GUEST COLUMN Investing in ecommerce – some simple criteria

In his latest guest column for InternetRetailing, veteran retailer David Kohn spells out the five Cs that make for an investment-worthy ecommerce start-up. 

When I left Heal’s at the end of last year one of my biggest questions was how I was now going to describe myself on LinkedIn. As an ecommerce director it’s pretty straightforward – in fact your only real challenge is to build into your profile some sense that you’re a miserable sod who does not take kindly to unprompted approaches. But as someone who’s stepping back from full-time work it’s a little more complex. Describing yourself as retired seems a little final and means many will no longer take you seriously. Saying you’re now a consultant will put people off as they suspect you’re fishing for business (which you probably are). Calling yourself a mentor merely sounds pretentious. 

After some thought, I decided to confer upon myself the rather pompous title of ‘investor and advisor’. Little did I realise the impact that this would have. Suddenly, instead of people trying to connect so they could sell me their digital products and services, enthusiastic entrepreneurs were contacting me trying to sell me parts of their business. Or worse still, asking for my sage advice about how to scale up or raise funds. 

All this set me thinking about what would persuade me to invest in an ecommerce business. Having never been much of a fan of Dragon’s Den (has there ever been a show featuring people so pleased with themselves and so free of self-irony?), I tried to come up with a few simple principles. 

Concept

First and foremost, it’s got to be the concept, the proposition underpinning the business. What’s the customer need that you’re trying to satisfy? Why do you believe that this need exists and what’s your evidence that it exists at scale? What makes you think there’s a gap in the market? Many think they’ve come up with something original, only to find that others are already doing it and doing it well. Many ideas are based on personal opinion or anecdote and lack an understanding of what real people need and want. 

Desk research is a critical first step. The internet and social platforms make it easy to do a reasonably thorough preliminary analysis. Ask Google all the questions you can think of and follow every interesting lead, whether it’s to an existing provider or just a discussion forum. See what content there is on Instagram / TikTok / Pinterest. Are people discussing or posting on the thing you’re interested in, and are they doing so in any volume. Even if your idea is truly original, it will be driven by an underlying motivation, and you can see whether this is something that people are talking about.  

The next step is to test your concept with real people. If you already have a product and customers, it really just requires asking. You’ll be surprised how much your customers are prepared to help. Contact them directly for feedback and consider creating an advisory group to make them feel special and engender greater commitment. And, above all, be prepared to listen – remember that criticism is a gift. 

If you’re still at the concept stage, it’s still worthwhile finding uninvolved third parties. Friends and family may act more as an echo chamber, telling you what you want to hear. If you can find a few sceptics or contrarians, it will help you not only refine the proposition, but also start building the arguments that you will need when trying to persuade prospective investors or partners. 

Comprehensiveness

If the concept looks solid, the next thing to look for is comprehensiveness of vision. For a concept to really connect, it has to form part of a broader story that means something to the consumer. And that meaning has to permeate through every point of contact. I recently bought a lamp from Serious Readers and was struck by how complete their vision is (not a deliberate pun, I promise). All of their brand content is about eyesight, reading and light technology. And, although the product is pricey, everything about the delivery and unpackaging experience is designed to tell you that you’ve bought a premium product and they care about your ongoing satisfaction. 

So, when looking at a new concept, do the business owners have a clear sense of how they’re going to provide pre- and post-sales service, who they’re going to use for deliveries, what content they’re going to produce to support the brand, even which charities or causes they’re going to support. Do they look like they care about the user’s overall experience and are prepared to make sure they deliver it. We’ve all seen examples of premium retailers who have not invested in the end-to-end brand experience, and therefore fail to engender loyalty and repeat purchase. 

Capability

Next to look for is capability. What are the specific skills that you or your team bring to the party? Are you particularly strong in brand development and story-telling? Do your strengths lie in product development, manufacturing or sourcing? Are you a skilled technologist with the ability to create a relevant and compelling user experience? To be truly credible, you’ll need to show that you’re bringing some skill, experience or knowledge that’s relevant to the value that you’re trying to deliver to your customer. Or, at the very least, that you know where and from whom to buy it.  

It’s interesting how often the skills don’t really match the requirement. As an example, I spoke recently to a business hoping to fill a gap in a sector where consumers cry out for product advice and service, but don’t get it from existing providers. The gap looks real, but to fill it well it would help either to have that knowledge or, if not, to understand how you can use content, data and AI to deliver it. This team didn’t convince me that they had either and would therefore have a lot to learn. 

Commerciality

The next criteria is commerciality. It’s obviously critical that the numbers stack up, or at least are capable of stacking up at some point. I don’t want founders to be numbers-driven, I’d far rather they were concept-driven and focusing on delivering their proposition well, but it is vital that they have a basic understanding of the metrics. 

One of the key areas is net product margin. Has the company factored in all the relevant marginal costs, such as packaging, delivery, dealing with returns, affiliate commissions, wastage etc. 

Another key metric is customer acquisition cost. With some businesses this might be justified by high margins on single transactions, but for most it only becomes viable if the customer acquired at cost becomes a repeat customer. If this is the case, does the business understand this and how are they geared up to drive loyalty and retention. 

Character

Finally comes character. I was tempted to go for confidence but over-confidence is a truly dangerous thing in this sector. Anyone venturing into ecommerce needs to understand the old adage that success is 5% inspiration and 95% perspiration. Retail is incredibly capricious and things can change with little warning. Changes may be local to your sector or, as the last few years have shown us repeatedly, global. You’ll have to have the character to deal with setbacks and disappointments and also not get too excited by sudden successes. You’ll need to maintain commitment to the underlying concept, but also the personality to be prepared to change course if necessary. 

So, we have the five Cs – concept, comprehensiveness (of vision), capability, commerciality and character. If I see a pitch that encompasses all five, or at least two of the first three then, you never know, in my role as investor and advisor I may be tempted to get involved. 

David Kohn is a retail veteran whose experience most recently includes customer and ecommerce director at Heal’s, and previously commercial and digital roles at WHSmith, Waterstones, Borders and Snow+Rock Group. Now acting as an independent advisor, David remains on the look-out for interesting and effective innovations.