Retention Science snags $750k from the woman who backed Warby Parker, Bonobos, and Birchbox

By Michael Carney , written on August 29, 2013

From The News Desk

Big data and machine learning are the decision making tools of the moment. And as such, they are turning up in places you’d never expect. Ecommerce businesses, for example, are turning to data analysis to better understand and market to their customers. However, it’s beyond the scope of nearly all ecommerce companies to build their own internal data science teams to create proprietary algorithms.

Enter Retention Science, a two year old Santa Monica startup producing customer retention and marketing automation software. The company recently exited beta and is beginning to work with many of the industry’s most well-known companies, including CafePress, The Honest Company, and Chrome Industries, as well as several of the world’s largest big box retailers which contractual terms prevent it from naming publicly.

Retention Science’s software analyzes data like email open frequency, site visit time, and purchase activity to help e-tailers identify when a customer is likely to churn. The platform then automates customer retention marketing in the form of tailored offers and promotions to drive re-engagement. The machine learning-powered software grows more efficient and effective with each new merchant and each additional customer data point. A newly introduced Retention Score quantifies and illustrate each customer’s satisfaction level and to benchmark ecommerce companies against their industry competitors.

Today, the company is announcing $750,000 in Seed-extension financing from Forerunner Ventures. The round comes on the back of a 133 percent increases in customer spending and 15 percent in business margin improvement year-to-date, according to co-founder Jerry Jao. Forerunner founding partner Kirsten Green will join Retention Science’s board of directors.

Green said in a statement:
We look for companies that are poised to disrupt, advance and transform the digital commerce experience, and Retention Science hits that high bar. Never before have retailers had such insight into what consumers want, how they want it and when they want it. Retention Science is leveraging this information to ensure online retailers keep their customers coming back, as repeat customers spend an average of 33 percent more than existing ones. This degree of tangible ROI is hard to come by in the world of digital commerce.
The relationship between Retention Science and Green, as well as the timing of the funding round was largely unintentional, Jao says. The first contact between the companies was less about fundraising and more about Retention Science seeking access to the VC firm’s ecommerce portfolio companies, which include Warby Parker, Bonobos, Birchbox, HotelTonight, Threadflip, Dollar Shave Club, Joor, Wanelo, and Wantful, among others. The relationship quickly blossomed from there.

Retention Science has been the target of intense inbound interest from potential investors, according to founder Jerry Jao. The company recently passed the 12-month mark graduating from Santa Monica’s MuckerLab accelerator and announcing its $1.3 million in seed round in July 2012 – a round led by Baroda Ventures and including Double M Capital and Mohr Davidow Ventures, as well as several local angels. But thanks to lean operations and increasing revenue, the company has more runway than most investors expected and had no plans to raise additional capital until next year at the earliest.

“We couldn’t turn down an opportunity to partner with Forerunnner and Kirsten,” Jao says. “Their track record in ecommerce is pretty impressive.”

Jau and co-founder Andrew Waage plan to accelerate hiring thanks to the unexpected infusion of new capital. The company currently has 19 employees, nearly all of which are data scientists. A building a salesforce is the will be the next, highly crucial step. The company will also accelerate its brand marketing efforts. Jao says his infamous conference crashing days are over and he may finally be able to bring himself to pay to attend the industry soirees.

Retention Science is a volume-metered SaaS product under which the largest customers will likely pay six figure sums annually. If the software does its job, however, they’ll see orders of magnitude more impact on revenue and avoid costly customer acquisition spending as a result.

The company has entered short-term, three to six month trial contracts with most of its current customers. Its big test will be to see whether it can convert these relationships into longer term engagements. Jao reveals that he’s looking to this conversion rate and the goal of $1.5 million in annual revenue as key milestones ahead of seeking Series A financing, likely sometime in 2014.

There are a few other competitors starting to target the customer retention big data space including San Francisco-based AgileOne and New York-based Y Combinator alumni Custora. Retention Science has beat each out for contracts recently, Jao says, but the fact that there are other solutions vying for the same business is a different situation than just a year ago.

The ecommerce category is highly competitive. The success of companies in this space is known to be dictated, in part, by the difference between cost of customer acquisition the lifetime value of a customer. Retention science inserts itself into the latter metric by helping companies keep their customers happy, engaged, and spending more, longer. It’s a result that any business would aspire to but that few beyond Amazon are capable of achieving on their own.

Retention Science entered the market at a time when the average online business is more aware of the existence and potential benefits of big data. All the company needs to do now is to deliver as promised with its current, early customers, and turn around and sell those case studies to anyone and everyone who will listen. It’s no easy task, but the rewards stand to be substantial if it succeeds.