Current Funding Environment in eCommerce and Options for Entrepreneurs
The ongoing trend shows that the eCommerce start ups who have survived and built a brand in the market seem to be noted by big firms (recent funding of Snapdeal by eBay for example $134 Ml pop!). There have been 70+ major deals in the eCommerce space in the last 2 years. Apart from that many brick-and-mortar retailers like Wal-Mart, Staples, Office Depot,Apple, and Sears have started their own internet retailing.
But the question is, will this scenario continue or end soon, where are we headed to? Lets analyze it a bit:
Most of the eCommerce companies are not profitable at the moment (retail is a long term game and break evens are volume driven painful trajectory)Due to which the eCommerce firms have had to find fresh ways to improve their capital infusion. Some are getting additional capital, while others are finding it difficult to raise funding.Even the new entering ones are finding fund raising a lot more challenging now.
Having Focus on More than One eCommerce Companies
It is found that most of the ventures want to invest in the eCommerce companies, and they have at least one or two such companies in their portfolio. In case of and Brazilian online retailer B2W Companhia Digital, investor Tiger Global Management had also invested on online travel agency Despegar, and Brazilian eCommerce portal Netshoes. Now in such cases, any online start-up seeking fresh capital infusion faces difficulty in getting funding from any such venture which has already invested in more than one eCommerce company.This scenario also seen in the case of SAIF Partners which has invested in baby products eCommerce portal Firstcry.com and its competitors Babyoye.com, a portfolio company of Accel Partners, and Hoopos.com, the investee company of Helion Venture Partners. Many of the investors current portfolios in eCommerce are already bloated and they must be looking for exits in next few years now.. till then the funding environment in eCommerce might remain tight fitted ( unless you have some path breaking niche idea which investors are wowed and get sold to... till then Bootstrap buddy! That’s a good option to build a strong business, our company ‘Connecting Dots’ is a completely bootstrapped business BTW) It also means there is another wave of eCommerce coming in when the exits start happening.. and it is going to be pretty soon now.
Such cases however limit the eCommerce companies fund raising options. So now when Firstcry wanted additional funds, it couldn’t rely on Accel or Helion as they were already funding its competitors. It is found that eCommerce websites selling specific goods need a fund infusion in the range of over $40 to 50 million to flourish as a large company. While Indian players like Flipkart.com focusing on a range of product categories need much more capital than the specific ones.
Now because most of the venture capitalists having eCommerce companies in their portfolios, it keeps cash blocked for their own portals, as they will require money to scale. These venture capitalists provide additional funding to the eCommerce web-stores that have already received funding only if they show success in the following cases:
- Have some growth and prosper as leaders in their verticals.
- If they focus on improving margins per transaction.
- Have proved their efficiency in marketing by reducing the capital needed for customer acquisition.
Investors Interested in Category Leaders
Reduction in funding opportunities for the start ups also causes in case the investors are investigating for category based leaders. In such cases, if you are selling a range of categories, then you are addressing a large pool of market where there will be a lot more players compared to the category based players. All these players manage to get funding as they are focusing on more than one product category.But in case of vertical player or a specific category based eCommerce company addressing much smaller pool of market, raising additional funding become a lot more difficult, unless you are a leader in this category.
To make it more clear, the Indian range of products based eCommerce portal, Flipkart, received over a hundred million dollars, Snapdeal received $134 million investment by eBay recently (check here), and Brazilian based B2W Companhia Digital received $520 million. But this was never seen in case of the category specific eCommerce portals, thus making them to raise funds for their subsequent rounds from their existing backers.
It is predicted that the venture capitalists might look at category based portals that have not invested in so far, focusing on those who have already raised their seed funding. New companies entering this eCommerce market will be considered by the investors only if they have unique value proposition, ability to do things differently, different marketing tactics, and good customer acquisition skills. Apart from these qualities they will also have to show success in small scale.
Currently, if you are facing VC money crunch and having difficulty raising finds, their remain some options for sure:
- Being acquired by some leaders in this field like Snapdeal acquiring eSportsbuy, Sports gear eCommerce company Fanatics acquiring Dreams,Shoebuy.com acquiring Cozy Boots, and Healthkart acquiring Madeinhealth.
- Bootstrap (or keep bootstrapping) your business.Keep changing along buddy.. Bootstrapping is the way to build a sustainable long term strong business.
Shut down and start afresh.Starting afresh after all is not a bad thing… Do you know how eagles take a rebirth midlife? Lemme leave you with a short video about it here:
[We are Connecting Dots, a full service eCommerce solutions company. At Connecting Dots, we help companies build great online businesses, we are Magento implementation partners and build great eCommerce portals]