Why we invested in an e-commerce startup when the sector was actually frothy

Our shared journey with BorderX Lab

In 2016, fundraising was not a smooth experience for Albert Shen and his team at BorderX Lab.

BorderX Lab was co-founded by Albert together with Chengdu Huang and Jun Liu in late 2014. All three of them earned PhD’s in computer science and overlapped at Google. Among the three, Albert and Chengdu had prior startup experience. The team built a suite of data APIs and AI bots to help US merchants and brands sell to international shoppers with the initial focus on the China market. By fall 2016, the team had signed a number of US merchant partnerships, and their app “Beyond” had been operating for a while and received much praise and great reviews from users in China. However, the timing for fundraising was not in their favor.

From 2013 through 2015, there was a lot of investment enthusiasm in e-commerce. However, many startups soon found themselves struggling with huge cash burn, inventory risk, crowded competition and, in the case for China, counterfeits. Many of these startups eventually went out of business. As a result, many investors began to perceive the e-commerce industry to be a lot less attractive than before. Subsequently, e-commerce became a cold sector in 2016.

Source: RJMetrics

However, we did not believe e-commerce is similar to social network where it’s a “winner takes all” market. As long as there is still friction between demand and supply that cannot be easily addressed by incumbents, there are potential opportunities for both startups and VC investments. Incremental improvements over incumbents give startups no edge. A fundamentally new approach is required.

BorderX Lab’s tech stack and drop-shipping model makes the app-based platform attractive to both consumers and merchants.

For consumers overseas, each package ships directly from the sellers’ fulfillment center with guaranteed authenticity, original price match (access to promotion and discounts), and a broad range of selection (over 1,000 brands and 5 million SKUs).

For merchants, their business partners are empowered with a turn-key, end-to-end solution that cover user acquisition, marketing, payment, logistics, customer services, etc. There is no upfront cost, no requirement for consignment, no forced participation of heavy discounts. Since there is a pre-determined take rate, BorderX Lab makes money only when a transaction occurs.

We have become more experienced in the e-commerce space over time. While raising our Fund I, we followed the BorderX Lab team closely. Although other investors showed little interest in the team and product, we found their approach to be very compelling. Above all, we were very impressed by the team’s determination to build, to grow, and to win.[1] Therefore, we decided to lead the investment and wired money to BorderX Lab immediately after the first close of the fund in fall 2016.

Since the investment was closed, we have spent a significant amount of time working with the BorderX Lab team across a range of areas. In addition to engaging the founders on topics of strategic importance, we brought in a number of key hires including senior engineers from Google and Facebook, helped establish and grow operations in China, promoted the culture of “delivering happiness”, and sometimes even caught and reported bugs in the app.[2]

As soon as the money was in the bank, BorderX Lab’s business took off. From 2015 to 2016, sales grew by 10x; from 2016 to 2017, it grew by 12x. The growth was achieved with high capital efficiency. In 2017 or its third year of operation, the company became profitable, by which point, the total net cash burn was just several million dollars.

Even though the company had plenty of cash runway in fall 2017, we decided to raise another round of financing to accelerate growth. For Albert, fundraising this time around was much smoother than a year ago. Within four weeks after the first investor meeting, the team received four term sheets from all top-tier VCs, and the round closed in mid-December.

Eric Feng of KPCB left everyone at both BorderX Lab and iFly.vc with a very positive impression about his insights and work ethics. Even though his term sheet did not come with the highest valuation, we felt a strong sense of synergy and decided to have him lead. The round was quickly oversubscribed with additional investors such as Hillhouse Capital from China which invested in Tencent and JD.com.

As the round was closed, the value of iFly’s equity in BorderX Lab saw an uptick of almost 10 times. We not only kept every single share but also exercised our pro rata right to invest more capital, because we saw that the company still has much upside growth potential.

As of this writing, it has been eight months since the closing of this round, and BorderX Lab has continued its growth momentum. Of course, the team will continue to face new challenges, but there is still a lot of exciting work to do, and we look forward to the shared journey with the BorderX Lab team in the years to come.

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[1] Before iFly invested, BorderX Lab faced a very tight cash position. I recall during the due diligence process I asked what if iFly’s capital call gets delayed and nobody else invests. They were all very affirmative about continuing the endeavor. Giving up is never an option.

[2] We have contributed so much that I was awarded with the title “Honorary Employee” (with an actual badge number). Of course, we did not take any extra equity or cash compensation for this title, but it is worth highlighting since it is a meaningful recognition of the iFly team’s value add.