Clipperton finance Sectorial Newsletter: e-commerce

Clipperton Finance
Sectorial Newsletter n° 1: e-commerce
It will not come as a surprise to anyone — Potential up-coming leaders of pure
interested in new ventures: e-commerce e-commerce are emerging in segments
is a hot sector. Clipperton Finance has where online penetration has been
provided transaction services to European historically low, for example automotive.
High Tech and Media companies since
its inception in 2003, and over the past Many European e-commerce businesses
18 months we have observed a wave of have been successful at building national
investor interest in European e-commerce leaders. However, these European
players that shows little sign of abating. companies, which have captured strong
market positions at a national level, are
A number of fundamental trends explain facing a new major challenge: will they
this interest: be able to lead the dance at the regional
— An established segment growing level and build the scale required to
at around 10% per year, e-commerce achieve venture-level returns for investors?
is supported by macro-trends such
as increased broadband penetration We believe that the sector offers ongoing
and consumer “online education” opportunities for investors who can
and willingness to buy online; identify the exceptional management
— A fundamental understanding teams that are able to create value
of required core competencies through innovative business practices
and growth and profit drivers and flawless execution, especially at an
needed to construct strong businesses international level.
have been attained;
— Proven value realization through The purpose of this paper is to briefly
liquidity events, including IPOs focus on the trends that make
(e.g. Yoox) and M&A (e.g. Zappos, this market so attractive, to understand
net-a-porter, and, more recently, the remaining challenges, and to evaluate
PriceMinister) is occurring; future developments. This paper
— A continuous flow of innovative concentrates on the market for physical
business models and practices goods, excluding sub-segments such as
(from touchless e-commerce to travel, event ticketing and digital media
mass customization to retargeting) – adjacent markets with similar value
is powering individual company growth; drivers but distinct characteristics.

1. european e-commerce : a very attractive market
1.1 An establised channel with ongoing, above-market growth
Online sales of physical goods in Western Europe are forecast to continue to grow at 11%
per year to 2013, albeit with significant variation at the national (see section 2) and vertical levels.
For instance, while automotive is expected to outpace market growth, spend on traditional
media (CDs, DVDs etc.) will held back by the increase in ‘all you can eat’ subscription based
models and electronic delivery.

1 Clipperton Finance – Sectorial Newsletter n°1: e-commerce

Western Europe Online Sales 2005-2013
CAGR
100 05-0909-13
Household 21% 10%
90

Source: Press review, Clipperton Finance Analysis and Estimates
Media 12% 7%
80

70 Automotive 24% 12%

60

50 Apparel 19% 9%

40

30

20 Electronics 24% 11%

10
Online
Sales €bn 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 Total 21% 11%

This buoyant environment has a strong impact on activity in the value chain that supports the
e-tailers themselves, which encompasses areas such as self-service storefronts, customer acquisition,
recommendation engines, and customer engagement. These sub-sectors benefit both from the
overall growth of e-commerce consumer spend and from the need of e-tailers to innovate – trying
to stay ahead of their competitors in environments where most of the time the “winner-takes-all”.

Value in the e-commerce ecosystem
Platform → Merchandising → Marketing → Post-sale
> CPA/CPL-Affiliates
> Storefronts > Touchless > Recommendations > Shipping and delivery
> Payments incl. Mobile > Mass Customisation > Retargeting > Feedback
> Long tail > Multi-channel > Customer Service

Despite an overall decrease in consumer spending during the recent recession, both pure e-tailers,
and the B2B players that support them, have been able to deliver significantly above market growth.
This has made the sector very attractive to venture investors.
Underlying improvements in broadband access and payments infrastructure have increased consumer
acceptance across the continent, accelerated substitution of the high street, and opened new verticals
to online competition. Furthermore, improved user experience and customer service coupled with
innovative business models such as buyers’ clubs, ‘mass customization’ and ‘touchless’ retail (see section 3)
have enabled pure-play e-tailers to offer an increasingly differentiated proposition, which traditional
‘bricks and mortar’ players cannot match.

1.2. Encouraging signs in the exit environment validate
the e-commerce equity story
Recent developments point to a healthy exit environment via both IPO and M&A transactions.
Yoox had a successful IPO in 2009 and several others are in the pipeline including British online
grocer Ocado and (potentially) e-tailer The Hut, all despite the IPO market continuing to be largely
shut. At the same time, Amazon acquired Zappos, Richemont acquired Net-a-Porter and, most
recently, Japanese e-commerce group Rakuten acquired PriceMinister for €200m.
Successful international expansion is critical across the European venture/growth space and nowhere
is this more true than for e-tailers. The Zappos and Yoox deals (priced at 1.4x trailing revenue)
demonstrate that returns in e-tailing are driven by scale and market leadership rather than by multiple
expansion – exit proceeds are likely to be broadly proportional to top line growth. Although bought
with a strategic premium, Net-a-Porter remains in the same range (2.9x last revenue, probably
around 2+x trailing revenue). Investors must therefore back business models and management teams
that have the ability to successfully enter multiple countries across the continent and beyond.

