Why 20x is the new 3x

The little I know about ecommerce valuations…

delivering 20x EBITDA

Over the last 20 years I’ve been lucky enough to work as an entrepreneur and as an advisor/consultant/director/co-investor in venture capital and private equity. My primary focus has been e-commerce, and in particular low value, fast moving consumer goods.

In the late nineties, we saw the first dot com boom. It’s worth reflecting on those before-Google (BG) days. Back in the day, Netscape, Yahoo was a thing, and investors rushed after this bright new shiny thing called the interweb, convinced that early players would own all of this priceless new Wild Wild West.

In those days, ecommerce businesses had the dual task of deflowering virgin ecommerce consumers, as well as building their brand , and selling their product (never mind the complexities of bespoke ground-breaking ecommerce code, payment platforms and logistics). And all of this marketing had to be completed offline, at huge cost, and without any realistic way of measuring success.

In the golden-age of internet marketing that historians call After Google (AG), emarketers have a suite of cloud products that enable to deliver fast websites (e.g. Shopify), Amazon matching fulfilment (e.g. Peoplevox), with world class customer service (e.g. Zendesk). Without the need for venture capital (cough..cough), it’s relatively easy to achieve scale.

“No margin!”, I hear you cry, “what about the margin?”. Yes, the AG era has given us Google Adwords, which in addition to pouring around $20bn a quarter into Alphabet’s coffers, has given us pay per click ads where the price you pay is a dynamic auction determined by how much your competitors are prepared to bid on a keyword. We marketers love it because it’s measurable, and delivers results. But in many markets it’s led to a race for the bottom, with Google being the only winner. And so, yes, margin has been eroded.

I’m not assuming,however, that Google’s monopoly position is unassailable. The European Commission’s landmark 2.4bn EUR ruling against Google is a signal that cheaper traffic is on its way back.

The 300 pound gorilla in the corner of the ecommerce room is Amazon. Jeff’s little bookstore has turned into a half a trillion $ giant behemoth that owns the world’s best logistics and web infrastructure. Can small etailers survive against this onslaught? In reality, it looks like they’re thriving, and achieving scale in all sorts of verticals. Many of these growing ecommerce brands leverage Amazon marketplace and utilise Amazon infrastructure. I would argue that Amazon’s big play is to serve etailers, not to destroy them.

So, I remain bullish on ecommerce valuations. In many ways we’re still in the foothills of a major retail revolution. Drone delivery, self driving trucks, more free time due to automation (universal basic income?) will all accelerate the rate of change.

In this context, paying 20x net profit for a fast growing stable business seems cheap. Fellow investors, fill your Zappos boots.

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