M13’s Brent Murri: Investing in E-Commerce's Next $700B in TAM at the Enablement Layer

ABSTRACT

KEY POINTS FROM BRENT MURRI'S POV

Why is e-commerce enablement such an important category moving forward?

• E-Commerce is a massive market opportunity, and online penetration is steadily increasing. The current market value in the US is $1T at only 15% online penetration. “Over the next five years this is expected to grow significantly. Another $700B  in TAM will be created and online penetration is expected to pass 20%," says Murri. (See chart, below.)
• Application layers are being built out to draw offline markets online for the first time. Verticalized industries that are transitioning online are going to drive a large portion of the upcoming TAM growth. “Take live commerce marketplaces, for example. They cater to brick and mortar retailers that still mostly sell offline,” Murri says. Another example is the sports trading card market, which until recently had largely transacted offline. M13’s recent investment in Arena Club looks to change that.
• Improved infrastructure is accelerating online consumption patterns. The entire Shopify ecosystem has advanced in the past few years. “New software tools that came after Shopify enable a brand to not only set up a store, but target and acquire customers and manage delivery more efficiently. This is enabling more goods to be purchased online than ever before.” As this trend continues, proliferation of online markets will continue to create gaps in the network and open the door for more kinds of providers. For example, the recent explosion of cross-border commerce has created a need for improved international logistics systems, and software providers like Passport have been leading the way in helping international customers receive their favorite U.S.-based DTC products.

What are the business models that might be attached to this category?

• Optimized e-commerce enablement tools. “Software tools that enable online merchants to run their business more effectively are seeing massive value creation. The entire Shopify space has advanced with new layers of software to support brands,” Murri explains. Examples of opportunity in this area are predictive commerce and leveraging organic content creation.
  • Predictive commerce tools that improve customer retention and lifetime value. “Think of the tool that Amazon uses to suggest ‘recommended brands’ or ‘customers also purchased.’This tool drives 35% of their GMV, or around $130B of extra revenue for the e-commerce giant. I believe this is a new ‘must have’ for brands, and there are software providers in the Shopify ecosystem that are bringing similar capabilities to DTC brands” argues Murri.
  • Organic Content tools that improve customer acquisition costs and drive advertising spend away from paid search channels. “CAC levels have risen over 50% in the past few years, turning unit economics upside down for many brands. Marketing tools that help brands find organic content and cheapen customer acquisition will be necessary for brands to hit profitability.” For example, Murri recently invested in a company called Bounty that allows merchants to leverage organic viral content on TikTok about their brand.

What are some of the potential roadblocks?

• E-commerce is susceptible to recessionary pressure.  Rising inflation and discretionary consumer spending could impact market opportunity in the near-term. However, this isn’t entirely bad news for enabling e-commerce. “As these pressures rise, investing in mission critical software tools will be more important than ever in order to run operations efficiently,” says Murri.
• The space is highly competitive and saturated. “There has been an explosion of activity in this space. The challenge for investors is distinguishing between point solutions that generate some value and the actual platforms that will emerge as larger businesses.”

VISUAL: $700B OF ADDITIONAL TAM

E-commerce growth continues to steadily grow its penetration as a percentage of total retail sales. Growth projected by M13 shows that the creation of an additional $700B in TAM will occur shortly before 2025.

IN THE INVESTOR’S OWN WORDS

We are still in the early stages of this category. The software tools that have been built out around Shopify are allowing merchants to do everything from communication to acquisition targeting to logistics. This category is seeing massive value accrual.

Innovation in content creation is changing the landscape. Software that targets organic brand content and pre-established online communities are offering merchants new models that drive down CAC and increase profitability. Ad spend is being driven away from paid search channels.

Some of the creator commerce businesses have switched their playbook by identifying a pre-existing community and building out a brand on top of it. This model can be much more efficient for long-term growth.

Growth in TAM for e-commerce over the next five years will be derived both from applications that are drawing previously offline verticals to online markets and from infrastructure technologies that are further increasing the efficiency and ability of online merchants.

MORE Q&A

Q: How do e-commerce enablement plays differ from DTC companies in value and growth opportunity?

A: "In Q1 of this year we broke down the numbers in a recent article to show the value creation of DTC brands vs. the software companies that enable these brands. At the time there were 515 unicorns in the U.S., or companies valued at over $1B, that represented a cumulative $1.8T in enterprise value. Of these companies, 2% of the value was attributed to DTC brands (e.g., Away, Glossier), while 11% was attributed to the software companies that enable these brands (e.g. Klaviyo, Attentive). As brands on Shopify and other e-commerce platforms like BigCommerce and Salesforce Commerce Cloud continue to grow, the software tools that power these brands will continue to accrue value."

Q:What do other market participants or observers misunderstand about this category?

A: "There is a common misconception that the rate of e-commerce is dramatically slowing because it isn’t as strong as it was during the pandemic. In reality, it has continued on a fairly linear trend in overall adoption.

Online penetration is a straightforward equation of online retail sales over total retail sales. The reason for these inflated numbers during the pandemic was because online sales continued to increase, while brick and mortar sales were nearly halted. During 2020 and partially in 2021, online penetration spiked in the mid-20% range. This was only because the numerator of online sales increased while the denominator was reduced dramatically with the near elimination of brick and mortar numbers. The decrease in online penetration we’ve seen post pandemic has just been a return to normal after an artificially-inflated spike. E-commerce penetration is still increasing at a steady rate."

Q: What is the time horizon for broad business, corporate and consumer adoption of the technology and behaviors that underpin your thesis?

A: "We’re still in the early stages of this category. Two of the largest players in e-commerce enablement are Klaviyo (10 years old) and Attentive (six years old). Most other players are smaller and between one to five years old. Meanwhile, we see that around $700B in TAM will be created in the next five years, and the number of online merchants will continue to grow. I believe that software and support systems are going to enable much of this TAM creation."

WHAT ELSE TO WATCH FOR

Services and tools that address the convergence of creators and commerce can bring brands to market at significantly lower unit economic costs. “The traditional model for DTC was to build a brand, find a market, and then finally create a community around that brand. This is being challenged,” says Murri. "Brands are leveraging content creators with an already developed and unique community. The marketing and branding are then built out on top of this existing community. Customer acquisition costs and marketing have significantly lower unit economic costs in this approach. One the most successful examples here has been the popular YouTuber, Mr. Beast, monetizing his massive online audience via food and beverage brands."

STARTUPS MENTIONED IN THIS BRIEF

• Arena Club
• Attentive
• Away
• Bounty
• Glossier
• Klaviyo
• Mr. Beast Burgers
• Passport