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E-commerce start-ups to watch

It feels like just yesterday that commerce on the Internet was stale and dominated solely by two of the earliest entrants – Amazon and eBay. Omni-channel retail (reaching customers wherever they shopped – whether in store, online or on their phones) was all the rage and, in fact, was one of the major trends that drove several investments in Metamorphic's first fund as big retail budgets flowed online.

At the time, the innovative commerce models were based mostly on flash sales and social commerce. Many of these companies needed to raise a lot of money, had high burn rates and therefore, were unsustainable (with the exception of a select few that are still thriving today, like Gilt). Even Gilt spent time iterating and finding its way within the commerce landscape. At the end of the day, these commerce companies were retailers. The ones that failed realized this too late after spending much time in denial. After all, it's not easy being a retailer.

A Warby Parker store
Source: Warby Parker
A Warby Parker store

More recently, though, we've seen the rise of new commerce models, many of which are not only sustainable in the short term, but also will continue to grow and prosper in the coming years. Their growth is driven largely by the advent of mobile and the proliferation of social media, making it easier to acquire customers than ever before. Users can tell their networks about new companies or products in real time, providing lower customer-acquisition costs if the experience is special or the pain alleviated is substantial. Buyers and sellers are also connected more efficiently than ever before as mobile becomes a magic wand for marketplaces. This not only opens up new markets that weren't previously available, but also allows entrepreneurs to expose opaque ones that had previously been dominated by incumbents.

Start-ups have been executing on several models that we find exciting:

Membership commerce: These companies offer customers a yearly subscription for a fixed price and in return customers get to shop at heavily discounted prices. In the offline world, this was a model made popular by Costco, but leveraging economies of scale on the Internet allows startups to offer even more heavily discounted prices. Popular companies in the space range from Jet.com, which offers club price savings on a wide catalog of goods competing with Amazon, to Thrive Market, a company that marries healthy and organic products with heavy discounts (think Whole Foods meets Costco).

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Subscription commerce: This category has been around longer than membership commerce, but companies in the space continue to flourish. According to Retention Science, an e-commerce marketing platform, subscription-commerce customers are more likely to make a repeat purchase and have a higher average number of orders in a 12-month period than traditional retailers and flash sale companies. Some companies in the space include Dollar Shave Club and Harrys (razors), Trunk Club (men's clothing), Stich Fix (women's clothing), Birchbox (beauty), Lola (tampons) and Barkbox (products for your dog). By offering a product each month to consumers, there is monthly recurring revenue with this model that makes for a strong business, provided there is value being delivered every month.

Direct to consumer: Many of these companies have been born out of the "black box" of traditional industry whereas legacy companies had significant margin due to industry monopolies and other dynamics that kept prices high unless you were willing to sacrifice quality. Warby Parker is the most notable of these companies. Warby's key innovation was the disintermediation of incumbents which gave them the ability to pass the savings to the customer. But others in the space include The Honest Company (bath & body care), Casper (mattresses), Cotopaxi (outdoor gear), Stowaway (cosmetics), Away (luggage), Harrys (razors), Campaign (furniture), Greats (sneakers), Bonobos (clothing), Naja (bras), and Everlane (clothing). Building a brand is not easy task, but modern commerce, social, and media has leveled the playing field for emerging companies.

Peer-to-Peer: This model has been around for a long time, beginning with eBay and Craigslist, but both companies have left certain categories open for innovation. By owning the entire stack including logistics, quality control and photography, startups have been able to provide a better customer experience than their predecessors. Poshmark (women's fashion), Move Loot (furniture), Threadflip (women's clothes), The RealReal (luxury), ReBagg (handbags), Slang (sneakers), Grailed (menswear), TrueFacet (watches), 1st Dibs (rare objects), and ThredUP (all fashion) are all companies operating in this space. More recently, this model has also gone further upstream with companies like OpenDoor (homes) and Beepi (cars). eBay still controls much of this market, but time will tell whether or not these companies will take a large portion of the pie.

Rental commerce: This category was opened up by Rent the Runway but there are other interesting companies in the space as well. The Black Tux provides tuxedo rentals online, Le Tote offers women's garments and accessories on a monthly basis, and Eleven James provides luxury watch rentals for men. This category can be more limiting, as quality control is more difficult and the use case doesn't span a wide variety of categories; nonetheless, existing companies in the space have seen strong growth and traction.

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As you can see, it's an exciting time to be investing in commerce companies. As the barrier to entry for these companies is reduced, more and more interesting companies and models will be born. In the midst of this sea of new companies and models, it can often be difficult to discern which will be winners.

One of the key things that we look for when investing in these companies is the potential strength of the brand. The most successful commerce companies have been able to build a strong brand that resonates with their customers. These "lifestyle" brands include the Honest Company, Gilt, and Warby Parker, which all have distinct brand identities. People that shop at the Honest Company care about their children and the environment deeply. Gilt customers are aspirational, wanting to live a more glamorous lifestyle in the mold of GQ. Warby Parker has built glamorous showrooms with more foot traffic than just about any other store with the exception of the Apple Store.

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Yet, it's important take heed of a recent shift in ecommerce toward opening up select, strategic bricks-and-mortar locations. Rent the Runway, Birchbox, and Warby Parker have all established physical locations in response to requests from their customers. After all, with ecommerce conversion rates no higher than about 5 percent, these companies have found a way to activate the other 95 percent of their traffic. While it is not an effective strategy for all ecommerce retailers, establishing tactical offline channels has proven successful for a handful of the winners. After all, humans are the end users and we don't usually think about offline or online strategy but rather that we want what we want when we want it.

Commentary by David Hirsch, co-founder and partner of Metamorphic Ventures, an early-stage venture capital firm in New York City. Prior to MV, he spent 8 years at Google, where he was on the founding team that launched Google's advertising-monetization strategy. Follow him on Twitter @startupman.

David Hirsch, through Metamorphic Ventures, is an investor in Thrive Market, Stowaway Cosmetics, Cotopaxi, Away, Move Loot, ReBagg, and Slang.