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Why investors should take another look at ecommerce

By Brian Garrett - Guest Post on PandoDaily
Silicon Valley has run away from the ecommerce category. The most common arguments among ecommerce bears are that the sector is over-invested and that late-stage valuations do not map to public company comps and realistic acquisition values. However, it’s foolish to fall into the lemming trap and write off the entire category.

Ecommerce spending by consumers is still growing like a weed, and there are plenty of opportunities for investors to generate great returns, especially by focusing on earlier-stage opportunities. Nonetheless, there is no doubt that the funding landscape has gotten much more difficult for ecommerce companies and the bar is significantly higher to get investor attention.

Here are three key ingredients that help an ecommerce company rise above the noise, and make themselves attractive to ecommerce investors:

1. Build a brand – This is the most critical element. The company and founders have to understand what it takes to build a brand. Know what you stand for, and know who your audience is, and then stay authentic to that voice. You must build self-identification mechanisms into your customer experience that keep them coming back.

NastyGal’s Sophia Amoruso has done a phenomenal job in this regard. NastyGal is primarily selling commodity apparel from the LA apparel marts, but Sophia spends a lot of money on content and photography. She knows who her customer is and what they like. Her merchandising is perfectly on-brand for Nasty Girls. Dollar Shave Club has also done a great job by building a brand based on humor for commodity products for the men’s bathroom.

On the other hand, the struggling ecommerce companies in LA, as a generalization, were started by technologists who lack a product background and the authenticity that is critical to success.

2. Offer a proprietary product – If you are selling the same product as five other online competitors, eventually, it will become a race to the bottom with either increasing customer acquisition costs or loss of margin. The online consumer is smart and will find the best deal. Investors need to look for companies with proprietary product or uniquely curated experiences that build trust and convenience with the end consumer.

Why is this important? It is all about margin. Without it, it’s hard to scale and even harder to build the brand equity that will eventually be attractive to potential acquirers.

3. Achieve operational excellence – Without the first two properties above, most ecommerce ventures will fail. But it is operational excellence that drives profits and cash-flow, which are ultimately the only thing that matter in an entrepreneurial endeavor. Manufacturing and sourcing product, convincing customers to buy it, and then dealing with the shipping (and returns) hassles that are necessary for a great customer experience all demand time, money, and an incredible focus on the details. Without a capable operator, any ecommerce venture is doomed to mediocrity, at best.

At the end of the day, having these three characteristics does not guarantee success, but they are most definitely correlated with successful outcomes. The Web has evolved to the point where an entrepreneur can engage in a two-way conversation with her customer and make them feel a part of the experience. Customers now have a greater voice than ever before, and the best companies are figuring out how to leverage that voice to build evangelists and advocates for their brands.

LA has launched many of the most successful and innovative new ecommerce businesses of the last five years including, NewEgg, Hautelook, NastyGal, JustFab, Dermstore, Sensa, Fandango, Legalzoom, Active Networks, and Gamefly, to name a few. Expect the region to continue emerging as a hub for ecommerce innovation given the local apparel manufacturing infrastructure, proximity to Asia, and the creative talent pool and brand orientation of the LA market. [Disclosure: JustFab, Sensa, and Dermstore are current or past Crosscut ventures portfolio companies.]

But regardless of where a company is located, innovative models will continue to emerge, taking advantage of the social Web, collaborative consumption, low-cost physical product design, and the increasingly flat global economy. Investors who are wise will be there taking notice.