Why e-commerce startups aren’t raising more funding during this historic boom

After yesterday’s look into the somewhat lackluster pace of investment into e-commerce-focused startups this year, a few VCs sent in notes that added useful context. So this morning let’s discuss why the pace of e-commerce startup fundraising has been so milquetoast in 2020.


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To frame the oddity of e-commerce startups not raising a flood of cash during what are historic boom times, we noted Walmart’s staggering online sales growth in Q2, which TechCrunch’s Sarah Perez broke out into a separate piece. Today, for a soupçon more, Target reported its Q2 earnings. Its results are similar to Walmart’s own, if even more extreme.

The American retailer reported that its “store comparable” sales were up 10.9% in the quarter, which was rather good. But Target also reported that its “digital comparable sales grew 195%,” which is staggering. Target’s revenue mix moved from 7.3% digital in its year-ago quarter to 17.2% in its most recent.

Damn.

If you’ve been around the internet lately, you can’t help but trip over more data detailing this extraordinary moment in e-commerce history — there are years of change happening in just a quarter’s time. For a taste, former Andreessen denizen Benedict Evans has some great data on U.S. and U.K. e-commerce growth, and here’s yet another great chart to chew on. It goes on and on.

So the e-commerce boom is real, and the startup funding funk is as well, per the data we ingested yesterday via CB Insights. What gives? GGV’s Jeff Richards had an idea, and we chatted with Canaan’s Byron Ling as well. We’ve also done a little digging into some of the largest, recent e-commerce rounds to get some flavor on who is raising in the space. Ready?

Why e-commerce VC isn’t going straight up

If you recall, our thesis yesterday was that, perhaps, the kill zone theory often posited concerning Amazon meant that the e-commerce space is less investable than we’d otherwise imagine and that because some things are “sorted” to a degree, there is less green space available in the sector for startups to tackle.

Bits of that might be right.

GGV’s Richards — we had him around for a chat the other week — sent over the following note as a response to our work from yesterday:

Jeff says a few things here worth teasing out. First, that a lot of the e-commerce success stories with which we’re familiar were born when a new platform technology came around, namely mobile. Shake up the world, and startups rush in to fill the cracks with new stuff. It’s a tale as old as technology. (For what it’s worth, we did reach out to GGV via email to get more from Hans Tung, but every email we sent to the firm yesterday bounced back, so once we figure out what’s wrong with checks notes G Suite, we’ll collect and share notes from the other GGV partner.)

Richards also notes that it’s hard to execute the same move today, as there is no such new platform to lever from. You could argue that social commerce fits the mold, but I think, so far at least, that social commerce is niche compared to the shift in consumer behavior that mobile unlocked.

Finally, the venture capitalist writes that smaller merchants are probably helping build up major indie platforms, to which I would add, instead of themselves (in the eyes of VCs?) to some degree. Canaan’s Ling agrees, telling TechCrunch that it’s possible to raise capital while building on top of Shopify and other platforms, but that also “it’s never been easier to get off the ground with stuff like Shopify, so many companies just may not need that capital.”

In a sense we may be seeing cheap e-commerce platform tech making it so cheap to build a high-quality digital sales experience that the need for external capital to make online-retail plays function is trending down. That’s a net good, even if it makes the venture capital results for e-commerce startups look more dull and flat than West Texas.

Ling had a little more to add, so let’s dig into it. In his estimation, seed-stage e-commerce companies may raise, but he thinks that what we may be “hearing is that Series A and B rounds are less popular,” which could be predicated on the “market saying the goal posts are higher.” He linked this to his points concerning building on Shopify and similar platforms.

So there may be seed capital available for e-commerce startups, but in Ling’s view, he expects that “e-commerce investing will [ … ] shift to later stages since the track record of companies that take VC too early tend to trade off growth for any product differentiation or true R&D.”

That got our mind whirring. Who has raised late-stage e-commerce capital recently?

Well, Fanatics just raised $350 million, which seems somewhat reasonable given that it’s a huge company that is probably having a hard year with sports delayed and undersized thanks to COVID-19. Pattern raised a huge, $52 million Series A for its e-commerce platform that upon quick inspection seems neat. And China-based e-grocer Nice Tuan raised $80 million. Those are the biggest rounds from the last few weeks in the space.

Not great, not terrible, but nothing that feels helpful in furthering our understanding of the odd discrepancy between a booming market and stagnant e-commerce spend.

But don’t despair, Ling has some positivity that we can end on. He said that some of the oxygen in the e-commerce room has been sucked out, but that when you compare the sector with traditional retail as a percent of spend, “there is still a long way to go.”

For at least some startups, that must mean lots of growth ahead.