Forecast: E-commerce Startups Need To Flex Their Customer Service Muscles In 2021

Retailers that started 2020 without an online sales presence most likely went into 2021 with one, or at least plans to do so, in order to get a piece of what is likely to become an increasingly larger e-commerce pie.

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The e-commerce landscape has been a good space for startups, too. The sector has shown growth for direct-to-consumer brands as well as for providers of tools that help retailers sell more stuff online. Data shows global e-commerce sales are poised to reach record numbers by 2022, with revenue expected to grow to $6.54 trillion.

In addition to sales milestones, experts predict 2021 will be a year where more shopping experiences are customized, customer service is key and several e-commerce brands will enter the public markets.

“We are going to see companies leveraging artificial intelligence to present curated, personalized experiences with recommendations in a way that delights and engages the customer,” said Lori Cashman, general partner at Victress Capital, which invests in technology-enabled consumer startups.

Getting in front of the customer

With the global pandemic driving faster adoption of e-commerce, one of the questions investors are asking is if brands will be able to retain their newfound online customers, said Cashman’s colleague, Suzanne Norris, general partner at Victress Capital.

“We think this will be dependent on the experience the customer has online, and what drives a great online experience?” Norris said in an interview. “Convenience, price and more options—if those were the three before COVID-19, they still hold true, but will the experience be compelling enough to stick with the phone or computer versus the store?”

She says one of the largest components is fulfillment. Many companies offer next-day delivery, but when intense demand hits, like it did over the 2020 holiday season, there’s room for new winners and losers to emerge in the market.

“Will shoppers forgive fulfillment hiccups?” Norris added. “Brands really need to be focused on fulfilment. To some extent it is out of their hands, but they should be asking if there are improvements they can make on their end.”

Digital customer service has become an increasingly common term. Last week, both Hootsuite and Glia announced deals in the space, with Hootsuite acquiring customer engagement tool Sparkcentral, and Glia, which focuses on managing companies’ digital customer service, raising $78 million in Series C funding led by Insight Partners.

Customer interaction is something even small and medium-sized businesses have to focus on, Madison McIlwain, an associate at early-stage venture capital firm Defy, said in an interview.

“Retailers used to sell products face-to-face and have adapted to online, but still don’t have the tools for how to manage the post-purchase,” McIlwain said. “Brands are becoming more like people, and it is critical to have that customer communication—talking to customers like people, so that a trusting relationship will continue to mean more.”

Entering the public markets

Despite what seemed like a flurry of investment activity, for e-commerce technology startups—those with a focus on “e-commerce platforms” and “retail technology”—deals and dollars fell both globally and in the U.S. in 2020, according to Crunchbase data.

Investors poured $2.4 billion into 128 deals in the U.S. in 2020, compared with $2.5 billion in 195 deals in 2019, according to Crunchbase data. Globally, that was $4 billion in 363 deals in 2020, compared with $5.1 billion in 534 deals the year prior.

Overall, investors have sunk $21.1 billion into global e-commerce companies since 2016 and $9.4 billion into U.S. companies during the same period of time.

Abhi Kumar, a partner at M12 focused on India and Asian investments, said there continues to be massive opportunity for investments because venture capital firms are still bullish on the space.

In addition, the number of e-commerce companies entering the public markets is a product of the sector’s growth and the pouring of capital into it, he said.

In just the past year, a strong list of companies have either started trading on the public markets or indicated they plan to go public, including Wish, Casper, BigCommerce, DoorDash, Poshmark, ThredUp and Barkbox.

Damir Becirovic, an investment partner who invests in e-commerce companies at Index Ventures, told Crunchbase News it’s a good time for e-commerce businesses to head to the public markets.

“The growth is staggering for a lot of these companies, which are also amazing businesses,” he  said.

One of the companies on Tina Bou-Saba’s radar as a potential public-market entrant is Thrasio, which specializes in e-commerce, private equity, online retail and business growth.

“I don’t have an idea of if or when they will go public, but Thrasio has an interesting business model building on the growth of marketplaces,” said Bou-Saba, who is founder of Big Future Fund and CXT Investments, a seed fund that invests in consumer brands, platforms and services. “Right now, in this crazy, wild bull market, there is a positive reception to IPOs for companies that are consumer-focused.”

Sectors likely to do well in 2021

A few of the expected stand-out categories in 2021 are in grocery, home furnishings and fitness—three areas that gained traction as a result of everyone staying home during the global pandemic, experts say.

A big thesis for Coefficient Capital, a VC firm launched in 2018 with a focus to invest in digitally powered consumer brands, is the movement of grocery to online and what that will look like, said Arpon Ray, principal and COO.

