June 2, 2014, 3:59 PM

Think big

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Tip 4 – Spend wisely

Venture capitalists may have billions to invest, but they like entrepreneurs who pinch pennies. And two important expense items they look at are inventory and customer acquisition.

One way to keep inventory costs low is to not own any. That's the case for both NoMoreRack.com and ScoutMob Shoppe. NoMoreRack.com takes orders that suppliers then drop-ship to customers. "We're very lean and capital-efficient," says Agarwal of NoMoreRack.com, which booked $350 million in sales in 2013 with only 65 employees. "We have no inventory risk and no fulfillment cost," he says. That's also true for ScoutMob Shoppe, whose merchants own the inventory they sell on ScoutMob.com and handle delivery.

Not that inventory is necessarily a turnoff for investors. Lee of Canaan Partners just wants to be confident that an online retailer can sell the inventory it owns. "One of the things I liked about NatureBox is that it has a direct relationship with its end customer," Lee says. "The consumers themselves will indicate what type of snacks they like and don't like. That gives NatureBox the ability to deliver the right things to the right consumers so that they're happy and will continue to return and buy more."

Marketing is another area where e-retailers can overextend themselves, as a web retailer can almost always attract traffic and buyers by spending heavily on online advertising, especially pay-per-click ads on search engines. "With commerce, you can always spend $1.05 to make $1," Lerer says. He says it's important for a startup e-retailer to prove it can bring consumers back again and again to show how much they spend and how often, and that it can sell goods consistently at a solid profit.

Those shopper metrics are often combined to establish the lifetime value that a retailer can expect from each new customer it acquires. That's a big part of the conversation with venture capitalists, says Heerin of ScoutMob Shoppe. "The most important thing is being able to acquire a customer for less than the lifetime value of that customer," he says. "VCs are laser-focused on that."

But Lerer emphasizes that a retailer can't improve that lifetime value metric without doing many things right. That includes providing good quality merchandise, efficient customer service and delivery, as well as a personalized and appealing web site accessible from all kinds of devices. "All of that results in a customer experience that will mean more purchases for higher values for a longer period of time," he says.

Tip 5 – Take their advice

Venture capitalists can bring more than money to a startup e-commerce business. If an e-retailer makes the right choice, these investors can also bring extensive experience and a thick Rolodex of contacts.

Even before raising capital, an entrepreneur can benefit from bringing on e-commerce veterans to an advisory board. That's what NatureBox did, and Gupta says he received valuable advice from mentors including Brian Lee, co-founder of ShoeDazzle.com and The Honest Co., and former Netflix Inc. chief financial officer Barry McCarthy, who remains on NatureBox's board of directors.

In fact, McCarthy sits on several boards, including those of online retailer Chegg Inc., and digital music services Pandora Media Inc. and Spotify AB. Agarwal of NoMoreRack.com says he values venture capitalists who bring lots of industry knowledge, either from their own experience or that of others in their firm. "They bring a wealth of experience to the table and can share knowledge and best practices," he says. "The best investors are great sounding boards for bouncing off ideas." He adds they also have contacts that can help a startup e-retailer connect with suppliers, technology companies and to recruit talent.

Davis of Revolution Ventures says his firm sees its role as helping companies that he describes as at the "middle-school" stage. "They have a track record, probably $10 to $20 million in revenue, and ideas on how they can build a billion-dollar company," he says. "But they don't have the tools or expertise or capital and they would like some help, and that's what we like to do."

Lolly Wolly Doodle is a prime example. It was was founded in 2008 by Brandi Tysinger-Temple, a mother of four who had begun selling selling her own handiwork on eBay. By the time Revolution invested in 2013 the retailer had 180 employees, most of them women from her hometown of Lexington, N.C., who sewed her apparel. There were only a handful of executives, including Tysinger-Temple as CEO. She says the Revolution team has helped fill out that management team, as Lolly Wolly Doodle in the past year recruited executives with experience at such retailers as Abercrombie & Fitch Co., J.Crew Group Inc. and Diapers.com, which is owned by Amazon.com Inc.

The e-retailer has also bought into Revolution's vision that it could create and sell more than little girls' clothes. New lines are in the works for women and home products. "They gave us a broader view and helped us see possibilities where we can scale and grow," Tysinger-Temple says.

Growth is what it's all about for venture investors. As zulily shows, the combination of a new idea, entrepreneurial grit, venture capital and the Internet can produce a big payday.




Other funding options for startups

Venture capitalists typically look for companies that are beyond the startup stage, and can credibly claim that they'll be big businesses within five to eight years. But there are other funding options for e-retailers not as far along.

After entrepreneurs max out their credit cards and raise all they can from friends and relatives, they often turn to angel investors. These are typically wealthy individuals willing to risk a few hundred thousand dollars for a chance to get in on the ground floor of a company that may one day be worth a lot.

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