Is Return on Investment Guaranteed in E-Commerce?

It is known that many entrepreneurs are influenced by success stories from Silicon Valley.

In fact, the success stories are always the same. A young talent comes up with a great idea. Then they pitch it to a good investor.

According to this theory, you can become a millionaire in a day.

However, even in the US, real life is not such a bed of roses. According to an Australian study, 70% of startups fail in the first five years (McKaskill, 2009; 10).

A young entrepreneur comes up with an idea that really works. But often ideas alone are not enough. Investors somehow want to see the idea in the flesh.

Either the entrepreneur himself writes a platform day and night, or he hires some talented engineers with his family's equity capital and tries to build at least a tangible platform.

In his Tweet dated December 28, 2019, Elon Musk stated that in 1995, he put $2,000 into the capital of Global Link Information Network, received $5,000 from my brother and $8,000 from Greg Kouri, and at a later date when the risk was reduced, he received a $200,000 angel fund contribution from his father. However, after waiting a year, Mohr received a US$3 million investment from Davidow Ventures. He subsequently changed the name of the company, which provides licensed online city guide software to newspapers, to Zip2.

Although Alibaba Group was officially founded in 1999 by 18 people led by Jack Ma in a Hangzhou apartment building, it was only a year later that it received US$25 million in investment from Softbank, Goldman Sachs, Fidelity and other investors (Huang et al., 2009).

From this point onwards, the bread began to rise. The venture starts to attract the attention of investors.

However, the money that investors give is actually the company's money, and is spent on acquiring skills (usually a server system and software infrastructure), organization and other costs to provide better service.

Unfortunately, those who just buy a domain name and software and launch a website rarely succeed. Advertising campaigns need to be organized so that the customer gets to know the site, uses it and has a positive image of it. There are even promotions to keep the customer on the site. All this wipes out investment resources.

So, what does the entrepreneur gain from this? In general, entrepreneurs are both the CEO and the employee of the startup in the first phase. Since everyone has to support their households, they may receive some salary depending on the agreement.

In countries like the US, it is very popular to offer stock options to executives. In countries like Turkey, stock options are only possible if the company owns its own partnership shares. However, startups are usually established as sole proprietorships due to tax advantages. After receiving investment, they are registered as limited liability and joint stock companies. Therefore, at first, the company already has the status of an ordinary partnership.

So, how is the return on investment achieved?

This issue must have been a problem especially for venture capitalists, as J. Kelly says: "There are only four ways for a venture capital investor to exit a venture capital firm: IPO, merger, redemption or bankruptcy. You can divorce your wife, but not the venture capitalist!" (Golis, 2002). 

In fact, in most cases, a profit-based return is not expected in the initial period, especially in e-business companies due to the continuous growth of the company. Most companies are not interested in monetizing the value they already offer due to the fierce competition. AliBaba, for example, is working for free in order to acquire long-term customers and compete with e-Bay, and cannot figure out how to generate revenue streams. The same problem applies to Google, which was founded in 1998.

At that time, there were two ways to get a return on investment in such technology companies: sell the company in its youth or go public on the stock exchange.

Nick Ferguson, President of Schroder Venture Holdings, said, "There are three times to sell a startup: early, late and at exactly the right time. But it is intellectually impossible to have all sales at the right time. Selling too late is stupid. That's why sales are usually made early. " However, selling the company at a young age does not bring the desired returns. Dr. Tom McKaskill (2009; iii) suggests that this period should be between 3 and 5 years.

On the other hand, when unprofitable but growing companies enter the stock market, hopes for the future are priced in and unit share prices skyrocket. For example, between 1995 and its peak in March 2000, the Nasdaq Composite Stock Index rose 400%.

However, the stock market started to fall after a while due to companies that were constantly making losses. Nasdaq fell 78% from its peak until October 2002 (https://en.wikipedia.org/wiki/Dot-com_bubble).

This situation prompts companies to find a solution to fix their balance sheets. Companies like Google find the solution in advertising. Companies like AliBaba are trying to generate revenue by launching paid premium services with more professional add-ons.

Many companies see customer retention as the key to securing profits. That's why they use different standard customer-related e-scales as part of your ROI analysis, including reach, acquisition, conversion, retention, loyalty, duration, abandonment, attrition, churn and innovation. For example, if you have a total of 500 potential buyers for your product or service and you place an online advertisement that 100 potential buyers will see, your total reach is considered to reach twenty percent (https://www.encyclopedia.com/books/educational-magazines/return-investment-roi-metrics-e-commerce-services).

In this context, the revenue of Alphabet, the holding company of Google, Inc. and various Google-related ventures, grew from $39.3 billion in 2018 to $46.1 billion in 2019 (https://techcrunch.com/2020/02/03/alphabet-earnings-google-cloud-on-10b-run-rate/#:~:text=The%20company's%20revenue%20grew%20from%20from%20over%20the%20same%20time%20frame)

For 2019, Alibaba's annual net income is 13,053 million dollars, an increase of 27.96% compared to 2018 (https://www.macrotrends.net/stocks/charts/BABA/alibaba/net-income).

References

Golis C. C. (2002), Enterprise and Venture CapitalA business builder’s and investor’s handbook, Fourth Ed. S, Avustralia: Allen & Unwin.

Huang L., Hu G., Lu X. (2009) E-business Ecosystem and its Evolutionary Path:The Case of the Alibaba Group in China, Pacific Asia Journal of the Association for Information Systems, 1(4), 25-36.

McKaskill T. (2009) Raising Angel & Venture Capital Finance: An entrepreneur’s guide to securing venture finance ,  Melbourne: Breakthrough Publications, iii