going forward, much of that revenue will come from mobile. Coupang launched its first app at the end of 2011, and its mobile performance now dwarfs that of any U.S. counterpart, accounting for 70% of its Web traffic and over half its sales.

Kim hopes to take Coupang public in the U.S. next year. Why not list in Korea? Kim says American investors understand consumer tech companies better than those in Asia, and he hopes they’ll give the company a better valuation–and ignore the inevitable comparisons to Groupon.

What about Amazon? Though Bezos’ tendrils have so far avoided Korea, the company does billions in sales in neighboring Japan. Kim is nonchalant: “If they look at what it will cost to take away our customers, I don’t think they will find this market very attractive.” We’ll see.