VC Funding Patterns Suggest Subscription eCommerce Bubble

By Pete Rizzo (@pete_rizzo_)  

Recurring revenue models successfully increase traditional online sales – at least that’s the latest finding from one of subscription eCommerce’s emerging heavyweights, Birchbox.

The New York-based commerce platform revealed on August 15 that 50 percent of its monthly subscribers are converting on purchases through another channel. But, while Birchbox has found success, a new study suggests subscription eCommerce may be losing the interest of another key demographic: investors.

CB Insights released a new report on October 14 that found that 83 percent of subscription eCommerce deals completed over the last two years have come either at the seed, angel or Series A stage.

“The companies in the space have largely not graduated to mid- and later-stage rounds,” the report authors wrote. “While one would normally expect follow-on rounds to be larger than the initial rounds, this is not the case in the subscription eCommerce space.”

The report provides evidence that the subscription eCommerce business may be at the beginning to decline, and that certain major players may be making the right move by pivoting away from this model.

Subscription eCommerce Buoyed By Big Deals

CB Insights found that the subscription eCommerce industry has earned $388 million in venture capital from 87 deals since 2011. But, roughly 20 percent of this funding came from investments in two companies: Glossybox and JustFab.

Further, from the third quarter of 2012 to the third quarter of 2013, the number of deals in the eCommerce sector has declined 2.27 percent. Though, this figure was bolstered by the nearly 10 deals completed in the third quarter of 2013.

Less than five deals were completed in the space during the first and second quarter of 2013, a sharp decline from the more than 15 deals observed in the third and fourth quarter of 2012.

Subscription eCommerce By Investment Stage

Adding further evidence to CB Insights assertion that the market is weakening, the report found that there has been only two Series D funding rounds since 2011, worth a combined $75 million.

While there have been more seed, angle and Series A rounds, 30 of these deals, accounting for nearly 35 percent of all deals, were for less than $1 million.

Subscription eCommerce Market Provides Little Incentive To VCs

The study’s data suggested one reason VCs may be losing interest in the space has to do with its lack of exits. The subscription eCommerce sector has seen just seven exits in the past year, and is only averaging two per quarter, CB Insights said.

Further, the report noted that not all the completed exits have been good for investors.

For more on JustFab’s acquisition of ShoeDazzle and what its results will mean for those looking to invest in the space, read the full report here