Zappos Key Facts Yoox key facts
! Founded 1999 ! Founded 2000
! 1,300 employees at acquisition ! 320 employees as of 31 March 2010
! Estimated Net Revenue: $660m for 12 months ! 2009 Revenue: €132 million, 47 % growth
through June 2009 (resp. $635m in 2008)
! Estimated EBITDA: $45 million (2008: $40m) ! 2009 EBITDA: €12.65 million, 105 % growth
! Raised $62.8 million in 6 rounds from Millennium ! Raised €15.5 million in 3 rounds from
Technology Ventures, Venture Frogs, LLC, Benchmark/Balderton, 360 Capital Partners
Draper Richards, L.P., and Sequoia Capital and Kiwi, who jointly owned around 75%
(ca. 10% capital, 5.2x return on its $48m commitment) of the firm at the time of IPO

! Acquired by Amazon for $930 million (22 July 2009): ! IPO of €104.6 million with first day of trading on
• 1.4x trailing revenue 03 Dec 2009. 24,330,703 shares (50.1 % of capital)
• 20.7x trailing EBITDA sold for €4.30 per share, giving the company a €208.8
! Paid $890.1 million in stock (10 million shares million valuation. Shares presently trade at €5.50
of Amazon common stock at $89.01) + $40 million ! 1.5x revenue, 22.3x EBITDA as of 12/31/2009
in cash and Amazon restricted stock.

Furthermore, establishing a market-leading position across Europe is a key priority in order to attract
acquisition interest from US buyers, who are naturally less confident in expanding across Europe’s
diverse markets and will pay a premium to acquire a business with pan-European critical mass.
We are seeing the start of a consolidation phase in some segments of the market where competition
is currently fragmented along national lines (e.g. Brands4Friends’ deal with SecretSales in the buyers’
club category) as a response to these exit dynamics.
The good news is that many e-commerce models can be highly capital efficient – particularly
those that can optimize customer acquisition costs, have high customer lifetime value, and have
limited stock requirements. With just-in-time ordering and aggressive cash-flow management,
such e-tailers can minimize the amount of capital they consume for expansion, thereby minimizing
dilution for management and early investors. Some of the most interesting e-commerce
opportunities for investors have been largely bootstrapped, achieving significant scale before
taking on institutional capital.

1.3. Ecommerce has become a refuge for investors in difficult times
Following the short-term fall-out of the financial crisis in mid-2008, there has been a significant
increase in investment activity in the European e-commerce space.

European e-Tailers Transaction Volume and Value Q4 2005 – Q1 2010 (TTM*)
Disclosed Deal Value (€ millions) Number of Transactions
6,5 30
Source: Press review, Clipperton Finance Analysis

6
25
5,5
20
5
15
4,5

4 10

3,5 5

3 0
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9

2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010

*TTM: Trailing Twelve Months rolling average

In the immediate aftermath of the financial crisis, investor risk aversion increased dramatically, leading
to a significant overall drop in investment volumes (particularly at the early stage). In such a situation,
it is not surprising to see investors return to the basics – as previously observed, e-commerce is now an
established distribution channel with proven business practices, and a tangible revenue-generating
business from day one.

2. distinct national environments in western europe
complicate foreign expansion
As we have seen with the first encouraging exits, the newly VC-backed companies, often founded
when only active in their native country, will strongly benefit from international expansion
at the European level. Management teams building a business in Europe thus require one
particular skill-set beyond that of their US counterparts: the understanding of, and ability to,
adapt to the diverse markets of the continent.

E-commerce is already a huge market and it is growing fast. Nevertheless, there are key differences
in size, penetration, and growth across national lines.

Ecommerce penetration in major European countries

55%
UK Buble area:
€1bn
Sweden
Bubble area corresponds
50% Netherlands to 2009 online sales
Germany in € billions

45%

40%
France

Rest of W Europe
35%
etration: Penetration:
ine shoppers
Online shoppers
Spain
a % of all
as a % of all
Italy
uts 2009
adluts 2009 30%
6% 8% 10% 12% 14% 16% 18%

% increase in online sales value CAGR 2009-2012

Of the big three European markets (UK, France and Germany), the UK is the most developed
in terms of overall market size and share of total retail value. This presents a double-edged sword
to new entrants. As the largest and most advanced market in Europe, a strong UK presence will be
highly valued on exit. On the other hand, relative market maturity and the success of high street
brands in capturing e-commerce market share means that it is likely to deliver the lowest overall
growth for pure-play e-tailers... with the highest acquisition costs! Furthermore, the UK market
presents particular challenges in terms of currency fluctuations against the Euro and has distinct
supply chain characteristics compared to the continent.

Although currently the smallest of the three, the French market appears to be the most attractive
in terms of sales growth and relatively low market penetration. France has a historically successful
mail-order industry, so consumers are used to distance purchasing. The high projected growth
of this market is partly a function of consumers switching from catalogue-based mail order to
e-commerce. France is the home of some of the top apparel e-tailers in Europe – Vente Privee is
the undisputed king of the buying club category while strong players such as Spartoo* (footwear)
are emerging as potential European leaders.

