Barrier to Entry: Is Ecommerce Investment Drying Up?

June 02, 2017

Barrier to Entry: Is Ecommerce Investment Drying Up?

While ecommerce is definitely on the rise, as more people get a taste of the pie, others are less willing to fund them. Initially painted as “tech companies,” people are less willing to invest in start-up retailers; as ecommerce becomes more commonplace, the less special it seems for capital investors. So what’s the current investment market like to start up your own ecommerce venture and what are some ways to stay competitive right out of the gate?

In the late ‘90s and early 2000s, we saw the rise and subsequent crash of the dot-com bubble. Internet-based companies were popping up rapidly, which, coupled with low interest rates, prompted massive and numerous investments by venture capitalists. Because of the easily obtainable funding, lots of unsustainable businesses were allowed to operate and stock value skyrocketed. When their venture capital ran out, however, a lot of these companies (and their share prices) quickly crashed and burned.

Today, we’re seeing something similar with modern ecommerce companies. With successful startups like Dollar Shave Club setting the precedent, more and more people have cashed in on the trend and started their own digital business ventures. However, according to Forbes, roughly 8 out of 10 new businesses crash within their first 12 to 18 months — something investors are acutely aware of. Now that the market is more saturated than ever with new businesses, those investors are becoming increasingly choosy regarding the entrepreneurs they do business with.


A Capital Idea

It’s well documented that ecommerce is experiencing a massive upward trend, not just in the United States but worldwide. Domestically, we saw the online retail market grow by 15.6 percent just last year. That amounts to 42 percent of our total retail growth, dwarfing any other sector. This signifies a distinct shift in the way we do business, and those with the capital to invest would be foolish not to take part in the boom. The potential rewards are enormous for resourceful business owners and entrepreneurs, and the allure is drawing in millions of people looking to realize their dream and make their fortune.

The initial investment required to found an online business is, for the most part, beyond the financial capabilities of any one person, especially if it happens to be their first significant business venture. The most common solution to this hurdle is to appeal to a venture capital firm, the most prominent of which tend to be located in California’s Silicon Valley. Led by powerful investors, they have the means to bestow large amounts of initial capital to businesses that are able to catch their eye and show potential for explosive growth.

In 2015, total investment in ecommerce companies and average deal size hit a record high, and has held relatively steady since then. Despite this, the number of ecommerce startups that receive venture capital backing has been on a steady decline since 2013 (as you can see by the chart above). This tells us that while investors are still very willing to put their money into new companies, they’re becoming much more selective with regards to whom they give their considerable backing.

What this all means is that, as a business owner, if you’re looking for that helping hand to get off the ground, you need to design and pitch your idea in a way that puts you head and shoulders above the teeming masses that are flooding the market.


Signature Fade With the Bevel Blade

Tristan Walker, founder of startup Walker & Company, recently gave an enlightening interview on what it’s like to try to acquire funding in an increasingly saturated market. His company is known for the Bevel line of products, which, according to Walker, is the “first end-to-end shaving system designed to help prevent and reduce shaving irritation.” Initially marketed toward people of color with coarse and curly hair, Bevel has found widespread popularity in many demographics and raised $33 million from prominent venture capital firms.

Image source: Walker & Company

The question is: what did Walker’s company do that made them the clear choice over so many others?

According to him, a large part of it was branding W&C as a “tech” company rather than “retail,” even though he has admitted that this was entirely a ploy. There are so many retail startups vying for funding — and they’re so prone to collapse — that investors are buying into very few of them. Tech companies are seen as a more reliable option, so Walker figured he’d have a better go of things if that’s how he presented his company. Since Bevel was initially sold via online subscription, he was able to label it as tech and get the money he needed. They have since moved beyond the subscription model and now sell their goods a la carte, enabling customers to try their products and then decide if they want to spend more on a month-to-month package deal.

“When I started, I said ‘We’re a tech company.’ That’s bullshit. We are a CPG [Consumer Packaged Goods] company that leverages technology in innovative ways to build this thing from the ground up.”

But while this gives some insight into how he was able to get started, it doesn’t explain how he was able to keep himself from joining the multitude of fledgling operations that are unable to make the cut and fail soon after beginning. For this, he prescribes a personal touch. W&C attempts to go the extra mile for convenience and personalization. They do one-on-one video chats with customers, and accommodate for things like vacations by sending blades to their destination when they can’t bring them through airport security. Walker diagnosed a problem he had personally experienced (difficulty shaving and a lack of products that tailored to him), and solved it in a way that gave him a successful business model.


Making It Your Own

So, keeping the statistics in mind and using Bevel as an example of a business that’s successfully navigated today’s startup waters, what can you do as a business owner or entrepreneur to ensure that your chances of success are as high as possible? The key is differentiation.

Whether you’re pitching your plan to a venture capitalist or a demographic of potential customers, you need to give them a reason why your business is any better than the hundreds that are struggling for that same opportunity you are. The money isn’t flowing as freely as it once was, and investors want to see something that’s not just another run-of-the-mill retail ecommerce startup.

Showcasing company attributes like integrity and strong leadership will inspire confidence that there will be a return on investment. Bevel, with a staff of only 25 people, has cornered a market that hasn’t yet been capitalized on and is moving from shaving products to the larger goal of providing a beauty and cosmetic experience for a clear audience.

Businesses that can demonstrate that they recognize opportunities like this and can adapt to what their customers want are the ones that will get the funding they need to make their vision a reality. It’s not enough to simply ride the wave that’s buoyed unsustainable business models for the past several years. If you showcase these traits in your work, there’s no reason your project can’t be the next multi-million dollar success story.

 




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