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Back to the future for e-commerce
By Tim Bradshaw
Published: July 10 2009 03:00
Ten years after the first dotcom boom, digital-media investors have come full circle: e-commerce is again the buzzword on the lips of London’s venture capital community.
When it comes to spotting the dotcom stars of the future, they are once again turning their attention to companies that sell goods or services, rather than those that hope to make money from advertising.
Revenues from social networking sites such as Twitter and Facebook are still lagging the rapid growth in their user bases, and even the mighty Google is still working out how to extract the most value from its $1.65bn (£1bn) acquisition of YouTube . While e-commerce might sound a little dated, for investors it offers the comfort of a familiar business model – selling things for more than they cost to make.
“People have a perception that e-commerce has been done but it’s just starting,” says Fred Destin, partner at venture capitalist Atlas Venture. He predicts the rise of “super-niche, high-quality sites” that sell a much greater range of products or services in their chosen niches than the high street could offer.
In addition, “the web gives people the ability to deliver a much more personalised experience”, says Saul Klein, partner at Index Ventures.
Popular second-generation e-commerce sites include Richard Moross’ Moo.com , which prints individually customised business and greeting cards, and Glasses Direct , which is exploiting the untapped market for online spectacle sales. Online event ticket resellers Viagogo and Seatwave have also attracted substantial investment.
Investors are less confident when it comes to selling digital media such as music and movies online. While online jukeboxes such as Spotify are attracting millions of users with their promise of unlimited free music, the strength of their business models remains unclear.
“Right now there is not enough [advertising] money to keep subsidising these free offerings,” says Nic Brisbourne, partner at DFJ Esprit. “People have to start paying or make the ads pay better.”
But Julie Meyer, chief executive of Ariadne Capital, says Spotify “does look like one that has potential”.
Ms Meyer is also bullish on mobile services, which have long been seen as a “black hole” for investors. Ariadne has backed Monitise, a mobile banking company, and Spinvox , which converts voicemail into text messages.
Video games are another popular investment. Online video-gaming services such as Playfish are expanding beyond the PlayStation demographic by offering their games (and selling products related to them) on social networking sites such as Facebook.
“Most of our users haven’t played video games before,” says Sebastien de Halleux, chief operating officer and co-founder of Playfish. In its first 18 months, 100m Playfish games have been installed, a growth rate which has attracted $21m in venture funding from Accel Partners and Index.
Investors in ” social gaming ” are betting that the internet will disrupt the video gaming market as much as it has disrupted the music and movie markets. “Gaming is bigger than TV, bigger than music . . . it’s a phenomenal media,” says Mr Destin.
“The next stage will be start-ups going after the core business model of Electronic Arts”, one of the world’s largest console games publishers.
Online business applications are also popular with venture capitalists. As people become more used to the slick user experiences provided by Google, Yahoo and Facebook, they become less tolerant of older, clunkier business applicationsSAP.
Huddle , an online collaboration service, is among the British companies tapping into this “consumerisation of the enterprise”.
“Users and revenues are doubling every three to four months at the moment,” says co-founder Andy McLoughlin, with customers including Centrica and Diageo.
Huddle also runs DrinkTank , a regular informal gathering of tech entrepreneurs. Mr McLoughlin says he has seen valuations “really dip” for start-ups raising new funds, with investors demanding more equity for less money.
In spite of that, many entrepreneurs see the recession as the best time to launch a business. It is cheaper to hire staff and marketing costs are lower.
“There’s a massive difference in the cost of setting up a business today”, compared with 10 years ago, says Michael Acton Smith, who founded Firebox.com, the online gadget seller, in 1998. “Now one or two guys with a few hundred or thousand pounds can set up a site and test it. And a lot more people are trying.”