In Germany, the home of Aldi, Lidl and Saturn where ‘Geiz ist Geil’, consumers are generally observed
to be highly cost conscious. However, German companies have taken the lead in mass-customization
plays where pricing tends to be relatively premium. Leipzig based Spreadshirt is the European leader
in apparel, and there are several promising players in emerging categories such as Fabidoo (3D printing)
and Chocri (food). A particular feature of the German e-commerce market is the relatively low use of
credit/debit cards online. This has led to the emergence of several leading alternative payment platforms
including T-Pay and Paysafecard. Just as France, Germany has a long history of catalogue retail – unlike
France, however, German consumers are observed to have a much higher propensity to return goods,
which has a material impact on the performance of e-tailers in the country.

Of the other European countries, Spain is noteworthy as it is expected to grow at 25% this year
(from €1.7bn total in 2009) and has low penetration (only 17% of adults shop online). As a result,
it is likely to offer ongoing growth opportunities despite the country’s particular vulnerability
to the sovereign debt crisis and subsequent fiscal tightening. The Scandinavian economies on
the other hand are small and have high penetration, so they offer relatively limited overall market
growth perspectives.

E-commerce adoption rates vary widely across both country and sector. In the early years of
e-commerce, the physical media segment (books, CDs, DVDs) was the first one to break out and
achieve mainstream acceptance. Such goods lend themselves well to online purchasing – small,
low ticket price, a consistent quality, and little need to be seen/touched before purchase.
Over time, however, media spend has transitioned to non-physical goods (iTunes, OD2) and
advertising/subscription models (Spotify, Netflix), which are not covered in this report.

Another ‘early-adopter’ category is electronics (computing, consumer electronics and appliances),
where price sensitive and technology savvy consumers take advantage of e-tailers who can undercut
the high street. We can clearly see that territories with lower e-commerce penetration overall
(see bubble chart above) have higher shares of their spending in electronics, reflecting the higher
proportion of early-adopter consumers.

2009 Online Sales by Category and Country (€ billions)
Total %

6 9%
Household

8 12%
Media
9 14%
Automotive
13 20%

Apparel

29 45%

Electronics

UK Germany France Other W Europe
Total 20,0 19,5 11,0 15,5
% 30% 30% 17% 23%

Sectors such as apparel are less conducive to e-commerce and have taken longer to develop (in the
above figure, the countries with higher e-commerce penetration overall have a higher proportion
of apparel spend). Consumers obviously like to see the look, feel and fit of goods before buying.
After the first attempts during the early 2000s (without broadband, no satisfying customer experience,
remember boo.com), a significant trend to buy highly discounted items through buyers’ clubs started
in 2004/2005. Once reassured, consumers started to switch to in-season sites. Likewise, the automotive
sector tends to see adoption rates increase behind the overall curve as cars are a ‘big ticket’ item and
spare parts are items where trust and services are fundamental. As consumer acceptance of e-commerce
develops overall, such ‘late developing’ sectors are starting to achieve mainstream adoption and create
opportunities for companies and investors – we identify a few interesting players in the automotive
and apparel sectors in section 3.4.


3. what will the next e-tailers look like?
This section identifies some significant innovations that can lead to interesting business opportunities for e-tailers
and investors – touchless e-commerce, mass-customization, mobile commerce and payments. We also identify
a number of other pure e-tailers that have built substantial businesses and offer ongoing growth potential.

3.1. Touchless e-commerce
A key advantage of the online retail channel is the ability to offer products that are not held in stock
– shipping directly from manufacturer to consumer on a ‘just in time’ (‘JIT’) basis. This allows an
e-tailer to aggregate products from multiple suppliers, thereby increasing product range and depth
without assuming stock overhead/risk. Businesses whose models exhibit this characteristic are broadly
categorized as ‘touchless e-commerce’.

‘Pure’ touchless players are effectively platform plays – they offer a storefront, payment infrastructure,
customer acquisition, and a trusted brand to the third party who provides product and fulfillment.
eBay and Amazon are the undisputed kings of accessing the ‘long tail’ of vendors using the touchless
e-commerce model. They both have “marketplace” offerings designed to allow third party vendors
to sell new goods via their respective platforms.

Like Amazon, other players often pursue touchless retail via a hybrid model. Traditional retailers such
as Tesco use the touchless model to offer a vast range of non-core products with its Tesco Direct brand.
Euroffice has built a market leading position in the UK by stocking its core lines and using a touchless
model to increase its product range and depth.

