I entered the VC business in 1998. I worked on, and screened, a lot of e-commerce companies.
I have seen a lot of e-commerce companies the past few years, but have hesitated because it has been a popular area for VCs. Now that VC interest seems to be waning, I’m actively looking again in the space.
In particular, I’m looking for founders who truly understand what it takes to build a real e-commerce company. The numbers can be unforgiving. Here’s what I mean. Here are some made-up numbers, but within the ball park of most e-commerce companies I see:
- Gross profit per order = $17.50 ($50 average order size x 35% gross margin)
- Contribution dollars per order = $10 ($17.50 gross profit less variable costs such as returns, customer support, shipping, and the carrying cost of working capital, all of which total about $7.50 per order)
- Customer acquisition cost = $120
Now, in this example, a start-up won’t break even on a customer unless he/she buys 12 times ($120 CAC divided by the $10 per order contribution). That’s tough to do.
So, here’s what I’m looking for in an e-commerce start-up:
- A firm hypothesis on the unit economics of their business. Real data not necessary, but a clear hypothesis is
- A creative idea on how to slash CAC. This is a major way to significantly improve your company’s economics. You might improve your customer returns, for example, but shaving another $1 off on a per-order basis won’t move the needle. Slashing a $120 CAC will, particularly because Google has crushed long-tail searches and made SEO much more difficult
Looking forward to continuing the dialogue.