Venture capital and private equity firms’ growing interest in D2C e-commerce companies have opened funding opportunities for brands seeking to scale their business and expand into new channels. Q3 of 2020 alone saw $2.6 billion in venture capital funds come into the U.S. e-commerce sector.
Demand for online shopping continues to grow as more of total retail sales occur through digital channels. As a result, investors believe strong brands have the chance to grab a strong foothold in the consistently growing market.
Recently, Insight Partners led a $200 million equity investment in HBC to establish the Saks OFF 5th e-commerce business as an independent entity. Another recent acquisition saw Walker Edison, a leading e-commerce furniture supplier, receive significant minimum investment from Blackstone.
In this post, we’ll review insights from partners at successful investment firms then analyze some of the important factors e-commerce investors look for when deciding to invest in an online brand.
What an Investor Says
Here's some advice one of our investors has for direct-to-consumer brands that want to make a name for themselves in e-commerce and attract the interest of fellow investors:
Robert Kaplan, SoftBank Investment Advisers:
"When looking at D2C e-commerce companies, many investors are interested in revenue growth, growth margin, and customer lifetime value versus customer acquisition cost. But more than that, they tend to look for a sustainable advantage given how easy it is for other companies to replicate products a retailer is selling. Investors will typically try to see how a D2C company has a sustained advantage versus competition. This generally will fall on the spectrum between convenience and experience.
"Given Amazon and other large retailers' expertise, we believe that some of the most exciting D2C companies focus on brand and customer experience. This is often a combination of world-class products, great brand positioning (including knowing who their customer is), and great technology infrastructure that leaves the consumer feeling like they had a world-class customer experience. For many of these companies, it is incredibly important that the full customer journey reflects the brand ethos, as that will be reflected in the customer lifetime value."
E-Commerce Investor Considerations
Before investing in a company, an e-commerce investor must examine a brand’s essential business and e-commerce metrics to understand its current health better. This includes:
- Sales revenue
- Gross margin
- Sales growth year to date
- Customer acquisition cost
- Customer retention
- Average order value
- Churn rate
To assess the brand’s future growth potential, investors must dive into the details of what the brand offers and its position in the market. Here are some of the key factors investors will evaluate.
E-commerce investors will look for brands that have a unique competitive advantage. That could be a specific product feature, a loyal brand following, or a world-class customer experience. If its advantage is difficult to copy, the brand has positioned itself better for sustained success.
Insight Partners saw these qualities in Saks OFF 5th, believing that the company’s superior merchandise offering will allow the company to grab more digital market share among luxury off-price retailers.
E-commerce investors will look to ensure that a brand has adequate operational processes to enable future growth. Brands must create a great end-to-end user experience through strong order management and streamlined logistics.
Such features are especially important for brands looking to expand their product line or begin distribution through new channels.
E-commerce investors understand how technology builds a brand online. As a result, e-commerce technology vendors are seeing an increase in funding similar to brands.
When deciding to invest in Walker Edison, Blackstone noted the company’s combination of scale and technology as a key factor in capitalizing on the growth of the online furniture market.
Leading Brands See Technology as an Investment Priority
Today’s online brands are allocating a significant portion of their investment capital to e-commerce technology. Much of this amount is going to third-party service providers. A survey of leading e-commerce brands reveals that top companies plan to spend an average of $1.1 million on third-party software.
The main objective of the heavy investment in third-party software is to improve the online shopping experience. The three main focus areas are:
- Improving mobile usability
- Ensuring site security
- Speeding up site loading times to support scale
An e-commerce system built with a modular approach is the key to giving brands the agility, scalability, and flexibility to thrive in today’s omnichannel world. With robust third-party solutions like fabric, brands can create unique commerce experiences while supporting complex business requirements.