ecommerce

In the trend-driven world of venture capital, sentiment toward the ecommerce sector changes as often as the celebrity crush of a teenager.

One minute, brick-and-mortar retail is going the way of the dodo and etailers are the hottest investment going. The next, investors have soured on the space, writing off as tired business model trends like flash sales, stuff-in-a-box, celebrity endorsement, and the like. At the same time, digital-first brands like Warby Parker, Bonobos, and JustFab are reversing course and opening physical retail locations under the guise of creating brand experience.

So, which is it? Is ecommerce a hot category among VCs or not? And is there still an opportunity to build successful commerce businesses online, or has that ship sailed in the form of the destroyer known as Amazon?

Addressing the latter question first, there’s no doubt that there is room for other successful ecommerce companies beyond Amazon. Look no further than Zulily’s November 2013 IPO. The four-year-old company priced its offering at $22 per share and closed the first day of trading up 71 percent at $37.30, giving the company a $4.7 billion market cap. In the three plus months since, the stock has traded as high as $72 and is currently north of $61 per share, valuing the company at $7.7 billion. Even Groupon, after all its issues, still has a $5.7 billion market cap, while OG giants Amazon and eBay continue to perform.

In the private markets, companies like Wayfair, One Kings Lane, JustFab, Warby Parker, Bonobos, Honest Company, and Fanatics among others appear to be generating real traction and growth in their respective categories. Even Gilt, which stumbled mightily from its one-time-perch as the grand poobah of ecommerce 2.0, appears to be righting the ship and preparing for its long-awaited IPO. Add in marketplaces like AirBnB, Etsy, and Eventbrite and there’s plenty to be excited about in the ecommerce category.

The question remains, then, what is the VC appetite toward ecommerce today, and, perhaps more importantly, what should that appetite be?

Judging by data from venture research firm CB Insights (CBI), VCs should be giving ecommerce meaningful attention. According to a recent CBI report, of the 450 venture-backed tech company exits (M&A or IPO) in 2013, 16 percent occurred in the ecommerce sector, the most of any category. Ecommerce is also the leading category by representation on CB Insights’ Tech IPO Pipeline list.

Of course, not all exits are created equal and the CBI data doesn’t delve into just how successful these 72-odd exits were for their investors. As the same report notes, just 1.04 percent of exits (across all categories) were for more than $1 billion and 66 percent of exits were by companies who had not raised any institutional capital. In other words, for every Zulily, there are dozens upon dozens of lesser exits, and even more companies that never make it to the finish line.

Nonetheless, the takeaway should be that there is an appetite among strategic and financial acquirers, and among the rarified air of Wall Street investors for ecommerce deals. Where there’s a downstream appetite from buyers, expect upstream money to flow. The problem, then, becomes identifying the winners and avoiding the losers.

Upfront Ventures partner and former Hautelook CMO Greg Bettinelli delved recently into his model for identifying ecommerce unicorns ($1 billion-plus companies) early on. He boils his methodology down to five criteria: 1.) An authentic founder/team; 2.) Early organic growth; 3.) Proven/potential operational excellence; 4.) Attractive market and margins; and 5.) Companies that are in a position to excel in a changing world.

Most companies won’t excel in all areas, but surely the more boxes an ecommerce startup can check the more likely success becomes. Why then, given models like Bettinelli’s for objective company picking, the recent exit success of the category, and the healthy crop of up-and-coming private companies, has investor appetite seemingly cooled on ecommerce?

The short answer is, ecommerce is hard. Amazon has claimed the low-cost, commodity products market and is effectively beyond competition. But in categories where brand identity and customer experience are important differentiators, online retailers have created real value. Finding success in this area requires operational excellence and experience that many entrepreneurs and, frankly, venture investors simply lack. Without the ability to place a thumb on the scale, as the saying goes, many VCs seem content to sit on the sidelines.

It took nearly five years, from Amazon’s July 2009 acquisition of Zappos for $1.2 billion, for the ecommerce sector to see another ten-figure exit. In that time, hundreds of companies have gobbled billions in venture dollars. Many of those investments are now worthless, as venture-stage companies are wont to become. Given this context, it’s unsurprising that investors cooled on the ecommerce space.

But if current trends are any indication, the opportunity in ecommerce is as great as ever. Not only was 2013 a strong year in terms of venture-backed exits, but consumer spending online continues to grow. Forrester research at the outset of 2013 projected $262 billion ecommerce spending for the year, up 13.4 percent from 2012, and further estimates this figure will compound at 10 percent per year through 2017 when spending would reach $370 billion.

This is exactly the kind of behavior shift that VCs love to draft behind. Investor appetite will always shift with the prevailing winds, but things appear to be gusting in the ecommerce sector’s favor.

[Image via Thinkstock]