Demandware, IPOs, and Bubbles
3 Min Read
One of my favorite bloggers and analysts in the ecommerce realm is Jochen Krisch. Not only does his blog, Exciting Commerce (supported by a team of smart colleagues), seem to scoop more stories than most other observers of the ecommerce industry, it also provides cogent and often non-obvious analysis of key industry milestones.
The blog is published in German and then translated (generally very well) into English, so that the English language entries lag their release in German by a few days. Nevertheless, I learn more about the industry by following Jochen than any other commentator I can think of. (Unfortunately, my high school German is not up to reading him in the original.) The fact that he is European and casts his eye globally adds a depth of coverage often lacking in US based commentators. All of which is preamble to his recent post about Demandware’s plans for an IPO. One salient observation that Jochen makes is that of all the frothy acquisitions and valuations in the technology space this year, ecommerce is a hot area. Not only are individual ecommerce plays making a splash (think Rue La La, Groupon (rumored IPO, $25B), Shopzilla and on and on), but the major ecommerce platforms themselves are making headlines with sustained M&A activity. Earlier this year, Oracle acquired ATG for $1B. (Read our analysis.) eBay took out GSI for $2.4 billion.
Nearer and dearer to our heart, eBay also recently acquired Magento. As a result, eBay now has offerings for thousands of smaller merchants (i.e., eBay), the mid-market with Magento, and the high-end market with GSI. (Although, in its defense, we at Corra are seeing ever larger deal sizes for Magento as it moves up-market into the enterprise.)
Magento obviously played the open source card perfectly. By creating great code, originally driven by the requirements of their consulting clients, putting out a robust open source community version, and then nurturing the hell out of that community, Magento rapidly gained critical mass in the market, attracting legions of users, millions of downloads, and major support of 3rd party developers. As a result, when they executed on the commercial side of their business in August 2007 with an Enterprise Edition sold only under license, they entered the market with huge momentum that hasn’t stopped since.
As a result, the rumored $180M valuation that Magento went for, if true, is well deserved. In fact, I would argue that Magento could have fetched an even higher premium on the open market with their amazing growth and success had it not been for the fact that eBay already owned a significant stake in the company and probably had the first bite at the apple.
Clearly, Magento’s success is not due to being open source per se. To wit, old-guard open source ecommerce platforms ZenCart, osCommerce and VirtueMart are also-rans at this point. Rather, Magento is succeeding by harnessing the ingredients required for any successful software company: superior leadership at the helm, great technology that is constantly progressing, and a strategic vision that is right for the times. Recall that in 2007 when Magento launched, ecommerce was, from any reasonable perspective, a fully mature market. It was saturated with lower end open source products, Yahoo Stores and their ilk, eBay, and grownup offerings like ATG, etc.
And into that sleepy, fully developed market stepped Magento, now the world’s fastest growing ecommerce platform. Add to this the mergers and acquisition activity in this suddenly hot space and that “sleepy” market is looking awfully exciting. At these valuations, are we talking about a bubble? As with any irrational exuberance, a bubble is only obvious in hindsight. Nevertheless, all of these platform companies are profitable and growing, unlike the business-model-challenged startups of the infamous dot com bubble. Furthermore, it is hard to make a case that the ecommerce business overall is going to decline in the foreseeable future.
There may not be a lot of F500 brands left to get online (but go get ’em Oracle if you think you can), but every company below that is actively working on their ecommerce strategy and technology. I suspect that the general ecommerce arena (both on the platform side and on the merchant side) is going to be one of rapid innovation for some time to come. We know mobile commerce is on its way. We know that evermore populations and demographic segments are coming online and buying things. And we know that a new business model combining social and commerce and search and god knows what comes online every day…. We expect to be VERY busy.