Ecommerce is NOT Tech

ECOMMERCEI can see why people who aren’t living in Santa Monica are suspicious of LA Tech. Look at the companies that get the most Tech press – Shoe Dazzle, NastyGal, Dollar Shave Club, Honest, Beachmint. These are all incredible companies run by some of the best of the best entrepreneurs in LA and the world. None of them are tech companies.

Ecommerce hasn’t been tech since the 90’s. Selling stuff in a box over subscription turns out to be a big finance innovation – doing really smart things with up front costs vs. CLV is quite profitable. It’s not a tech innovation – Science knows this and they don’t care. They make great businesses not great tech business. (That’s actually an innovation in itself, an incubator that doesn’t just do tech).

Ecommerce tech is so standard now that all of the innovation is in Finance & Marketing. Using social media as a cheap & effective customer acquisition channel? Shoe Dazzle nailed that. Brilliant marketing insight. But don’t call it a tech company.

Amazon is a tech company. In 1995, selling books online was revolutionary. The internet was just becoming a thing. It took massive infrastructure build out to get an ecommerce site up. One click buying required quite a bit of biz ops and tech innovation. If Amazon was still just doing online retail, it wouldn’t be a tech company. Amazon has EC2. It runs a ton of the web’s backend. Amazon has Kindle. An Ecommerce company doesn’t set the standard for breakthroughs like Infrastructure as a Service and definitely doesn’t make its own hardware.

The difference is that a tech company continually innovates in technology. The company culture lives and breathes innovation. Tech companies are always looking at what’s next, how can they reinvent their own industry or someone else’s.

Google is a tech company. Reinvent Search. Reinvent Email. Reinvent cartography. Make cars drive themselves. Take over broadband because Comcast sucks at it and it’s the biggest bottleneck during a search query. Setting up a Magento instance and optimizing it might make you a startup by the definition of growing fast, but not a tech company.

The reason why tech companies get 20X multiples is because they are capable of reinventing industries with breakthroughs that let them create or takeover a market incredibly fast, and they do it with a lasting competitive moat around their latest move (technology breakthroughs are hard to replicate, or at least hard to catch up with).

In LA, much of the investment community doesn’t get it. I routinely hear angels say stuff like “this company is good because they have revenue”. That misses the point. Revenue is not a competitive advantage, it’s not a moat as wide as technology innovation. If all you want is revenue, open a McDonalds.

It’s not helping LA any that Ecommerce companies here far & away get the most tech press. This is what everyone sees living on the outside. They don’t see the companies brewing in Coloft and Cross Campus doing something different. Taking on industries. They don’t see the behind the scenes enterprise companies that are brewing. They don’t see the StartEngine companies taking real risks with innovations. At LA Tech Happy Hour, I’ve been lucky enough to see these companies – the ones that are doing something different. Almost all of them are unfunded. Nearly all of them. Companies that could easily close a $250k round in the valley don’t stand a chance raising money in LA because they’re competing with people doing online retail.

I see it changing though. I saw it at the Silicon Beach hackathon. I feel it everyday at Cross Campus. I hear it in whispers at LA Tech Happy Hour. The world doesn’t see it because the noisy folks today are in Ecommerce. If you’re suspicious of LA Tech because of what you hear is big from the press, I get it – I would be too. Dig a little deeper though, look at the companies that won’t die, the ones that keep innovating in the face of investors looking for a new way to sell socks online, the ones doing something different.

If you’re an investor, LA is your market. There’s very little sophisticated Tech investment competition here like there is in the valley. There is huge money to be made in LA, just know what you’re looking for and don’t be tempted by faux tech companies that have revenue. Your safe Ecommerce investment might net you 50% or maybe a rockstar 400% return over the next few years. Investing in a tech company, with a moat, and one taking real innovation risks, you’ve got a shot at 10X-1000X return. That’s X not %.

LA Tech is real. It’s happening, but please stop calling LA’s great Ecommerce startups tech companies.

5 comments

  1. Aaron George (@aaronwgeorge) · February 6, 2013

    This is incredibly well written and right on point. I couldn’t agree more and I am happy to be here witnessing the wave. LA Tech is what’s next.

  2. Pingback: Ecommerce is NOT Tech
  3. Zach Sekar · February 7, 2013

    This distinction matters most because it is so often lost upon LA angel/seed investors. There’s nothing wrong with investing in e-commerce businesses, it’s when you start talking about and valuing them the same as technology businesses that real tech gets lost in the noise.

    Just as Groupon never deserved Facebook’s P/E multiple, commerce businesses built off Magento don’t deserve the same multiple eBay paid to acquire Magento. ShoeDazzle didn’t disrupt shoe manufacturing, only the buying patterns of its customers. I’ll call them a tech company if they can bottle a defensible personalized recommendation engine and sell it to thousands of other companies.

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