Why Is E-Commerce Such a Hot Area in Venture Capital Now?

Answer by Elizabeth Knopf:

I kind of over did it on this one, but it’s stuff I think and get excited about, participate in, and write about every day … so here we go…

Below I outline the following:

Part 1. : The last 10 years of eCommerce Investment

  • VC market criteria
  • Quick History
  • Lack of VC Investment/Lack of Interesting Companies (Keith’s point)
  1. Boom/Bust
  2. Lack of defensibility
  3. Capital Intensive
  4. Market Timing
  • More Male VCs/Entrepreneurs than Female

Part 2.: Why Now?

  • Privates Sales Sites Reinvigorated eCommerce
  1. The model
  2. Market drivers
  3. Investment in Models not Technology
  • Current Landscape & Market Dynamics
  • Supply Chain Drivers
  1. POS & Payments
  2. Fulfillment & Logistics
  3. 3D Printing
  4. B2B eCommerce
  • Channels
  1. Mobile
  2. F-commerce
  3. X.Commerce

Part 3.: New Models

  • Subscription
  • Curation & Personalization
  • Customization
  • Consumer Merchandised Shops
  • Access to New Inventory- Global
  • Access to New Inventory- Local
  • Collaborative Consumption
  • Multi-Level Marketing
  • Direct to Consumer
  • Media + Commerce
  • Shopping as a Game
  • Personalization & Tastkemaking
  • Marketplaces
  • Hollywood Meets eCommerce

Part 1. : The last 10 years of eCommerce Investment

What’s hot to a VC?
While each VC has its own strategy for investing, there are some common themes around the nature of industries and sectors that are attractive to venture capitalists.  (This does not include the micro-economics of a company or other elements that make a ‘company’ attractive–just sectors and the nature of their models).

  • Large Market- In order for a company to grow into a billion dollar company, which is the idealized hope, there needs to be a lot of potential customers. However, on average, a VC expects to exit a company at least above $100M. Let’s assume a 2x multiple on revenue (multiples could also be based on EBITDA ,take into account growth and a few other factors, and vary by sector, economic environment, etc..). So, for this example, to be doing about $50M in revenue , it would be easier to get 5% of a billion market than 50% of a $100M market. There will be competitors, there needs to be growth opportunity even upon exit, and even despite itself, a company will stumble into customers and get to a decent run rate in a large market.  Additionally, VCs invest in large opportunities due to the risk/reward tradeoff  (ie if they aren’t going to potentially have a low IRR then, they might as well invest in something of lower risk that would have comparable returns). Most VCs take a portfolio model approach since most companies fail, they need a few big wins to compensate. Lastly, VC funds are typically large and thus need to move the needle hence a billion dollar opportunity is required .
  • Market Maturity/Timing- Is the market ready to adopt your product? What is the infrastructural situation that would make your product possible to use and business to scale? Will someone actually be ready and willing to use it or do you have to educate them? Timing is crucial. Most ideas are not new, they are just a new version of something that had already been attempted and failed because people or the infrastructure was previously not ready.
  • Macro Changes- What’s happening in the world that might drive adoption of X? This could be deregulation, better infrastructure or adoption of infrastructure, rising or decreasing costs of factor inputs or alternatives, etc…For instance, the rise in cost of oil will drive adoption of alternative energy hence the increase in investment in alternative energy over the past 10 years and more intensively recently. Another example is the CAN-SPAM act scarred investors from investing in email marketing software , which ultimately came back in fashion or at least a new permutation of it.
  • High Growth Markets/Models- VCs have maximum horizon on their funds  , thus, they have to exit within 10 years–ideally 5. The economics of a business or sector must be such that it has a high growth opportunity. For example, think about the differences required to build and scale a software company vs. brick & mortar retail–capital intensive to setup, operate, and ultimately to scale. Because VCs want to have high growth businesses, traditional retail has inherent challenges to scale quickly, which is why you do not see a lot of venture investing in retail or other capital intensive industries.
  • High GM- The nature of certain businesses have higher gross margins than others (e.g. software-high, shipping-low, commodities-low). For low margin businesses, you need volume, and with smaller startups, they don’t have the distribution or volume to achieve financial viability. Higher margins on the sale of the product enables you to have more capital to work with for S&M , and high GM businesses typically have better cash flow.
  • Profitable Distribution Model- The ability to acquire customers in a capital efficient way is extremely important to maintain a viable business (ie LTV>CAC) . This is both from a customer acquisition perspective and an operational one. It’s all about growth, so models that can capital efficiently access and acquire customers and scale operations are appealing to VCs.
  • Competitive Landscape- Does one or a few winners take all? Is it highly crowded? This also takes into account network effects , switching costs, and the possibility to usurp incumbents . Additionally, barriers to entry , which you can overcome but will be challenging to others, historically were more important than now . Defensibility for a specific company is important but less so for the general nature of a sector .  For example, think about the shift in perspective around IP or the interest in GroupOn. GroupOn had a competitive advantage of their distribution to consumers but the nature of the business has low barriers to entry.
  • Exit multiples- The market assigns better multiples to certain industries and whether it’s based on EV/Revenue , EV/EBITDA, or other ratios in non-monetized startups. This typically comes down to the financials and economics of a business (with the exception of non-monetized companies with lots of users or a talent acquisition). If you are going to finance a company, and there’s just as much effort to build one vs. another with a higher multiple, you’d go with the latter. I won’t get into the specifics as to why certain industries have better exit multiples here , but this to a degree plays a part in which sectors are attractive and is a result of aforementioned factors.

I’m sure I missed a few sector factors, but those are some key ones.

So, how do those criteria relate to eCommerce…?

Historical Dynamics
Over the last 10+ years eCommerce has gone from  boom  to bust to diffusion to adoption and over the last few years is just coming out of its nascent stages.

First, to give some historical context, here’s a fun infographic on the history of eCommerce starting in the 1960s…

Lack of Historical Investment due of a Lack of Interesting Companies…
Below I elaborate on a few of Keith Rabois, Anthony Wang, and other respondents’ points about the lack of VC investments and add a few more thoughts.

1. Taste aversion
There were hyped expectations for ecommerce in the dot-com boom but the infrastructure and market were not yet ready or able to adopt the innovations and efficiencies offered by internet companies. Thus, a lof of hype in the dot com boom and massive burns in the bust left a negative aftertastes. Even though a lot of other areas left a sting, ecommerce had additional complexities and capital inefficiencies pushing VCs away from investing in this area.

~$59bn in 1999 and $103bn in 2000 invested in ecommerce ( The scars remained visible over the next few years.


Josh Kopelman  mentions in his blog that the list of top ecommerce sites from 2005 to 2010 were almost exactly the same , therefore, showing a lack of innovation in the space.


2. Lack of defensibility

  • Product:   eCommerce historically lacks defensibility from a technology perspective. With software, you can have IP, or it is just difficult to build, which creates some level of market entrance barriers. With ecommerce, you are selling products. Thus, other stores may carry the same items, which gives you limited defensibility.  Unless you are also creating the product and selling it only retail (and not wholesale to other retailers) ,  the most important elements are the assortment ,  breadth, and variability of the merchandise, and the overall access to it. The access to inventory is relational , which is not defensible unless you have an exclusive agreement with a vendor– in >95%+ cases this does not occur. Thus, because there is a lack of technological and merchandising defensibility, solid metrics around extent of distribution , CAC relative to LTV,  overall margins and profitability are required prior to an investment. Thus, traction is important in this segment even more so than software or other internet services. This is still true today, but there are better means of distribution, which I’ll describe later.

Most of the interesting technology developments that could add
defensibility, were either  for large companies with in house solutions, which
were very expensive, or companies became software–not ecommerce–

  • Network Effects (eBay & Amazon effects): eBay, ‘the world’s pawn shop’, enables anyone to sell online and thus has democratized selling. There was an explosion of small entrepreneurs selling as eBay sellers. VCs always get scared of competing with incumbents that garner network effects.  eBay did enable an ecosystem to build ontop of their community with ecommerce tool vendors, but to get buyers’ attention and eyeballs as an ecommerce company, eBay & Amazon were and continue to be  challenging and scary competitors.

3. Capital Intensive
VCs love the high gross margins of software because it can get to profitability faster . This historically is not the case with  ecommerce. Amazon did not expect to be profitable for 4-5 years ( The startup costs for non-eBay sellers and non-drop shippers were traditionally high not only due to technology costs but also inventory and fulfillment expenses combined with lower margins.

  • Buying Inventory – The typical/historical model for a retailer is to purchase inventory that you then resell. This requires capital. [ Brands selling inventory sometimes offer terms and/or utilize ‘factor’ financing , where a factor buys the A/R at a discount, and the risk assessment is based on the retailer’s ability to pay vs. the brand’s assets ]. Thus, this is some protection for a brand, but the retailer is still on the hook to pay. Most often, they will still need to pay prior than when they’ve sold the goods . So, a retailer needs the capital to finance these cash flow cycles.
  • Inventory Risk- Not only is it costly to purchase inventory, but then you have the risk of not selling it. Thus, you want high inventory turns to free up the cash to finance your operations. For ‘fashion’ or industries with a trend like nature, there is even higher risk since once a season is over, the probability of selling something at the initial price declines much more dramatically than replenishment items. Thus, you resort to sales/discounts just to free up the capital to finance the next season.  Even if an item is a ‘replenishment’ item (one that is inelastic and doesn’t depreciate due to trends or seasons), you still have capital tied up that could be worked elsewhere. So, you ultimately lose money on low-turns (this could be potentially offset depending upon profit ).
  • Warehousing- Where are you going to put all that inventory? If you are doing a startup ecommerce site in your garage, you’ll probably use your garage but that will become too small quickly . Storing stuff costs money not to mention figuring out organizational processes for managing the inventory, which can get costly if you don’t have the right structure and workflow in place. [Aside: I ran a storage business back in the summer 2005; having startup resources, we used stickers/color coding+excel, and while you can get away with it, it gets painful fast].
  • Fulfillment- Even if you are storing stuff in your in your garage, you’ll need to organize your inventory,  pick (select the items that were placed in an order), pack (package the items up into the appropriate shipping container), and then ship the items. You can work with 3rd party logistics providers (3PL), but once again, this is another costly and/or logistically challenging aspect of the supply chain.

To mitigate the above , the drop-shipping model arose . [Note: Zappos actually started this way. See Dropshipping: Is drop-shipping the best way to bootstrap an e-commerce company?:  ] However, because the brand , retailer, or whoever the drop-shipper is assumes the inventory risk and aforementioned challenges, your margins are not that great. Thus, even though you mitigated that risk, you still have/had the below issues…

  • Technology– Historically, like other internet businesses, start up costs were high. Though for ecommerce, any of the tools enabling ecommerce entrepreneurs were either too expensive and often targeted at large organizations or they were lack-luster.
  • Customer acquisition and retention- consumers are expensive to acquire and retain. Historically, there were not great channels beyond online advertising, Google, and SEO/SEM to get consumers’ attention. With advertising, good keywords get bid up substantially, and you can hit a wall for customer acquisition where the LTV<CAC .  Once you get their attention, to convert them into customers is expensive. Not only this but also re-engaging them to get them to purchase again and not have to reacquire them was extremely expensive. Email marketing in the mid- 2000s had negative connotations due to the CAN-SPAM act until its renaissance  in the later part of the decade. Thus, most of the spend was on advertising, and it was harder to develop loyalty let alone incite any viral effects.
  • Lack of Seed Financing: The angel environment was not as lucrative or accessible. Thus, there were fewer options to overcome the cashflow hump (drop-shipping was one option). With less seed capital, there was also less experimentation going on in terms of different ecommerce models. Hence, fewer companies were making it to a level that would even be attractive to a VC.
  • Chicken-Egg: Because of the difficulty in scaling these businesses based on the lower relative margins and historical CAC/Retention costs, you required capital; however, to get capital, you needed to prove the traction.

