Marketplace / Software for eCommerce?
May 03, 2024
by a searcher from Columbia University in Brooklyn, NY, USA
Have you been involved in eCommerce software or marketplaces / platforms? Looking at an opportunity (think Etsy or Shopify for a specific product type) and would appreciate speaking with other folks with experience there
Few key questions right now:
1. Valuation - how did you approach valuing the business when a significant portion of revenue comes from transaction fees?
2. Diligence - what did/would you focus on in diligence? Any unusual metrics you would look for?
3. Credit card processing - one potential growth lever is offering credit card processing (right now, each merchant uses their own processor account) and sharing the volume discount. Obviously, this introduces more complexity with remitting the payments to merchants. If you have dealt with this, what surprises did you encounter?
in San Francisco, CA, USA
Ecommerce marketplaces live and die by the supply side, so this is where I'd spend the most time in DD if I were you.
For example, I'd consider what role in the supply chain the sellers occupy. Are they closer to the point of production or are they typically middlemen? This dictates how much pricing power you'll have. At Wish we worked directly with manufacturers in China and Southeast Asia, which is why everything was so cheap. But the tradeoff is that they were very difficult to work with, and in some cases were outright fraudulent. Distributors/middleman bring a level of consistency to the process, but obviously charge a significant markup. If I were in your shoes I'd still prefer working with middlemen, as I'd prioritize predictability post-acquisition.
Metrics off the top of my head:
- CAC: is the company spending more money to bring users in than each user is generating? This can be tricky as marketing costs may not always appear as a marketing expense. For example, a data science resource might go under R&D, but in reality what they're actually doing is optimizing ad spend and those optimizations go away if the employee leaves.
- SKU diversity: one of the most closely watched metrics at Wish was the total number of unique SKUs on the platform. SKU diversity correlated almost perfectly with GMV, and even a small decrease in the total number of available products led to an immediate drop in revenue. Wish was very much an impression-driven platform however so if the company is in a specific niche this may not be as important.
Happy to chat more if it's helpful, you have my email!
from University of Notre Dame in San Diego, CA, USA