Investors, both private and public alike, have shied away from e-commerce investing in recent years. However cautious, this might be the wrong strategy. There are new channels of growth that startups are leveraging, which could lead to new billion dollar brands.
Fortune’s e-commerce story yesterday is interesting but fails to appreciate the importance of brand creation (and there are far more long lasting brands than Amazon alone). Brands do take time to build and often burn vast amounts of capital before getting to this point. But this is changing and companies are reaching the point of brand creation far earlier and cheaper.
This is more than just academic for me. I spent the first decade of my career working in every retail job I could find (for my sins, only one was online and the rest brick and mortar). The next decade was spent in public market investing for retail companies and I am pleased to now be on the private side at Lightspeed Venture Partners.
It has often been said that ‘when the facts change, you change your mind.’ The facts on e-commerce are changing and presenting real opportunities. I’m going to talk about that in three parts:
1st week: The theory behind what is changing (this post!)
2nd week: 7 things VCs look for… does e-commerce fit?
3rd week: The US & International breakout e-commerce names we believe have bucked the trend with attractive ROIs
The prevailing wisdom among investors is that e-commerce does not provide venture type returns. While this is still true for most startups, there are breakout companies using different methods of growth and these are ripe investment opportunities. First, we look at how e-commerce is viewed by 3 parties: i) public markets, ii) acquirers, iii) private markets.
How is e-commerce currently perceived by public investors?
Investors continue to tell me they are unwilling to pay multiples higher than 1x sales for e-commerce companies. They continue to ask “how big will they really be?” and question both the expected growth and duration of growth in the category. I disagree as there are several factors leading to higher and sustained growth in e-commerce. The table below shows these 10 reasons.
Wayfair is a good example doing $2bn in sales, growing ~70% p.a. but the market believes that as soon as marketing stops, sales will dry up as it has no longevity of growth. However, a) growth is from repeat customers, b) each cohort is coming back sooner and spending more and c) word of mouth is very strong, implying the creation of a strong, long lasting brand. Everything is pointing in the right direction and while stock volatility will continue, Wayfair will be a long lasting brand ripe for re-rating. If public investors can be convinced that there is growth sustainability and that new trends will develop new legs of growth, expect to see many more public billion dollar e-commerce brands over the next decade.
How is e-commerce currently perceived by potential acquirers?
I recently spoke to two CEOs of global mall companies, who both asked if they should have more focus on e-commerce (vs. brick and mortar) and if so, whether it should be done organically or through acquisition. Having covered both on and offline retail, I did argue they should have more exposure to e-commerce. They agreed and while some companies are doing a good job themselves, many others are looking to spend their war chest on acquiring brands. This potential for exit opportunities is encouraging. It’s what’s led my partner Jeremy Liew and I to take a step back and look at the huge opportunity in e-commerce.
How is e-commerce currently perceived by VC investors?
Billion dollar e-commerce exits have been few and far between, and this has not gone unnoticed. Many Venture Capitalists have shied away from e-commerce, believing that the category is not a good fit for venture investment. This is due to:
• High capital requirements before you reach product-market fit
• Lower gross margins + inventory risk vs. software
• LTV/ Paid CAC arbitrage gets harder over time
• Not many billion dollar exits
• Operationally intensive businesses
• Lower revenue multiple requires large business to be built
While this prevailing wisdom is often still true, our analysis over the past few months has showed that things are changing, and some companies have been able to buck the trend.
New Data that is positive for e-commerce:
My prediction for the future
Prevailing wisdom prevails because it is usually true. But it isn’t always true. We are investors in rocketship e-commerce companies that look like they will offer strong venture returns, including Stitchfix, Honest and Bonobos. But there are many more great e-commerce companies that we didn’t invest in. We will provide quick case studies on 15 terrific e-commerce companies in the 3rd week. As with many other categories, the specifics matter more than the category. But there are some commonalities.
I seek to invest in e-commerce companies that show some of these characteristics:
– Excellent operationally minded entrepreneurs
– New, repeatable, scalable, defensible customer acquisition channels
– High LTV (driven by repeat purchases, high margin and/ or high ASP)
– Ability to alleviate inventory risk
– Opportunity for brand creation
If that sounds like you, drop me a line at [email protected] and tell me more!