Business description: Euroffice has developed a unique Ownership : Private
Founded in 1999, Euroffice is a automated product recommendation Funding : Net Partners (Diana
British company that helps small system that helps users find Saraceni) - £2m, May 2001
businesses lower their supply products based on their past Key Management / Founders :
purchasing costs by aggregating purchase history. This system also George Karibian
similar orders and leveraging allows the company to accurately (Founder and CEO)
the resulting economies of scale. segment its customers, offering Headquarters : London, UK
Now stocking over 27,000 items, the right marketing incentive Active in : UK
the company prides itself on the to the right person at the right Ecommerce segment :
breadth of its choice of products. time. The founder, George Karibian, Office supplies
To help customers navigate continues to lead the company. Website : www.euroffice.co.uk
through this massive catalog,

The touchless model can also be applied to the ‘microenterprise’ crafts market (Etsy in the US
and Notonthehighstreet in the UK) and to enable furniture to be purchased direct from the factory
(e.g. MyFab from France – currently expanding to the US following €5m investment from
BV Capital in 2009).
The Hut (UK) deploys this model in reverse by offering a whitelabel storefront for music, video and
related categories, allowing other retail brands to extend their offering and earn incremental margin.
The Hut strips out its consumer acquisition costs and is able to build scale quickly, working towards
an IPO with recent backing from Balderton.

3.2. Mass Customization
Another key trend that is enabled by modern JIT production and online transactions is ‘Mass
Customization’. Here, single unit production runs mean that the consumer can design, customize,
or even build their product from scratch.

Mainstream producers are increasingly applying the mass customization concept as a differentiator by
offering online design tools with a wide range of options – recent examples include the Citroen DS3
and NikeID.

The segments immediately adjacent to print were the first to break out in the US with firms such
as Shutterfly, Cafe Press and Zazzle proving the model together with the European-founded but
now truly global Vistaprint. In Europe, Spreadshirt concentrates on the apparel market tapping
into consumers, ‘shop partners’, and corporate demand. UK based Moo is taking on the US with
its tiny and versatile photo cards. Photobox (currently run by the ex-Kelkoo team) is a close analogue
to Shutterfly and has achieved notable scale.

Business description directly in the US with analogues on Kennet (Max Bleyleben),
Founded by then Café Press and Zazzle. Accel helped €10m, February 2009
graduate student Lukasz lay the foundation for growth Key Management / Founders :
Gadowski in Leipzig (bringing on current CEO Jana Jana Eggers (CEO), Lukasz
in 2002, Spreadshirt Eggers to professionalize the Gadowski (Founder), Mattias Spiess
has grown into an organization) and Kennet joined in Headquarters : Leipzig, Germany
international player 2009 in a growth round focused on Active in : Europe (13 Countries,
providing an innovative international sales and marketing. USA, Canada
C2C approach with customized Ecommerce segment :
apparel designed by fashion Ownership : Private Mass Customization, Apparel
designers of the Spreadshirt Funding : Accel (Harry Nelis), Website: www.spreadshirt.com
community. Spreadshirt competes € undisclosed, July 2006 + follow

Categories where customization is common in the off-line world are natural targets for the next wave
of online players: StyleShake (UK) and TailorStore (Sweden) take apparel mass-customization to the
next level by offering bespoke tailored clothing, while Glassesdirect (UK) is disrupting the multi-billion
pound UK market for prescription glasses. It is unclear if these categories can become mass-market
online propositions either from the point of view of consumer acceptance (the measurements and
design process are relatively complex) or financially (since complex measurements leads to errors, which
lead to returns that cannot be re-sold).

Business description Created in in Helsingborg, Sweden with Key Management/Founders:
2003 and launched in its current manufacturing carried out in Jan Höjman (Owner and Managing
incarnation in 2007, Tailorstore Sri Lanka for its combination of Director)
has the modest aim to “dress low cost and high skills base. Headquarters: Helsingborg, Sweden
the world in customized clothing”. The company had a profit of $370k Active in: Worldwide
The company sells bespoke on turnover of $4m for year ending Ecommerce segment:
tailored shirts, polo shirts and June 2009. Mass Customization, Apparel
accessories online, with the customer Website: www.tailorstore.com
supplying the measurements. Ownership: Private
The company is headquartered Funding: No VC funding to date.

High ticket-value items such as jewelry lend themselves well to customization – Adamence in France
sells gems and jewelry, just as its role model BlueNile does in the US, while Swiss-based 121Time
sells customized watches. Nevertheless, purchasers are likely to value the ‘touch-and-feel’ aspect of
the buying process and this will slow adoption.

Food is another category that lends itself to customization and naturally recurring sales. For instance,
Graze (UK) sells natural snack boxes that are selected and packed individually. In Germany, MyMuesli
and Chocri do the same for breakfast cereal and chocolate respectively.

3D printing technology has revolutionized the industrial prototyping process and is now being
applied to consumer goods. Fabidoo (Germany) offers small gift figurines created using a simplified
design process. Shapeways (Netherlands) offers more flexibility – allowing consumers to design objects
from scratch using their own 3D-modeling tools (such as Blender and Sketchup) and resell them
in Spreadshirt/Threadless like-stores.


