VC Investments in E-commerce Brands

Traditionally VCs have taken technology risk in their investments and if that risk is covered, the market risk is minimal. If the technological innovation is successful, generally it will be massively successful and get mass adoption generating say 100X or more. And it will cover up losses of all other investments. At the portfolio level, the power law manifested clearly. As Vinod Khosla once remarked – the loss can be max 1X but upside unlimited.

Investment in e-com brands is a different ballgame. The traditional tech players have ventured into investing in brands using the same methods as tech investing but these investments carry largely market and business risk. A lot of elements have to fall in place to make the business successful. On top of that, the network effects of tech businesses are missing and growth in business requires continuous investments in manpower, inventory etc.

A lot of e-com businesses were being built on mainly having brand (not product) as the differentiator as easy marketing dollars were available. This just doesn’t work.

For a fund manager. the e-com portfolio has to be constructed differently with low failure rate as the 100X investment will be missing.