By Pauline Roux & Amélie Juge.
What are the next hot topics as an investor? This multi-billion dollar question is on everybody’s lips. Our crystal ball at Elaia is no more accurate than others. But our analysis has highlighted 5 sectors which we believe will keep growing — even thrive, during and after the crisis. Cloud Infrastructure, Digital Transformation, RetailTech, Digital Life Science and FinTech are compelling investment opportunities due to their transformative potential for businesses and consumers
Chapter 1: Elaia and RetailTech
Chapter 2: Key trends
- Customer knowledge and experience
- Infrastructure and tech-enablers
- Process optimization and business efficiency
- Sustainability and impact
Chapter 3: Golden age of B2B exits is on its way
Elaia and RetailTech
Before we dig in, let’s keep in mind that RetailTech is not only about eCommerce but also commerce in general. Providing a definition of RetailTech is a challenge; the space is so vast that RetailTech refers to any tech innovation that helps build the future of Commerce. It embraces innovation applied to offline as well as online shopping, with the critical reconciliation of both in the customer journey. At Elaia, we consider RetailTech as a major investment opportunity and are passionate about projects relying on complex technology that support retailers in improving their front and back-office operations, their customer acquisition, or their transverse infrastructures.
As a result of the Covid crisis, eCommerce has accelerated its conquest of the world. However, at Elaia, we do not invest in eCommerce websites. We invest in the technologies that fuel online/digital and cross-channel commerce. And we think there is still plenty of room to embrace new innovation.
Let’s start with a bit in history to understand how digital technology has disrupted, then powered Retail:
- The first big digital disruption of the Retail industry in the 1990s and 2000’s enabled online shopping. It started with travel (buying online train or plane tickets without queuing felt revolutionary!) and continued with basic consumer goods (books, TVs, household appliances). Think back to how quickly Amazon disrupted the book industry and became an eCommerce giant in less than a decade. Remember eBay’s huge footprint when it created a marketplace for second-hand goods? The new value proposition of eCommerce was huge: Buy anything anytime, and typically with cheaper prices (the latter being a prominent differentiator at that time). The tech challenge of this era was about designing fancy websites, selling a large number of items, and building robust front and backends to grease the whole machine. PayPal eventually came along to streamline payments. VCs of this era mostly targeted B2C plays. It was a massive investment thesis and an instrumental one as a first-step to changing the face of Commerce. But it also gave birth to the dot-com bubble. A lot of VCs were racing to invest in anything with a “.com” name. Some of them achieved great successes when exiting in the middle of the hype-cycle in shiny IPOs or early trade sales, but others suffered heavy losses from over-valued investments with no model except turning a catalog online. As B2B-focused investors we at Elaia were not involved in this. Still, e-retail was born and was poised to thrive. And an important lesson was learned: Adding .com to a name was not sufficient to be successful in eCommerce; there was indeed complexity in this new game and the whole sector would be more challenging than initially thought.
- The second and equally massive wave of innovation was about capturing an audience, bringing it to eCommerce websites through advertising and marketing, and then converting it into customers. Thus, the 2010’s became the golden era of AdTech startups solving the customer acquisition question with innovation in performance marketing, retargeting, programmatic advertising, etc, as well as the emergence of social media in the eCommerce game. Think of SEO or Facebook selling ads to bring audiences to eCommerce websites. At this time as well, China entered the game and invented the totally integrated user experience where people could buy from within the social network (WeChat, 2013). Later came the question of customer re-engagement, which continues to be a challenge today. This wave has been a great investment opportunity for us as it was the beginning of algorithms and AI applied to marketing. It was a solid contribution to our track record: We have witnessed the birth and the scaling-up of strong tech-enablers in the AdTech/MarTech industries and had the chance to back some of them as first investors (Criteo, Teads, tinyclues, and more recently KMTX).
