April 8, 2013, Posted by Phil Wohl
There is no sector within the software/internet landscape that elicits stronger opinions about future growth trajectory then eCommerce.
The Skeptics
In one corner, you have the Skeptics who hear “eCommerce” and think “Webvan” and “Pets.com” and then run to the nearest exit, fearing the bursting of another bubble. The Skeptics love to point to the fact that there have been exactly zero M&A exits greater than $1BN, with only Zappos (bought by Amazon in 2009) coming close at $890MM.
While the Skeptics concede that eCommerce will continue to take a greater share of overall retail sales, they see this growth as incremental, rather than a fundamental shift in consumer buying habits. The Skeptics are also wary of too many VCs, too many companies and too many misguided entrepreneurs chasing too few online transactions. Most importantly, they view shopping as a deeply human experience that can’t be replicated in the online world.
The Believers
In the other corner, you have the Believers, whose patron saint Marc Andreessen recently said,
”Retail guys are going to go out of business and eCommerce will become the place everyone buys. You are not going to have a choice. We’re still pre-death of retail, and we’re already seeing a huge wave of growth.”
The Believers see a woman walking into Nordstrom’s as a relic, wondering why she doesn’t just log into Net-a-Porter instead, or better yet, check out Gilt to see if she can get the same item at 40% off.
As is often the case, the truth likely falls somewhere in-between. Will shopping malls see higher vacancy rates in the coming years? Yes. But there will always be a profitable business arena for brick-and-mortar retailers, especially those who adapt to the changing times and incorporate some of the innovation we’re currently seeing in the online world into the in-store shopping experience.
Traditional retailers are indeed punching back. The competition from eCommerce is pushing retailers to introduce innovation such as:
Low Barriers, Big Advantages
The barriers to entry in starting an eCommerce site have never been lower, with many of the key components of a site (such as shopping cart, affiliate product catalog, recommendation engine and payment gateway) available for little or no upfront cost. In addition to the low friction in starting a business, entrepreneurs are lured by the many advantages that eCommerce holds over in-store shopping, including:
Looking Forward
We believe that the eCommerce sector will see a tremendous amount of new company formation, financing activity and consolidation over the next five years. We fully expect several of these companies to separate themselves from the pack and achieve successful IPOs or high value M&A exits. There will also be plenty of failures. Does the world really need 500 Daily Deal sites? Probably not. Will the VCs who have poured over $1.2Bn into the Flash Sales category end up regretting these investments? Conventional wisdom would say yes, but it’s also possible that Gilt, Fab or One Kings Lane could grow into the “Amazon of Impulse Buys”
Our Approach
We take a holistic approach to covering the eCommerce ecosystem. We are interested not only in the online merchant executing the transaction, but also all the platforms and tools that allow merchants and users to:
The pace of innovation occurring across the eCommerce landscape is only going to accelerate from here. We are particularly excited to see what’s next in the arenas of personalization, big data analysis and cross-channel experiences. No doubt, many models and categories that look promising today will turn out to be fads. But amidst the challenges and chaos inherent to this kind of market disruption, we fully expect to find the kind of amazing products and companies that will make Believers out of Skeptics.
Phil Wohl is a Partner at Catapult Advisors, an investment bank providing M&A and capital raising advice to leading software and internet companies. https://www.catapultadvisors.com