Venture Capital (VC) firms are a major funding source for e-commerce companies; however, funding has been on a decline compared to the record-setting 2021 levels. According to Crunchbase, Q4 2022 declined 13% compared to Q3 2022, and for the 2022 calendar year, funding has shown a 36% decrease compared to 2021. Although there are changes in VC investment behavior, there is still plenty of dry powder waiting to be invested in new products and technology. E-commerce businesses must be more thoughtful and strategic in the way they position themselves to potential investors.
VC firms are becoming more cautious regarding future investments, causing the e-commerce market to be very competitive. There has been a shift away from short-term investments as investors begin to think long-term, causing VC’s to target a different type of company profile than in the past. Unicorn e-commerce brands may look attractive, but with high acquisition costs, lack of profitability, and high cash burn, VC’s may be more cautious with their investments. They are now looking for profitability and sustainable growth as opposed to solely looking for top-line revenue growth. As the trends in the market shift, we are seeing more demand for founders and executives to refine their “plan to profitability” and initiatives for customer retention.
To have a competitive advantage, companies often have a unique product or service that solves a consumer’s problem. Is there an opportunity to take over a large segment of a market? Oftentimes, companies create prototypes in the early stages in order to track consumer demands before getting in front of VC firms.
Aside from having a unique product or service to separate themselves from the competition, the company’s management team must be knowledgeable and have the same values and vision as the potential VC investors. One must also think – does the team have the right people in place to successfully scale the company and the right distribution model to help them succeed? Consider the timing of your fundraising and maturity of your investors to determine if you have the right people and service providers in place that will help grow your company to the next level. Key hires before and during your fundraising process can be a strategic decision that will help better position the company for fundraising.
Despite these VC investment trends, there is still plenty of opportunity for e-commerce companies to benefit from VC funding. Founders should focus on the long run, building a profitable and sustainable business to show that the company can withstand economic shifts.
For more information on this topic, please contact a member of Withum’s E-Commerce Services Team.