4. Market Dynamics

  • Market Size: ecommerce is just getting to $197 billion (depending upon which report you read) , which is still only ~8% of US product sales (according to Forrester)  . Even though years ago it was large and the potential was/is still huge, it was still smaller and earlier in the adoption phase .
  • Market adoption & demographics:  First, the market was still getting acclimated to the concept of purchasing something online. eCommerce sites were not fully trusted. Especially with the older demographic who were the base consumers back then, it was not only a new behavior but also trusting the payment systems, trusting that a product would actually show up, trusting relationships with ‘new establishments’ , and just generally being comfortable with buying from a ‘virtual catalogue’.

Broadband penetration was not as ubiquitous as it is now and the speed
was not nearly as fast as it is today. This, thus impacts the ability to even
access  these sites let alone the consumer’s experience . was a
massive  failure in the dot-com boom/bust partially (among many other
reasons) due to  this issue.

Previously, it was about proving IF people would buy online. Now, it’s about the HOW people will buy online.

Fewer Female VCs/Entrepreneurs
Another side point, and I don’t want to make this into any kind of gender issue, but the fact of the matter is there are fewer female entrepreneurs and VCs. Thus, it is less intuitive for a dude to understand the buying nature/habits of women, who are the primary consumers (see below). They don’t see the opportunities as much because they are not engaging in the problems associated with shopping. So, they are going to be less inclined to build or invest in areas that are not as obvious.

If you look at Theresia Gouw Ranzetta at Accel Partners and Aileen Lee at Kleiner Perkins Caufield & Byers , they are the partners on most of the eCommerce deals within their respective firms.

Here is a good little article on different consumption habits ” Men Buy, Women Shop”

Part 2.: Why Now?

For ecommerce and buying/selling of  goods, a seller wants to identify ‘what can I sell today , most profitably (in the most efficient means possible), to the most amount of people (market opportunity), and how can I get a lot of people to buy
(experience to get conversion)’?

There are many models out there that will be able to get some legs due to the infrastructural changes that give ecommerce sites better ways to scale their distribution, ultimately improving the economics.

Thanks to Gilt Groupe, RueLaLa, One Kings Lane,  the rest of these Private Sale Sites  and Group Buying and Daily Deal Startups, the renaissance of interesting ecommerce companies and thus VC interest in this area has begun.

Greylock Partnerss, James Slavet, delineates some of the reasons in his TechCrunch article ‘How E-Commerce Got its Groove Back ‘ ( ).

[Coupons vs. Flash Sale Note: I want to make the distinction between GroupOn or anyone implementing deals versus private/flash sale sites. The former are just marketing/advertising companies with new ad units and the tools and distribution to convert ads into transactions. Private sale/Flash sale sites actually merchandise and hold or at least consign inventory. Inventory creates a whole new dynamic around how you operate and your economics, which is a key, fundamental difference in ecommerce versus these other marketing companies.  If you don’t really touch the inventory, you are just a marketing company (not to totally overstate this claim). Retailers who only use brands that drop-ship create a gray area for this. Thus, that said, some components of my response below blurs the line a bit. HOWEVER, daily deal sites— whether you want to bucket them as ecommerce, advertsing/marketing companies, or something in between–have produced externalities and direct implications to make commerce attractive once again. ]

I’ve outlined below :

  • Privates Sales Sites Reinvigorated eCommerce  – 1) the model 2) market drivers
  • The current landscape and shifts in the market dynamics
  • Market drivers that may propel a few of the changing models forward
  • Some of the models that are gaining traction or have opportunity
  • Enablers to longer term innovation

Why did Private/Flash Sale Sites Reinvigorate eCommerce Investment?

First Flash Sales & Private Sales is a means to move inventory that garnered enough traction to be companies in themselves. So, let’s first define the parameters to examine what was different to drive their success and thus capital investments.
The key innovations : moving inventory quickly thus less inventory risk
or higher sell-through and getting massive consumer adoption in a short amount of time (relative to their incumbent traditional ecommerce sites). Often times, these sites sell before they buy ( aspect of the strategy employed in drop-shipping).

[Note: You can get a full overview of the Gilt model from Matthew Carroll‘s answer: Gilt Groupe: How does Gilt’s business model work? ]

1.Model/Product Innovations

Model: Short-term sale of high quality or often high end goods with limited inventory seemingly available. The combination of the following made this approach innovative:

1.    Time frame
2.    Luxury goods
3.    Limited Supply

1.    Cash cycle/Inventory risk
2.    Fulfillment technology

These concepts are all utilized in brick & mortar establishments, but the
combination online was yet to be seen.

  • Experience: These guys actually make shopping fun & addictive! These sites were able to create a great customer experience from showcasing the items to creating a habit–like tuning into your favorite TV show at the right time (that is pre-Hulu, OnDemand, and DVR). People get excited to go to one of these sites at noon or whenever the new inventory goes on sale. There is also a sense of urgency due to a combination of limited supply AND time that motivates buyers . You know it would go fast, which is unlike traditional online sales that you typically have a decent amount of time before the sale ends or inventory runs out.
  • Product: Gilt and a lot of the private sale sites were able to get access to luxury items. Selling luxury goods online was (and to a degree still is) rare. This is for quite a few reasons that I won’t get into now. Yet, getting ‘access’ to this type of inventory that could be sold online was actually quite new. [ At the end of the day, the product, especially, for discretionary items, are purchased due to the product quality rather than a ‘need’. So, having quality merchandise was also a key factor].
  • Data Accessibility, Collection, & Analysis : For a lot of ecommerce sites, you would not know who would be on your site browsing until the person put in his or her payment info or perhaps had logged in. Private sale sites require login and thus know your buying habits/patterns . If you abandon your shopping cart, they know who you are and what you abandoned. RueLaLa even added a button so that you can automatically purchase it if they get more available. Thus, they have better data than the average ecommerce site because someone actually logs in. This is in addition to their  sneaky tactics of being ‘invite-only’ or ‘private’ to get consumers excited to give up their email address.
  • Decreased Inventory Risk: Not all of the sites employed the consignment model, where a site could give back anything they did not sell, but they at least were better structured to take limited amounts of inventory available. Other sites do not touch or pay for the inventory until it is sold to the consumer.  However, this was a great way to decrease their inventory risk. Gilt ultimately holds some inventory and fulfills, but they minimize the risks . Because there is limited supply, the sense of urgency and impulse shopping that these sites incite also move inventory faster than traditional sites. Thus, there is decreased risk in initial financial outlays/cash flow as well as holding inventory.
  • Fulfillment:  In drop-shipping, a retailer  sells an item without touching the inventory or making any financial commitments. However, if you want to control  customers’ experience, you have to actually touch the inventory at some point. So, these flash sale sites utilize aspects of this concept and evolved managing inventory risk. They either did not touch the inventory until it was sold or it was held and returned if it was unsold. In each model, the former especially, new operational issues arise. You get your order , which includes multiple brands’ products, thus you need to efficiently get those items from the brands and then fulfill (pick, pack, and ship) the orders.

2. Distribution/Marketing Innovations

  • Email : Email was actually under-utilized as a channel to sell goods with the exception of DailyCandy & Thrillist. Private sale sites leverage email extensively , which if people even ‘open’ an email are much more likely to buy. Additionally, it’s not about a ‘spammy email’ but rather good content. Flash sale sites incorporated better content into their email marketing, not to the extent as companies like Betabrand or Ahalife, but they took it up a notch from the traditional ecommerce sites. Additionally, because it truly was a limited time offer, it is exciting to open the email because each day it’s new versus the stagnant inventory in traditional stores.
  • Initial Exclusivity: The ‘invitation only’ concept caught on because people always want to get into ‘the club’. This created some initial buzz , and thus  got consumers excited to give out their email addresses .
  • Social Media: Because these sites were able to leverage social media channels , they were able to accelerate their growth faster. There is currently a lot of noise , but identifying new channels early on that cater to your demographic has a potential for a huge win.
  • Referral Programs: Because of social media channels, referral programs were augmented. They figured out how to create viral loops much more effectively and the right incentives to increase their subscriber base.
  • Market Dynamics & Psychological Shift: At the time of the economic downturn, the obvious discount combined with a sense of urgency magnified the adoption of these sites. There was in fact a fundamental shift in the way people think about shopping. Buying ‘full price’ for a Gucci handbag has become in a way embarrassing (somewhat overstated) because the conversation has shifted from ‘look what I bought’ (implying a luxurious, pricey item) vs. ‘look at the deal I got on this’. The bargain hunting mentality has become the paramount of shopping status. Plus, the market opened up where not only the 1% could buy Prada but now the 2% could 😉 .

3. Investing in Models not Technology

  • Technology as an Enabler not a Solver: I want to acknowledge, that the success of the ‘private sale’ sites are actually not from ‘technological innovations’ but rather distribution innovations, which , sure, you can argue are technological to a degree. Yet, these are about bringing people together or easily promote versus using technology to solve a hard algorithm. That is also why you see the proliferation of sites beyond just Gilt & RueLaLa—a low barrier to entry ‘IF’ you can get access to the inventory, which is really the barrier to entry (it’s a relational barrier that can be overcome versus a lot of the other problems have infrastructural or technological barriers) . With private and flash sale sites, these are actually fairly easy to start but hard to scale.
  • Implication: Thus, a lot of the current investment strategy is  not due to technology but either from distribution or some under leveraged model  both of which can be augmented by channels that allow for better promotion and distribution (ie FB, twitter, blogging, and perhaps closer attention to email—not necessarily true anymore).

Overall, the new model for selling was able to identify new ways to decrease capital intensity than traditional ecommerce and gain distribution quickly. Thus, despite a lack of technological innovations, these sites were able to prove economic attractiveness worthy of VC dollars.

Current Landscape & Drivers:

Below I describe the landscape and some of the drivers as well as large problems that need to be solved making the current time in the market attractive for creating interesting ecommerce or related companies and attracting VC investments .

