The Artist Formerly Known as Ecommerce

I feel like investors and entrepreneurs are doing themselves a disservice by bucketing all types of companies that sell stuff online into the same 15-year-old catch-all category of “ecommerce.” As a VC, I am trying to challenge myself to a higher level of intellectual rigor when I evaluate what I used to call ecommerce and engage in a more nuanced conversation around the levers that will drive growth, margin, and sustainability. Sure, technology must be a component, but there seems to be an overall lack of clarity as to the role technology will play. (For the sake of simplicity, I’ll confine this discussion to online purchases of real world goods.)

Here’s how I breakdown the Artist Formerly Known as ecommerce:

1. Brandtech — The rare brand that can change an old stodgy industry
2. Modern merchandising — New user entry points revolutionizing when & how we shop
3. Human-assisted commerce — New forms of customer service
4. Physical products that combine atoms and bits — Some of you may know this as IoT

(1) Brandtech — The rare brand that can change an old stodgy industry

Contrary to traditional wisdom, big businesses can in fact be created initially purely via an online sales strategies. While the Warby Parkers, Honest Companies and perhaps the Ipsys and Dollar Beard Clubs (😉) of the world are on their way to building a new wave of iconic consumer product brands, many industries have yet to be disrupted and/or will have multiple winners — food, soft home goods, furniture, toys, and educational products, come to mind, among others.

The formula these days has become well known:

• Target a large and valuable industry segment with issues (ex: mediocre product, lack of brand leadership, fragmented distribution, and poor customer experience or service)
• Deliver a great product and brand, typically with the leadership of an entrepreneur who is authentic to the space
• Create focused distribution, typically starting in one successful channel and then moving to an omni-channel approach to reinforce brand. Omni-channel is always smart when product is best in class as product becomes the best form of customer acquisition

While we’ve seen this formula play out through a handful of newly ascendent companies, I’m confident it will be the basis of an upcoming wave of big companies in industries that though massive, have yet to be disrupted by online commerce. This is why Upfront invests in companies like Walker and Company (health & beauty for people of color), Adore Me (elegant lingerie without the hassle) and Parachute (quality soft home goods with transparent pricing).

For every one of these investments, we evaluate hundreds of other “ecommerce” businesses. In each case, the the decision to invest (or not) comes down to a detailed analysis of the business fundamentals. But if a business fails on the three points above, starting with an authentic entrepreneur and a world class product, it’s tough for any amount of data to drive us to a different conclusion.

(2) Modern merchandising — New user entry points that will revolutionize when and how we shop

Little has changed about the way we shop online in the last 15 years. While ecommerce revenue has grown ~30x over the same period, most of the innovation has occurred behind-the-scenes — online/mobile payments, 1-click shopping, discount-based pricing, rapid delivery, supply chain economies of scale, etc.

Like most things in this category, Amazon has led the way on many of these advancements. But, while Amazon won the last decade of online commerce, there may still be room for other big companies to emerge to 1-click-enable the non-Amazon web. For example, do we really all want to be managing marketing campaigns across each individual social buy button? Similarly, there are likely big B2B companies that will emerge to bring the physical and digital retail environments together more seamlessly. These businesses are more likely to be evolutionary, often behind the scenes, by strong operational entrepreneurs.

We have seen some in the ecommerce world steal a page from the real world in terms of curating product and improving the navigation of websites and by making shoppable products sharable within social environments. But most people still come to a webpage looking to get in and out as quickly as possible (especially on mobile).

The real world behavior of wandering through the aisles of Anthropology looking to be inspired now happens, but it happens on Pinterest, and Loverly, and Houzz. Perhaps the Pinterest buy button will change this behavior, or perhaps it won’t and consumers will go to Pinterest mainly to lean back and entertain themselves.

This is why I get excited by fundamentally new forms of merchandising in both retail and online environments. The innovation has only just begun.

Imagine….

• Virtual reality fitting rooms
• Interactive displays in retail that take you deeper into the product/brand
• Your Xbox/Playstation/Apple TV console taking your measurements and getting you perfect, custom fit without ever having to leave your home
• Your smart phone scanning your face and custom fitting/styling glasses to your features, then 3D printing those custom frames on the spot
• Your entire closet cataloged online with styles suggested for you each morning based on what your calendar knows you are doing that day. Then imagine selling into your existing closet.

