E-Commerce Software Funding Slows As Shoppers Pull Back

With inflation running at multidecade highs, budget-strapped consumers are cutting back on discretionary spending. 

For retailers, this has translated into fewer buyers for items like clothes, furniture and gadgets. Walmart shares tanked earlier this week after the retailer said it is having to cut prices to reduce merchandise levels, which brings profits down. Items like kitchen appliances and exercise equipment that were backlogged a year ago are now overflowing stores and warehouses. 

The slowdown also has extended to providers of backend software and services to online retailers. This week, Shopify—the stock market poster child for the e-commerce boom of 2020 and 2021—posted a quarterly loss and downwardly revised forecasts, and said it will cut 10% of its workforce.

Shopify shares, down about 80% from highs last fall, are also emblematic of broader sector woes. Others in the e-commerce software space, including relatively recent market entrants like BigCommerce and Global-e, are also down sharply.

For startup investors in the retail-focused SaaS startups, meanwhile, all of this is happening at a particularly inconvenient point in time.

That’s because last year, investment in e-commerce software companies hit an all-time high, with more than $4.8 billion in global venture funding, per Crunchbase data. This year started hot as well, with a decline in funding in the past couple months only slightly offsetting a rollicking first quarter. For perspective, we chart out investment to the space for the past 5+ years below:

Where did venture investments go in 2022?

Salsify, a provider of tools for retailers and brands to beef up their e-commerce presence, was the largest equity funding recipient in the space this year, per Crunchbase data. The Boston-based company closed on a $200 million Series F round in April at a $2 billion valuation.  

Other big funding recipients included:

  • Lehi, Utah-based Route, a provider of package-tracking tools for online orders, raised $200 million in a January Series B at a $1.25 billion valuation.
  • Boston-based Zoovu, developer of an AI-enabled platform for online customers to find products, raised $169 million in a June Series C
  • Toronto-based Shoplazza, which pitches itself as a commerce platform aimed at helping online brands “go borderless,” raised $150 million in a January Series C round led by SoftBank Vision Fund.

Notably, big financings followed several quarters of sharply rising revenue for funded companies.

Salsify, for instance, said it generated over $110 million in annual recurring revenue in 2021, up over 50% from 2020. Cart.com, meanwhile, said its revenue grew over 400% in the year leading up to its last funding round.

Market conditions, however, are sharply different from even a couple quarters ago. And the swell in online shopping that began in the early days of the pandemic has since receded. 

As Shopify CEO Tobi Lütke pointed out in a letter to employees this week, when the COVID pandemic set in, almost all retail shifted online, and demand for software to help with that shift skyrocketed. 

“We bet that the channel mix—the share of dollars that travel through e-commerce rather than physical retail—would permanently leap ahead by five or even 10 years,” he wrote. “It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-COVID data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful five-year leap ahead.”

For venture-funded e-commerce software software startups, it’s likely a similar trajectory will apply. Consumers haven’t abandoned their online shopping carts. And it’s reasonable to expect steady growth ahead. But the environment is now one in which supercharged growth will likely be much harder and costlier to achieve.