Business description: in June 2009 and will shortly launch Ownership: Private
Founded in the UK in 2007 and a corporate scheme. The concept Funding: DFJ Esprit (William
launched at the start of 2009, has proved to be remarkably Reeve) and Octopus (Alliott Cole)
Graze is revolutionizing snacks and recession resistant and its high – A-round, £2 million in February
lunches by delivering a personalized retention rates are leading to high 2009, joining seed investors Arts
box of mixed, healthy, and recurring revenue. The company’s Alliance Advisors and The
nutritionally balanced snacks via board is chaired by William Reeve, Accelerator Group (Robin Klein)
regular first class post. While it is co-founder of LOVEFILM – Key Management / Founders:
yet to diversify outside of its home a company with a similar financial Graham Bosher (Founder & CEO)
market, the young company, led profile. Mr Reeve brings to Graze Headquarters: London, UK
by Graham Bosher, was already his experience of LOVEFILM’s Active in: UK
shipping over 80,000 of its boxes capital efficient scaling phase. Ecommerce segment: Food delivery
daily in its sixth month of operations

3.3. Mobile commerce and payments
Globally, Asia leads in acceptance of direct mobile commerce and the US is ahead of the curve,
however it is likely to be some time before the direct mobile commerce experience for most product
categories is good enough for mainstream acceptance in Europe.

One key aspect of mobile payment systems is the relatively high charges that are imposed by
mobile operators. This market feature has arguably held back adoption for lower margin physical
goods. On the other hand, the relatively low charges in the UK (through the Payforit joint venture
between the mobile networks) do not seem to have increased adoption significantly beyond that
of the rest of Europe.

Indicative Operator Fees as % of Transaction Value (Bango Payment Network)

Paypal 10%

Credit/Debit Cards 8%

United Kingdom 20%
Mobile Payments

Other Europe 41%

United States 40%

Other non-Europe 43%

The bulk of commerce conducted over mobile is therefore for non-physical goods – in particular
ringtones and games. M-ticketing adoption (Digitick*, Mobiqa, etc.) is increasing rapidly and it is
logical to assume that an increase in transactions conducted entirely over mobile will follow. In terms
of physical goods (the focus of this report), the Japanese experience suggests that apparel and physical
media (40% and 33% penetration respectively, according to Infinita) work well over mobile, but it
is not clear which, if any, categories will break out in the near future.

At the present, we therefore view mobile as a complementary device for multi-channel physical
goods retailers. The mobile phone’s presence in the consumer’s pocket, together with technology
such as QA codes (3G Vision, Quickmark), allows forward looking retailers to bridge the gap between
the physical and online worlds. This opens interesting applications for promotion and vouchers,
price comparison, rich product information and feedback. The segment recently saw further interest
when eBay acquired RedLaser – a leading developer of premium barcode reading software for mobile
phones – and immediately re-released the RedLaser applications for free.

Establishing convenient payment systems is critical to kick-starting the mobile commerce channel.
This has led to particular interest in mobile payment assets from investors. European examples
include Zong (Switzerland, funded by Advent, Matrix and Newbury – spun out of Echovox), Mi-pay
(UK, Octopus) and Bango (UK, AIM listed billing system aggregator with good traction in the US).

3.4. ‘Early mainstream’ segments
Overall, mainstream consumers in Western Europe are accepting e-commerce into their daily lives
and will increasingly consider making online purchases for items that are less naturally suited to
the online channel. Some categories were traditionally tough for pure-play e-tailers, but as market
acceptance and best-practice spread, early players have an opportunity to become international
leaders. As noted in section 2, the automotive and apparel segments currently appear attractive
in the relatively well-developed Western European markets.

Automotive
New- and used-car retailers Aramis* (France) and Autoquake (UK) are expanding rapidly and
have recently attracted significant VC funding. Aramis* initially focused on new cars but now has
a used-cars offering, leveraging pan-European sourcing to compete on price. Such retailers can
present their stock to consumers regardless of their location, offer a greater choice than traditional
local ‘mono-brand’ dealerships, and have a limited number of physical showrooms to allow customers
to ‘touch and feel’ before purchase. Autoquake focuses on used cars sourced from corporate fleets
and leasing companies, claiming to undercut traditional competitors by 10%. Cars undergo extensive
checks and have high quality photographs to highlight ‘wear and tear’ and minimise return rates.
Aramis* raised an undisclosed first institutional round from Serena Capital and 360 Capital Partners
to continue its growth.

Online tire retailers such as Blackcircles (UK) and PopGom (FR) aim to disrupt a huge segment
of the automotive sector, following the success of Germany’s Xetra listed Delticom (€311m
turnover in 2009 and present in 35 countries). Both firms seek to beat traditional retailers
such as ATS and Kwikfit on price (through aggressive sourcing and lean cost base) and service
levels (with a network of independent local garages that fit the tires). Blackcircles has recently
launched a car-servicing offering, effectively transforming itself into a lead generation play for
independent garages.

