Business

5 questions venture capitalists should ask e-retailers before investing

This is a guest post by Dotcom Distribution executive Doug Sternberg

Business is booming in online retailing. During Cyber Monday ’12, consumers spent nearly $1.46 billion online, underscoring the value of growth-minded online commerce startups in the venture capital community.

But what many eCommerce startups, private equity groups and venture capitalists don’t realize is that once the retailer surpasses a certain number of daily orders, their third-party logistics (3PL) provider often can’t keep pace with sales. In many cases, successful eCommerce startups grow so quickly that orders exceed the capacity of existing fulfillment routines and resources.

Investing $20 to $400 million in a non-scalable eCommerce startup isn’t an attractive option for any investment firm. So to protect their investments, VCs and equity partners need to properly assess the capabilities of the retailer’s third-party logistics provider before they commit to the next round of funding.

Evaluating whether third party logistics are scalable

Thorough assessment of 3PL scalability should be a priority for any organization investing in an eCommerce startup. By asking the right questions, you can improve your ability to determine whether the retailer’s logistics provider is capable of scaling fulfillment to accommodate a steep growth curve.

  • Does the 3PL have proven experience and a performance-based history with larger online retailers?

There is a big gap in capabilities within the logistics industry. Most 3PL providers are capable of leveraging basic infrastructure to help retailers reach the critical $5 million, 150 orders per day benchmark. But from an investment perspective, the 3PL has to be able to handle a “hockey stick” growth curve, seamlessly enabling the retailer to go from its early stages to $50 million without having to completely retool infrastructure.

  • Does the 3PL consistently provide the retailers with key performance metrics?

Accountability is the driving force behind a healthy, sustainable 3PL relationship. Although 3PL management teams usually tout the importance of accountability, the real test is whether or not the logistics provider regularly delivers mutually agreed upon performance metrics to the retailer and investors. Since many smaller 3PLs don’t have strong reporting recipes, the availability of key performance metrics can also be a sign that the 3PL is equipped to handle much larger fulfillment volumes.

  • Are the 3PL’s shipping and packaging solutions tailored to meet the retailers’ specific needs?

In addition to making sure that the 3PL has the capacity to manage the retailer’s growth requirements, VCs need to determine whether the company’s logistics provider has the equipment, technology and facilities to provide tailored shipping and packaging solutions on a large scale. Custom software development and first-rate client services departments are telltale signs that the 3PL is equipped to deliver tailored solutions after the next round of funding kicks in.

  • Are evolution and improvement initiatives a priority for the 3PL?

The best 3PLs are constantly evolving through continuous process improvement initiatives, generating ideas that remove costs from the supply chain and use technology to help clients grow their business.  A quick way to assess the 3PL’s improvement agenda is to ask about the company’s current initiatives to drive change as well as examples they have implemented in the past.

  • Is the 3PL responsive and culturally aligned with the retailer?

The company cultures of the retailer and the 3PL must be aligned before rapid growth occurs. Although technology resources are important, startups poised for explosive growth should have a solid relationship with a responsive logistics provider that can continue to provide a high level of customer care even after capacity has increased tenfold.

Fulfillment and logistics snafus routinely sink successful eCommerce startups. But with a little digging and a few simple questions, investors can make real progress toward protecting their investments and securing reliable fulfillment channels for the e-retailers in their portfolios.

Doug Sternberg (1)As Executive Vice President of Client Strategy, Doug Sternberg directs the strategic planning activity with client partners to insure management teams are aligned and client objectives are consistently achieved. Doug’s background includes 30 years’ experience managing fulfillment, ecommerce, catalog, direct marketing and supply chain initiatives. Prior to Dotcom, Doug served the industry in various management and executive capacities as VP of Operations, Director of Customer Service, VP of Client Services and VP of Marketing & Sales. 


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