Understanding The Social Commerce Bubble [Tulips in Netherlands]
The Social Commerce Investment Frenzy
New York Times published an article reporting the possible GroupOn IPO with a speculated value of $15billion for the venture. This news has not only resulted in increased excitement to invest in the social commerce space but also triggered a conversation about a possible bubble.
The reason for this belief has been the frenzy of investment in this space over the past 1 year or so. In recent times, the social commerce space has witnessed the following investments:
- $950m investment in Groupon, social commerce platform (group-buy) (Jan 2011)
- $1.2m investment in ShopSocial, a new Shop-And-Tell social commerce app that will offer kick backs for sharing purchases – (currently no more than a holding page as a site) (Jan 2011)
- $175m investment in LivingSocial social commerce platform by Amazon (Dec 2010)
- $10m investment in BeachMint, social shopping solutions (Dec 2010)
- $15m investment in Gilt Groupe, social commerce site (members-only flash sales) (Dec 2010)
- $31m investment in HauteLook, social commerce site (members-only flash sales) (Dec 2010)
- $6m investment in Payvment, social commerce software (shopping cart, payments) (Nov 2010)
- $30m investment in Lockerz, the teen ‘friends-with-benefits’ social shopping site with 18m members, including $18m from Zuckerberg/Bezos/Pincus sFund (Nov 2010)
- $5m investment in Yardsellr, social commerce app (f-commerce (Facebook marketplace)) (Nov 2010)
- $1.1m investment in ShopSocially, a social shopping site (shop with your friends) (Oct 2010)
- $20m investment in Etsy, social commerce platform (indie crafts marketplace) (Aug 2010)
- $15m investment in ShopKick, social commerce (check-in rewards) app (Jul 2010)
- $12m investment in Beyond the Rack, social commerce site (members-only flash sales) (July 2010)
- $16m investment in BuyWithMe, social commerce site (group-buy) (July 2010)
- $1.3m investment in Yipit, social commerce site (group-buy deal aggregator) (Jun 2010)
- $19.8m investment in Modcloth, social shopping site (indie fashion) with ‘be the buyer’ (customer driven inventory) program) (Jun 2010)
- $110m purchase of Woot, daily deals community by Amazon (Jun 2010)
- $7.5m investment in Swipely, Shop-And-Tell social commerce app that creates a social stream from credit card payments (May 2010)
- $11.2m investment in Blippy, the Shop-And-Tell social commerce app that creates a social stream from credit card payments (April 2010)
- $6m investment in PowerReviews, social commerce app (user reviews) (Mar 2010)
- $5m investment in Alvenda, social commerce software (f-commerce, shopping cart) (Jan 2010)
- $1.2m investment in ThisNext, social shopping site (Jan 2010)
The list highlights an approximate sum of $1.5bn has been invested in a segment which yet to be properly established. To better understand this frenzy it is important to review the history of economic bubbles and especially the last tech bubble (i.e. the dot com boom & burst).
Bubbles are Inevitable
The recent investment overdrive in the social commerce space is not the first time we have witnessed a potential bubble. Bubbles have been an integral part of our economy for a long time. Just in the last decade, we have experienced the dot com boom and bust (where startups with just a concept and no business model were valued more than stable & profitable businesses), and the real-estate boom (where house prices would just keep multiplying even before they were built). Each of these bubbles had their economical explanation and in retrospect the associated speculation seems completely absurd. However, every single time, when we live through them, the speculation and trading just seems too hard to resist. A great example of this is the first of such bubbles. This was related to flowers (can you believe that) !
In the 16th century when tulips were introduced in Netherlands, they became an instant craze. Very soon there were many passionate cultivators who bred various unique color varieties of the flower. Farmers started to sell them in the market and since tulips would only blossom between April – May, speculation started around them. The speculation on their value would happen from winter and people started the first ever futures trading market on the promise of the spring buds.
The frenzy resulted in the cost of the some of the multi-colored petal to be as much as acres of land, gold, prized paintings, etc. Finally in February 1637, the Tulip bubble burst and many people were just left with unsellable overpriced future contracts and some really nice flowers !
E-Commerce and the first dot com bubble
Now let’s look at the last tech bubble and the role commerce had to play. Investors have always had a bias towards commerce as those businesses have a direct revenue and easy to understand. So, when e-commerce came with the promise of massive scale and adoption (powered by the assumption of crazy internet penetration and lowering cost of web infrastructure) it was an instant sensation for investors. At that time it was very hard to deny the promise that this new way of doing commerce promised.
Fundamentally the claim was valid, however there was a serious mis-calculation on the time and effort required to grow such a business and reach profitability. Coupled with that was investment at crazy valuations with very little scrutiny of the idea or business model. Serious amounts of money got pumped into the sector and a lot of that was blown up on unnecessary large marketing campaigns and other frivolous expenses.
What resulted was a collective nose-dive of the segment barring a few pragmatic startups. These ventures had smartly entered early, created sensible business plans, and had execution skills to survive till actual market adoption happened. Such ventures like Amazon, E-bay, etc are now large successful businesses.
Rise of Social Media & why investors just love Social Commerce
The aftermath of the bust resulted in very little investment in the tech space. However, at the same time we started to witness the rise of the next generation web (also referred to as web 2.0). This web was being powered by democratization of online content publishing, Ajax, and search.
A lot of interesting web project (not startups, as they started with an idea and not a business in mind) sprang up with this evolution of the web. These projects relied on the new social nature of the web. They needed very little money to kickstart and get the service up and running and spread through viral / organic adoption rather than marketing dollars. Some of the most prominent web-project which later transformed into killer businesses from this trend were Flickr, Youtube, Twitter, and of course Facebook.
Investors loved them because of the low initial bootstrapping costs and true consumer adoption which was drive by viral yet scalable growth. However, the one thing was missing was a clear business model.
This is why investors just love Social Commerce. It has the scale of reach that was promised by e-commerce and is powered by the viral adoption of the social web. Social Commerce has all the advantages of social media and an added clarity towards making lot’s of money.
So, behind all this frenzy there is a justifiable reason for investors to be excited and investing in the Social Commerce space. It is the one segment that seems ready to leverage the value ( low infrastructure and engineering costs, great reach through smart-phones, and viral adoption of social web) that has been created by the tech industry over the last decade.
What’s Social Commerce and Its true value
In the midst of all this frenzy it is important to look at where can Social Commerce really create long term value.
Social Commerce or Social Shopping is defined as “helping people connect where they buy and buy where they connect”. The first part of the definition aligns with the work happening in the mobile commerce space where apps are people to connect while in a shop and the second part is being realized through commerce tools being powered by social networks like Facebook, Twitter, etc.
However, if you look at the definition closely, you realize that social shopping has always been a part of our lives. Even in the past if we had to buy a product, we would take inputs from other passionate people about the product ( i.e. communities), people who have used a similar product (i.e. experts and reviews from existing users) and people who understand us (i.e. our friends). The only difference now is that we have social technologies (i.e. both on the social web and mobile) that are helping us to this with greater ease, better reach, and nearly in real-time.
I think this is the true value of Social Commerce and that is what we should focus on and be excited about.
What’s your take?