VC-backed ecommerce has struggled recently. I don’t think it’s dead, though. How VCs invest in ecom will change, but the invested companies will be much stronger for it.

The modern ecom VC cycle kicked off around 2010 when Warby Parker was founded. Warby sold directly to consumers and was a huge hit with investors. Pretty soon, dozens of companies sprang up with similar models like Casper, Dollar Shave Club, and Harry’s, raising hundreds of millions each. They largely used the capital to buy inventory, build teams and, most of all, spend on marketing, especially Facebook ads. This era lasted from 2010 to around 2018; let’s call it Ecom 1.0.

I think the next era, Ecom 2.0, started in 2018 when Thrasio was founded. Thrasio was the first Amazon aggregator, a company that acquires Amazon brands. Thrasio had early success and, especially after ecom growth during COVID, saw more than 100 copycats enter the market which collectively raised $16B.

Unfortunately, neither model has really worked out. The stock prices of public Ecom 1.0 brands have fallen 75-95% from peak, and the Amazon aggregators are doing even worse; Thrasio is reportedly near bankruptcy.

VCs have noticed. Crunchbase stats indicate that in 2023 ecom investment is down 97%(!) from 2021, and 85% from 2018.

Does VC-backed ecom just not work? I think it can. I call it Ecom 3.0:

Going back to first principles, what is venture capital for? Ideally, VC is best used to fund early upfront fixed costs which provide a competitive moat and enable long-term profitability. Think of classic VC investments like silicon chip production (Intel) or complicated software development (Microsoft).

VCs got away from that in Ecom 1.0 and 2.0. Venture dollars were not generally used for upfront costs, they were often used to buy ads or inventory.

In Ecom 3.0, VCs will go back to basics by investing in upfront costs which establish a moat. What does that mean? Product development. VC will be used to create differentiated products and manufacturing capabilities that will be very difficult and expensive to copy and so will be the basis of long-term profitability.

A differentiated business shouldn’t need round after round of capital–it should be able to grow profitably on the strength of its products and reinvest profits into inventory, ads, and team. For that reason, Ecom 3.0 brands will raise much less than Ecom 1.0 or 2.0 companies.

There will be other differences. I think we’ve learned that it is very difficult to profitably grow a brand to “venture scale” exclusively online. Ecom 3.0 brands will start online but, from the beginning, plan to expand into their own retail stores or sell wholesale. Otherwise, as you grow, all your profit ends up going to Facebook, Google, or Amazon. Maybe we should instead call it CPG 3.0.

VC-backed ecom is in a rut right now and will have to adapt. I think it will. Ecom 3.0 will be more product-focused, capital efficient, and much stronger as a result.