The State of Finance in E-commerce
This isn’t 1999 anymore. Our technological capabilities and scale have grown exponentially during the last decade and a half. But the tech isn’t the only thing that’s different. Financing these innovations has changed quite a bit as well, with investor appetites and expectations looking nothing like the “old days.”
To speak to these changes as well as the role of trust in financing decisions, we interviewed Greg Bettinelli, a prominent venture capitalist with Upfront Ventures.
What are you seeing right now on the financing side of the e-commerce world?
I think as a whole, the investment community has become far more educated, or re-educated, around e-commerce and has a definite list of characteristics that companies need to have in order to be considered for investment. I think there is a greater appetite to see traction in the marketplace before investment consideration, meaning you’ll see very few pre-revenue or even early revenue e-commerce financing. I think we, as investors, want to see some level of transactional volume before really considering investment.
Other things that we’re looking for are really differentiated e-commerce concepts – concepts that won’t run directly into the wheelhouse of someone like an Amazon. We’re really looking for differentiated products, whether it’s from the functionality, from the design aesthetic, or most importantly, from the gross margin of the product.
On that note, what would you consider traction? At what level do you think a company has demonstrated traction?
Well, that depends on what round of financing we’re talking about. Let’s say beyond a “Friends and Family” round or any round of funding above a million dollars (and I assume it’s not someone who used to run Amazon), I think we want to see transactions around $100,000 per month. We’d like to see those transactions primarily driven organically. I’m probably less concerned with product margin at that point and more concerned with, if you spent $200,000 to get that $100,000, that’s not interesting. We don’t want to see customer acquisition and lifetime value in a Series C deck. We’d rather see that the product is differentiated; the market is speaking; you can put it in a box, ship it and scale that to some degree. We want to see that customers like it.
Me, as a personal investor, I’m less interested in businesses that are considered high fashion. I don’t mind fashion, but the idea of being a high fashion business is less attractive than other categories.
The other thing that we look for early on is, what is your unfair advantage? Why are you able to do things that no one else is able to do? That could be an authentic founder with a unique point of view. It could be that you have proprietary supply chain relationships. Access to incredible design talent. It could be that you have a product category that has a unique and protectable margin structure. Whatever it is, it has to be more than just a good idea and early traction, but also something that you can count on being your long-term unfair advantage.
How does trust play a factor when you’re looking at a company and deciding on financing?
I’ll use the word authentic. In the market place, customers and investors have to believe that the entity designing and selling the product is a trustworthy, authentic organization that has the best interests of the customers, investors and employees in mind. Trust plays an integral part of every investment decision we make. Obviously, whether we think this individual represents the best interests of our investors who we’re being asked to invest for, all the way through to the long-term value for the customer beyond just trying to “schlep” a good to them and hope you cash the check before they realize it’s something not worth purchasing. And that’s why we spend a lot of time looking at repurchase rates and recommendation rates because if you do have a good experience, you’re obviously much more likely to share and tell other people about that experience. That’s a good indicator or output of trust.
So when you’re looking at an investment, you’re looking for someone who conveys that?
Not in a direct way – I don’t want someone saying “Trust ME” on his or her site. But if you think of the great brands out there, there is a trust factor that you’re getting the best-produced product at a fair price. This may not be the cheapest price, but the overall experience creates value for the consumer. Brands that don’t have that inherent trust don’t survive over the long haul.
When it comes to you and an entrepreneur, how does trust play a role?
A lot of the work we do from a diligence perspective is with those an entrepreneur has worked with in the past. Not just the people that they worked for, but also the people that they might have been the boss of as well as their peers. We spend a lot of time getting to know those relationships. We want to build a personal trust beyond the entrepreneurs pitching us and telling the story of their business – how they act in public, what kind of employee they are, etc. We like to put people in different situations than what you’d get with the typical business development or investor pitch scenario. This is a long-term relationship where you have to have trust.
I’m not one in particular who likes to be “BSed”, I would much rather just have an honest conversation. If someone has a concern about a business or opportunity, let’s figure out a way to potentially solve it or work around it versus trying to convey that it doesn’t exist at all. The experienced people in business and investments have a pretty good understanding of who those people are and through your own interactions as well as others’ interactions, they can get a pretty good picture of someone’s trustworthiness.