- There is now a third wave, which we think is in its early days. And that’s what we want to explore and dissect here. This wave is about mastering the orchestration of cross-channel commerce with no silos and seamless end-to-end customer experience. To be able to deliver on that promise, retailers need to refine their infrastructure, workflows, procurement/supply, and logistic processes with better knowledge of their clients’ personas and a differentiated offer. Here is another opportunity for Elaia to back tech enablers that support the automation challenge.
RetailTech evolved massively in the recent years. Worldwide eCommerce saw a significant jump in 2020 with a 27.6% growth rate and sales reaching over $4tn. Though global eCommerce will not grow as fast this year to approach a $5tn market this year, accounting for almost 20% of total retail sales, the market will pick up in 2022 which demonstrates how much consumers transitioned to online retail last year and will maintain their newfound digital behaviors. We firmly believe that there still is huge potential for growth and that technology is going to become the fuel of this growth. Look at Amazon’s revenue which grew 37% in 2020 alone, as Benedict Evans outlines in his article “The Great Unbundling”.
Broadly speaking, this new generation of RetailTech is helping merchants address key challenges in many distinct areas of expertise and know-how.
Let’s not forget that eCommerce and Cross-channel Commerce are increasingly complex. The modern tools that facilitate both the creation and the operations (from Shopify to the new no-code tools) and their integration altogether, that you need to master, have also grown exponentially. This includes AI-driven pricing strategies, NLP-driven conversational agents, live shopping experience, back office side predictive inventory management, optimization in logistics, etc. The endgame of these tools, tech, and complexity is to help retailers make more money! The objective is ROI-driven. Not just tech-driven.
The evolution of eCommerce and the shifting consumption behaviors continue to make RetailTech a fertile playground for Venture Capital in search of transformative ideas and the potential to back a new generation of global winners. From our investment perspective, there are a bounty of opportunities to seize with strong tech-enablement plays and B2B models.
In other words, the Elaia sweet spot.
Our predictions for the top areas of investment opportunity in RetailTech
Our focus on RetailTech is primarily on four categories of startups that are addressing the major challenges that retailers must address to be successful. Here’s where we see the next big opportunities in the future of Commerce:
- Customer knowledge and experience,
- Infrastructure and tech enablers,
- Process optimization and logistics,
- Sustainability and impact.
1. Consumer knowledge & experience
How can retailers acquire and retain customers? By both knowing them and making their buying experience unique.
Retail must become more personal, more immersive, and — without losing customer care — more automated. This requires a deeper understanding of shoppers. Pauline Roux, Partner at Elaia recalls that “the Retail ecosystem is shifting from a push economy to a pull economy”. That means that where retailers once offered catalogs of products, now they want to create an experience around product discovery and purchase. Savvy consumers but not just out of need, but because these purchases define them: You are what and how you buy.
Customers’ expectations are high when it comes to just about every aspect of the consumption journey. Managing this cross-channel journey requires insight to help brands personalize their customers’ experience by including tracking a buyer’s progress across any platform and optimizing every step until conversion. This also means building trust in order not to lose them during the purchasing process because of latency, UX, third-party widget popping-in, identity theft etc. And it doesn’t end there. The next challenge is getting them to engage with your brand and buy again!
Customer journey is perhaps the most challenging topic for retailers, as it involves a multi-touchpoint understanding. It requires collecting and analyzing thousands of data points — coming in different formats that are often unclean and noisy. Whether this information flows from online or in-store sources, or whether it tracks online behavior or transactional data, the goal is to gain greater insight into customer acquisition and loyalty. Armed with that intelligence, companies can transform it into actionable marketing and engagement programs.
As the challenges and the stakes are high, this customer journey startup space is still quite fragmented but increasingly crowded. Companies are still concentrating on a portion of this challenge and often being channel centric (e.g. Contentsquare on digital only journey) or data centric (e.g. CDPs focusing on customers and transactional data). We are convinced that new startups are going to embrace larger spectrums or that established scale-ups will proceed with expansion strategies to enlarge their value proposition to retailers.
