Staples’ Tom Stemberg advises businesses to avoid the ‘Amazon effect’. (Image: Courtesy Company)

Now a VC investor, Tom Stemberg has a warning for entrepreneurs thinking about competing with Amazon.

In the ’80s and ’90s, Staples founder Tom Stemberg was a big-box pioneer. Those days seem distant, says Stemberg, now 65 and a VC at Highland Capital. His portfolio includes sporting-goods chain City Sports and yoga brand Lululemon. “Terrestrial, mundane businesses,” as Stemberg explains to Inc. editor-at-large David Whitford, but with a twist he couldn’t have imagined when he was starting out: the ability to serve customers wherever they shop, on Main Street or in cyberspace.

In order to be successful today, you have to operate on all cylinders. You have to have a great retail operation and a terrific e-commerce operation, and you have to link them together. Your store may not have to be as big as before; some things you’re better off fulfilling from a distribution center. But you really want to integrate the strength of a retail store-the ability to let people touch and feel the merchandise-with the efficiencies of e-commerce. That’s the real challenge, and it’s tricky.

One thing I worry a lot about, which wasn’t an issue for Staples initially, is the Amazon effect. Amazon has built a wonderful business. However, it’s a business with very little profit. Amazon prices its goods in a way that creates an incredible problem. Do you price at these insane levels? Or do you yield market share to Amazon? As an investor, I try to avoid companies with products that are susceptible to the Amazon effect. Until Wall Street demands Amazon make a profit, that’s a dark cloud that’s going to hang over everything in retail.

When I invest, I look for two things above all: a great market and a great entrepreneur. The business plan is going to change. The team is going to evolve. But if you have a leader who can inspire others and a growing market that offers you an opportunity to differentiate yourself, typically you’ll have a winner.

My general advice to entrepreneurs is the same I’ve been giving for 30 years: If you want to get into a business-no matter what the business is-first, you ought to work for a really well-run company in that industry and learn some management fundamentals. I’m talking about how to hire people, how to fire people with dignity, how to motivate people. Sure, some businesses don’t require a lot of people in the early stages. But as you get bigger, people skills become critical. The entrepreneurs who bring those skills to their first ventures will have a big advantage over the entrepreneurs who don’t.

There are the rare birds like Bill Gates who have the talent to succeed without experience. But they’re like the guys who go straight to the NBA out of high school. Works for some, but for the vast majority, it doesn’t.

By David Whitford

Source: Inc.com