Observations About Tech Market, Part 1: E-commerce

In the comments to my previous post, I was asked about what companies on Russian high-tech market can be described as interesting and what start-ups have managed to develop into profitable companies. Well, I will try to answer this question, but I'll start a bit from afar.

 It's impossible to write about everything in one post, besides it will be too long and boring to anybody to read it. So I'll break it into a series of articles each covering some segment of the market or some piece of timeline. If the topic will get some attention, I can write more specifically about some companies or areas.

First of all, let's try to divide high-tech into some sectors. Of course, such classification will be very subjective, and the best and most interesting companies are usually created on the edge of a few completely different spheres or even bring into being a new one area or business model. But if we still want to get some kind of classification, here is one possible variant:

• E-commerce
• Social networks
• Search and its applications
• Mobile payment
• Online travel services
• Online education
• Games (mobile and PC)
• Consumer web (all that doesn't fit previous categories goes here)

Now, a few more words about this classification. First of all, it's incomplete. There should be no such thing as Consumer web, as almost every company can be added to this area - in fact it has no specific description. Secondly, some of these areas may be divided into several independent sectors, or vice versa, merged into one. So, it is just some type of classification which I feel comfortable to work with.

Now, let's try to begin observing each sector. Today I'll talk about E-commerce.


E-commerce

This sector seems to have little connection to high-tech or startups, but in fact it has been probably the most profitable area during the last few years. The large share of venture capital is also invested in this sector.

In the last 5 years or so a lot of great businesses were launched in this field - and there were created two completely new business models. Their creators managed to develop their startups into multi-billion dollar companies, a lot of competitors tried to copy their ideas, and many of them successed. These ideas are group deals and shopping clubs.

Group deals - new view on the whole retail business or the way to nowhere?

The first site of its kind, Groupon, was launched in November 2008. Two years later, it covered North America, Europe, South America and Asia, and had over 35 million registered users. There were four major investment rounds, and that's excluding seed financing and the last relatively small financial round in February, 2011. Through these rounds, the company got a fantastic $1.1 billion, including $950 million in the last huge round of financing. After that, Groupon was valued at about $12.8 billion during its IPO, an impressive amount of money, but way less than predicted by analysts $25 billion valuation. Today, its market capitalization is about $3.43 billion, and the downfall continues.

According to the description at Crunchbase, Groupon "brings buyers and sellers together in a fun and collaborative way that offers the consumer an unbeatable deal, and businesses a large number of new customers". The model is quite simple and very appealing. The company has been expanding its operations throughout the world at a fantastic pace. So what's happened?

Several reasons have been named, and much more can be imagined. The main problems are the need of huge marketing spends to acquire new customers (and also to maintain the current ones), the rising competition from the global clones (such as LivingSocial, which received more than $800 million in funding, including two last rounds led by Amazon) and local ones (such as Russian Vigoda.ru), and the inability to continue to scale up by acquiring local competitors, as almost all market are either already controlled by Groupon, or have its own established players now.

So, the future of the company and the sphere itself is uncertain.

Shopping clubs - just another view on group deals process, or something entirely different?

Another, and a more interesting, at least in my opinion, idea is so called "shopping club". It is also a relatively new, as it was created just about 6 years ago, but today there are dozens of successful companies with revenues exceeding hundreds of million dollars all over the world.

Basic idea of shopping clubs is quite simple - there has been demand for some new business model from the apparel's retail, which is extremely unstable business, with high dependence on brands' popularity and seasonal changes in demand. The percentage of returns there is also higher than in any other segment and usually it is almost impossible to sell returned items as they can be returned in the end of the season, when there is no demand for them, and the next year they can become no longer popular.

In this situation, shopping clubs appeared to be able to provide great opportunity for the stores to sell unsold inventory. Shopping clubs are positioned as luxury clubs with by invitation-only membership. They collect unsold items from the stores and then sell them at heavily discounted prices for just a few days to its members. This model, in some aspects quite similar to group deals concept (large discounts provide an attractive opportunity to customers to buy goods, and large volumes help businesses to sell otherwise unsold inventory) is much more effective and stable, because in the business of selling apparel there was demand for some suitable solution in the industry, and group deals services do not adress any specific demand, and, while they can be quite profitable for customers, value proposition for businesses and group deals services themselves (due to high marketing costs and low loyalty and return rate of businesses) is really questionable.

The list below includes some examples of shopping clubs:

• Gilt Groupe (USA, the company that started the industry, received $220 million in funding)
• Hautelook (USA, acquired by Nordstrom for $270 million in 2011)
• BuyVip (Spain)
• One Kings Lane (USA, received $63 million in funding)
• ideeli (USA)
• Rue La La (USA)
• Markafoni (Turkey)
• KupiVip (Russia)

It is also very interesting to look at Russian market, as there is one very interesting company there named KupiVip.

KupiVip was started in 2008 by Oskar Hartmann, an expat from Germany, who created maybe the most successful startup in Russia since Yandex. Today it was funded with more than $100 million, including huge in terms of Russian market the most recent financial round of about $55 million, in which participated such famous VC funds as Accel Partners and Mangrove Capital Partners. Now it is not just a shopping club, it offers a full range of servicea including all-in service for offline stores to enter online retail market. KupiVip provides all infrastructure, and all that is required from the store is to provide goods and to run advertising campaigns to promote online store. That is really great service, and the list of stores using it includes such brands as Central Universal Department Store (ЦУМ). In the interview to Forbes in March, 2012, Oskar Hartmann said that he expect the company to have revenue exceeding $1 billion by 2015. Well, it seems definitely possible.

Of course, there are much more interesting companies in E-commerce segment in Russia and in the world. Ozon.ru, Russian version of Amazon, has got $100 million in funding, an enormous sum of money for a local (yet quite successful company), so its IPO is postponed now. Lamoda.ru, an online store focused on apparel, has just received an undisclosed sum of money in the $40-$80 million range from J.P. Morgan.

It's impossible to cover all events, but as anybody can see, both local and global market are alive and developing on a high pace.

I hope that somebody will find this article interesting enough to spend time on reading. Next time, I'll write about major trends in social networks' segment.