John Lusk's Blog

After almost 20 years in the ecommerce space and ample experience in both B2C and B2B models, I’ve got a pretty good sense of what it takes to build a sustainable ecommerce business. And after spending the last 2 years performing private equity due diligence on a vast number of ecommerce investment opportunities, I have a strong opinion on what’s needed to scale, and sustain, an ecommerce driven business.

One of my colleagues recently asked me what I look for what first analyzing a consumer ecommerce business and I thought my responses were worth publishing. Clearly, there’s much more than just the below but at the highest level, the following represents what I’m looking for when first presented with an ecommerce investment. (Note: If I’m looking at a private equity deal, I’m already assuming that growth in the market exists).

1. Niche industry and/or target demographic: Does the company’s product or service appeal to a very specific audience? The more focused the product, the more relevance to the target customer and the higher level of brand equity. Why is this important? In the age of Amazon and large-scale marketplaces, an ecommerce driven company needs every ‘brand equity’ advantage it can muster. Brand equity typically equates to premium value and less of a need to compete on pricing. The tight focus also makes it more difficult for broadly positioned brands to penetrate a specific niche target. And another bonus…..focusing on a single niche makes your product development, sales and marketing efforts so much less complex.
2. Sustainable competitive advantage: Does the company really have a competitive advantage that they can sustain over a longer period of time? Are they just selling ‘stuff’ to a target audience or is there some kind of magic behind the curtains? There’s a huge difference. Most companies like to think their competitive advantage is their brand. Or their community. Or their customer experience. And all could be the right answer. But in most deals that I’ve looked at, a true, distinct competitive advantage doesn’t really exist. The companies that I’ve worked with who have created a competitive advantage have typically done so through supply chain advantages or through the strategic use of data, typically as it pertains to supplier relationships, inventory turns and product creation. And of course, IP (intellectual property) is a HUGE advantage. But when AMZN or GOOGL end up buying you anyway, I don’t view that as necessarily sustainable over a long period of time.
3. Merchandising Model: How a company selects the products they’re offering and how they’re strategically positioning products to customers is typically a signal of ecommerce sophistication to me. Is the company designing product themselves or simply branding white label products? Are they using data insights and business intelligence tools to predict customer product needs and behaviors? Are they curating products and making purchasing decisions easier for the customers? And do they have a good sense of how to move products using onsite conversion drivers such as price discounts, messaging, on-site advertising. Building a merchandising model takes customer volume, a strong understanding of data, and typically some relevant expertise. It’s usually pretty evident when a merchandising model doesn’t exist within a company.
4. Omnichannel touchpoints: Yes, ‘omnichannel’ has now become an overused buzzword, much like ‘community’, but the general approach is incredibly valid. Consumers want to be able to engage with a brand when they’re in a mindset to do so. In other words, consumers don’t want to have to wait to get more information, to make the purchase, to initiate a return, to engage in the brand. I like to look for even the simplest of omnichannel strategies. I don’t necessarily need to see the site + mobile app + direct sales reps + the showroom + the retail storefront + the scalable event model + [insert your idea here] all working together in a tightly integrated fashion. I also don’t necessarily need to see proof points on how all of the offline and online data captured is being used to drive marketing or merchandising decisions. I just want to see acknowledgement that ‘omnichannel’ is important and that the company expects to continue testing different channels in the future.
5. Amazon Strategy: Has the company recognized that regardless of what industry they’re in, what audience they are serving, what product/service they are selling, etc…..they need to have some kind of Amazon strategy. That strategy may be one that’s focused more on awareness, utilizing Amazon solely for it’s vast customer reach. Or it may be one that’s focused on amplifying unit sales or top-line (revenue) growth. I’m not looking for the perfect Amazon strategy (I’m not even sure I know if one exists), I’m just looking to see if the company is thinking about Amazon, much like they should be thinking about Google and Search. What I can’t stand, and what I’ve usually perceived as a red flag (justified or not) is when a CEO tells me “Amazon will never get into our space because our product is too expensive, too customizable, doesn’t address a big enough market, etc.” I’ve been so unbelievably WRONG making Amazon predictions in the past and have learned to just simply assume they’re going to enter your space. Ideally, the company has put some thought into how they’ll utilize Amazon in their growth plans and can present a solid strategy for how they’ll work with Amazon…either as friend or foe.

Again, these are just some of the high-level things I look for when I’m first reviewing a company. Keep in mind that all of the companies that I look at are doing quite well, with most in the $20M – $100M annual revenue range and most delivering double-digit EBITDA growth annually….so they’re usually doing something right. And clearly, there’s a slew of other metrics and key performance indicators that are looked at eventually, especially the details that encompass the basic financial statements.

But I consider these my ‘gatekeeper’ areas. If a company doesn’t hit at least 3 of the 5 areas above (60%), then I’m apt to make ‘pass’ recommendation.

What do other folks look for when evaluating the viability of consumer ecommerce companies?

John