Approaching e-commerce investments in the age of Amazon

With Amazon as the 800-pound gorilla, many of my fellow investors choose to ignore e-commerce altogether. In fact, the industry hit recent lows in a number of deals and investments. But as Bonobos’ $310 million acquisition by Walmart and Stitch Fix’s IPO demonstrate, there are still plenty of exciting opportunities in this space for investors.

In my ongoing hunt for investment opportunities, I recently came across a brand that had garnered significant traction without raising a lot of capital. This traction, however, was across traditional retail channels, not the channel that mattered most to me as a venture investor — e-commerce.

Why do I value this direct to consumer channel so highly? For one, e-commerce margins are better (in the 80 percent range versus as low as 50 percent in traditional retail). But it also offers the potential for scale that retail simply can’t match. My grandfather grew his textiles business methodically, one merchant and store at a time — something I greatly admired as a child, given the grit and hustle he put into closing each sale. However, today, with the help of Facebook ads, viral videos like Dollar Shave Club’s classic ad, influencer and celebrity-driven endorsements, sales can boom overnight.

People have been shopping online for more than two decades, and we have seen a number of iconic brands originate online. Behind many of these brands are successful venture investors, such as Forerunner Ventures (Warby Parker, Glossier, Bonobos) and Maveron (Everlane, Madison Reed), as well as amazing entrepreneurs and marketers like Kal Vepuri, Divya Gugnani and Rohan Oza, who “just get” consumer branding. They know how to make something cool, at an affordable price point, and how to position their companies for big M&A when the time comes.

As these investors and individuals know, billion-dollar acquisitions come from scaling and plugging in e-commerce startups directly to help scale with the acquirer. (Walmart), Dollar Shave Club (Unilever), (PetSmart) and Lazada (Alibaba) were acquisitions of talent, revenue, EBITDA, supply chain and strongly branded online brands.

This leads me to approach direct to commerce brand deals through the following three lenses.

Who are you disrupting?

Identifying problems with the incumbents is often the starting point for why a new company needs to exist. It could be an unethical or unhealthy supply chain (something Everlane has exploited well), stodgy brand imagery associating incumbents with older consumers or delivering a similar but cooler product for a cheaper price than the gross-margin laden incumbent (see Dollar Shave versus Gillette).

I also care about CACs — costs of customer acquisition. The general thinking for e-commerce businesses is that with less than 10 percent of U.S. commerce taking place online, you will eventually exhaust all potential customers for your product. Facebook and Instagram ads will only get you so far with a digital audience. Once you need to scale to those shoppers who don’t live their commercial lives online, the common approach is partnerships with traditional brick and mortar retailers.

Let’s use Casper as an example. After famously hitting $1 million in sales within a month and $100 million in its first full year of business, the mattress maker was the undisputed king of the nascent online bedding industry. Spying the masses of potential customers beyond the e-commerce realm, Casper has since partnered first with home furnishings retailer West Elm and then Target — coincidentally, after the Minneapolis retail giant tried to make them one of those billion-dollar acquisitions mentioned above. The approach appears to be paying off: Casper took in around $200 million in revenue last year, and CEO Phillip Krim suggested in the spring that they were on track to double that in 2017.

In the case of Casper, and e-commerce brands in general, customer reviews on Google and Amazon really matter. I never believed I’d buy a mattress online, thinking I’d have to test out a “durable” purchase such as a bed before trying it. My millennial shopping habits kicked in, however, and I realized I didn’t need to roll around on the bed to know it was comfortable because I trusted user reviews.

Casper disrupting the mattress industry

Finally, how you’re disrupting matters. I want to know how you’re using data to improve the e-commerce relationship. Companies such as power search for giant e-commerce companies and demonstrate the power of building a walled garden search box for your products. Analytics drawn from what people are searching for (e.g. products you don’t currently stock, but you should) can provide a lot of tactical insights into new or adjacent product categories that a vendor should stock.

There’s also a lot of insight to be gained from knowing which customers were successfully retargeted and for what products. If you have a retail presence, are you leveraging data that stores are gathering about customers while they’re physically in the store itself? Take RetailNext, which uses strategically placed cameras and computer vision technology to give retailers deep insights into everything that happens from the time a potential customer enters the store to the point of sale.

How much of your supply chain can you collapse by cutting out middlemen and taking your product to customers in as direct a way as possible?

Cut out middlemen like these guys

Digital-first (and sometimes digital-only) brands can benefit from nimble supply chain maneuvering. Larger, brick and mortar business is still largely conducted via salespeople working out of local shops and national distributors that cater to large businesses. E-commerce shoppers are lured away with instant comparison shopping and free delivery, on top of whatever else the digital brand may be offering.

It doesn’t matter if the new digital brands sometimes use the same factories and sourcing as the incumbents they seek to disrupt. The new company is selling a millennial-empathetic lifestyle and the incumbent is something for your parents and “old people.”

When operating as a horizontal e-commerce platform — which can absolutely be branded — think no further than Amazon Marketplace or Boxed Wholesale, one of our investments at Signia. Once customers trust the online marketplace, they will trust own-label products from the platforms themselves. This is typically highly beneficial to the platform due to the higher margins of acting as a vertically integrated supplier versus a third-party product distributor.

How brandable is the product?

Online brandability, especially on Instagram, is a must-have in order to build a successful e-commerce company today. In a previous article, I wrote about the growing importance of influencer marketing and how much brand equity matters in these campaigns: “While influencer marketing takes many different forms, there always has to be a great product, a great story, and great storytelling for the magic to be unlocked. You can’t just attach an influencer to a brand and hope for sales takeoff.”

“Offline” brandability is also an important consideration. When a D2C brand ventures into retail, part of its strategy may include partnering with an incumbent retailer with extensive foot traffic, as Casper did with West Elm and Target. Another part may involve opening retail “brand ambassador” locations. For example, the Mongolian-American luxury cashmere brand, Naadam, recently opened a New York City pop-up containing artifacts from the Mongolian nomadic lifestyle and imagery inspired by the brand’s exotic eastern roots. Glossier recently hosted a pop-up store and dinner in London with a bunch of beauty influencers. These physical IRL (in real life) events and locations can provide real-world brand experiences that further tie consumers to the predominantly digital brands they covet.

Meeting these criteria is not easy, but startups that do attract my attention and my investment dollars. Although other venture investors may beg to differ, e-commerce continues to spawn a wide range of innovative companies that offer compelling investment opportunities.