1. Market Dynamics

  • Well-Founded Hype: So , these private sale sites and the daily deal sites got investors’ attention. With huge success in these markets brings a lot of followers. Success or traction begets money. With a lot of followers, you can have more companies being formed in which you can potentially invest . So, now that a few have proven that there’s lots of money to be made and new companies being formed in ecommerce, VCs are interested.
  • Disregarding eBay and perhaps AMZN: This is a large enough market for a lot of players to succeed. It’s not a company like Google where winner takes all (Google has technological barriers to entry vs. relational barriers). Thus, despite the early fears about eBay and Amazon being the only dominate players, there are new sets of problems and consumer demands that can be addressed.          .                                                                                                                                            For instance, eBay’s experience sucks and the ability to get discovered is tough–not to mention the fees; hence, Etsy came about. Amazon is highly utilitarian and is more about price than an enjoyable, leisurely shopping experience.  Thus, you probably go to a different website for clothing or even aspirational items. You also won’t find certain brands on eBay or Amazon due to certain rules brands put in place in how and where they are represented online–if you do find them, it’s most likely without the brands’ permission or it’s second-hand. Also, if you don’t know what you are looking for, the browsing experience is dismal for either. .                                                                                                                                           .                                                                                                                            eBay’s X.commerce initiative is a question mark at this stage, but the discovery and experience problems still exist . Additionally, X.commmerce will enable other companies to have better ease getting into the game leveraging the tools and community rather than eBay fully competing with them.
  • Economy: Well this is quite volatile, but bargain hunting or discounting is not going to go away any time soon. The middle market is evaporating. Thus, one must tread carefully with the average consumer, whom is not so ‘average’ anymore. This drives more people online to buy because they can often find better deals online where it’s easier to shop around or find a coupon. We’ve also started to see Collaborative Consumption and rental models that decrease the cost of buying because products either have been used before or ownership expires.     .                                                                                                                                                                                                                                                                        Additionally, you have lots of people unemployed, so new models can leverage these people to either execute work or harness these people more cheaply to actively sell or market in exchange for discounts/deals or other incentives . Stay at home moms will be looking for ways to make a buck and ideally do so at home and thus online. With the competitiveness within eBay, all of those 25M sellers (, might be looking for new channels to get a leg up on selling.

2. Decreased Capital Intensity:

  • Development Costs: This applies broadly to startups. It has become substantially cheaper to test new models and get up and running. This is thanks to a lot of the ecommerce software, various SaaS tools, and AWS .  Testing using current tools and infrastructure enables more models and approaches to be easily tested with limited initial investment.                                                                                                .                                                                                                                               You also have much better tools to facilitate ecommerce. Shopify , Bigcommerce , & Magento among many other companies are making online storefronts much more engaging and exciting. The cost to get this built and have a beautiful design is inexpensive relative to preceding tools. Additionally, they’ve created marketplaces and communities around their products. So, accessing new tools, and tool vendors distributing those tools are more cost effective for everyone . Thus, leveraging APIs has made a huge difference in integration both in time and money. While not limited to ecommerce obviously , Software-as-a-Service (SaaS), has enabled people to cheaply build and test their stores with limited commitment and  get the benefits of updates and new features that are automatically pushed to their site . Integrating these various tools and data sources is actually extremely important in ecommerce more so than for other types of online businesses because of the supply chain. There are so many moving pieces from POS all the way back through the ERP to vendors/suppliers and then the vendors/suppliers to their manufacturers and warehouses. This looks different since supply chains can have many different parties and stakeholders involved in many different combinations.
  • Decreased Inventory/Merchandising Risk: Newer models such as the aforementioned flash sale sites are providing ways to mitigate the inventory risk. This is either through pop-up shops, shorter selling windows, deals,  etc.. Beyond just the deal mentality, subscription services add an element of personalization to hopefully only show and even send a subscriber relevant items. This decreases inventory risk because you understand the tastes of your buyer much better , there is a decreased likelihood of returning an item because it’s just a pain in the ass for us lazy folk, or because you are seeing an item in person.                                                                                                                                .                                                                                                                   Additionally, sites are getting product or merchandising feedback from consumers prior to buying large lots of the item. This offers better insight into what will actually sell. Rather than relying on ‘buyers’ who edit the assortment for their consumers, these new sites are creating larger breadth of products to preview before making those selections. Quirky (company),, Moxsie, ModCloth, etc…. actually leverage voting and feedback via their sites, twitter, facebook, tumblr, etc… before producing or buying items.                                                                                                           Even collaborative consumption and rental models (while the latter initially capital intensive) offer new ways to either not hold inventory or create different economic models.
  • Better CAC: You can get viral before you even launch. Getting distribution is much more cost efficient than previously due to all the various ways to share and engage with people. Thanks Facebook. Thanks Twitter. Thanks all the other Social Media channels.  Below, you can see broadly that referral economics are extremely valuable. has an amazing referral program and was able to just completely kill it within their first month because they were able to get people signed up before launch  . These guys are quite Fab 🙂 ! Nice work, Jason Goldberg and the team!!! Also see:  Startup Traction: How did get 200,000 signups before launch?


  • Supply Chain: Innovations are happening to decrease capital costs , but I get into this in more detail later.

3. Consumer Psychology:

  • Social Acceptance: No longer is there the issue, IF people are going to buy online but what/how/with whom. We are past the psychological and trust issues in the earlier days of ecommerce.  Now, it is much easier to develop that trust  due to secure payments, general standards, general market education/acceptance, design, etc… The market is not in the education phase but online shopping is becoming a part of our daily psychology of how to consume goods. People are even purchasing stuff through their cell phones including large ticket items like cars. Now we want an experience or something exciting beyond just ‘buying’.
  • Deal hunting mentality: ‘Discounts’ and ‘deals’ will stick around for awhile. This is now becoming an expectation versus a luxury both due to the proliferation of deal sites as well as the volatile economy that has yet to really recover. Thus, in order to create value, brands and retailers will need to become more creative in terms of how they position themselves. Daily deals & flash sales have also driven more people online to actively engage in ecommerce thus accelerating adoption. Even SMBS are now more aware and gaining better exposure to technology as a byproduct of the outreach from the deal sites. .                                                                                                                Here is a good HBR article on adaptive pricing
  • Design/UX: This is under appreciated but is actually a crucial element in ecommerce. You have ‘transactional’ (ie less experiential shopping excursions through Amazon—where people typically shop due to price or utility) . However, an interesting or pleasurable shopping experience has been rare to find on the web. The focus and emphasis on design has only recently taken shape. This is one reason why a lot of brands had not engaged in ecommerce as extensively as one would expect. They need to represent their brand well, and if the medium cannot communicate a brand’s philosophy and potentially compromise its integrity, a brand will most likely not utilize that avenue. This historically was one of the factors for brands staying away from actually having an online presence (this combined with concerns around seeming ubiquitous and thus less ‘exclusive or scarce’). If they get online, the whole world not just a few block radius will see them. Thus, online risks could substantially damage a brand, so the adoption has been relatively slow. .                                                                                                                                                                                                                                            Beyond the brand, sites are making sites much prettier and aesthetically appealing as well as functional. New forms of buyer engagement is taking form . It is no longer browse and buy but rather consuming, creating, and sharing opinions, content and media that surrounds a shopping experience.

4. Data access, data collection , data integration….
Retailers and brands have a lot of data offline and now online. Accessing this data by better collection tools for ecommerce, or tapping into existing external or internal data by leveraging 3rd party tools is starting to become more possible and cheaper.  VCs are going to be very excited about companies that utilize all the data that’s out there to better optimize shopping.

  • Retailer: The biggest challenge of a retailer is leveraging its data into actionable items, which historically has been challenging because there is a lack of  knowledge around the following:
  1. Who the customer is
  2. Buying habits or tastes outside of the retailer
  3. Pre-purchase data (ie ‘in the store’ or things in the shopping cart that do or don’t convert to sales, etc… )
  4. Customized/personalized incentives/deals to up sell, come into the store, etc…

Data is still siloed in these old systems and is very difficult to extract or
integrate, but companies are starting to unlock this data . TellApart is
for example, is tackling customer segmentation and ‘data-driven’
marketing /re-targeting. They identify the most lucrative customers and
help retailers target their marketing dollars towards them verus low-value

  • Brands: For brands, accessing any kind of data has been a challenge since most of the historical data has not been shared by retailers (or at least very little has) in addition to being able to leverage that information across retailers based on customer demographics. In fact, most retailers that have large amounts of data still use EDI , making it fairly costly to provide sales reports to their brands. Thus, there is a huge lack of visibility into sales let alone real-time data. .                                                                                                                                                                                                                                              Brands have lower traffic if they have a website (many of them are just now getting web presences let alone ecommerce shops–mind boggling for all of us techies but true).Thus, they don’t have very good data from their sites either and are typically less sophisticated than retailers since they have more aspects of their business on which to focus.
  • Connecting the Dots: Generally, there are HUGE opportunities if a company can plug into the back end of the supply chain and push forward, BUT in terms of timing, there is higher likelihood that something more disruptive will come from the consumer side (as usual) due to the slow moving nature of the enterprise and having to integrate with their systems or the sales cycle associated with business sales. Thus, the innovation will need to deal with the data (consumer, retail, brands, etc..) that is out there—and there is quite a lot!!!     .                                                                                                                              Now that product data and personal data is out there, we need to bridge the gap . Companies like ShoeDazzle employ surveys to get some level of personalization, but this is just scratching the surface. With all the tech talent and data out there, someone is bound to make the recommendation engine more ubiquitous and cross-channel and cross-vertical.  You have companies like Polyvore, Svpply, Pinterest , Lyst (website) , and Fancy where consumers are curating their tastes in different ways. So, now there needs to be a way for companies to leverage that information in an actionable manner.


  • Large Problem: Across the web, no one has solved this problem—not even Google (for products that is). People are developing more content around products beyond just the description, which is helpful, but finding products is still really tough. Googling a product is useless, especially, since brands use different terms than consumers to describe a product (ie using the ‘cloud’ as a color is not the same or discoverable as ‘white’, but many brands and retailers do not get this SEO factor). Going to your favorite online retailers is your best bet, but if they are too extensively merchandised such as Amazon or Zappos, you are screwed. has some of the better filtering experiences , but it is still hard to find exactly what you want within a retailer let alone across the web. The Paradox of Choice plagues us all and with an overwhelming amount of  stuff on the Internets, we can get frustrated and exhausted trying to consume. Additionally, those with the best SEO will win even though they might not have the exactly right product you are looking for–you will probably just give up. Discovery is a HUGE problem. New angles on this challenge will gain traction , for example,   ModCloth and Etsy have created great experiences to discover unique stuff. New companies solving discovery will emerge.

Due to this conundrum, there are a lot of prospects to solve the discovery issue and a lot of data to work with–not just search terms but leveraging personal elements (demographic, history, likes/social media conversation), social/influencer data, and better product information.

Models described below address this challenge in both technical and non-technical ways.

  • Curation: Typically, you discover stuff by browsing stores. Creating highly curated stores will make discovery more inviting. Sites like Ahalife and Everlane use interesting people/personalities that people can identify with and these people to a degree curate their stores . The older version of this was CSN stores or NetShops, which created super niche stores  and bought the niche’s domain names to help with search. The newer version of finding interesting, indie products  may include adding content (to help with search) and adding personalities for a consumer to identify with and who help source the goods among many other mechanisms.
  • Social: Shopping in the offline world is inherently social. You see this with ladies shopping in groups, getting opinions from friends or stylists/salespeople,discovering new items from friends or the sales people, and showing off your latest purchase to your friends. This helps for people to discover new items from trusted or relevant sources–other people with the same tastes or people you trust.  With the explosion of everything being social, there are easy channels and adoption these social shopping habits. These behaviors have sparsely been mirrored in the online realm. So, there is opportunity to innovate drastically.A few examples include Pose , which allows you to get feedback from friends, or Snapette that allows you to capture, share, and discover products out IRL, which  start to mimic these behaviors.Sneakpeeq uses game mechanics to encourage online sharing of wants and purchases.  Yet, there is still ample opportunity to increase the ubiquity of these tools.
  • Influence: Beyond just feedback or sharing, there is , of course, there is the influence or ‘trend setting’ factor. This concept is nothing new..In 1905, Richard Sears sent boxes of his company’s mail-order

catalogues to his best customers in Iowa  and asked each one to
distribute them among friends and neighbours. Mr Sears collected the
names of  those who received the catalogues and, if they purchased an
item, rewarded the “influencers” with a gift, in the form of a stove,

perhaps, or a sewing machine.

