You’ve probably heard the phrase, poacher turned gamekeeper. It describes someone who protects the interests they previously attacked. But what can happen in business is that the gamekeeper turns poacher. Someone you paid money to, relied on, now works against you by trying to get to your customers.
This can happen in the case of suppliers. The more of your supplies you get from a single provider, the more vulnerable you are to that supplier turning poacher and deciding they don’t need you, instead going straight to your customers.
Here’s an example of poaching at work.
In the US, Sebastian Johnston co-founded TheAmazeApp in 2014. The idea was simple. Social media influencers could upload a picture of what they were wearing (i.e., a “look”) and tag the items on TheAmazeApp’s database of e-commerce wholesalers. Then, when one of the influencer’s social media followers liked their look and wanted to purchase one or more of the items the influencer was wearing, TheAmazeApp would receive a commission, 20% of which was shared with the influencer.
TheAmazeApp’s founding team raised $800,000 through the San Francisco-based accelerator 500 Startups. By leveraging their influencers to drive traffic, TheAmazeApp quickly grew to four million active users per month.
The app was a huge success with consumers, but there was a flaw in their model that held back their valuation. For the model to work, influencers needed to be able to tag whatever they were wearing, so TheAmazeApp needed to get a comprehensive catalog of hundreds of thousands of the latest fashion items. To do that app relied on the data feed of five e-commerce wholesalers who uploaded their data to TheAmazeApp.
TheAmazeApp became increasingly dependent on Zalando, one of their five data suppliers. Zalando is one of Europe’s largest fashion wholesalers and controlled around 70% of TheAmazeApp’s inventory.
The more TheAmazeApp relied on Zalando’s data, the less leverage they had when it came time to sell. Johnston approached all five of his data providers to buy his business, and two expressed interest in buying TheAmazeApp. This buoyed Johnston’s spirits because he knew multiple bidders would give him some leverage with acquirers.
As the process dragged on, one of the two acquirers dropped out, deciding to set up a competitive app and leaving only Zalando left. Given Zalando knew they controlled 70% of TheAmazeApp’s inventory and that a comprehensive selection was key to their business model, Zalando knew they were in the driver’s seat.
Johnston also realised that if he pushed Zalando too hard, he risked them turning poacher and setting up their own competing service.
In the end, Zalando acquired TheAmazeApp for between two to three times revenue, which was a relatively modest multiple given the traffic the app was generating just eight months after being funded by an accelerator.
The lesson to be learned.
The more of your supply that comes from one provider, the more susceptible you become to your provider turning poacher and taking the customers that you found. This liability drags down the value of your business and undermines your negotiating leverage when it’s your time to sell. So if you want to maximise the value of your business it’s best to diversify your suppliers.