Pando

Ecommerce is supposedly capital intensive. So why do the companies that raise the least tend to do the best?

By Sarah Lacy , written on June 17, 2016

From The Disruption Desk

One time near unicorn One Kings Lane has sold to Bed Bath and Beyond for a “non-material” sum. And so ends another ecommerce 2.0 company that we once thought could be a $1 billion winner.

Let’s recap:

Gilt Groupe: A long time IPO prospect who sold for a mere $250 million.

Zulily: The hot flash sales winner that actually made it public… before it saw its stock fall by more than 60% and sold to QVC-- for admittedly, a comparative impressive $2.4 billion.

Fab: The granddaddy of ambitious ecommerce 2.0 startups that out fundraised the lot of them and then had the most ignominious of fates a sale of less than $20 million.

BeachMint: Raised some $75 million in capital at the peak of the subscription commerce fad, burned through it, shutting down verticals, and ending in an unceremonious sale to Lucky Magazine. All its sites are now defunct.  

ShoeDazzle: In the early days of ecommerce 2.0, the Kim Kardashian endorsed site went from scorching hot upstart of the LA scene to sold for a fraction of its one-time worth to “copycat” competitor JustFab.

Those five companies, combined with One Kings Lane, represented more than $1 billion in invested capital and billions in valuation from some of the top investors in the world. There is a reason VCs have just eschewed ecommerce. They mostly got their asses kicked.

To be fair, there are still some would-be winners. Honest is valued at north of $1 billion, although we’ve detailed they didn’t have the cleanest terms in that last round, and it’s been said they are looking at options other than an IPO. Bonobos could still be a winner one day, although having spun off its women’s brand Ayr you have to wonder how big it can get tailoring only to men. Birchbox is hanging in there, despite modest layoffs earlier this year. Fellow unicorn Warby Parker appears to be going strong still. One of the best may be JustFab, whose Fabletics clothing line is a breakout success from what we’ve heard. JustFab’s execs mastered how to acquire customers via cheap methods, based on tricks they learned during their MySpace days. That’s one big reason the “copy cat” outlasted and bought ShoeDazzle.

But there are vanishing few others, at least among the one time venture-hyped gang.

Recently, a string of interviews have made me wonder if the key to ecommerce is a bit like the key to content: Raise absolutely minimal venture capital, and mostly bootstrap.

This may sound insane, given the costs of shipping actual real inventory around and building a brand. But consider:

  • One of the only $1 billion exits since the dot com bust in the category was Zappos which did most of the heavy lifting without venture capital. In an interview last year, former Zappos COO and Sequoia general partner Alfred Lin reminded us that the company got to that exit on just $10 million in primary capital. (The rest of Zappos’ funding was all secondary to cash out existing shareholders.)
  • Last week, I interviewed Stella & Dot CEO Jessica Herrin for my podcast on motherhood and entrepreneurship, and she detailed a very similar story. Her reason for not raising money wasn’t the dot com crash, as in the case of Zappos. Rather she wanted more work life balance and to control her own fate. Her Sequoia round, too, was mostly a secondary round of a profitable company.
  • As a mother, I’m a huge fan of Tea Collection, which also raised a small amount of angel cash, but mostly just slogged it out on their own after that, under the tech blog radar. Today, the company looks a lot like a Bonobos, only without the guide shops. It sells through boutiques, large department stores, and through its Web site.

Bryan Spaly of Bonobos and Trunk Club also spoke to this at PandoLand last week. TrunkClub “only” sold for some $350 million to Nordstrom, but like those other companies, it had raised very little. “Bonobos has raised $117 million,” he said on stage. “TrunkClub raised $20 million when we sold for $350 two years ago, and had $8 million in the bank, and we had $8 million of inventory on the balance sheet so net cash burn if you take inventory out of the equation, we basically didn’t burn any capital to get to where we got to.”

It didn’t exit for $1 billion. Still, compared to the hundreds of millions Gilt, Fab, and One Kings Lane burned to get less in the end, TrunkClub was certainly a win, which was a big reason Spaly took the deal instead of raising more capital, he said.

He’s continuing to build the company under Nordstrom’s brand, has launched TrunkClub Women, which he expects to be bigger than the men’s trunk club brand by next year. Spaly had tough words for those who hate on ecommerce simply, because it’s a tough category. “I think it’s so lame when people blame the economy and the headwinds,” he said, as he detailed why he personally still invests in ecommerce:

Spaly takes pride in building a company without much capital, adding this bomb of anti-Valley speak: “Raising money means you aren’t good enough to build a company that’s profitable.” He drew a distinction between what large VC firms need for a company to be a “success” and what angel investors, small funds, or family offices may determine a “success.” He believes a lot of the latter is out there, even in an Amazon world, tough category or no.

Like content, ecommerce is hard, particularly when it comes to fashion. But like content, there are people who will keep trying because they are passionate about the sector. Maybe relying too much on venture capital to artificially buy audience simply isn’t the way you build a big company here. The surprising legacy of the tens and hundreds of millions invested in growth ecommerce 2.0 rounds may be that the single digit millions were the only investments that made money.