However, now there are better channels and mechanisms for influencing. Anyone from friends to bloggers to celebs play their influencing role. Influencers are influential in certain circumstances. For instance, friends are not always the influencers in buying fashion since you might have different tastes, and rather celebs or bloggers might be those that sway your purchasing decisions. While some people love Yelp, I hate the 4 star default. Traditional reviews and recommendations on products/services no longer have influence on my decisions (I know I’m not the only one either), thus, new ways to get insights from various influencers that matter to you will arise. I know of a few startups tackling the ‘review’ and influence problem in a few different angles. Ultimately, different profiles and people have different levels of influence on the type of product or service and on the information you are extracting from them.

Behavioral incentives ( eg BJ Fogg‘s persuasive technology, Dan Ariely (author)‘s Predictably Irrational examples , or in laymen’s terms ‘Game Mechanics‘ ), are driving ways to improve engagement and influence within the shopping realm. Beyond the monetary incentives of deals or urgency with flash sales, there are many other types of influence to incite purchases. Some examples are offering new ways to engage with more content and media surrounding products, point systems, sharing, which get you vanity, monetary, or entertainment rewards.  Alternatively, influence can come from  buying because it’s from trusted sources (people and stores),  other people with whom you identify  are sporting those goods,  it’s personalized, it’s showing up at your doorstep, it’s a better visual or engaging experience  etc…

A few companies are creating  platforms to shepherd influencers to promote items. This model has been seen time and time again in various forms. This can be from influence as a special person such as a celeb (ie Kim Kardashian and Shoedazzle to BeachMint) or ‘host/peer pressure’ whether the Tupperware party and other Multi-level Marketing (ie Stella & Dot or Chloe & Isabel) , which are structured in ways to promote and incite people to buy (previously highly deal oriented).

Curation, social , and influence all help with not only the discovery but engagement and distribution of goods to relevant people online.

Supply Chain Drivers

Below are other innovations happening more broadly that will enable new models  to take hold and decrease capital requirements.

1. POS & Payments:

Point of Sale Systems (POS)…Micros has dominated the high end of the market, but the market is highly  fragmented and many businesses still use just the cash register or have local systems that aren’t hosted.

  • Hosted POS: I absolutely love Square, Inc.and am in complete belief that it really will revolutionize the way  business is conducted!  However, Square focuses on the payments piece  and has some other POS features, but there is still opportunity for more sophisticated systems including Vivonet, Revel Systems, POS Hero, and many others to capture some of the mid-market. The fact  that the cash register has had hardly any innovation or at least the  innovations have been un-adopted is mind-blowing !  It is the most crucial aspect to a business and yet there has been limited improvement  in the experience and technology that actually has been adopted. There  are a number of companies who have made valiant attempts at getting  retailers to adopt their hosted POS systems in addition to their local  terminals. eBay is also bringing Paypal offline as part of theirmulti-channel strategy , so this will also play a part in advancing howwe transact.
  • Insight: Having better information on retail inventory in real time and knowing this  information , potentially across industries (ie benchmark against theindustry as a whole) or just being able to have better insight into what is happening with your business in real time will help many businessesbecome much more efficient in managing their inventory , merchandising,and for business as a whole .
  • Multi-Channel: Extracting and analyzing data is extremely painful, especially, for smaller shops! So, how does this relate to eCommerce? Well, if a B&M storecurrently wants to sell online or via a mobile device, they have toactively manage their online and offline merchandise, which can getmessy really quickly since your online store has no insight into what’sbeing sold in the store!

A few challenges a store owner would have to overcome include:

  1. Merchandising each channel separately
  2. Avoid selling an item online that is actually out-of-stock
  3. Painfully manage inventory/order reconciliation

Most companies that have the distribution and are at the heart of the    information, such as POS, do not necessarily have the incentive to invest in
the new opportunity of local search but would rather continue to invest their
existing business.

  • Enterprise :Even larger brands are disconnected online and offline. Their systems don’t talk to each other. Buying online and picking up in store creates massive pain (this is also a fulfillment issue which I get into below).However, just having insight into what items are in-stock is tough forlarger brands/retailers let alone small B&M. New POS systems, whichhave their heart around payments and the cash registar , will help tocreate more transparency between these entities . For larger brands, itgets more complicated due to their complex enterprise  systems, but when they need to become competitive and create a seamless multi-channelstrategy for their consumer, they will be pushed to identify new tools.  worked on this problem, and is now extending the effort as a part of  eBay & X.commerce. For the smaller, highly fragmented B&Mstores, new POS systems are the first step, but it will take time forthem to deal with some of the logistical issues involved inmulti-channel.

Good answers on this topic: Is there a reason merchants use a typical POS terminal instead of Square?
Brian Roemmele has some great answers about the company work reading!

2. Fulfillment
Shipping and the whole supply chain is one reason people shy away from commerce. Shipping is expensive and complex. There are a few great Quora answers that get into the complexities and issues around this , so I won’t rehash. Below are not neccessarily new innovations (a few companies are) , but these tools will ease the pain for eCommerce companies.

They have a global network of warehouses to make the storage and fulfillment process more efficient.

  • Drop-Shipping: Drop-shipping was a development that occurred earlier this decade and is an easy way for large manufacturers to get a lot more people selling their stuff. Sellers do not have to hold inventory but receive a lower cut of the item sold because the inventory risk is on the manufacturer’s side. Then, the drop-shipper (the manufacturer) will send the item to the consumer without the seller touching the inventory. Alternatively, once an item is sold, it can be then sent to the seller who packages in the way they want vs. the manufacturer. This is , of course, a better experience for the consumer and representation by the seller if there were multiple purchases from one store front. The downside is that the fulfillment will take a bit longer than if it went straight to the consumer. So there is the trade-off between time and experience. Even though drop-shipping is not something new, it’s getting wider adoption not just from manufacturers but also from retailers. Therefore, this is a driver for more ecommerce experimentation.

They automate the pick, package, and labeling process.

Kivauses game-changing automation technology for distribution centers that helps companies simplify operations and reduce costs while increasing strategic flexibility. Using hundreds of autonomous mobile robots and sophisticated control software, the Kiva Mobile-robotic Fulfillment System enables extremely fast cycle times with reduced labor

requirements, from receiving to picking to shipping – all without


These were founded back in 2003 and have been servicing anyone from Staples
to Gilt. It took them awhile to get some traction, but they are doing exceptionally well.

4. Manufacturing:  3D printing for prototyping
There are some great answer on this topic.

Prototyping enable the production cycle to decease dramatically. You can have quicker concept to product iterations . This is still a nascent industry and process but will become more ubiquitous as the technology improves and there are more shops that can facilitate this innovation.Robotics that automate pick/package/labeling  make supply chains to become more efficient.

5. B2B eCommerce & Supplier/Buyer Relations
Discovery, communication, and transactions are still a many to many process with ample workflow redundancies… Back in the dot-com boom, B2B ecommerce was a hot topic and just like B2C eCommerce has yet to realize its full potential given people are still relying on spreadsheets or heavy systems.

Retailers : Let’s say you are a retailer just starting out… So, what are you going to sell? You decide you want to sell shoes, so what do you do and how do you get those shoes? You might know of some larger brands that you like and want to sell, some emerging designers, and perhaps some generic, non-branded items.

  • Ordering from Large brands: First, you search for the large brand online. Easily you’ll come across the ecommerce site, but then you have to find the corporate site and navigate  to the relevant contact. Most likely, it will be a generic number,which you’ll then have to navigate a phone tree to get to those who represent wholesale accounts. You probably won’t reach that person and will get an automated voicemail box telling you that they’re not accepting new account, or that you need to request a form by sending it to , and then once you submit it to their blackbox, they’ll let you know. They won’t let you know, or in 6 months, you might get a note that they’ve rejected you.  Yes, this is a slight exaggeration but actually true for certain brands. As you get smaller, it’s a bit easier to reach someone.
  • Ordering from Small brands: For smaller brands, if they have a web presence–you’d be surprised at the number of brands just in the last few years getting websites–you’ll be able to find the relevant contact. Again, you’ll have to fill out a ‘new account’ form, all of which have the same information, but you have to re-fill it out for each account. They again decide based on other brands you carry, geography, and credit check (often can be addressed with more aggressive payments terms). Depending upon the size and type of brand, they’ll be highly concerned around to whom they sell (ie what other brands the retailer sells). .                                                                                                                                                                                                                                                  Even if you already have your relationships established, you still need to manage your planning and seasonal buys , these relationships, orders, re-orders, shipping dates, etc… Right now the communication and ordering is most often is handled still with lots of paper, pdfs, and excel. Larger retailers still use Electronic Data Interchange,  which is an antiquated painful and expensive system to setup and use–nobody ‘likes’ or is excited about EDI. Some brands have wholesale portals for re-orders and a way to download linesheets (wholesale catalogue) , lookbooks (marketing collateral), and order forms. For the retailer this is still painful because you have to do a slightly different process/format and order through a different system or process.


  • Trade shows: Typically to see the latest lines in the most efficient means possible, you’ll go to a trade show. You’ll get to touch and feel the items and  build the relationship with the reps and designers. It’ll cost anywhere from $200-$500 within the US to travel to a trade show, then you have to pay for a hotel for 3 nights ~$150-$500/night plus transportation around town or to/from the airport and then entertainment. .                                                                                                                                                                                                                          If you are from a boutique it can get overwhelming with 5,000+ brands and hundreds of thousands products. Larger retailers have categories that they focus on , so they can manage the process a bit better. However, 80% of your time will be spent on looking at your current relationships’ lines and maybe the other 20% at new items. This is assuming you are not exhausted. Some orders are placed at the show, but most of the orders are placed after the show once you’ve digested all the different items and can plan out your buy a bit better. Yet, you probably made notes all over the line sheets (~catalogues) and don’t necessarily remember everything or they did not have images ( just flat sketches) on the line sheet or the information did not necessarily match. There are ways to organize and track all of the product information and try to visually merchandising but for SMBs most tools are mediocre.

Brands: Let’s say you’ve successful created some fashionable iPad case you want to sell. So you can and probably will setup an online store that will be direct to consumer. This will enable you to capture higher margins but also prove that consumers want to buy what you have to offer. Retailers might not take the risk your first season unless you have B2C sales or data points showing that there’s demand . They also will have reservations in your first 2 seasons whether you can actually fulfill and deliver on time. .
However, direct to consumer is challenging . You already have to focus on the product development and supply chain. So, then trying to acquire customers is tough let alone the inventory risk and individual order fulfillment. Thus, you’ll want to get better distribution , decrease inventory risk, and more efficient fulfillment through wholesale sales.

