The feature is currently being tested in several of Drizly’s markets. It is expected to launch early next year.
Raising money is tough these days for web retailers and e-commerce vendors. An industry shakeout could be in the offing.
Growth was at the heart of the strategy at Working Person Enterprises. Use the Internet to become the category killer in work clothes and boots, then sell the company or go public.
But that plan required continually raising capital to add inventory in new categories and to improve the web operations of the retailer, which generates at least 90% of its sales online. When the economy spiraled downward in the fall, suddenly capital became hard to come by. And the company’s board and investors changed its tune, says Stephen Antisdel, a director and investor in the company.
“While the early strategy was focused on top-line growth, that shifted as the world changed,” Antisdel says. “Now the strategy is: Don’t focus on growth for growth’s sake, focus on operations and profitability.”
That’s a common theme among online retailers and e-commerce technology providers that have relied on investor capital to grow. Investors-be they venture capitalists or Uncle Robert-were happy to put money in as long as the economy was healthy and online retailing was growing steadily, suggesting the possibility of a big payday down the road. Now those investors, their portfolios hammered by a 40% drop in stock prices, have less money to invest and are increasingly telling e-commerce companies to make do with the capital they have.
This capital shortage will affect online retailers in two ways. Those e-retailers like Working Person relying on investor capital to grow quickly will, at best, be forced to scale back their plans. Some are going under or being forced to seek a buyer in order to survive.
And all online retailers will be impacted by how this cash crunch limits the capacity of e-commerce technology providers to invest in new products and services. Retailers will want to pay close attention to the financial stability of vendors, as some of them inevitably will not survive the sudden sucking of oxygen out of the system.
“There are all these solution providers out there, and there’s not that much room in the market,” says Mike Miller of e-commerce consulting firm FitForCommerce. “There’s got to be some consolidation.”
While the sudden shock of last fall’s Wall Street meltdown invites comparisons with the collapse of technology stock prices in 2000-2001, the evolution of e-commerce makes the two periods very different. It also explains why relatively young e-commerce technology providers are better positioned to raise money than online retailers just getting started.
2009 vs. 2001
Online shopping is much more pervasive than it was early in the decade, more U.S. homes have broadband Internet access and it’s clearer how online merchants can attract consumers through tactics like search engine and e-mail marketing, says Amish Jani, director of venture capital firm FirstMark Capital.
“All have come together to create a fertile and robust environment for e-commerce and technologies that support e-commerce,” says Jani. That helped convince Jani and FirstMark to participate in April in a $10 million second round of funding for Conductor Inc., whose technology helps retailers and other web site operators measure and optimize natural search results.
But the growth of online shopping has attracted to the web such retail giants as Wal-Mart Stores Inc., and fueled the growth of such successful online retailers as Amazon.com Inc. Jani would not be interested in investing in a retailer that proposed to sell everyday goods in direct competition with these huge retailers. “You have to have a novel approach, because e-commerce has matured,” he says.
Retailers that offer customized products, like CafePress or Zazzle, and the member-only site Gilt Group that sells designer clothing at deep discounts, are examples of online retailers he considers innovative, says Jani, who does not have investments in those companies.
Jani is not the only investor showing caution when it comes to e-retailers. Online retailers have attracted relatively modest interest in the last five years from venture capitalists, says Mark Jensen, leader of the U.S. venture capital services group at accounting and consulting firm Deloitte and Touche LLP. Since early 2004, there have been 148 deals that infused $1.7 billion into 79 U.S. e-retailers, he says. That’s barely more than 1% of the more than $135 billion invested in U.S. venture capital deals during that period.
Although it’s hard to come up with comparable figures for technology companies focused on e-commerce, it appears those companies are having more success than e-retailers in attracting capital during the current economic downturn.
While not a single online retailer had publicly disclosed raising capital this year, through early May there were 11 deals in which providers of e-commerce technology or services raised money. And six of those deals were for at least $10 million, including a $70 million investment by three venture capital firms in e-mail service provider ExactTarget.
It’s easier for a start-up to make the case its innovative technology can help retailers sell online than for a new retailer to persuade investors it has a truly unique approach to selling on the web, Jensen says. “There are major opportunities for companies that enable e-retailing,” he says. “They would have an easier time raising money than an e-retailer, for sure.”
A tough sell
Jensen wouldn’t have a hard time convincing executives at e-retailers Working Person, eImprovement LLC or Paper.com LLC that it’s a tough time to raise cash. All have tried without success to raise money in recent months, and are adjusting their strategies accordingly.
Working Person’s parent company, WPE Holdings Inc., was among the last e-retailers to report a venture capital deal, obtaining $1.1 million in funding in October from Agile Opportunity Fund LLC. Agile cited Working Person’s double-digit revenue growth even in a difficult economy as a reason for making the investment.
But raising that money was difficult last fall, and it’s even more difficult this year, Antisdel says. A big factor is that the roughly 40% decline in the stock market has prompted a comparable reduction in the value investors assign to privately held companies. Just as selling a house today means accepting less than it was worth a few years ago, Antisdel says a retailer exchanging equity for cash must give away a bigger share in the company to get the money it needs.