Business description: sourcing, ‘flash sales’, inventory Partners (Emanuele Levi) –
Since launching in 2001, Aramis consistency, and national undisclosed joint financing round
Auto has been France’s premier distribution centers, allow the in September 2009
internet-enabled car distributor. company to offer high service Key Management/Founders:
Aramis’ founders, Guillaume Paoli levels at market leading prices. Nicolas Chartier and Guillaume
and Nicolas Chartier set out to In 2009, Aramis sold 10,000 cars Paoli (co-founders)
disrupt the archaic ‘monobrand’ and achieved gross revenues Headquarters: Gentilly, France
dealership industry and offer of €120m. Active in: France
their clients maximum savings and Ecommerce segment: Automobile
choice. A low-overhead business Ownership: Private Website: www.aramisauto.com
model, combined with a pure-online Funding: Serena Capital Disclosure: Aramis is a Clipperton
marketing play, pan-European (Marc Fournier) and 360 Capital Client

Apparel
Spurred by the phenomenal growth of Vente Privee, buyers’ clubs (including BuyVIP, Privalia,
Koodos and Brands4Friends) have seen a wave of investor interest and have performed strongly.
Most recently, France based Showroomprive.com, number two in the European market, received
a staggering €37m from Accel Partners to boost its already impressive growth (€75m revenue in 2009,
€140m forecasted for 2010). As previously noted, we saw the first moves towards consolidating
this relatively fragmented market when Brands4Friends acquired a stake in SecretSales.

Although the apparel sector in the UK is mostly dominated by high street players, e-tailer
ASOS (‘As Seen On Screen’) is notable in terms of size and growth – turning over £96.5m
in the 6 months to 30 Sep 2009, 25% of which was international sales. Unusually, the business
listed on the London small-cap market AIM relatively early in its lifecycle and has grown as
a public company. ASOS copies the Arcadia Group’s (Topshop etc.) business model – own-label
goods bringing catwalk styles to the consumer – using the Internet to get to the market faster
than its offline competitors.

Business description: integration is in place to encourage Joint financing round of €4.3m
MonShowroom was created in 2006 ‘viral’ customer acquisition, in February 2009
by Severine Gregoire and Chloe and a fully transactional iPhone Key Management/Founders:
Ramade. The site targets young ‘wardrobe builder’ app was launched Severine Gregoire (co-founder),
women aged 16-44, and is a one-stop in November 2009. This cutting Chloe Ramade (co-founder)
shop for fashionable but affordable edge approach has been paying off Headquarters: Carnoux-en-Provence,
clothing brands, which previously – the company expects to achieve France
were often only available in sales of €10m in 2010, up from just Active in: France, UK, Worldwide
boutiques and small chains. €2m in 2008. Ecommerce segment: Apparel retail,
The company has adopted several Fashion
of the retailing trends identified Ownership: Private Website: www.monshowroom.com
in this newsletter: basket building Funding: Alven Capital (Nicolas Disclosure: MonShowroom
is encouraged throughout the site, Célier) and Crédit Agricole Private is a Clipperton Client
a referral program and social media Equity (Michel de Lempdes) –

French competitor Monshowroom*, on the other hand, is a ‘one stop shop’ for mid-high end
branded goods – accessible to its target 16-44 year old female consumer base but not widely available
on the high street.

Net-a-Porter.com has proved that premium designer apparel can be sold to ‘high net worth’ consumers
online. Richemont acquired a majority stake of the company in June 2010 (having acquired a minority
stake earlier in the year), valuing it at £350m – a remarkable 2.9x last year revenues of £120m,
presumably reflecting the relatively high margins on premium goods and potential synergies arising
from acquiring a leading online distribution channel. Astley Clarke (UK, TAG and Index) targets
similar consumers with a premium jewelry offering – the company reported a like-for-like sales increase
of 63% in January 2010.

The success of Zappos (see section 1.2) in the US has attracted interest in the European footwear
market. Spartoo* is the strongest player in the market with local language presence in four major
European countries and a €12m B-round in January 2010. Cloggs.co.uk is a notable bootstrapped UK
based competitor. Amazon is seeking to replicate Zappos’ success in Europe by launching Javari
in the UK with pan-European ambitions.

Another interesting segment is the upcoming Children and Baby wear. Players such as ASOS and
Monshowroom* have launched a dedicated offer, and pure players, such as bibaloo are also popping
up on the market. We believe that baby gear will be the next big thing in the industry, with players
such as Oclio (which received a significant €4m funding from Crédit Agricole Private Equity (CAPE))
and Bambino World.

Business description: and 2009 to €30m, and looking Key Management / Founders:
Spartoo is all about shoes, shoes, to replicate its dominance in France Boris Saragaglia (co-founder and
shoes and is in pole-position to in new European markets. CEO), Paul Lorne (co-founder
replicate the success of Zappos in and VP Customer Service),
Europe. Conceived at a New Year’s Ownership: Private Jeremie Touchard (co-founder
Eve party and founded in France Funding: €16.8m raised in two and VP Web Marketing)
in 2006, Spartoo now sells over rounds – Highland Capital Partners Headquarters: Echirolles, France
7,000 models of shoes from over (Fergal Mullen) and Active in: France, Italy, Germany,
150 brands to customers in four key EndeavourVision (Bernard Vogel) Spain, UK
European markets. With the help leading the €12m B-round of Ecommerce segment: Shoes
of its latest €12m financing round, January 2010 and joining CM-CIC Website: www.spartoo.com
the company is growing rapidly (Stéphane Pesqué) and A Plus Disclosure: Spartoo is a Clipperton
– doubling its sales between 2008 Finance (Jean-Michel Pimont) Client