  • Distribution: You’ll then hire a sales rep or a showroom (multiple reps often representing multiple lines/brands that have a set of samples at their location). These reps will have existing relationships to whom they’ll reach out. It’s tough to find good reps and showrooms, and they can be fairly expensive 7%-17% (~12% avg) commission plus showroom  fees ~$750/mo ($250-$1,000/mo) plus trade show fees $2,500-$10,000 for a booth. .
  • Discovery: Going to trade shows gives you some visibility, but getting attention from buyers prior to and at the show is tough given their focus on new brands being a small percentage of their time at these shows. Also, sifting through all of the different brands/vendors at the show can be overwhelming. Buyers might miss shows or they are too expensive. So, you might have appointments at the shows and perhaps get some new leads..                                                                                                                                                                                                                                                                   .                                                                                                                     Regardless, your effort expended on larger accounts is comparable, especially with limited resources. Thus, the ROI on larger accounts is typically an order of magnitude larger, assuming you actually can get a buy and have production capabilities to fulfill the order. Smaller accounts are great to prove demand, work out operational kinks, and ramp production capabilities. Additionally, financial terms are better because they can and will bend to your terms versus you to theirs , as is the case with larger retailers who dictate terms. So, depending upon your financial an cash flow restraints and production capabilities, small accounts might be more beneficial. That said, efficiently getting access to buyers is time intensive, expensive, and inefficient. .
  • Communication: Once you get accounts, you’ll have to manage them , communicate delivery windows/order status, provide ongoing available to sell information for re-orders, and market to them on new lines. Many still use simplistic tools (excel, pdfs, paper,etc…) for managing this while others are implementing CRMs and other back end systems (in addition to their ERP) , and some have wholesale portals for buyers to login and view the lines and possibly place orders, but these are typically rudimentary systems for smaller brands or large enterprise systems that were built 5-10 years ago and are a pain to manage (note: I have a friend that has a Harvard degree working at Juicy Couture , and her job is matching POs/Invoices with 3 different systems. It’s a nightmare!).
  • History/Market Timing: Above I laid out one example and more biased on the sales side rather than relationships with manufacturers and indirect inputs, but there are various structures and levels of vertical integration in the supply chain that face similar challenges of discovery(sourcing), communication/collaboration, and transaction . Over the last 10 years, there have been some improvements that can aid ecommerce companies. Back in the dot-com boom, Ariba software and Alibaba arose trying to tackle B2B ecommerce issue. Ariba focuses on e-procurement (ie maintenance, repair, and operational items for businesses–think business supplies). Alibaba built a B2B directory for sourcing goods from Chinese manufacturers and then built Alipay/Aliexpress to purchase goods directly from these suppliers. This was a trend back in those days with 1,500+ B2B marketplaces. However, at the time they were highly focused on indirect inputs and commoditized goods. At that time, there were issues around market timing/adoption. For goods that are slightly more sophisticated , there were more challenges in adoption given the nascency of the opportunity .

[Source: ]

In certain verticals, there are solutions to reduce costs in various aspects of the supply chain. However, there is still plenty of opportunity for innovation in markets with slightly more sophisticated products and for smaller players who historically did not have the resources to access these tools.

That said, supplier portals and marketplaces  have substantially reduced the cost for supplier sourcing, planning, PO/Invoice management, advance ship notice/bar code label generation, shipment communication, demand visibility etc…

Overall, below is a  diagram of the value chain from an old yet still relevant Booz Allen & Hamilton report.

Example goals or value gains in most B2B ecommerce include:

  • Improve transparency in where there’s  information asymmetry
  • Aggregate fragmented value chain
  • Organize multi-step value chain
  • Decreased sales & marketing cost
  • Consolidate volume
  • Reduce search costs
  • Streamline process (approval, fewer ordering errors, transaction process, & possibly AP/AR)
  • Faster cycle times (Reduced time for collaboration , management, communication)
  • Improve production/delivery transparency and communication
  • Better product testing


Shameless plug… because I saw how ridiculous and inefficient this process is, my co-founder and I created Sorced (company) ( )–to a degree non-China version of Alibaba (company). We are an online showroom (or B2B marketplace) enabling brands, sales reps/showrooms, and retailers to better discover, communicate, and transact with one another.

New channels:
Technology is evolving faster than adoption in many instances. Many of the possible innovations will have to come from having access to the siloed data in businesses, which have a MUCH slower adoption curve than consumers. Therefore, the immediate opportunities will be in the B2C space. Longer term as more data becomes accessible , lots of innovation can occur (One  previously mentioned  example is local product search; think Milo, which worked hard to get into large retailers’ systems).

Brands and retailers have their website, possibly B&M store, mobile commerce, Facebook commerce, eBay, Amazon, and other channels and avenues to sell or get traffic. Multi-channel strategy is becoming complex because even though you need consistency across channels,  each channel address different behaviors for the consumer. Thus, sorting through those objectives is key.

1. Mobile
See Mobile Commerce: What is the size of the m-commerce market in the US? , but just  eBay alone, expects to hit around $5bn in mobile commerce by the end of 2011 ( .

Obviously, smart phones are enabling a new kind of engagement with location. Getting access to information on the go as well as employing that data with the current circumstance is quite meaningful. Getting consumers to engage to improve their experience will be important. However, the impetus to use your phone to interact with a product must provide value such as ‘price comparison’, discounts, data capture/reminders, etc… Yet, consumers still need to ease into this behavior or make the app as seamless with the current experience as possible. The phone is a powerful thing that can offer significant improvements in our lives, but again, getting buy-in from businesses is always tough as well as creating a great UX.

Retailers still need to buy into this, which is an easier sell than other technological innovations since it has real-time and obvious gains to get ‘foot traffic’. Yet, there are a lot of moving pieces for this to have high impact that will just take some time.

To make an in-store experience meaningful, you need to incorporate the inventory and data into the app. I delineate a few later on that focus on product sharing (via photos+location+bar code, etc…) more than pure m-commerce. However, we still have some time before we get to foursquare level of success for mobile commerce.

That said, there is still a lot of opportunity  to leverage data that exists on the web and bridge the gap between that and your local experience. Deals associated with product scans or gamification around getting you to scan items such as shopkick and the now dead Stickybits ( reincarnated as

That said… location sans the retailer can still create commerce opportunities. Other opportunities can include:

  • Price or even product comparison which can leverage internet data, and we’ve seem tons of apps with barcode readers (ex. RedLaser ).
  • Pre-order for pickup, require the cooperation of retailers until they have this capability on the web—this could just be a hack.  Aisle50, a Y Combinator company, actually does an awesome job of the pre-order concept, but they are not using (or at least I don’t think are) using mobile yet—they should!

There’s been hype around ‘F-commerce’ for awhile but nothing has taken off yet , or at least in the form we thought. F-commerce will continue to be an obvious driver as a marketing and promotional channel, but something needs to change for it to catapult a new marketplace.  This use of Facbeook is very obvious! Engagement with customers, getting access to them and the data around their behaviors, and creating a conversation has historically been a challenge that Facebook has now removed.

Again, Amazon is about finding any product at the best price and purchasing efficiently (experience is less of a priority or reason for shopping despite the new redesigns that might shift this a bit). Whereas Facebook is about social discovery based on influence or engagement (news, promotions, contests, content, etc…)

Facebook on the other hand is also about discovery but more passively and accidentally. You might ‘like’ a page and see things in your feed or see a friend promote some product or brand. However, once you engage , you are probably going to travel to its website verus purchase within Facebook (I don’t have the metrics to support this—it’s anecdotal—so please correct me if I’m wrong). Also, what your friends like is not necessarily correlated to your tastes, so there are limitations that need to be adressed with using social sharing as a mechanism for taste identification. However, this is a great channel for brands to tap into because they are FINALLY getting access to data that they rarely if ever received from their retailers.

Facebook will serve as a platform for social shopping since it’s the center of our social lives these days, but whatever tools they offer will have to be accepted and leveraged by brands and well received by consumers. This has recently begun with the X.commerce initiative that was announced a few weeks ago whether the Open Graph will be integrated into Magento, which has 100,000+ retailers using their software. Yet, Facebook failed or at least killed Deals back in August []. Rather, Facebook needs to focus on engagement around brands , products, and the shopping experience. Deals had a number of things wrong with it , but Facebook’s new initiatives with X.commerce could drive the new social layer to become ubiquitous in ecommerce.

I’ve been following Payvment  for awhile now, and they’ve recently released some interesting new products These guys have enabled brands to easily create a store and make it easy for the consumer to shop within their virtual mall.  Beyond just adding products to a store, brands and users are getting creative with how they use Facebook. Brands are leveraging facebook well , for example,  Adidas’ ‘Pop-up’ shop ( The immediate audience and high level of engagement enables these smaller and temporal campaigns to happen more effectively . This would get poor attention if they did it on their own website, because most brands don’t get a lot of traffic relative to retailers, and if they worked with a retailer

1) they do not get the full economic and customer data benefit
2) they can drive more transactions .

Facebook seems to be about using social cues and engagement to drive additional transactions as a marketing channel.

Status Updates for Sales Work Best – it’s news about sales events, not coupons that are the primary driver of fan engagement on Facebook. This is especially true for luxury retailers  People buy then “Like”, not “Like” then buy – most likes come from people who have already bought the product, i.e. liking is a post-purchase activity. BIG implications for marketing – should your Facebook strategy be about customer retention and loyalty and not customer acquisition? Likes drive Sales (22 million of them) – Facebook has driven at least 22 million sales transactions in the US (22 million consumers have been driven to make a purchase because of a recommendation on Facebook). Overall  35% of consumers on Facebook are more likely to buy a product if it has more Facebook likes

I had to add this on due to recent developments . Facebook has opened their Open Graph to integrate with Magento and GSI Commerce products. Facebook is expanding ‘liking’ into ‘buy’, ‘own’, ‘want’, ‘recommend’, or ‘review’ , which will segment your relationships with products/companies and augment the level of sharing. Paypal will now add easier ways for developers and merchants to use it for identity management, since this has become of paramount importance especially across channels and stores.

With the acquisitions of Milo and Magento, eBay is making an attempt to build out the 850K developer community and use X.commerce as the open commerce fabric to connect shopping regardless of the channel or means. Merchants and developers can engage in the ecosystem to better create the tools that catapult shopping into it’s next evolution.

This has the potential to really change the game since historically a lot of the tools used and build are difficult to integrate or build on top of. With commerce and the complexities of it, especially now that we are at the inflection point of multi-channel, this will enable easier development, scalability, and integration. This includes tools from business process to marketing to logistics to transactions etc… (ie transactions, payments, fulfillment, marketing, loyalty programs, demand generation, merchandising, vendor/partner management, analytics, customer service, product sourcing, etc…).

If eBay had launched this initiative prior to its acquisition of Magento, I would have been highly skeptical given the company does not have a developer-centric DNA. However, Magento has cultivate a strong developer community thanks to Roy Rubin and his team.

Part 3. New Models
Below is a set of models that are wetting VC’s appetites. I do a quick outline of a few. Because of the aforementioned changes and drivers in the market, the below models can be executed with enticing economic and/or behavioral models. It’s no longer through some shopping cart software and selling ‘x’ items. You now can sell playing to new or different behaviors . Again, it’s no longer about the ‘if’ you can sell, but the ‘how’ you sell.