One company reinventing the customer experience is ShipUp, whose cloud-based platform helps companies turn post-purchase delivery into a branding opportunity. “There was a cliff between the experience we would deliver during the acquisition phase, which was super sexy, and the disappointing experience they got post purchase,” explains ShipUp CEO and co-founder Romain Ogiela.
ShipUp addresses this issue with products that clean up the shipping data and put eCommerce companies back in control, so they can ensure a better customer experience and optimize communication with their clients. Thanks to ShipUp, companies that work with multiple shippers, can control the messaging and brand identity around shipping, by adapting the customer support to be more proactive about potential incidents, give eCommerce companies more precise insights on what is — and is not — working well, and provide more accurate shipping estimates.
2. Infrastructure & tech-enablers
This plays into Elaia’s historic strengths in deep and intensive tech. Startups in this category are creating tools to enable new features for commerce players whether they are purely online or physical stores. The need to make purchasing more personalized, easier, and quicker is now a key differentiator. This category encompasses startups that ensure online payments, prevent fraud, optimize search and discovery, and even build an entire marketplace infrastructure. Such enabling solutions are bringing greater automation and efficiency to retailer operations, a must-have for their customers’ journey, and to ensure healthy margins in a competitive environment.
CB Insights, from “RetailTech 100: The Tech Innovators Transforming Retail” (source) explains that the demand for commerce-enabling solutions soared in previous years and will keep growing in 2021 with “companies enabling eCommerce platforms from multiple angles as a dominant theme. This includes solutions that focus on increasing page load speed and enabling single-click checkout, as well as those that open new online channels such as text messages, video chat, voice, and augmented reality”.
Let’s spotlight three elements that Elaia finds particularly interesting and that are key retail tech-enablers in 2021.
Spotlight on: Search
Established scale-ups such as Algolia and Elastic or even a contender such as MeiliSearch, using a different open-source approach to develop its own search engine API, are delivering advanced product search through AI-enabled product tagging and cognitive search solutions. As of today, there are no default solutions for search and yet every application and website needs an optimized internal search solution for its website. eCommerce visitors who use internal site search have a higher level of purchase conversion, and it is rare that the returned results totally fulfill a visitor’s request.
Spotlight on: Pricing
By its nature, most retail models are a low-margin business, which means being particularly careful on how you manage and monitor pricing. Dynamic price optimization startups such as PricingHub, Price(fx), and BlackCurve use a combined means of data, AI and price elasticity that will enable every retailer to better position himself, rather than mimicking competition, thus are able to assess their performance and grow profitability.
“Though it is still a prominent conversion driver, price is not the only decision factor; the weight of pricing in ordering online is very different according to product categories, timing, and needs to be considered together with other elements such as product availability, delivery fees, after sales services, etc.” said Pauline Roux.
PricingHUB is one of the emerging companies helping retailers optimize eCommerce pricing using proprietary machine learning algorithms. The startup’s goal is to move away from a reactive, ”meet or beat” pricing strategy which can negatively impact revenue and profitability. To do so, PricingHub offers a SaaS platform that focuses on internal data from the eCommerce site augmented with data from partners and third-party analytics services that monitor broader market trends. The platform allows for automated adjustments based on customer profiles and their sensitivity to pricing changes. The retailer defines a goal (for example, growing profits with minimum revenue increase) and the platform recommends an actionable optimized pricing.
Spotlight on: B2B Marketplaces
In terms of new tech-enabler business models, enterprise markets have seen a growing adoption in recent years and are becoming a key part of commerce. Numerous companies saw the need to connect their ecosystem partners, increase their product selection but also grow their revenue from additional operating services such as payment-as-a-packaged service, commissions and subscriptions. For example, French startup Ankorstore (raised $30m with Index Ventures) is building a wholesale marketplace that connects SMB’s brand.
