5 Things to Look for to Make E-commerce Startups Work

/ Thread: There are over 400 startups trying to be the next Warby Parker, but history shows that 90%+ of e-commerce companies will fail. What separates the successes from the failures? Here are 5 things I look for to figure out if an e-commerce startup is a good opportunity –>

/1. Does it have defensible, scalable acquisition channels?
2. Is it operating in a category that is well-suited to brand building, and if so, has it built a brand that people love and trust?
3. Is it selling a unique product that not everyone can offer?
/4. Does the business have network effects?
5. Are there economies of scale that can be captured ahead of later entrants?

/ Unpacking each one of these: 1. Customer acquisition: It’s unsustainable to rely heavily on paid acquisition channels to grow, as the margin ends up being bid away.

/ Instead, does the company have unique, scalable ways to reach new consumers, e.g. a devoted community who spreads the word, or exclusive distribution channels?
/ Dollar Shave Club’s launch video was a major accelerant for customer growth, and cost just $4500 to produce. While viral videos aren’t an uncrossable moat, it was an advantage that helped build up brand awareness cheaply, and enabled DSC to reach scale first.

/2. Brand: Brand as defensibility exists for a lot of companies–but not all product categories are suited to building strong brands, and brand defensibility is also difficult to assess in the time frames that map to venture investing.
/Brand as defensibility works better in categories where there is a big emotional component to the purchase, where a sense of identity or community is intertwined with the brand, e.g. categories like health, cosmetics, or anything aspirational.

/ Whitelabel a Glossier/Chanel/La Mer product, and chances are women won’t covet them nearly as much, even if the contents inside are the same. See my tweetstorm on the shifting power balance between brands & aggregators–and where the opportunities are:

/3. Product: Does the startup have defensibility in terms of creating a proprietary product that others don’t have the ability to create, whether that’s derived from better design, deeper customer understanding, or manufacturing moats?

/ As an example, Hubble Contacts found that the vast majority of the contact lens market is controlled by a few manufacturers. Hubble was able to establish exclusive supplier relationships that blocked other contact lens startups from scaling in the US.

/4. Network effects: There are various flavors of network effects in e-commerce. Marketplaces, obviously, improve with more buyers and sellers.

/ But even a single retailer or brand can have network effects. Stitch Fix’s algorithms for predictions and recommendations improve each time a customer reviews the items their stylist chose for them, leading to greater retention and LTV.

/5. Scale effects: Amazon is the archetypal example of a retailer that thrives on economies of scale. As a startup example, Rent the Runway purchases expensive designer apparel and accessories, amortizing that cost over multiple rentals from different customers.

/With greater scale, RTR can increase utilization, expand its inventory, and lower prices, making it harder for another women’s rentals startup to compete.

/Not every company will be a ‘yes’ to all of the above, but more of these being true can indicate a stronger opportunity.

/There’s also interactions between these: Strength in one regard can compensate for the absence of another. A manufacturing moat in a large category means establishing a beloved brand is less important. A strong distribution advantage can be investible in and of itself.

/Obviously, building a great company and making investment decisions is more nuanced than just 5 factors. It’s apparent that there’s still tons of exciting opportunities left to build great e-commerce companies, and I’d love to chat if you’re working on one!