Inside the Mind of an Ecommerce Investor

How Is an Ecommerce Investor Different?

Ecommerce Investor
Ecommerce Investor. danleap / iStock Vectors / Getty Images

When one thinks of the stereotypical investor, the thought process goes as follows:

  • Investors bring in money...
  • ...which they risk based on their assessment of the growth and profitability of the specific opportunity that they invest in...
  • ...with the hope that they will make good returns.

That, in a nutshell, is any investor – regardless of whether we are talking about the stock market, bond market, real estate, bitcoin, or what have you.

Naturally, this characterization of an investor is true even for ecommerce investors. But:

Ecommerce Investors Possess Some Specific Beliefs

  • The Growth of Online Commerce Is a Given, the Only Question Is Whether This Specific Team Will Deliver

While other investors may work hard to evaluate the market opportunity, ecommerce investors tend to believe the online retail opportunity is obvious. Hence they are largely focused on figuring out whether this specific team will deliver.

  • Even If Markets Do Not Grow Much, the Mere Migration of Offline Retail to Online Presents an Adequately Large Business Opportunity

This is one of the underlying beliefs of an ecommerce investor. And present data indicates that ecommerce is indeed cannibalizing physical retail.

  • Profit Is Not a Requirement Today, in Fact, it May Be Undesirable

This is something that a conventional investor will find counterintuitive. Though all investors understand the concept of a gestation period, as well as the need to leverage investor-dollars, most would loathe endlessly stretching out a profitless existence.

But the ecommerce investor is in it for the long run. As I have mentioned on this site earlier, after more than two decades of "successful" business, is still not making a profit and investors seem to be ok with that. The premise here is that ecommerce businesses have to be in the pursuit of growing their top line, i.e., sales.

  • Anything Can Be Sold Online

Not all ecommerce investors will agree with my analysis here, but facts indicate that optimists believe anything can be sold online. Sure started as an online seller of books – a rather impersonal product; one that did not require being touched before purchase. But over the mid to late '90s, it became clear that just about anything could be sold online. And that started the ecommerce gold rush.

  • Usual Methods of Valuation Do Not Apply to Ecommerce Businesses

Classically, several methods have been used to evaluate the worth of an enterprise. Though everyone agrees that there is some hocus-pocus involved in all valuation exercises, there is usually a range, however broad, that most valuators would assign to the value of a business. These conventional methods have been thrown out of the window when it comes to ecommerce valuation. Despite mainstream business media crying itself hoarse about the insanity of ecommerce valuations, things have not changed much. And ecommerce investors are putting their money where their mouth is by not only expecting great valuations, but also paying for ecommerce stock at stiff valuations.

  • Buying Customers Is a Valid Business Strategy

    Most ecommerce businesses spend a hefty sum on PPC and other forms of online advertising. And it is not uncommon for prospects to yield substantially lower profit than the price of acquiring them. But, as explained earlier, to the ecommerce investor, it is not about profits but about sales growth. Consequently, most investors would not think twice about investing in an ecommerce business that intends to use the money to "buy" customers.

    • Low Price Is a Valid Business Strategy

    I have always maintained that low cost is not a valid ecommerce strategy, and there are several who think like I do. But the vast majority of ecommerce investors do not seem to think twice about using low price as a go-to-market strategy. The only problem is the go-to-market phase of the business just does not seem to end.

    Final Words

    If you read this article and thought that ecommerce investors are crazy, you are not alone. However, I do not think that ecommerce investors are irrational. Though I do worry that ecommerce investments have often demonstrated insane exuberance, several of the beliefs mentioned above have so far turned out to be true.