Signs are emerging that venture capital firms are becoming less enamored with e‑commerce startups in the latter part of 2012, especially if they can’t furnish hard evidence of their growth prospects.
Investors were robustly optimistic about new e‑commerce enterprises in 2012, right up until Q3, with Forrester Research forecasting that online sales would surge from $226 billion in 2011 to $327 billion in 2016 (that’s a 45 percent increase). E‑commerce managers were smiling from ear to ear in the third quarter of 2012, as venture funding galloped to $242 billion – twice the level it attracted in the same quarter of 2011.
Are valuations too high?
But the mood may be changing, bringing new headaches for web content managers and e‑commerce analysts. New York based startup Fab Inc., a luxury wares marketplace launched in 2011, is a case in point. Although it enjoyed a blast of popularity after its integration with Facebook; a move which boosted its membership to 9 million, it appears to be bracing itself for a tougher funding climate.
As recently as July, the firm jubilantly managed to raise $105 million, headed by London based Atomico. But Fab’s CEO Jason Goldberg was nonetheless forced to send a letter to existing investors dropping Fab’s valuation from $700 million to $600 million in June, just one month following Facebook’s IPO. Even after that some investors were reluctant to get involved, considering even $600 million to be an overestimate.
A sign of the times or mistaken perception?
Sequoia Capital partner Alfred Lin makes no secret of the fact that he’s kept e‑commerce at arm’s length since joining his current firm in 2010. In a somewhat ominous comment, he said, “We certainly have discussed e‑commerce in partner meetings. We’ve gotten to the point where we were doing due diligence and were interested in investing, but valuations have taken over at levels that we think are not sustainable.”
Brian O’Malley, general partner at Battery Ventures, shares Lin’s views. Although his firm has recently sunk funding into e‑commerce startups like home furnishings vendor Serena & Lily, flower-delivery subscriptions service H. Bloom and men’s clothier J. Hilburn, O’Malley is resisting further e‑commerce investments because the valuations seem improbably high.
The future, it seems, lies in up-and-coming e‑commerce firms refraining in the most disciplined way from irrational valuations and keeping their economic heads on straight.