Undoubtedly one of the big success stories here is Mirakl which is developing an end-to-end marketplace infrastructure platform. Founded in 2011, it started off with a SaaS offer to enable any retailer to build a B2C marketplace to extend its offering with a larger choice of products. Along the way, Mirakl developed a Catalog Management module to help its clients manage their suppliers as well. Eventually, this evolved into a second product: a dedicated B2B platform. Today, their SaaS platform enables both B2B and B2C organizations to create their own marketplaces. With all the front-ends in place, Mirakl is now building a full partner/customer ecosystem.
Elaia saw the potential of this marriage of advanced technology to enable solutions that catalyze eCommerce, and was one of Mirakl’s first investors. It was a good bet: Last year, Mirakl raised $300 million at a $1.5 billion valuation.
3. Process Optimization & Logistics
A direct consequence of the Covid pandemic has been the boom of online buying, which has put a lot of pressure on the e-retailing value chain. Optimizing supply, warehousing, shipping processes, and delivery has never been more critical. New innovations are promising even greater productivity for those who can seize the opportunity. This includes rethinking operations management with tools such as inventory management software, on-demand or robotized warehousing solutions, reworked logistics around last-mile delivery, micro-fulfillment centers, cashierless checkout solutions, and even dark stores (the term dark store, dark supermarket or dotcom centre refers to a retail outlet or distribution centre that caters exclusively for online shopping).
When it comes to digitizing commerce operations, Amazon has been blazing a trail by embracing cashless stores, merchandise management, and many other processes. But there are a range of companies now trying to help other merchants stay competitive by matching some of these critical competencies.
This illustration shows some of the early-stage startups as well as established category leaders who are already paving the road to digitalization. They continue to offer ground-breaking and specialized solutions to drive further business efficiency for retailers in every stage of the value chain. It’s important to note that these logos are not exhaustive, but they show the diversity in terms of business models in this vertical while emphasizing that RetailTech is a broad category with numerous startups operating together to optimize retailers’ businesses.
Spotlight on: Trend Forecasting
In 2019, Elaia led a €4 million Series A round for Heuritech. Co-founders, Tony Pinville and Charles Ollion, have PhDs in machine learning, the kind of deep technical expertise that Elaia likes to back.
The company has developed a fashion trend forecasting platform that helps predict demand, stock and sales more accurately. Heuritech’s AI technology can detect 2,000 details in an image, including shapes, colors, and patterns. Business and creative teams can then use those insights to guide their strategies and conceive products that really meet the demand. They thereby play a key role in helping companies toward their digital transformation for a more streamlined and sustainable fashion industry.
“Thanks to all these influencers, the customers want a specific product, and brands need to adapt to that,” Pinville said.
Spotlight on: Logistics & Delivery
In this category, Elaia invested in the last-mile delivery startup AntsRoute, a key software for managing first and last-mile delivery routes and on-site services. It is used in the field of transport, maintenance and home healthcare. The software automatically integrates transport orders from multiple channels (freight exchange, eCommerce sites and more), plans/optimizes routes and enables the tracking of deliveries for the end-customers.
4. Sustainability & Impact: a recent but fast-growing trend
There is growing evidence that consumers are becoming more environmentally and socially conscious when making buying decisions. Impact has become a core tenet of a retailer’s business. A Nielsen survey found that 73% of global consumers are worried enough about their impact to shift their purchases to companies whose products are greener. They notably want their items to come in sustainable packaging, to promote reduced energy consumption, and join the circular economy.
These long-term changes in the stores we visit, as well as the way we consume and buy, are illustrated by big corporations making pledges to become carbon neutral. But they have the resources to do so while also building the marketing and brand awareness around these efforts. Once again, smaller companies are looking for solutions that allow them to reduce their impact while struggling with how to make that transition.
The first wave of Sustainable Commerce was focused on peer-to-peer commerce, with companies such as Ebay, Etsy, LeBonCoin or My Little Market which enabled greater reuse of existing products. Despite massive penetration of such models, our B2B focus did not drive us to those plays. The second wave is happening now, and we see more B2B models emerging.
