E-Commerce: Fertile Ground for Venture Investors

The U.S. economy is in a funk, but that doesn’t mean opportunities for venture investors have dried up. E-commerce is one sector that will see continued growth opportunities even in an economic downturn.

In fact, industry observers say growth and revenue opportunities for e-commerce ventures — such as alternative payment options, next-generation advertising technologies, trading services, lead-generation platforms, and more — are as attractive as ever.

Trends Converge

E-commerce remains appealing to consumers and interesting to VCs for several reasons. Increased Internet adoption, low-cost broadband, ubiquitous smartphones, increasingly sophisticated e-marketing technology and stronger security are driving consumers to shop online.

When they shop, they typically find the goods they want at prices that local retailers find hard to beat. Better still, orders are delivered to consumers’ doors for much less than the cost of a tank of gas. It’s a perfect competitive mix for the current economic environment.

It’s also a global industry, unrestrained by borders. As the number of Internet users around the world rises, so too does the number of Internet shoppers and the amount they spend.

Fueling this rising tide are innovative companies that are identifying unmet needs or technological gaps in the global e-commerce infrastructure — and then filling them with sophisticated new services or technologies. Some of the areas of highest activity:

  • Security. Consumers lost a total of US$49.3 billion to identity theft last year, and the figure continues to climb. Online businesses are under increasing market and legislative pressure to keep shoppers’ information safe. The opportunity for tech companies is to develop superior techniques for keeping sensitive information out of the hands of cyber-thieves. Clearly, conventional tools for dealing with viruses, phishing attacks, spyware and other malicious software aren’t doing the job. Demand from consumers, merchants and financial institutions is sustaining healthy investment opportunities in young companies with a focus on security.
  • New payment methods. With U.S. consumer debt at all-time highs, adjustable-rate mortgages squeezing homeowners, and food and fuel prices setting records, consumers are more willing than ever to consider alternative ways to pay. This goes double for merchants, who are competing aggressively for buyers’ loyalty and dollars. That’s opening doors for technology innovators, who are rolling out alternative payment systems that are interest-free, incentivized, more secure than credit cards, or all of the above. PayPal was an early entrant into this space, but the success of firms like BillMeLater indicates that there’s still plenty of room for innovation. This represents an interesting area for investors looking to get a piece of the multibillion-dollar payments industry.
  • Advertising technology. Internet advertising represents just 10 percent of global ad expenditures. Even so, that makes it a $21 billion industry — one that’s growing faster than any other advertising sector. Advertising as a whole is transitioning from print, radio and television to the Internet. This is a major media shift, and it will create great opportunity for startups all along the marketing infrastructure portion of the value chain. This will be most notable in the technology that facilitates more sophisticated targeting of ads. While analyst forecasts of the near-term online ad market vary, there’s no doubt that the upside, in the long term, is huge.

Instability in major areas of the U.S. economy is certainly cause for concern, but that doesn’t mean venture capitalists are rolling up their welcome mats and bolting the doors. The venture industry is surprisingly resilient, thanks in no small part to its ability to ferret out bright spots of opportunity where others fear to tread.

These days, that means keeping a keen eye on expanding demand for e-commerce services and technologies. These sectors have defied downturns in the past and will likely continue to do so in years to come.

Kevin Kemmerer is senior vice president and managing director of the technology group at Safeguard Scientifics.

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