As Amazon has grown more dominant, investors' interest in e-commerce start-ups has plunged.
In 2016, venture deal volume in e-commerce start-ups dropped to a four-year low, while the total dollar amount was almost slashed in from the year before, according to CB Insights.
But there are ways to thrive in this environment, even when Amazon is driving more than half of US e-commerce growth, says Deven Parekh, an investor from Insight Venture Partners.
"There are ways to compete with Amazon," Parekh said. "The question is what are your odds and I don't think the odds are very good without a truly differentiated strategy."
Parekh, who's invested in successul e-commerce companies like Alibaba, JD.com and Fanatics, notes that several similar companies have built a strong following lately despite Amazon's dominance.
To illustrate his point, Parekh shared three different types of e-commerce business models that can work:
- Don't go after commodity categories: It's impossible to beat Amazon with the "everything store" concept. Instead, you have to go after a specific category that's hard to get into. For example, Wayfair has become a $7 billion dollar company by successfully focusing on the furniture space, a category Amazon is not focused on yet.
- Build an inventory-light, marketplace model: One way to keep costs low is to build a strong marketplace model with a unique offering. That way, you don't have to spend much on inventory, and once you reach scale, it becomes hard for others to replicate your model. 1stdibs (where Parekh is a board member) has done this by focusing on luxury art pieces, while start-ups like OfferUp and LetGo have become popular with their Craigslist-style apps.
- Build a strong consumer brand: You have to spend a lot of money on branding to make sure it instantly resonates with consumers. For example, companies like Casper or Dollar Shave Club have built a loyal customer base with a simple branding message.
That doesn't mean it's an easy task to pull off. Plenty of e-commerce companies have gone bust after enjoying early success, including flash sales site Fab and the daily deals provider Living Social. But given e-commerce is still in its early stages, accounting for just 11% of total retail sales, there's still much more room for growth.
"Amazon is a formidable competitor," Parekh said. "But there are certainly examples of companies that are executing well in e-commerce."