May 12 2011
by John Backus

E-Commerce 2.0: The Birth of Companies Worth $50B in Market Value

A new wave of e-commerce is upon us, but most people do not yet understand it. No, I am not talking about fashion flash sales here (though Gilt, Moda Operandi and Zulily are building very valuable businesses here.) And no, I am not talking about the wave of discount group buying that Groupon, LivingSocial and ScoutMob have popularized. More later on these new e-commerce 2.0 companies….

The flash sale and group buying sites are part of a much larger theme. A theme that I believe will be a deep and rich vein of gold for entrepreneurs to mine for the next decade. VCs also stand to make a lot of money here, by backing the right entrepreneurs carving out their e-commerce 2.0 niches.

Let me be bold. I predict that the next five years will see the creation of over 100 new e-commerce 2.0 businesses, each of which grows to $100M in revenue. That is $10B in new revenue moving online.  These businesses will be worth 5X+ revenue because of their rapid growth, customer loyalty and recurring/predictable revenue.  That adds up to $50B in new market value.  Probably 5,000 new entrepreneur millionaires created in the process.

Impossible you say! Actually, quite realistic if you look at the current Comscore numbers for online retail spending. $38B spent online. For Q1 2011. The last twelve months was $146B. But total US retail sales are $400B each month. Online remains less than 3% of all retail spending. So my bold forecast is not that bold indeed. But a lot of wealth will be created here by startups – and not by incumbents – who don’t see this coming and won’t react in time. They will buy up these new companies.

Most of the online retail spending today is in categories that moved online ten years ago. Again, from Comscore in May 2011:

“The top-performing online product categories were: Video Games, Consoles & Accessories; Books & Magazines; Computers/Peripherals/PDAs; Consumer Electronics; and Computer Software (excl. PC Games). Each of the aforementioned categories grew at least 13 percent in Q1 2011 vs. year ago.”

But e-commerce 2.0 will not happen in these categories. It will happen in emerging online categories that fill a recurring need for consumers. These businesses will be capital efficient to create. They will generate revenue quickly. They will turn profitable quickly. And they will have three things in common.

1. Consumable goods, which need to be replaced with predictable frequency.





2. Goods which are purchased frequently, out of necessity or out of desire

3. Goods which are a hassle to buy, boring to buy, or a great bargain to buy

All of these new businesses will have similar business models, but models that are very different from today’s “traditional” e-commerce giants like Amazon (which is experimenting successfully around the edges with the ability to set up automatic repeat purchases – but for them it is a feature and not a business. These new business models will focus on:

1. A customer base of hundreds of thousands and not millions (at least initially)
2. A subscription or recurring revenue model
3. A relentless focus on annual revenue per customer
4. Uncompromising and outstanding customer service

A few companies I see that “get it” in this space, of varying sizes: (diapers), ShoeDazzle (shoes), Manpacks (men’s underwear and socks), TrunkClub (men’s essential clothing) and two that we have invested in, MyWinesDirect (mainstream wine) and HealthWarehouse (prescription drugs).


Imagine the business model for (hypothetically of course.) Your baby goes through 6-8 diapers a day. For $45 you get a big box of 280 diapers. Shipped free. Want wipes with that? Add $30 for 500 wipes. $75 covers your baby for 45 days. You make this order 8 times a year. You spend $600. If 250,000 households do this, that is a $150M revenue business with great predictability.


We love e-commerce 2.0 companies. If you have started one, enjoy some early traction and have what it takes to build a $100M+ business worth $500M+ in an interesting niche, please give us a call!

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