[Note: I assume for all of the below models that CAC vs. LTV is an issue, so rather than be redundant I don’t mention it. If there is some miraculous mechanism within the model that should drastically mitigate the ‘k factor’ and thus CAC, I’ll mention it. Otherwise, just assume that in every model getting and retaining customers is a challenge.]

Let’s think about why people buy stuff ?

  • Urgency
  • Exclusivity/uniqueness/quality
  • Influence/Social Pressure
  • Discount/pricing
  • Convenience/discovery
  • Service/experience/engagement
  • Relevancy (ie personalized/customized)

The models address the above behaviors,  and  a few models , many of which have variations, have redundancy in how they are categorized.

Problem: This model addresses convenience, engagement, personalization, and often discovery.
Ex: ShoeDazzle,, Stitchfix, Trunkclub, Birchbox, etc…

Overview: See my quick outline of this model here: E-Commerce: What are the most interesting eCommerce subscription businesses going on right now?

Whether its product sampling (ie Birchbox), pre-ordering (ie Fashionstake), or
convenience/discrovery (ie, Stitchfix, & Trunkclub), subscription
models have interesting angles to play. Most employ some level of
personalization through a questionnaire, and then

Trunkclub just raise $11M , which is a testament to perhaps their 3.5K customers paying a lot for the service and thus implying good growth metrics …(assuming the VCs are right..hmmm….)? []

A sub-note to this is ‘ShoeDazzle’ ,which has combined the personalization, convenience, and value proposition utilizing subscriptions and Kim Kardashian 😉 …. They have pioneered the way for a new model that works extremely well.

Love subscriptions! Predictable revenue makes scaling a lot easier(—of course
annualizing and collecting cash up fronts makes it even better). The ability to personalizing and capturing consumer tastes is very important since you are giving them a snippet of the inventory and hoping it will convert! You can also more easily manage your inventory with lower risk partly due to understanding the customer tastes as well as sizes but also because if one person doesn’t like something, you can send it to someone else.

Plus, we all like to get packages in the mail 🙂 . Net-net this makes a lot of sense and there are quite a few of these popping up.


  • This requires the right segment of customers and merchandising is KEY. If you get the products wrong, you margins drop from the shipping costs .
  • If you are relying on your packages or sample to drive re-engagement online , your economic model needs to account for this , and you need to figure out interesting ways to re-engage the consumer who is examining  the items offline that you don’t know.
  • If you don’t know your customer well, you will fail since they have a smaller selection from which to choose and you are spending money on shipping.

Curation & Personalization:
Problem: Addresses discovery and influence.
Ex: Everlane, Ahalife ,  One Kings Lane (leverages curators to a degree), all of which are angel or VC backed.

While retailers inherently ‘curate’ items based on their merchandising, curators serve a public role of not only identifying the products that they like and add to the store but also what’s relevant to you. Oprah Winfrey was one of the first to take this to a new level with ‘My Favorite Things’.  You also see celebrities endorsing products all the time.

However, these sites pool interesting people together to better select items. Thus, these curators are those with influence either because they are celebs, influential/active on social media channels,  you can identify with them from a style/taste perspective, or it’s relational (ie friend, etc..)

Many sites including subscription models and curated sites need to understand you to better supply you with an item. Thus, many are taking inventory (pun intended) of you! They ask questions about your tastes based on photos or get your measurements to resolve the infamous fit problem (Bombfell is trying to resolve the fit issue as well as Zoora—both new startups).

These concepts will be overlaid on many models and can stand on their own. Again this helps you find better products that are suited for you!


  • Because they are incorporating ‘influencers’ into the model, the have better opportunity to gain traction.
  • Utilizing personal information to suggest and match products to a person has limited downside! Again, discovery/personalization is a huge opportunity.


  • Merchandising awesome stuff will always be a challenge but achievable.
  • Tracking , tweaking, and leveraging the influence will also be important but is doable.
  • As a pure curated ecommerce site (not subscription or flash sale), there is no sense of urgency, so they might need to incorporate some other element to incite people to buy to improve conversions.
  • Identifying the most relevant personalization factors and getting that right is also a challenge. For instance, people don’t always know what they want or if it’s a size issue, there might be some human error.

Consumer Merchandised Shops:
Problem: Companies using crowd sourced merchandising are trying to decrease inventory risk and increase selection opportunity by getting feedback on goods prior to them being stocked . They are also creating engagement, which is a hidden problem.

Ex: Moda Operandi, ModCloth, LOOKK (formerly Garmz),  Moxsie, Fabricly, FashionStake, etc…

These companies bring the designer to the consumer without the merchandising or editing of the retailer. Thus, consumers can decide what to buy. This increases consumer engagement and connection with a store because they feel like they are 1) getting what they want 2) making an impact . MO addresses this by selecting couture items while Fashionstake (which has iterated/pivoted a few times) to incentivize ‘pre-orders’ .

  • Voting:This has become a popular feature across ecommerce stores to better merchandise or get feedback on their inventory. It also creates engagement with the consumer, which enables a better experience.
  • Contest: Older company, Threadless, but I’ve seen more of these companies popping up beyond just t-shirts. People can submit designs based on parameters the ‘contest’ maker sets and then within a certain time frame, items are voted on and then selected for production or other reward.


  • Decreased inventory risk: This decreases your risk of what you think the consumer will like because you are actually getting their input. You have real data to work with and can make better decisions based on this. Thus, this should lead to higher inventory turns.
  • Engagement: Because people are offering their feedback, they have a sense of purpose or ownership over the process, especially if it gets chosen. Thus, even though it’s a small stake in the game, they are still a part of the process and have made a contribution.
  • Social & Influence: Depending upon the mechanics of the voting or contest,  people want their ‘candidate’ to win, and thus will most likely try to get others to vote too. So, people are more likely to not only just share it but try to influence people to vote too.
  • Anticipation: You get a sneak peek of a product, so now you want it! This creates some excitement. If you create some other barriers to access or incentives like limited production, first in line get X, or discount to pre-order (ie apple effect ), this can have a powerful impact.


  • Design by committee: Too many cooks in the kitchen can make the item a hot mess. Also, this will result in more ‘average’ vs. fashionable items. Thus, the way you ‘score’ results and who you pay attention to whether it’s the majority or based on a buyer profile/value (ie think someone who votes but never buys) will be the challenge. This of course can be actually measured and adjusted over time.
  • Fashion cycle: Trends typically follow the S curve just like startups. So, by showcasing ‘fashionable’/contemporary items too early can put you ahead of when the market is ready to adopt. Thus, the retailers are ‘anticipating’ what will be trendy before consumers are ready for it. So, your tastes may change in 6-9months even depending upon the celebs who are the typical tastemakers or some other shift. For this reason, showcasing a product too early to the wrong audience could have false data. Yet, with this model, these companies will probably be within trend vs. the innovators and have shorter production cycles, that at least align the taste to production gap but still worth mentioning.
  • Flipside of Social Fashion- Influence can be false , for instance, if you get your friend to vote just so you can buy something, but your friend might not actually want it. Thus, even though this helps identify ‘what’ merchandise to add to the assortment, the companies still have to decide the ‘amount’ to order. Additionally, the nuanced wrinkle with fashion is that people want a ‘unique’ item . I don’t buy stuff that I know my friends have, and so sometimes people might not want others to get in on the action (personally, I think this is somewhat marginal–perhaps an issue with the 13 yr old girls but still a point to note on shopping psychology).
  • Pre-order incentives: If you actually want to consumers to ‘pre-order’ like Fahsionstake that completely reduces your inventory risk (depending upon your return policy)
  • Fulfilment: However the challenge will be on the cost/fulfillment side due to cut to order vs. pre-order. Fulfillment and production need to happen at a faster pace also increasing the cost.

Access to New Inventory–International Commerce:
Problem: Addresses discovery , uniqueness, & international trade.
Global- Ex: Cecilia Pagkalinawan ‘s StyleTrek, ;
Some ecommerce stores mix in international brands, but few if anyone has been able to dominate or be a large player as a retailers  dedicated to buying international brands and reselling them online to a new market (at least that I’ve seen in the US).


  • Unique inventory is always something exciting! Merchandise is the differentiator of a store. Ubiquity results in commodity, so rather than be a store for convenience, having unique inventory creates a competitive advantage.
  • This is a broad market and with a large distribution opportunity.
  • This needs to happen. It is kind of crazy that the world is still very isolated in terms of getting access to international goods.


  • Scouting out products will be tough and hard to scale if you don’t have teams throughout the world. Though, there are solutions to solve this through the internet or just having a physical presence. The world is much smaller these days, especially with facebook and twitter.
  • Shipping/fulfillment has always been a challenge since you are not going to spend the money to import or ship 1 item to the US from Africa—just too expensive. They will have to hold inventory in this model , which always has risk but if they overlay it with voting or consumer engagement, they can mitigate that risk.
  • Tastes don’t always translate well across cultures. I was chatting with a Brazilian guy the other day, and they only buy locally due to the tastes within the country . While this is an anecdote, this holds true to a degree or at least the adoption curves are staggered.
  • Tariffs can be exorbitant ! I was chatting with a few of my customers who sell internationally but can’t tap into certain markets because the retail value after incorporating in the tariff cost will result in the product just not selling. Unless you can setup a factory within a country or depending upon the specific country’s laws, tariffs are a real issue that prevent export into certain countries.

Access to New Inventory- Local
Problem: This model makes supply or fulfillment convenient or satiates desire to support one’s community.
Ex: Aisle50, Ourtisan, Kreeya, LocalDirt

I am really excited about Aisle 50, a Y Combinator company that integrates online purchase with in store pick up. You can buy ahead for deals, and then pick up the items in-store, and they integrate with grocery store loyalty cards to track the transaction. This works well for grocery stores who are less likely to be out-of-stock of an item.

Ourtisan takes a marketplace approach while Kreeya is a store with local designers but can sell to whomever, and local dirt connects local produce with consumers.

  • Defensibility- If you can execute, it’ll be hard for challengers to compete.
  • Market timing- The timing seems right or at least close to it. So, whoever figures out the best model could win !
  • Local massive, untapped– HUGE opportunity that hasn’t been dominated. Craislist, Yelp, and then GroupOn have penetrate the localsphere but have different models allowing plenty of opportunity to innovate and disrupt the local realms.
  • Groupon & Yelp- I’m highlighting the issues, but , hey, Yelp & GroupOn did it! Thus, so can others…


  • Local– The blessing and curse of the Internets is that it is globally. If you are looking for a local audience, it actually adds a lot of noise. There are ways around it much more now via geo-location, geo-searching, mobile, etc… This is really an issue if the only way to fulfill or the value of your product is to supply it locally. However, if the ‘local’ thing is just giving the startup a radius to start in, cultivate a community through focus, use it as marketing, etc… then it’s less of an issue.
  • Supplier tech-saviness– Adwords won’t work folks. Suppliers are not searching for ‘local market place to sell’. In fact, they still might not know what Google adwords is or have claimed their store or place on Google maps. For local dirt, or finding these local farms, these people are not online trying to figure out savvy ways of selling. They’ll go to farmer’s markets or work with local distributors . They might not have a website and use Yelp as their ‘web presence’. So, overcoming the reach and education piece is a tough challenge. Though, you might be able to find them on Facebook depending upon their privacy settings 😉 … In retrospect, we can figure out if the market right now is timed well, but we’ll see…
  • Supplier Acquisition Cost- Because of the lack of online presence, you have to call them or even knock on doors, thus, making it expensive to acquire suppliers.
  • Scaling- With supplier costs and the nature of ‘local’ , scaling this model is challenging and potentially very costly. Additionally, in certain markets, various traits and strategies might not be transferable.  It works in one city, so how do you effectively replicate this in every other city vs. town etc… also holding your own against  inevitable competitors.