Prior to COVID-19, 4 percent of groceries were sold online, and that grew to 10 percent in one year, Ray said in an interview. The market size is poised to grow to $1 trillion, he predicted, and of that, $100 billion was created essentially overnight.

In December, Coefficient and The New Consumer, a publication about how and why people spend their time and money, released the Consumer Trends 2021 report that shows 52 percent of millennials and 44 percent of Gen Z consumers prefer online grocery shopping.

“A lot of these trends accelerated through COVID-19 and it became a game-changing moment as we work to understand how much of this consumer behavior will stick,” Ray said.

Meanwhile, one investment winner in the home furnishings space is direct-to-consumer brand Resident, which announced last week that it had closed a $130 million investment led by Ion Crossover Partners and Nexus Capital Management.

Last May, Fernish, a Los Angeles-based startup that gives people a way to rent upscale furniture and decor online, raised $15 million in a Series A round led by Khosla Ventures.

Fernish co-founder and CEO Michael Barlow remains bullish about the sector, especially after 2020 redefined the relationship many people have with their house and physical surroundings in the midst of pandemic stay-home orders. There’s a potential $120 billion market up for grabs just in the furniture space, he said in an interview.

“Last year ingrained the home as important in people’s minds, and I don’t see that going anywhere,” Barlow said. “There is also a clearer path now than there was 12 months ago for a pure-play internet brand to get enough scale to march toward profitability.”

The home has become a work hub for many more people. For some, it’s also extended to become a gym, according to Elizabeth Edwards, general partner at early-stage consumer products fund H Venture Partners.

“Fitness apps are crushing it across the board,” said Edwards, who was an investor in Peloton before it went public in 2019.

She expects this momentum to continue in 2021, including quite a bit of deal flow as new companies enter the space. With the diversification of major players like Peloton, Edwards cautions that investors are looking for platforms that can be more of a fitness content company.

“It is going to be hard for new folks with a narrower offering to make it work,” she added. “If you just have a rowing machine, we will want to know if you can get into yoga or other areas in the future.”

Illustration: Li-Anne Dias

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Top VCs say they want to fund startups that solve retailers' biggest problem — e-commerce logistics

Summary List PlacementThe COVID-19 pandemic has forced all kinds of retailers to double down on e-commerce like never before. 
Even as restrictions on in-person retail have lifted across the US, many consumers are choosing to do more of their shopping online as they keep health and safety top of mind. 
eMarketer analysts have estimated that US online sales would reach $794.5 billion in 2020, a year-over-year increase of 32.4%.
But, businesses were met with some challenges while dealing with the huge influx of online shopping.
Some online retailers struggled to keep inventory in stock, particularly early on in the pandemic. Others began exploring new ways of getting goods into consumers’ hands as delivery networks filled up with packages. 
For venture capitalists looking to fund the next big thing in e-commerce, these bumps in the road spell opportunity.
Insider recently reached out to the top firms investing in e-commerce to get their take on where the sector is headed. Many said they were interested in funding startups that can solve problems for e-commerce businesses looking to scale.  
Read more: The 25 VC firms most active in funding e-commerce startups told us what they’re looking for in an investment — and shared the big bets they’re making for the future
“We believe that the best time to start a company is during times of uncertainty because both the cracks and innovation become more evident in a given sector,” Hans Tung, managing partner of GGV Capital, said. “If e-commerce is growing, then it’s only logical that new demand for infrastructure and analytics will be there.”
He said that the firm is interested in startups that provide “backend logistics, analytics, and operational services such as Flieber,” which helps online retailers manage their supply chain operations. 
He’s also keeping an eye on fintech startups, such as Affirm, that are changing how we pay for goods and services, to be trends in 2021.
Gautam Gupta, a partner at M13, said the firm is “looking for critical, not just nice to have, infrastructure that drives growth for independent sellers.”
He pointed to M13’s investment in Passport as an example, describing the startup as a “software-enabled international shipping carrier for DTC brands.”
“As US-based merchants look to expand their customer base overseas, Passport provides a full-service solution including logistics, duties and tax calculation, insurance and customer service,” he said. “As customers scale their international sales, Passport scales alongside the business.”
Adina Davis, an investor at BoxGroup, added that 2020 saw an “explosion of the Shopify ecosystem,” leading to investment opportunities. 
“We have been eager to make investments into companies that can serve as the infrastructure that supports e-commerce businesses in their growth,” she said. “This can span everything from innovative software solutions, to 3PL and warehousing solutions, to financing solutions, to innovations in the checkout experience, and more.”SEE ALSO: The top VCs funding e-commerce startups share what trends they’re excited to see more of in 2021
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