The Subscription eCommerce Hype Cycle

While investor enthusiasm and valuations in the daily deal space are falling like a lead balloon, it looks like a new startup meme may be poised to take the crown from the daily deal space as the new hot area for investment – subscription eCommerce (or “SubCom” for those in the know)

Subscription eCommerce services generally charge members a monthly fee to receive some type of box which contains either complete products or samples. These boxes are generally demographically targeted. So for example Birchbox targets women with cosmetics or Manpacks targets men with a monthly fix of underwear and condoms delivered to their door (their tagline – “Clean Up, Get Laid”). There are numerous other players attacking the male & female markets as well as others including flowers, children’s clothes, food, etc. They all hope to build a loyal base of customers whose preferences they understand intimately and who can offer them the highly coveted recurring revenue model and other upsell and monetization opportunities.

The revenue model while still in development for some of the players generally centers around making money from member subscriptions and/or fees for products which members buy. Also, for players who ultimately achieve scale, there is likely a lot of “data exhaust”, i.e., data about customer preferences that they can use to make better recommendations and which would likely be valuable to the suppliers of the products that go into the boxes. But that data exhaust is only possible at scale which none of the companies in the space appear to have yet achieved. And for those companies that achieve scale, suppliers may actually be willing to buy a spot in the boxes to reach their customers turning COGS into a revenue center.

However, on the spectrum of technological complexity, subscription ecommerce companies are not technically difficult businesses and so barriers to entry are minimal – a knock on the daily deals space since the beginning. This invites lots of new entrants – some funded (as the first graph below illustrates) and many others unfunded – which suggests an increasingly crowded market. And the subscription commerce space is attracting lots of companies (interestingly, there are at least 5 players targeting men).

http://www.cbinsights.com/embed/aggregate_funding.php?h=500&w=635&sm=10&sy=2010&em=cur&ey=2011&ctag=290
Venture capital data by CB Insights

Most of the fundings to-date in the space have been in early stage companies (1st graph below) but some of the more recent venture capital rounds into the more mature subscription ecommerce companies are trending upward significantly. And so akin to daily deals, these are businesses which will require not immaterial amounts of capital to scale.

There is also the risk given low barriers to entry that providers of these supplies or those who have relationships with these demographic bases already could enter. We’ve heard rumors that Sephora may be interested in entering which would present a formidable challenge to BirchBox. Or if Thrillist chose to attack the space, their reach into the male market and knowledge of their preferences along with relationships with existing sponsors could mean bad things for those delivering boxes of manly goods to your door. And for many of the companies at the earlier stages, these incumbent players may represent an existential risk as these young companies don’t have a customer or IP lead that provides them a credible competitive moat. And then there is the always the potential of the 800 pound gorilla Amazon targeting the space. It is well known that Amazon likes subscriptions.

http://www.cbinsights.com/embed/percent_deals_by_round.php?h=500&w=635&sm=9&sy=2010&em=cur&ey=2011&ctag=290
Venture capital data by CB Insights

http://www.cbinsights.com/embed/avg_deal_size_by_round.php?h=500&w=635&sm=9&sy=2010&em=cur&ey=2011&ctag=290
Venture capital data by CB Insights

Of course, unlike daily deals, SubCom companies don’t suffer from the need to have feet on the street in every market like a daily deals company which may mean a more efficient and scaleable sales & marketing process.

Given the number of new entrants emerging into subscription ecommerce and the funding love that investors are now showering on the space (akin to what happened in daily deals), we’ll expect consolidation in the form of distressed M&A occurring about 9-12 months from now much like is happening with daily deal M&A. Of course, this also means there may be some breakout winners in the space as well.

We’d love to hear what companies you think are poised to be the winners in subscription ecommerce and why, i.e, what’s their secret sauce? And also do you think subscription ecommerce funding is getting bubbly just as daily deals once did or is there something about this market/meme which makes it different?

For those interested in more on the subscription ecommerce space, you should check out the following thoughtful posts by other folks discussing SubCom. Specifically, Sean Percival’s post here, Rob Go of NextView Ventures’ thoughts on SubCom here and this answer by Elizabeth Knopf about SubCom on Quora here.