Access to New Inventory — Emerging Designers/Small Brands:
Unique Emerging designers/smaller brands both locally  globally OR P2P are being given tools to leverage the internet to sell their goods on a larger scale and more efficiently.
Ex: Ourtisan, LOOKK, Fabricly, Not Just A Label, Of A Kind, Asos, Crave
The incumbent examples are, of course, eBay & Etsy, but new market places are emerging such as Crave (company) for enthusiasts and other niches.


  • Proven achievability: Etsy did it, so can someone else for one of the many other niches!  This helps discovery because the experience is bounded and thus easier to find what you’re seeking
  • Unique- People want interesting stuff. Thus, bounding the right niche to find interesting items is a win-win.
  • Seller Demand- Even though it’s relatively cheap to setup an online store, you still need traffic. Most  of these indie or small folk, don’t have good sites or get any traffic; thus, bringing them together makes sense.


  • Chicken-Egg-Marketplaces are always tough with the chicken-egg problem.
  • Niche-Finding a niche that is not too niche is important.
  • Fragmentation-Finding enough fragmentation- Identifying the right fragmentation and structural elements within the market are important and could make/break the product/market fit and opportunity.
  • Monetization opp- Figuring out a business model that does not hinder adoption but still can be financially successful is always an issue.

Collaborative Consumption :
Problem: Reusing and deriving value from goods already consumed/owned, enables individuals get value by getting rid of something or from unused, depreciating assets.
Ex: Airbnb, Getable , Getaround, thredUP, Rent the Runway, Bag Borrow Steal, Getable, Chegg

These companies either hold or create a marketplace for renting items.

Collaborative Consumption describes the rapid explosion in swapping, sharing, bartering, trading and renting being reinvented through the latest technologies and peer-to-peer marketplaces

For high cost items, especially those that are ‘fashionable’ or ephemeral in
value, renting items makes more sense. Rent the Runway is killing it right now,
thus, I expect more angles on rental sites to arise. Rentcycle also raised $1.4M from Collaborative Fund, Andreessen-Horowitz, SV Angel , and others. Other obvious companies that have received accolades over the past few years include Airbnb and Chegg.

  • Value-Pay 1/5 of the price for something you’ll wear once and then return it. Umm…hell ya—I kind of hack around current models to get to this… +1 !!!
  • Proven model- This model works offline and just has not been translated as effectively only (with the exception of eBay). Netflix and Chegg have done it but most consumer goods classes can be sold in this manner and have yet to .
  • Better eBay- eBay is too big , so creating verticals and niche focus is the way to go.
  • Niche– Better access for niche products is possible with the internet, and now people are actively searching for interesting items that they might want to rent for a short period of time. Unless you are a collector , niche often has inherent ephemeral characteristics–think occasions or events .


  • Capital intensive (for rental)- This absolutely fills a large gap . However, this requires a lot of capital and inventory with depreciating value—think Chegg vs. something more salivating like Inkling! That said, there are rental companies for many types of businesses.
  • Financial Engineering- For rent models, because it is capital intensive, it quickly becomes financial engineering. You need to figure out the breakeven on a product , lifetime value and maintenance of a product and how this influences the value. You can get royally screwed if you do not figure out asset value and depreciation rate .
  • Chicken-Egg:On the P2P side, the chicken-egg problem is always an issue, so segmentation is important. You need to have relevant buyer/seller matches.
  • Using the System- Are people trying to cut the marketplace out or is there additional value in the market (ie trust issues addressed, etc..)? The transaction cost must address some issue where people will not want to go outside of the market.

Multi-level marketing:
Ex:  Stella & Dot ,  Chloe & Isabel (old school: Amway, Mary Kay, Avon,

This model is due for a resurrection and S&D (Stella & Dot), which is backed by Sequoia Capital (VC Firm) has been trailblazing the path! They are killing it—like absurdly so. They’ve received uncanny success as well as have massive market potential and lack of relative competition in a technological wilderness to be harnessed. Chloe and Isabel is backed by First Round Capital, Mike Maples and Floodgate, SV Angel, Founder Collective, Ashton Kutcher among other impressive angels. The barrier to entry is relatively low BUT scalability as with Gilt , RueLaLa, and private sale sites is tough. With PS, access to inventory is tough, with MLM this is the same issue whether it’s for wholesale or if you own the value chain, which most MLM leverage due to the economic model, there are still many challenges. The new instance is about high quality product that is affordable and to be purchased through a ‘better social experience’.


MLM is tough for goods beyond small or low-weight products for a variety of reasons. First, to produce and fulfill within the time frame that MLM require, you either must have the inventory on hand or have the ability to manufacturer quickly. The latter meaning you will not be able to produce in China and thus in the US (assuming you sell here too) , and it will be much more expensive (ie lower margins or higher prices). Next, because you are showcasing ‘samples’ which are also more expensive to produce and distribute , it can get costly to scale effectively. Building out a salesforce like you do in a PS model is expensive, while for different reasons. That said, because of social graph and the ability to promote much easier, there is the possibility to employ this model more effectively.

Historically, to build this out, it can be very expensive since you are building a salesforce. This has not been the core competency of CPG or any kind of company that actually manufacturers a good—think about the labor required to actually produce that item. Thus, to be the  force behind selling and diluting the focus on this can easily compromise some aspect of the brand . Hence (not for the most previous mention) but for plenty of other reasons this model has not been as broadly employed.


  • Initial traction & proven market: Stella & Dot has proven this out, and this has also been proven in the offline world with billion dollar companies (ie Amway 9.2Bn in revenue, Avon -9.31Bn market cap, etc…).
  • Economy: the economic situation is driving more people (in this case a lot of women) to become entrepreneurial or earn money on the side. I love these companies because they are enabling more people to be small time entrepreneurs.
  • Access to People: people can go beyond their immediate circles and tap into new consumer bases to sell .
  • Promotional Channels: there are more scalable, low cost promotional channels such as twitter, facebook, tumblr, instagram, blogging etc… to promote and sell goods.
  • K Factor:Referrals/social/a viral element is inherent in the model, thus, there is a good opportunity to scale.

Quick Example Models

  • Online+Offline: While traditionally this model requires offline selling, leveraging online  tools can bridge the gap between offline and the online experience . OR, there is even an opportunity to do this purely online.
  • Online Tupperware Party: There is also the opportunity to have ‘event-based’ selling or something comparable to pop-up shops. This leverages a sense of urgency to buy and almost creates mini-flash sale sites. This is kind of like an ‘online Tupperware’ party!

Market Size



Problem: Uniqueness, fit, personal taste
Ex: J. HIllburn , Zoora , Fitted Fashion, Solosso , Proper Cloth ( Founder – Seph Skerritt), Gemvara , Blank Label, Taylor Stitch
Because the web adds a level of ubiquity to the presence of a product and brand, luxury brands need to find new ways to maintain their sense of rarity through customization. This is a bit more complex model. Historically you had Threadless or the white label Zazzle or Cafépress dominate this space.

New entrants such as high end brands like Prada ( is exploring this .

Luxury goods want to maintain exclusivity , scarcity, and uniqueness .


  • Uniqueness- Thus, customizing items makes sense. You can create unique or ‘tailor made’ items for your customer. ‘Customized’ always has the value connotation because it is one of a kind.
  • Brand enhancement– This adds a new way to engage with a brand. You are creating a direct relationship with the brand because you have an impact on the product.
  • Traffic- Creating a new experience for a consumer will drive traffic to an otherwise low traffic site. If you can only get this offering on a company’s site, consumer have a reason to go.
  • Experience and Financials- Build-a-Bear is the best example of this. They have beem able to create an interesting experience where they actually get their customers to do the work and labor involved in creating the product; kind of genius! They make a commoditized teddy bear more expensive with lower costs to them because they cut out the labor and allow you to have a personal teddy.


  • What will it look like- Sometimes when I go to Cold Stone creamery to make my ice cream, something that in theory would taste good turns out pretty disgusting. Thus, I wish I just chose from a menu because someone else took the risk and figured out the right recipe. Even though you can preview the item before it’s created , there’s always that risk.
  • Effort– I probably will not go and always buy customized X partially because I’m lazy and want to buy what is already packaged.
  • Paradox of Choice- Companies need to make sure the number of choices is just right , otherwise, consumers get overwhelmed.
  • Expensive: This is an expensive model to execute. Thus, to what degree is it custom and how to the costs play into it. There’s a trade off or the consumer to pay extra for the customization, but if it’s just selecting a certain color in a certain place, this value might not be there. However, if the product is completely unique, I might be more willing to pay–but that is more challenging for a company to produce.

Direct to Consumer
Problem: Value, Unique, Fit/Personalization (a few), Control experience (ie vertical integration)
Ex: Betabrand, Everlane, Bonobos (company), Warby Parker, Nau, Eliza Parker

First producing a product is kind of tough , and then you have to think about retail and marketing to the consumer, which is also kind of rough. Few companies as a percent of all companies have been able to master the vertical integration. We see great brands like Levi’s, Gap, J. Crew, A&F, etc… Often companies will start off wholesale and then build out a consumer retail component. It used to be much more capital efficient that way for the following reasons:

Now direct to consumer has much more opportunities especially for newer brands.

  • CAC: As I mentioned earlier, getting access to consumers is somewhat easier because there are more, better and cost effective channels .
  • Better Retail Tools: It’s cheaper to create an online store that’s a bit slicker.
  • Production Costs: Production resource centers such as or urban manufacturing centers as well as 3d printing somewhat reduce the manufacturing cost and increase prototyping/development cycles (note that this is to a marginal degree now but will have higher impact when hopefully costs drop).
  • Decreased inventory risk: You can get consumer feedback prior to production.
  • Better margins: If you can do it well, there are better margins going direct to consumer. For instance, rather than producing something for $10, selling it wholesale for $20, and then retailer marks it up to $40, you can now capture $30 vs. $10 on a unit (ie 75% vs. 50% GM).

Challenges :
Most challenges are mitigated but generally are still challenges these guys will have  to face, but the examples mentioned have already overcome the below

  • Inventory risk: Holding your stuff has risks. So, either you need to make a small batch, which will be expensive due to the lack of economies of scale or you will have to take the inventory risk. If you take the inventory risk, you’ll have additional risk if it is seasonal or contemporary

             >  Larger orders : If you can produce in large batches, you have
better economies of scale.
             >  Cut to order: In this model , where you produce based on the
one-off or small orders, the margins are not great. Thus, larger
batches are more capital efficient.
             >  Order prior to production: In non- direct to consumer companies,
you can get orders from retailers, prior to  production, which
decreases your inventory risk (putting aside  the recent volatile
nature of retailers going out of business, leaving  producers on the
hook and the limited factor financing happening  that can mitigate
this risk).

