Venture Capital Funding Doubles for Online Retail

(Reuters) - Consumers spent a record $1.25 billion on Cyber Monday, according to comScore, highlighting how much people love shopping online.

But another group is in just as much of a frenzy over online retail: venture capitalists, who invested a record $2.39 billion in online shopping this year, according to Thomson Reuters data. That's more than double last year's $1.06 billion, which in turn was almost double the prior year's investments in the sector.

(For a graphic on venture capital investments in online retail, click on link.reuters.com/bec55s.)

We think that online commerce -- traditional goods, soft goods, social commerce, flash sales -- that whole category is going through a tremendous amount of innovation, Tony Florence, a venture capitalist at New Enterprise Associates, told Reuters.

You've got this confluence of technologies and business models that for consumers is creating a unique value proposition. NEA has backed online retailers ranging from high-end flash-sales site Gilt Groupe to diapers retailer Quidsi, which was bought in 2010 by Amazon.com for $500 million.

The excitement has led to a surge of investment in the sector. Shoedazzle, a subscription site, secured $40 million from investors like Andreessen Horowitz and Lightspeed Venture Partners in May, and Gilt Groupe landed $138 million in May from backers including Goldman Sachs and NEA.

Earlier this week, flash-sales site Fab.com raised $40 million in a round led by Andreessen, just months after transforming itself from a network for gay men.

EXTREME CURATION

A big part of the growth stems from changes in habits in shopping online. A few years ago, people used search engines to find specific things they needed.

Now, because of sites like Facebook that make it easy for people to see what their friends are buying and for merchants to get the word out about their products, potential customers are much more likely to gain exposure to products they might not otherwise be aware of, and to shop when they weren't necessarily planning to.

The Web makes it easier to acquire customers and engage with those customers, said Roger Lee, a venture capitalist with Battery Ventures whose investments include Groupon and customer-review site Angie's List.

To encourage shoppers who feel overwhelmed by too much choice, many sites offer highly curated selections, often to a degree not feasible in a bricks-and-mortar store. Retailer Joyus.com, for example, offers sales of perhaps a dozen items at a time, each carefully chosen to appeal to professional women, such as chic blouses that look good at the office and dressed down on weekends.

Curation taken to an extreme is what drives the daily-deal category, which has spawned some of the biggest growth in online retail by offering a deal per day. The offers arrive by email, and members can decided whether to purchase them.

The category gives some investors the shakes, given large losses at Groupon. But Groupon's rapid growth -- its revenue for just the first nine months of this year totaled $1.1 billion, more than three times the total for the whole of last year -- illustrates the potential for online retail.

VIDEO SHOPPING

Gilt Groupe CEO Kevin Ryan says his private-sales company will achieve $2 billion in annual gross revenue within five years, up from $500 million in the year ended June 30. In part, that's because being online gives Gilt a peek at information it wouldn't otherwise have about its customers, such as knowing not just order history but the types of items they like to look at on Gilt's site, he told Reuters. That allows for very tailored sales pitches.

In most sectors, online sales are under 10 percent of their offline totals, said NEA's Florence, which he argues will change quickly giving the increasing time consumers, particularly younger ones, spend on the Internet.

Part of the change will come as companies experiment to get the most out of the medium, for example with video. Joyus Chief Executive Sukhinder Singh Cassidy says video eventually will drive significant sales volume compared with static pictures.

Yield over still, that's what we have to optimize, she told Reuters. She said using video helps her site create a richer experience, with short and chatty demonstrations designed to seem more like a friend is sharing a tip rather than a sales pitch.

While she is carefully tracking sales data based on her videos, that metric is still relatively unusual, she said. Video online is still mostly measured in engagement -- how many viewers watched and for how long -- rather than responses, making it hard to gauge success, she said.