Elaia’s portfolio company, ARMIS is on a mission to help retailers defend a positive impact on the planet as well as a more human approach of commerce. They have developed a SaaS platform that combines catalog digitization with the power of programmatic and geolocation and enables retailers to adapt to today’s technological issues, consumer demands and ecological challenges. And retailers love it! Monoprix, for example, a leading french food retailer with 300 stores, has reduced its paper consumption by stopping paper flyers while increasing its revenue through the hyper-personalization of ads in each of its stores. Thanks to this partnership, each 1€ invested in the ARMIS solution generates between 1,5€ and 4€ of additional sales and the contact cost has been divided by 4 to 6 times versus paper flyers (source: HubInstitute).
New environmental “clean” or “green” solutions such as Contreeb help retailers with the environmental scoring of products. Or Kleiderly, which aims to reduce the global fashion footprint by converting customers’ old clothes into reusable plastic.
In the bio-cleantech space, numerous disruptive startups are inventing new materials and methodology for a greener consumption. Cellugy is using bio-cellulose material to replace fossil-based plastic.
Elaia entered this space when we met Pili, a biotech startup that produces dyes and pigments using proprietary fermentation technology. Pili has invented a process that involves enzymes to create these dyes which are durable enough to be used by clothing manufactures. Brands love it because it looks great and reduces their environmental impact. In June 2019, Elaia joined Pili’s €3.6 million Series A round.
These four trends are not the only ones in RetailTech. Clearly, things are changing fast and we acknowledge many other startups in the sector! As a VC, we look at sectoral movements and try to anticipate waves, from an investment perspective, but also in terms of consolidation opportunities.
Golden age of B2B exits is on its way
This eCommerce surge has led to some astounding exits. But so far, these deals have been mainly in the B2C space — verticalized e-retailers, marketplaces, etc.
In many of these acquisitions, the underlying rationale for big retailers is to gain market share. According to McKinsey & Company, between 65% and 75% of spending on such deals between 2008 and 2019 fell into this category. Examples include Walmart acquiring Indian eCommerce business Flipkart in 2018 for $16 billion; Amazon buying online pharmacy Pillpack in 2018 for $753 million; and Macy’s acquired New York City-based store concept Story. Such deals are still being dominated by U.S. retailers.
At Elaia, B2B is our focus, and our bet is that the next wave of consolidation will be there. There are plenty of signs that exits in this slice are entering the lift off phase. Let’s go back to Mirakl. Remember that $350 million funding? It was the biggest VC round raised in France’s history. And that is just one sign of what’s to come.
Why are we so confident about the coming RetailTech exit wave?
Because eCommerce companies increasingly understand the need for RetailTech and are opening up their wallets. According to Gartner (Report Highlight for Market Insight: 2020 Technology and Service Provider Agenda for Retail Industry), retailers are projected to spend $268 billion on IT products and services by 2023. This is creating the right conditions for RetailTech companies with the right solutions to scale quickly to meet this global demand. These conditions are just right to nurture global champions. Think of Klarna that became Europe’s top tech unicorn in early 2021, surpassing payment software firm Checkout.com, which hit a $15 billion valuation last month, both with large exposure to RetailTech.
Ernst & Young agrees, reporting that about one-third of retail executives said they plan to pursue acquisitions that will lead to “transitional capabilities that will change how the company operates, including digital and new routes to customers.”
This trickle of such exits is now turning into a steady stream. These include Tulip, which sells an in-store mobile platform to access customer preferences, acquiring Blueday, whose SaaS platform provides real-time data to store managers and employees. Google bought Pointy, whose hardware and software help small businesses get their inventory online, so potential customers can discover it. And last July, Square acquired Stich Labs, whose platform helps optimize inventory, purchasing, and order fulfillment.
Roux says “Elaia is on the hunt for the next crop of such RetailTech startups with technologies that can catalyze the Commerce next revolutions while helping retailers navigate their rapidly shifting challenges.”
Even after more than 2 decades, in many ways eCommerce is just beginning to realize its true potential. These emerging RetailTech startups, including many located in Europe, are ready to seize this global opportunity.