As a VC turned CEO of start-up, I’ve had the privilege of being exposed to both sides of the coin. So when our company recently decided that we were ready to initiate VC talks, ready to get some funding to take us to the next level, I was surprised by some of the reactions we were receiving. While some VCs that I met seemed to be rightfully bullish about everything that had to do with eCommerce, some seemed to be missing the point. To put it bluntly, on more than one occasion I encountered a VC saying that the eCommerce model doesn’t have a “VC feel” to it. Huh? What were they missing? Why weren’t they seeing what I was seeing? Hadn’t they heard about the recent funding rounds from Ecommerce companies Groupon and LivingSocial? Since then, and after resting aside my ego, I placed myself back in my VC shoes to try to understand what “proof” such VCs needed to feel comfortable with an eCommerce investment. I genuinely believe that when it comes to internet investments, eCommerce is not only a VC story, but that it is the VC story. Here’s why …
The growth of eCommerce as a percentage of total retail is no secret. Steady growth over the past 10 years has propelled eCommerce from roughly 0.5% to nearly 5% of the total retail market, with a forecasted continuous increase. The online price comparison websites that were once King of eCommerce are now commoditized and being replaced by innovative models such as social commerce, group shopping, private sales, and open source technologies that are part the “eComm-aissance”, a true renaissance, a breath of fresh air that has lead to great shopping experiences over the last 3-4 years. Just look at the history of computer hardware retail, for example, in considering the potential for other eCommerce sectors. Today, over 50% of personal computers are purchased online. Compare that statistic to the reality just a decade ago, and the trend implications become clear: The entire eCommerce industry is heading towards online success. Considering that we are already in an era where everything from automobiles to engagement rings are sold online, it’s simply a matter of time before, like computers, their 5% will be transformed into 50%.
Today’s e-consumers are reaping the benefits of eCommerce’s cornerstone: Superior technological innovation. They are accustomed to more frictionless buying, easier payments, smarter recommendation engines, sharper display (product images, 3D, HD), short fulfillment time, and excellent customer service. And while 5% of the total retail market seems like a relatively small piece of the pie, eCommerce influences about 80% of that pie in most segments. After viewing what’s available online, people are heading out to the brick and mortars as savvier consumers. The ripples of eCommerce are tangible.
Capital Efficiency, High Growth and Scale-Up
The appealing qualities of capital efficiency and high scale up are actually inherent to eCommerce companies. Outsourcing, for example, is a common thread among many eCommerce companies and supports capital efficiency by enabling dedicated focus. A company will decide what operations are best to keep in-house while outsourcing those that it can “afford” to. For example, some companies may choose to outsource their SEM activities, some may decide that their R&D can be outsourced, while others may eventually outsource customer support. All depending on which of the above are in the company’s core business and which are not. Correctly weighing opportunity costs, or staying focused, allows for broader innovation and potential for new models
Today, eCommerce companies can scale up faster than almost any other consumer business model. They are high-growth companies, with a roughly 30% year-over-year growth over the past five years that shows no signs of slowing down. This is due in part to the relatively simple and immediate validation of business models that are not fully dependent on advertising. While there’s no need to reinvent the wheel, there is certainly room for improvement and intra-vertical competition as companies master not only supply chain logistics and shipping and handling, but also SEO, social media, and equally as important, staying creative.
ECommerce is a fragmented industry, a fact that leaves room for new players to enter and to create more than one winner per industry. Why is this so? Consider for example a company that would want to enter the soft drinks industry with a new Coca Cola brand. It would be competing against Coca Cola and Pepsi. Practically impossible for a startup. However, consider a company that would like to create an eCommerce store focusing on consumer electronics. Needless to say that with proper execution, expertise and funding, they could certainly make a company exceeding $100 million in value in a 2-4 year period. Moreover, a fragmented industry creates numerous exit opportunities as the fragmentation is slowly consolidated. Consolidation will persist to prove itself as companies like Amazon and eBay continue to make acquisitions (Zappos, Quidsi, Woot, BuyVIP, etc.).
VC dollars can create true value in eCommerce! Investing in eCommerce means investing in a proof of concept. A company showing well executed signs of growth has broken the barriers to entry and proven that it can keep up with the big boys. That same company will meet and exceed its competitors so long as it has the funding to maximize its potential. At the end of the day, the predictability of the business model, coupled with a fervent devotion to technological innovation, means that a company can invest in more marketing with confidence. That marketing, however, is dependent on capital, and that capital means Venture Capital.
Tomer Tzach is a VC turned entrepreneur. Before becoming the CEO of Zoara (http://www.zoara.com/), the premier website for diamonds and jewelry, Tomer was an acting partner at Venture Capital firm Eurofund.