Farla Efros is quoted in the below New York Business Journal article surrounding Wal-Mart’s acquisition of Jet.com.
For e-commerce startups, the game of getting money for your not-yet-profitable startup to scale hasn’t changed, but what — or make that who — is on the other side of the table is changing.
Just a few weeks ago, consumer products giant Unilever announced that it would acquire Dollar Shave Club— a subscription razor service known for its funny YouTube commercials featuring the founder — for a billion dollars. That seemed like a pretty stunning exit until Wal-Mart Stores Inc. one-upped them Monday with news that it was acquiring Jet.com for $3.3 billion, the largest price tag ever paid for an e-commerce startup. This means that just as venture capital firms are becoming more stingy about putting money into e-commerce when profits do not appear imminent, large companies with fat wallets are
It also means the financing world is tilting for e-commerce businesses. With customer acquisition a constant and costly goal, a parent company may be a better bet than investors to provide the necessary marketing cash.
“With e-commerce players, how they are going to win is by acquisition,” said Farla Efros, president of Northbrook, Illinois-based retail consulting firm HRC Advisory. “Most retailers are struggling with e-commerce, specifically related to not being able to make money from it.”
Efros says the Wal-Mart move was a smart one, an acknowledgement that the retail giant didn’t have the internal e-commerce abilities to truly do battle with Amazon — or for that matter, Target. As a newly released Slice Intelligence reportpoints out, the acquisition will also allow Walmart.com to surpass Target.com, which had a slightly larger relative market share (47.5 percent to 46.6 percent for Walmart.com, which will now benefit from Jet.com's added share of 5.9 percent).
“It’s a lot of money, and they bought Jet.com for one reason, and that is capabilities,” she said. “It was 100 percent strategic so that they can garner learning, and implement it into what they’re doing today.”
With Jet.com, Wal-Mart (NYSE: WMT) brings in its cofounder and chief executive, Marc Lore, a seasoned veteran of e-commerce who will now lead Walmart.com and Jet.com. This is his second big deal. He sold his company, Quidsi, which owns Diapers.com, Soap.com, and others to rival Amazon (Nasdaq: AMZN) for $550 million in 2010. With Jet.com, the allure is dynamic pricing that lets shoppers save more and more money by increasing cart size and extending delivery dates, and a hip brand that, for Wal-Mart, has enviable access to urban and millennial customers.
Wal-Mart, which uses the lure of its massive brick-and-mortar empire to command low prices from suppliers, has been highly efficient in its retail stores as a result.
“They have yet to master that with e-commerce. They realized ‘We’re not making money as we should,’” Farla said. “Wal-Mart has always been about making money and the bottom line.”
Nordstrom acquired Hautelook and Trunk Club for the same digitally-driven reasons, she said.
“These startups are at a very advantageous state today, they’re in the driver’s seat,” Efros says. “E-commerce is all they do.”
Still, e-commerce startups looking to raise venture capital are having a harder time. One example of how VCs are changing their tunes: Last week, Birchbox investors gave the subscription beauty brand a $15 million lifeline to keep the business going and the CEO is now fixated on the quick profitability her backers demand.
Bullpen Capital partner Paul Martino says that in the venture capital world, late-stage investors “have exited the room,” and are unwilling to back unprofitable startups which is why Birchbox — which two years ago had a valuation of around $500 million after raising $60 million is struggling.
“If they can’t reach profitability with the $15 million bridge, they’re going to be in a very difficult spot to raise any more money,” said Martino, whose Menlo Park, California-based early-stage VC firm backed a rival in the beauty subscription space, Ipsy.
Ipsy was cofounded by YouTube makeup tutorial star Michelle Phan, who already had a following online and built the brand through content and community.
“We invested in 2012, and what was so compelling is they had zero customer acquisition cost,” Martino said. He sees a few possible exits for Ipsy, including an IPO, or an acquisition by a big consumer products company or another e-commerce player.
On the other hand, he says the Dollar Shave Club deal could help pump some new venture money into subscription retail, a market that has cooled since its heyday of 2010-2012.
“Venture capital is like fashion. Things go in and out of fashion,” he said. “Now with the Dollar Shave Club deal, people are going to think it’s not so bad to look at again.”
As for the Jet.com deal with Wal-Mart, he thinks catching up with Amazon is going to be tough, but larger retailers are going to keep on trying.
“A couple of big players are going to snap up properties to get into the next level of digital,” he says.
One retail entrepreneur pleased about the deals of summer is Josh Udashkin, founder and chief executive officer of the New York City-based smart luggage brand Raden. The company sells via e-commerce and has a store in SoHo.
“Both Jet.com and Dollar Shave [Club] managed to create waves in a short period of time,” said Udashkin, a former hedge fund lawyer. “Incumbent brands took note of it that and the fact that they were also getting a new generation of consumers. Acquiring startups gives them access to a pool of very creative, very ambitious, very hustle-y kind of people.”
He also believes that joining forces with larger companies is the way that emerging consumer brands like his own can ultimately take off faster. Growing the business with Unilever and Wal-Mart as parent companies means that Dollar Shave Club and Jet.com don’t have to keep raising venture capital and selling off more and more of the business along the way.
“If you’re a startup founder, you’re lying or naïve if you haven’t thought about how your business fits into a big company’s portfolio,” Udashkin says.
For its part, Raden has lined up wholesale deals with multiple retailers that will begin selling the brand’s luggage starting in October. He says catering to shoppers’ wishes, whether they want to shop on the Raden site, in the store, or through a third-party retailer, is key.
“I’m definitely a believer in omnichannel retail,” he says. “You don’t have to be militant about this direct-to-consumer thing.”