By Arjun Kapur
The infrastructure powering e-commerce has been ushered into a new era because of the pandemic.
The pandemic has changed the meaning of the phrase “window shopping”. Today, with the acceleration of e-commerce globally there is an ecosystem of tech tools which allow consumers to window shop virtually. The infrastructure powering the global e-commerce ecosystem is scaling rapidly and investors should understand the trends in this space to determine where commerce infrastructure and the overall tech stack is headed.
According to McKinsey, e-commerce witnessed ten years of growth within the first three months of COVID-related restrictions last year. The acceleration of e-commerce penetration both on the B2B and B2C side is arguably the most permanent industry shift resulting from the pandemic.
Companies have had to revamp and upgrade their technological capabilities to meet this unexpected demand. In doing so, they have ushered in the phase of Commerce 3.0 where startups are decoupling the front-end from the back-end of the infrastructure stack and providing increased flexibility and agility, both for their developers and consumers.
What are the roots of Commerce 3.0 and what does it entail?
The initial growth stage of e-commerce began in the dot-com era where companies went online for the first time by developing websites that could accept orders and deliver products efficiently. Pets.com, Webvan, and Boo.com are just a few examples that raised hundreds of millions of dollars from investors only to go bankrupt within two years of an IPO. The few that survived thrived; most successfully, Amazon has dominated the global retail landscape over the past decade.
The acceleration of e-commerce penetration both on the B2B and B2C side is arguably the most permanent industry shift resulting from COVID-19.
The second phase of e-commerce has been led by Shopify, which allowed for the creation of online stores for smaller merchants with order fulfillment capabilities. This online presence was bolstered by the existing brick and mortar or offline channel and has led to what is considered omni-channel retail today. Furthermore, this rising tide essentially lifted all historical brick and mortar retailers to create, strengthen, and focus on their own e-commerce and omnichannel capabilities. Those who did not make this pivot successfully have struggled, with the “retail apocalypse” serving as evidence of that failure.
We are now in the middle of Commerce 3.0, or the creation of tech infrastructure that allows consumers to enjoy the seamless integration of mobile, online, and offline experiences. Commerce 3.0 is driven by developers who create APIs and plug-ins to integrate online activity directly with retailers and provide them with personalized services, increased speed, and better functionality.
For example, Attentive is the leader in SMS marketing that allows brands to turn browsers into shoppers by running personalized advertising campaigns and increasing subscriber lists. If you receive a message that you added a pair of pants to your shopping cart and only three pairs are left in inventory, that message is likely to have come from Attentive, which is fully integrated with the inventory and back-end of the retailer. The scope and level of analytics they provide to retailers are beyond customer recognition, which is why Commerce 3.0 is characterized by the invisible infrastructure supporting the growth and proliferation of e-commerce.
What is unique about Commerce 3.0 is that it is headless in the sense that it separates the front-end user interface from the back-end of the tech stack. Historically, the integration was monolithic in nature, with both ends tightly integrated. Any change to the user interface required adjustments to the back-end, resulting in a lack of flexibility and lengthy delays. Headless commerce provides brands with the ability to be agile and produce faster web page load times with high conversion rates.
We are now in the middle of Commerce 3.0, or the creation of tech infrastructure that allows consumers to enjoy the seamless integration of mobile, online, and offline experiences.
A snapshot of companies in various verticals within the headless commerce ecosystem
What are the trends in this space?
The most recent trend within headless commerce is that of incorporating specialized microservices, which has resulted in the rapid growth of applications that integrate across Shopify, BigCommerce, Magento, and WooCommerce while also existing independently. This enables retailers to provide best-in-class services for a particular function. For example, a retailer could add Attentive for SMS Marketing, Shogun for building their storefront, and Fast for one-click checkout. The coexistence is referred to as the rise of Modular Commerce where individual modules allow for increased personalization, efficiency and speed.
To go a level deeper, there are also cloud platforms such as Vercel which allow developers to create headless applications by utilizing software development frameworks. Vercel has React, an open-source customizable framework that empowers developers by providing the tools and infrastructure to ensure ease of deployment and use for end customers. This is the second layer of headless commerce that allows for applications to scale, and it has garnered interest from both enterprise and consumer focused investors.
Where should investors focus today?
Swaths of investors have been attracted to this universe over the last 12–18 months, and a host of investment firms examine headless commerce startups including those with an enterprise SaaS, direct-to-consumer, and consumer internet focus.
A lot of the innovation within the headless commerce ecosystem is global. For example, Saleor is an incubation lab in Poland with a lean team that is able to scale and deploy applications. They recently raised their seed round from Cherry Ventures, as well as the Founder of Vercel and other notable e-commerce players.
Most companies in this field are still in their early innings and have largely attracted seed and Series A investment rounds. Investors such as Accel, Accomplice, CRV have had an eye on this space for a while and have invested significantly across the application and infrastructure stack. Other funds have raised dedicated pools of capital to focus on the wave of innovation that is likely to accelerate over the next 5–10 years due to the overall tailwind that the pandemic has created.
Investors are also data scraping and finding applications that are best-in-class within specific verticals appearing on enterprise websites given their scale, pricing flexibility, and preference for longer contract lengths.
What will commerce tools enable in the future?
With the rise of e-commerce tools and overall content creation today, platforms are now being developed which service individualized verticals and the creation economy. E-commerce enablement tools will focus on expanding the creator economy by facilitating the development of marketplaces such as Souler where consumers can purchase items from specific content creators within certain niches. Other areas that are still relatively nascent include B2B marketplaces, reverse logistics and after-market platforms which these tools will facilitate and promote in the future.
While the pandemic has clearly accelerated the adoption of e-commerce, it has also spurred the growth of an ecosystem that is invisible to the consumer but has massive effects for the future of commerce. The simple act of online window shopping and purchasing is made possible by an entirely invisible ecosystem that is scaling rapidly.
Arjun Kapur (’22) is a second-year MBA and Venture Capital Fellow at Columbia with a background in consumer investment banking and corporate development. He is also working with Left Lane Capital where he focuses on internet and consumer technology investing.