4. strong activity generates b2b opportunities
across the entire value chain
We have highlighted three innovations in the e-commerce space around which high quality European early stage
and growth companies are creating value. The e-commerce ecosystem is broad and extends to B2B players who
provide the technology and platforms to power some of the innovations deployed by online and offline retailers
in their quest for competitive advantage. America’s large unified market is a natural advantage for B2B platform
plays and successful European companies with global ambitions frequently flip their headquarters (Criteo,
Zendesk, VirtuOz) to Silicon Valley in response.

Business description: banner advertisements based Funding: AGF PE (Benoist
Criteo was founded in Paris in 2005 on products that browsers have Grossmann), ELAIA Partners
with the vision of creating better, previously viewed. This helps to (Marie Ekeland) - €3m, April 2006 +
more-relevant, and more engaging bring dropped customers back follow on Index Ventures (Dom
banner advertisements. It launched to the advertiser’s site, thereby Vidal) - €7m, January 2008
commercially in 2008, shortly offering dramatically increased Bessemer Ventures (Byron Deeter)
after raising a B round with Index. conversion rates. Criteo optimizes - $7m, May 2010
As the clear leader in European its financial performance through Key Management/Founders:
ad retargeting, one of the hottest arbitrage – purchasing ad-inventory Jean-Baptiste Rudelle (CEO &
segments in online advertising, the at rock-bottom CPM rates and Co-Founder), Romain Niccoli (CTO
company relocated its headquarters re-selling it at CPC rates comparable & Co-Founder),
to Silicon Valley in late 2009, to paid search. The company Headquarters: Palo Alto, California
subsequently raising a round with serves over 4 billion banners Active in: Worldwide
Bessemer to replicate its success each month for over 400 top-tier Ecommerce segment: Advertising/
in the US and beyond. Criteo e-tail partners. Retargeting
serves dynamic, personalized Ownership: Private Website: www.criteo.com

4.1. Customer dialogue
Effective use of technology can help retailers create a two way dialogue with their customers and
provide a feedback loop to improve service and minimize churn. This is particularly important
for products with a high customer lifetime value – such as mobile phone subscriptions, or repeat
custom – such as supermarkets. Fizzback’s platform collects ‘point of experience’ feedback and analyses
its ‘sentiment’. This prioritizes feedback, allows for immediate response, and gives real time, granular
metrics to identify both localized and systematic problems.

Operators can then drill down Angel round
into the data to analyze customer Advent Venture Partners (Mike
Business description: experience KPIs at (for example) Chalfen) and Nauta Capital
Fizzback helps companies to listen the individual store level, responding (Jordi Viñas) – Joint financing
and respond to their customers’ to negative feedback on a real time round of £1.6m, October 2009
comments in real time. Using basis to improve customer retention. Key Management / Founders:
a SaaS delivery model, Fizzback The product was launched in 2007 Rob Keve (CEO), Jonathan McKay
captures consumer feedback from and raised a £1.6m B round in (Chairman)
multiple channels (e.g. SMS, October 2009 to support a push Headquarters: London, UK
phone, and email) and at the point into the US and continental Europe. Active in: UK, Anglophone countries
of experience. Incoming feedback Ecommerce segment: Customer
is analyzed for sentiment using a Ownership: Private feedback
proprietary AI engine and presented Funding: The Accelerator Group Website: www.fizzback.com
via a web-based dashboard. (Robin Klein) – undisclosed


Founded in Denmark and now relocated to the US, Zendesk develops a SaaS helpdesk system that is
more vertical in nature but still directly applicable to retailers. The product is sufficiently powerful to be
used by large retailers such as John Lewis, while the subscription model puts the power of an enterprise
grade customer service system within reach of far smaller e-tail businesses. VirtuOz (France founded,
HQ flipped to San Fransisco) and Qgo (Netherlands) also serve the helpdesk market using natural
language processing to enable customer self-service.

4.2. Product recommendation, aggregation and basket building
Some touchless e-tailers are, in effect, much closer to B2B affiliate portals than they are to real retailers
– they aggregate products from a large range of retailers, use a recommendation engine to offer an
enhanced browsing experience and drive purchases, and charge retailers on a CPA basis. In the US,
this market is relatively mature and entering a consolidation phase. Stylefeeder, which uses past
behavior to predict user’s style preferences, and was purchased by Time Inc in January 2010 for an
amount “well the eight figures” after having only raised $3.5 million. In the same space, ThisNext,
which emphasizes social features to connect people with similar tastes, acquired close competitor
Stylehive in November 2009.