  • Focus/Resources: Most designers or small brands are just that– small group of people. So, it’s already resource intensive given the logistics involved in just producing a physical good from designing to sample production to the larger manufacturing to fulfillment. Thus, it would require a lot more resources to setup a retail store (B&M or online) and then actuallyfinding and selling to customers! This is not to mention the cash flowcycle of manufacturing that typically looks like a sin wave frompre-production through fulfillment. Hence, it’s easier to focus yourresources on what you’re good at and one aspect of the process.
  • Experience: If you are selling direct to consumer, you need a compelling reason for the consumer to come to your store. You might have an amazing product that just sells itself, but to get traffic you need a unique value proposition around the brand. The fact that it is exclusive through your store is great, but consumers want some level of variability. Thus, if your store is stale and not changing much, a consumer won’t have a reason to come back.

Problem: This improves the SEO of a site for consumers to discover it; it enhances the overall experience that a consumer has and engages the customer in the experience.
Ex:, Daily grommet,  Lockerz
Tools: SellStage (Y Combinator company)

CONTENT to support the sales is vital right now. It’s a no-brainer. People consume content about and around products and brands before or as they purchase an item.  Video, for example, is an underutilized medium to enhance shopping. Infomercials are still successful and yet people haven’t heavily employed this online. This is not to say create a seemingly ‘spammy’ demo and limited  time offer but use media to get people to hang out in your store longer .  Tell the story of the brand or product and get people to connect! Bloggers have even started off with medi and shifted to monetizing their content, so create a ‘personality’ or ‘brand’ for your store or angle of ecommerce so that you’re more than just a store. V-hauling has also become a trend where teenage girls review their latest purchases on YouTube.

Beyond video, if you look at the different social media channels such as Tumbrl, Svpply, Instagram, Pinterst, Polyvore,, Chictopia, etc… , consumers are creating, grouping,  tracking,  sharing , and engaging with content about products and brands that they love even if the purpose of these channels is not intended for that purpose. Thus, brands/retailers need to figure out how they capitalize on the content created or figure out how to distribute, interact with, or package the information produced.

Stats explain it all…

Zappos reports a 6% to 30% increase in sales for products with video. (ReelSEO, December 2009)

Visitors who view product videos are 85% more likely to buy than visitors who do not. (Internet Retailer, April 2010)

Retail site visitors who view video stay two minutes longer on average and are 64% more likely to purchase than other site visitors. (Comscore, August 2010)

Retail sites with video increase conversion by 30% and boost average ticket by 13%. (L2 Specialty Retail Report, September 2010)

So, you get the point… Even though this is only video, other content will apply to this.

  • SEO:Sugar Inc. has been successful building great content around ecommerce. This has helped them get in front of buyers without having to compete (even though they still do) on adwords and advertising.
  • Experience & Engagement: People want something different and before you buy, you might either want to read product reviews, see social recommendations, see influencer recommendations, watch a product demo, get insight on the story, etc… People are dying to connect with a product and a brand and will engage with content to do so. When you walk into a store, you expect or desire a certain experience, consumers are now yearning for some permutation of this online.

I don’t have too many interesting challenges on this beyond typical ecommerce challenges. However, the ‘videos’ actually need to be quality.

  • SEO: While they’ll have a leg up on a lot of companies, Zappos still has 50K product videos that you need to compete with.
  • Qualtiy: just like any content, it actually has to be good! Content for content sake is meaningless and potentially alienating. Consumers need to derive value.
  • More than just video: This is one of those trends, that once everyone ‘gets it’ , everyone will have it. So, constant innovation versus relying on this is important. Again, quality can overcome this.

Shopping as a Game
Problem: Shopping online is boring and lonely, measuring your marketing, improving conversion
Ex: Lockerz , Sneakpeeq, To Vie For

The are many different models to make shopping entertaining. With 19M members, Lockerz incites you to do certain activities whether its consume a video clip  or listen to music or buy something. You earn points which can go towards lower prices. Sneakpeeq is quite sneaky… You can shop for in season items  from your favorite brands and get deals by taking a peek at the price. The price gets lower when you or your friends take a look. Once the price is at a point that someone looks, that person can buy and then it’s gone!  You get points and rewards (free shipping and other deals) for other actions on the site.


  • Some proof: Lockerz has 19M members. Beyond that metric and using the large amount of capital they’ve raised as a proxy for some credibility, I’m not sure of their metrics. However, again… 19M members is hard to ignore. Also, people buy lots of stuff within games! Even though this is different, gaming+commerce has some opportunity but just depends on the ‘rules’ of the game.
  • Pricing : After setting some margin buffer, it’s somewhat arbitrary. Price discrimination and optimization is possible online but rarely implemented.
  • K Factor: All of these add social elements to ensure there is some viral component.
  • Not just shopping: When you are out in the world shopping with friends, you are not just shopping, but it’s an outing. These are also trying to mirror aspects of that experience in the virtual context.
  • Data & Engagement: Brands can sneakily add in some marketing games or adver-gaming to get people engaged with their product and brand as well as get data on this.
  • Behavioral Psychology/Conversion: These guys are playing into the consumer’s psychology and creating new ways of impulse shopping. The ultimate question is how do you get people to buy something, they are test new ways to get conversion.
  • Context: Elaborating on the above point, historically, shopping online is highly utilitarian and in a very generic context/structure online. They are creating a new environment and thus new mind set of what and how you want to shop. Think about when you are at a baseball game, you might be pumped and want to buy a foam finger or panda hat, but perhaps if you’re in a shopping mall, you’d never buy something like that. They are changing the context and thus habits and proclivities for certain items.


  • Wild West: It’s just an unknown and your guess is as good as mine until it’sproven. This is a new model and new approach, so we’ll have to wait andsee.
  • Auction failure: On eBay even, more people buy at full price vs. auctions. Since eBay there haven’t been a lot of successful auction sites. The auction concept is one of the closest ‘games’ that’s had any legs or small success online.
  • Pricing: The game structure needs to be modeled out so that these companies actually don’t lose money on the items. I am giving them the benefit of the doubt on this one, but using ‘falling prices’ also means fallingmargins. So, they’ll have to make up for it in volume. Additionally,until they have volume, there is quite a bit of unpredictability I would guess. Once they get some traction though, I would imagine there arecertain behavioral frameworks that can be modeled.
  • UX: This is a UX game just like gaming. Thus, just like games can be hit or misses, they have to test, test, test and optimize….

Personalization & Tastemaking:
These are not ‘ecommerce’ sites but they surround the ecosystem and actually are creating something very unique—buyer profiles.
Ex: Pinterest, Polyvore, Fancy  Buyoshpere

These are capturing your ‘tastes’, ‘interests’, and history (for buyosphere). Polyvore and Pinterest could be also categorized in the consumer merchandized section since they take an approach of leveraging consumer interests to either sell via affiliate (or not at all). Thus, it is slightly out of the scope of this , but there is still a commerce component to it just not with holding
inventory per se. Though, all of this data is very usable for merchandising and
selling the right goods to the right people!

Opportunity :
Few companies have been able to capture consumer tastes—odd and mind-boggling but true !!  I see ways of capitalizing on this, but I am not sure that they will. Tumblr, while highly tangential to ecommerce, has ironically been thrust into the mix within the fashion category. Recently there was an article about the massive upset about them not catering to brands who were utilizing this channel or whose constituents were quite ubiquitous across the platform. Yet, they kind of fell into it and thus did not plan to be a dominate force within fashion. Now, there are some backlashes and it’s unclear if that’s an angle they want to or should play. Thus, there is and has been demand for this type of platform but it has clearly been underserved.


Mos of these with the exception of Polyvore are not monetizing. So, of course, the economic model is always a good question and challenge without alienating their consumer base.

Ex: Storenvy, Crave, Zaarly,  Etsy—there are many more.
However, these are taking all different shapes and forms.  Marketplaces make sense if you create the right buy/sell construct. I can rattle off about 20 different angles from vertical types to transactional models within this context; however, the success here lies in execution.

These are one of the hardest things to build because they require scale and the unpredictably network effort to add true value. Someone will get it right, but I’m not sure who is the next eBay , but someone will!!!


  • Large: If you can do it, these can be massive opportunities.
  • Plenty of angles:There are plenty of inefficiencies in buying/selling goods and finding the right people.


  • Chicken-Egg-Marketplaces are always tough with the chicken-egg problem.
  • Vertical-Finding a vertical that is not too niche is important.
  • Incumbents: Yes, you probably still will be competing with eBay and Amazon.
  • Fragmentation-Finding enough fragmentation- Identifying the right fragmentation and structural elements within the market are important and could make/break the product/market fit and opportunity.
  • Monetization opp- Figuring out a business model that does not hinder adoption but still can be financially successful is always an issue.

Andrew Chen has a great answer that offers a bit of color on structures of marketplaces: Why are the most successful internet marketplaces supplier-oriented and not buyer-oriented?

Hollywood meets eCommerce
This falls under the influence category but wanted to offer a few random unproven ideas. Celebrity endorsements are nothing new. Yet, they possibilities of ecommerce+hollywood are under utilized. Beachmint and ShoeDazzle have successfully been able to leverage celebrities to endorse their brands and concepts. However, it has been based on personal endorsements .

Yet, what if you had a Sex & the City store or an  Ashton Kutcher store? So, sure you can either go to SATC and find info about outfits etc… but to buy specific outfits is tough. Sometimes in magazines you’ll see the ‘actual outfit’ and then the cheaper version that they suggest but it doesn’t really come together. I have plenty of clothing hacks to mimic Carrie inspired outfits. Alternatively, you can use Stipple for celebrity outfits based on images you see of outfits you want to buy. Then celebs don’t have to sell out their personal brands, which becomes much more calculated because they can only have a few options since they don’t want to endorse everything and  whore out their brand. However, they play many characters that consumers fall in love with and want to mimic.   We might buy the trinkets that the movie franchises but you rarely see fashion that’s inspired by a movie or show. Movies and TV networks are typically focused on the entertainment vs. the ecommerce. so, they don’t emphasis or create a good experience to capture the opportunity.  Banana Republic just pulled off the Mad Men collection, which is great.

Yet, I would like to have an online store where you could have movie or show inspired outfits with perhaps the orignal version + the affordable version . When I’m watching something on Hulu it would be great if I could then actually buy some of the stuff that people are wearing. SeenOn, a Delivery Agent company, has built a private sale site for this.

The biggest challenges here are getting access to celebs then navigating the Hollywood politicking and then the large brand politicking.  Additionally if you have someone in a movie or show wearing Fendi, Fendi would get pissed if you showed the Forever21 or any kind of cheaper version of the outfit. There are lot so licensing issues to navigate as well. So, there are a lot of issues and concerns to navigate. That said, lots of money and opportunity are being left  on the table.

Last words…

If anyone is interested in talking ecommerce , let me know. I have lots of B2C and B2B ideas that I can’t pursue given my focus on my company but there are ample problems to solve and many new models that could be achieved.

Thoughts, feedback, rebuttals… ? Go for it…

View Answer on Quora