Where is the e-commerce app ecosystem headed in 2021?

The pandemic-induced growth of e-commerce is, by now, well documented.

What is happening in the app ecosystem that supports e-commerce? Is it growing? Are we likely to see consolidations or IPOs? Are there superapps that will emerge?

This post is less about conclusions and more about taking you along while I go through the rabbit hole to satiate my own curiosity.

I see all three trends forming:

1. Superapps are likely to emerge. I think companies like Bold Commerce will be among the earliest superapps.
2. There will be consolidations anchored around large SaaS players and roll-ups powered by private equity funds.
3. There are players like Tiny that acquire early-stage firms and let them run independently.

The closest match to the growing e-commerce stack is the marketing automation stack. While there are significant overlaps, it’s fascinating to compare and contrast the growth of these ecosystems and what drives consolidation.

Between 2015 and 2021, the martech stack grew from 1,800 to 8,000, meaning it roughly doubles every three years.

The explosion of the martech stack is common knowledge and is well documented by Scott Brinker and his famous supergraphics. What’s worth noting is that the consolidation we expected to happen is happening, and yet the pace of new companies coming up in the space makes up for the consolidation — and some more.

According to Brinker, the martech landscape grew 5,233% between 2011 and 2020. The fastest-growing category within martech in 2020 is data and governance, which grew in numbers by 25%. The martech app ecosystem more than tripled between 2015 to 2018, powered by the growth of SaaS and e-commerce industries.

I am an avid tracker of this space, but I am also interested in how we can apply martech’s evolution to the e-commerce stack. The e-commerce stack also grew 3.5 times between 2017 and 2020. But much of the growth is ahead, and so is the upcoming consolidation.

Shopify launched its app marketplace in 2009, but it was not until 2013-14 that the app store started gaining critical mass. Taking 2014 as the index year, the whole martech landscape had 947 apps. Shopify’s app store alone had over 750 apps. The Shopify app store is behind the martech stack by three years if you compare the number of apps on the app store with the number of martech companies. There are likely to be overlaps, but the point I am about to make still stands.

There is a Cambrian explosion in the e-commerce software stack, too. I am not counting the Amazon app store. There are thousands of apps already on the Amazon Marketplace app store, and there are region-specific app stores as well. Put them all together, the e-commerce stack is bigger than the marketplace stack.

There are some similarities, but there are some nuances that are unique to e-commerce.

The ecosystem is built around big players, but it’s not a duopoly

Look at Hubspot and Salesforce in the case of martech, Amazon and Shopify in the case of e-commerce. However, the ecosystem that powers the e-commerce stack is much broader and more nuanced. In markets like Europe, platforms like PrestaShop are more popular than Shopify. Owing to the open-source nature of platforms like PrestaShop and WooCommerce, we have huge ecosystems of open-source plugins and themes that will all thrive as small businesses.

A recent study by IDC (sponsored by HubSpot) mentioned that HubSpot’s partner ecosystem makes $5 for every $1 that HubSpot makes. I am not sure if all of this revenue is directly attributable to Hubspot. In contrast, Shopify’s partner ecosystem makes only 10% of Shopify’s revenue, and yet Shopify claims that the ecosystem partners make over $6 billion. I’d interpret that as revenue coming out of activities not closely tied to Shopify — making the point that the e-commerce stack players have strong independent businesses not connected to the major platforms. With trends like headless commerce, this is likely to be the direction in the future, too.

The stack is more heterogeneous even within specific target revenue segments of merchants

The martech that serves a revenue segment is fairly homogeneous. But in the case of e-commerce, the stack is diverse even within a target revenue segment owing to region, category and even compliance-related exceptions. In the U.S., e-commerce is evenly divided between marketplaces and direct-to-consumer. In China, marketplaces rule the industry. In India, it’s in the favor of marketplaces, but there is a nascent yet vibrant D2C ecosystem. Each of these markets will support apps that are regional and may never go global. This is unlike the martech ecosystem, where regional or category/vertical-specific plays are not big factors.

Consolidation driven by dilutive capital is less prevalent in e-commerce than martech

The e-commerce software stack has been micro-SaaS in nature long before micro-SaaS started captivating the attention of builders. Besides, with the open-source origins (remember OSCommerce?) and the continuing popularity and significant market presence of platforms like WooCommerce and PrestaShop, there is a vibrant plugin/agency ecosystem that never took the VC route to grow. In martech, there is a race toward growth and dilutive capital (in part due to the homogeneous nature of the total addressable market, making everyone compete with everyone else for the spend) and hence just much more consolidation.

But there are other compelling reasons for the e-commerce stack players to consolidate. As D2C brands grow more sustainably than the first cohort of VC-powered high-growth successes/burnouts, we will see the need to retool the stack that allows brands to stay independent and profitable longer.

I already see evidence of this in areas like subscription payments, where the traditional SaaS-implant subscription platforms are a lot less relevant than subscription tools built for e-commerce. The same forces come to play in analytics, as well. Omnichannel e-commerce is a given. With creators selling through livestreaming channels and platforms like TikTok, the need for real-time analytics has become critical. The person who consumes analytics is also the same person that teaches you how to flip burgers on their YouTube channel. They are not going to have the patience to look at tableau dashboards. They need answers, not charts.

Such retooling in the e-commerce stack will drive some consolidation, but there is just so much more room for new companies to emerge and serve the lifestyle D2C companies. Besides, regional favorites will spawn small local stacks that may thrive independently.

So the consolidation in e-commerce is likely to be driven more by the needs of the market than factors like market size or return for investors. Now is the best time to invest, build or acquire e-commerce SaaS companies with both a U.S.-centric thesis as well as regional themes.

3 adtech and martech VCs see major opportunities in privacy and compliance