In Europe, Mydeco provides the closest analogy and focuses on furniture, offering a ‘basket building’
tool in the shape of a 3D room designer. MixMatchMe is an earlier stage apparel basket-building
platform that has developed an ‘outfit creator’. It sells both to retailers and direct to consumers with
a multi-brand destination site similar to its US competitors. Avail Intelligence (Sweden) has a pure
B2B model, providing an easily integrated behavioral marketing system that allows retailers to show
their customers a dynamic home page with recommendations based on past behavior. This delivers
conversion uplift of 5%-30%, charged on a performance basis.

Rapid geographical expansion will be crucial to build the scale necessary to compete with US
counterparts. With VC backing and no direct US equivalents, MyDeco is about to launch its US
operations. MixMatchMe’s apparel focus means that it faces a crowded market in the US – making
it more likely to concentrate on controlled expansion across Europe once it proves itself in the UK.
As a B2B play, Avail is working hard to build its presence in the US market and may be a good
candidate for a HQ flip.

Business description: result in revenues-per-visitor that Ownership: Private
Founded in 2000, Avail Intelligence are higher by up to 30%. Since Funding: Scope (Andreas
is a behavioral recommendation, Scope invested in 2006, Avail has Ossmark, Daniel Hallberg) €3.5m,
personalization, and merchandising entered several new markets, further October 2006
plug-in solution for automatically developed its business model, Key Management / Founders:
promoting the most relevant and launched new SaaS versions Pontus Kristiansson (CEO), Stefan
products to each visitor, thereby of its solutions. It now serves nearly Jacobsson (Chairman of the Board)
maximizing conversion rates and 100 retailers in 25 countries and Headquarters: Malmo, Sweden
average order values. The result 18 languages. Active in: Western Europe
is an immediate and measurable Countries, USA
improvement in conversion rates Ecommerce segment: Behavioral
(by 10-20%) and in average order Merchandizing
values (by 10-15%). Together, these Website: www.avail.net

4.3. Marketing
The digital marketing and advertising segment innovates constantly and has generated significant
VC returns over the last decade. Criteo, for example, is at the forefront of retargeting – a relatively new
online marketing methodology where banner ads are dynamically generated and shown to consumers
who have viewed particular goods at a retailer. By reminding a consumer of the items they have recently
viewed, the system induces them to return to the product page and complete the purchase.


The economic crisis has accelerated the shift of retailers’ online marketing spend towards CPA (cost per
acquisition) – a model where retailers sacrifice some margin to shift risk onto the advertising network,
thereby gaining a virtually risk free incremental margin. This development also appeals to consumer
media publishers who regard e-commerce as a vital component of their slowly crystallizing new revenue
model. Skimlinks (UK) is taking advantage of the trend towards CPA and disrupting the established
affiliate marketing leaders with a platform that vastly simplifies placing affiliate links in editorial
content and aggregates relationships from other networks.

The marketing segment also contains some sizeable service led businesses, including Bigmouthmedia,
Latitude, and Steak. Fredhopper is a notable bootstrapped Dutch platform/services business that offers
predictive targeting (similar to the product recommendation engines described above), onsite search
and targeted advertising to e-tailers.

An interesting, if unexpected, development in the UK, is the transition of voucher codes sites
(vouchercodes.co.uk, myvouchercodes.co.uk) from discussion-board style aggregators into an essential
part of the marketing mix. Cash-back schemes (cashback.co.uk, Quidco) on the other hand, do not
appear to have gained as much traction. Comparison shopping sites (Kelkoo, Reevoo) have added
voucher code functionality in an effort to squeeze stand-alone vendors as opposed to consolidating to
gain access to their high traffic destination pages.


disclaimer
This document has been produced by Clipperton Finance (“Clipperton”) and is communicated to you solely for your
information and should not be construed as a solicitation or offer to buy or sell any securities or related financial instruments.
This newsletter expresses only Clipperton’s views on the European high tech and media landscape and does not express
in any case any judgment of the future trends on the capital market evolutions.

No representation or warranty (expressed or implied) is made as to, and no reliance should be placed on, the fairness,
accuracy or completeness of the information contained herein and, accordingly, none of Clipperton’s officers or employees
accepts any liability whatsoever arising directly or indirectly from the use of this document.

disclosure
The following companies mentioned in this report are, or have had a commercial relationship with Clipperton: Spartoo,
Aramis, Monshowroom

clipperton finance
Based in Paris and London, Clipperton Finance is a European corporate finance boutique dedicated to the High Tech
and Media industries. Clipperton is focused on start-up and high-growth companies in the Internet, Software, Telecom,
Components, CleanTech, MedTech and Media spaces, advising them in their financial transactions: fundraising/capital
increases and Mergers & Acquisitions. Over the past years the company and its team have successfully structured
numerous high level international transactions in the European High Tech sector.

For more information, visit www.clipperton.net

Contacts
Thomas Neveux, Partner
tneveux@clipperton.net

Stéphane Valorge, Partner
svalorge@clipperton.net

Mike Callow, Senior Associate
mcallow@clipperton.net

10, rue du Mont Thabor - 75001 Paris, France
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