Our kids will say… “What? You shopped HOW?” right after they say “Your telephone used to be connected to a wall?!”

(3) Human-assisted Commerce — New forms of customer service

The difficulty of serving customers has never been greater, now that we live in a world of unlimited selection, both in terms of products and the merchants who offer them.

One answer to this challenge has been a proliferation of the stylist model Nordstrom pioneered, applied to a broad base of customers moving online (see: Trunk Club, StichFix, and Keaton Row). The inverse is also true, with previously online-only brands like Trunk Club, Fab, NastyGal and others seeking to interface with their customers offline via brick-and-mortar storefronts (which are routinely viewed as something in-between a revenue center and a marketing and consumer intelligence expense).

Another exciting approach to this challenge could see conversational commerce take today’s remote human- or AI-assisted models to the next level, promising nirvana for an Amazon Prime-addicted shopper like me. Believe me when I say, texting my AI friend a request to send me a leprechaun Halloween costume for my 5-year-old while I walk between meetings is NIRVANA. (Yes this is how I shop most often).

Give me vertical Magics and Operators, please! But it won’t be easy. Text-based interfaces make it easy to onboard customers, but this also means low barriers to shopping around for competing services. In this category, focused customer segmenting, great human styling, unique merchandise access, and outstanding personalization will be critical (using data intelligently will help companies win, but strong sense of brand is equally important).

(4) Physical products that combine atoms and bits — Or what some might call IoT

Upfront has been investing in traditional offline retail, ecommerce, and increasingly omnichannel businesses for twenty years, dating back to predecessor investments in companies like Costco, Starbucks, and Dick’s Sporting goods. Along the way, we’ve seen bits slowly encroaching into the products themselves, not just the way commerce is transacted.

The next step in this evolution seems poised to be IoT, in which physical objects (home electronics, health/medical devices, apparel and beyond) become both smart and connected. As a result, many future purchases will incorporate levels of data, personalization, and automation never before possible.

When we look at an IoT product company, we look to take all the knowledge we have amassed around retail brands and apply it to this new category of products. But the IoT category is fundamentally different than its commerce predecessors. Success in this area will typically require more complicated product development processes, substantial consumer behavioral changes, and increased upfront spending by consumers in exchange for lower operating expense or better customer experiences (safety, peace of mind, better sleep, better tasting food) over time.

One way to overcome these initial barriers will be to create significant brand value through delighting customers, which promises to make marketing easier and easier over time. Look for strong word-of-mouth and brand-driven acquisition trends to define the best of the connected consumer products category. Look for traditional retail to play an important role as well.

Ring is a great example of an Upfront investment that excels in this area, selling a connected consumer product (a video doorbell) into the home that over time will become a core management tool for homeowner security. By delighting consumers with its initial physical product, Ring earns the credibility to charge for additional ongoing services, as well as to sell additional connected devices under a shared platform.

IoT is quickly moving through the hype-cycle and is becomes more and more commonplace in everyday consumer lives. Expect to hear more from us about investments in this category.

One quick note on metrics… For most ecommerce investors, myself included, LTV/CAC (lifetime value / customer acquisition cost) is the metric that rules all others. I’ll save a deeper conversation of metrics for another time. For today, let’s just say the LTV/CAC consideration is a necessary, but not sufficient foundation for thinking about any of the four categories above.

Ecommerce investing can get scary to the untested as these businesses are as complex to evaluate as they are to build. The fastest growing ecommerce business will never (and should never) scale as fast as the fastest growing software businesses. But the best have strong competitive advantages and barriers to entry in the form of brand, distribution, and operational excellence. My partner Greg Bettenelli wrote an excellent post on this topic two years ago.

In 100 years, I bet more of today’s emerging ecommerce brands will survive the test of time (and continue throwing off cashflow), than will the software brands we’ve all come to know. So for those of you who are long term investors, jump on in (with appropriate levels of caution). And to the entrepreneurs who are taking new approaches to merchandising or building the future vertical Magics or Operators of the world, I’d love to hear from you @karanortman.

[Image Credit: Marsel van Oosten]